Aflac Incorporated (AFL) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the Aflac’s Fourth Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. Please be advised today’s conference is being recorded. I’d now like to turn the call over to Ms. Robin Wilkey, Senior Vice President of Aflac Investor and Rating Agency Relations.

Good morning everyone and welcome to our fourth quarter conference call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Ken Janke, President of Aflac U.S, Executive Vice President and Deputy CFO of Aflac Incorporated; Eric Kirsch, Executive Vice President and Global Chief Investment Officer. Also joining us today from Tokyo are Paul Amos, President of Aflac; and Tohru Tonoike, President and COO of Aflac Japan. Before we get started, let me remind you that some statements in the teleconference are forward-looking within the meaning of federal securities laws. Although, we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they’re prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our quarterly release for some of the various risk factors that could materially impact our results. Now, I’ll turn the program over to Dan, who will begin this morning with some comments about the quarter and the year as well as our operations in Japan and the U.S. I will follow-up with a few financial highlights for the quarter and the year and then we will be taking your questions. Dan?

Thank you, Robin, and good morning. I am pleased that we met and in many cases exceeded our financial targets for the quarter and for the year. Let me begin today with an update of Aflac Japan, our largest earnings contributor. Pre-tax earnings in yen were up 16.9% for the quarter and 13.6% for the year, reflecting a stronger dollar. Sales of our third sector products were up 15.7% for the quarter and for the year third sector sales increased 4%, which was at the high-end of the annual sales target of flat 5%. The increase in third sector sales largely reflects a favorable response to our newest ever medical product introduced in August and innovative advertising promotions of this product. As anticipated our largest medical policy has proven especially popular with consumers in their 20s to 40s. Even our under penetration of this demographic, I’m especially pleased that these efforts do appeal to consumers in their 20s to 40s that yield very positive results for us. Consistent with our expectations, Japan’s new annualized premium sales in the fourth quarter declined 33.3% for the quarter and 29.1% for the year. These results are largely attributable to the significant decline in the sale of WAYS product following the repricing of first sector products in April. Reflecting on the expansion of our distribution channels, we’re pleased with our agreement with Aflac Japan and Japan Post Holdings. I believe that in the coming years cancer sales through Japan Post will steadily benefit our business. If you recall the first sector sales particularly WAYS were very strong in the first three months of last year leading up to the premium rate increase that took effect in April of 2013. As a result, we expect first sector products to be down 60% in the first…

Thank you, Dan. I'd like to get through some fourth quarter and annual numbers this morning especially as related to the yen impact which was strong, and I'll start first with Aflac Japan. Beginning with the currency impact for the quarter and the year, during the quarter, the yen weakened against the dollar 19.5% and for the year, the yen weakened 18.2%. In reference to top line in yen terms, revenues as reported were up 4.1% for the quarter. Excluding the impact of currency, revenues were up 2.6%. Investment income as reported increased 15.7%. Excluding the weaker yen in the quarter, Aflac Japan dollar denominator and investment income, net income rose 5.5%. In terms of quarterly operating ratios, the benefit ratio to total revenues declined over last year going from 63.9 to 61.2 in the fourth quarter. Excluding the impact from the reinsurance agreement initiated in the third quarter, the benefit ratio for the quarter would have been 60.8%. Additionally, if you exclude the impact of the weaker yen, the benefit ratio for the quarter would be 62.1%. Now looking at the expense ratio, it was up 18.9%, up from 18.4% in the fourth quarter of 2012. This increase reflected additional spending in line with our expectations. Reflecting the improvement in the benefit ratio, the pretax margin increased during the quarter going from 17.7% to 19.9%. Excluding the impact on currency, the pretax profit margin for the quarter increased 18.8%. With the expansion of the margin, pretax earnings increased 16.9% in yen terms. Excluding the impact of the yen, pretax earnings in the quarter increased 9.3%. The reinsurance agreement from the third quarter had approximately an $8.2 million pretax income on earnings and a $5.4 million impact on an after-tax basis. Now let me turn to Aflac U.S., total revenues…

Thank you. (Operator Instructions). Our first question is coming from Chris Giovanni from Goldman Sachs. Your line is now open.

First question just around the outlook for third sector sales in Japan and I guess I'm wondering why the target isn't higher given the momentum you've seen with the medical product, and how underpenetrated that younger age cohort is? And then really no benefit at all to-date from cancer and my understanding is you should the post specific product kind of on-boarded here in the second half of the year?

This is Paul. I'll tell you, first of all, we do expect strong momentum in the first quarter and the second quarter and that will be a continuity coming from the EVER launch in the second half of last year that drove extremely strong third and fourth quarter third sector sales. It's because of that strong third and fourth quarter that we’re up against difficult comparisons of course, medical product is going to sell in a higher level than the cancer plan in general, as well as the market is growing at a faster pace. That being said, we remain confident about our Japan Post partnership and are continuing ability to grow that. As we said, it is a long partnership that is focused on growing it steadily. We have continued to expand the number of post offices, but doing so slowly and it really been a later half of the year before we see a significant number of post offices begin to come online. As you stated, the cancer plan is something we are focused on revising at this point pending approval from the government and focused on selling that plan with a specific plan for the Japan Post system. At this point, however, we’re still in the process of developing that plan with Japan Post. I can’t go over the specifics of that, but we feel very optimistic about it. That being -- all of that being said, all of that is modeled in the 2% to 7%. And we’re -- I think that's where we’re and I think we’re confident about the numbers and what we're going to see for this coming year.

Okay and then maybe one for Eric. Can you talk about the decision kind of to get back into the U.S securities asset class and then how we should be thinking about with rates kind of back down here managing the volatility of the SMR when rates should rise again, since this -- clearly isn’t eligible for that PRM category?

Sure. My pleasure. Well, going back in the last couple of quarters when the volatility hit last year and we change the asset allocation, you will recollect I had said that we were going to spend significant time on recalibrating our SMR given the reinsurance, how the capital position went up to the risk factors we’re exposed to, in particular, in the AFS category. And those risk factors being yen interest rate, dollar interest rate, currency and credit spread. So a great body of work has been completed on that, which was our goal during the fourth quarter, so that we could go into the year with a much clear path. And given the higher capital levels that we’ve and all of our modeling, we can sustain if rate should increase that negative impact to SMR, of credit spread should rise, yen yield should rise. So we could still be within the SMR levels that management wants us to be in. So SMR is now at a comfortable level where when those things happen in the market, we can absorb an SMR, that those impacts from unrealized gains and losses. The other thing I would comment on as well, there is a correlation effect between these factors. So when U.S rates are going up suggesting a strong economic growth here, the dollar is strengthening, the yen is weakening. But we’ve currency exposure in our SMR. So those are risk factors that kind of offset each other. So with all of that modeling and our view of that capital market, that allowed us to go into the year with a view that we can get back on our path of the original strategic asset allocation from Goldman. However, we’re going to be much more tactical on how we implement that. So…

Great. Thanks for the thoughts.

Thank you. The next question is coming from Yaron Kinar from Deutsche Bank. Your line is now open.

Hi, everybody. Dan, I think you briefly mentioned progress on the Everwell platform and on to broker exchanges in the U.S. I was wondering A, if you could give us a little more color on the Everwell progress? I think on the last call you talked about it has been 68. So where does that stand today? And then on the broker exchanges, I think you had mentioned being on 60 today, which seems significantly greater than where you were a quarter ago. So if you can give us any thoughts on both?

Let me make a couple of statements and then I will have Ken talk a little bit more detail as we’re all working together to do this. The one thing I think is important that all of you understand is we introduced a major change with our field force. As you know we’re probably the only Company out there that is concentrated so heavily on accounts of 100 or less. It’s always been our bread and butter; it’s always worked very well for us. Our agents have also rolled the accounts of 100 or more. But what we’ve seen here as we’ve seen those accounts of a 100 or more shift more to dealing with brokers. So as we started several years ago, we started seeing the brokers coming in and we started to put them in our market to some degree. Now we’re not saying you can’t do it, we’re just paying to move you that way. We’re then working with the agents to where these agents will work with brokers to try to enroll what I would call the local brokers more and they end through our plans with Aflac group, we’re doing the national brokers. So this is a major shift that all occurred in the fourth quarter. And at the same time we’re now getting ready as you talked about to move to Everwell with the small businesses, which especially will be 50 and less. And of course we got the delay with the Obamacare that now it won’t go into effect till next year. So all those things kind of hit at the same time, which I think accounted for part being our problem, part being that we arrive more small business, but all in all, unacceptable numbers in my case. So I will let Ken talk a little bit about specifically your Everwell and what we're doing there and then if Teresa wants to follow-up with any comments she is welcome to. Ken.

Yes. Let me start on the Everwell exchange. We’re right in the middle of the pilot. We had orchestrated an extended pilot from October 1st through the end of March of this year. It's actually in three states, one of which we’ve our appointed agents in that area have access to not only our products, but major medical as well as vision, dental and life and then the other two test states right now. They’re limited to all the products -- they’ve all the products, but not a major medical, because it is such a sweeping change in how we maybe enrolling the small businesses in the future, we wanted to take a very pragmatic and conservative approach to this. So we’ll evaluate after we finish the pilot in March. We’ll evaluate our rollout plans. We currently anticipate that we’ll be rolling the platform out to the majority of our states throughout the balance of this year, but the exact timing of that rollout is going to be dictated by our assessment of the pilot and we're not quite done or in a position to make that assessment. I can say that generally we're pleased with what we've seen so far. We have seen higher penetration rates than we've seen in our traditional business for accounts of the same size which was one of the success metrics that we're focused on. Over the longer term, we'll focus on things retention of accounts as well as distributors. But we do expect that it will go well and that we will be a position to rollout. That said, we don't expect for it to have much of an impact on sales in 2014. But if our rollout plans meet expectations and we're able to roll it out as we currently anticipate, we…

And Ken is concentrating of course on combining the two both Aflac Group and Aflac Columbus, but Teresa maybe want to make a couple of comments on Columbus because that's still 90% of our sales. And so Teresa, you have any comment.

I'll just echo what Ken said with regard to Everwell. Currently, we have a couple of other platforms that we use today; our SmartApp unit that you all are familiar with. The majority of our activity is basically driving the multi distribution strategy, handing the sales operating guidelines, making sure that we have all of the alignment with compensation and sales targets so that we can migrate everybody to this new Everwell exchange.

It does. And one quick follow-up on that, if I could. On the national exchanges, with the national brokers, do you think that the investments you're now making in sales and in the platform will be ready to bear some fruit for 2015 enrollment; come in, in October, November of this year?

Well, we're really positioning this for better growth out of the large case markets for group products in '15. This is really a build-out year of sorts. Again, we're increasing our ability to reach those broker distributors. As you know, there's a very long lead time to large cases, so we're really positioning this for – while we would hope expect there'd be much growth in the group platform in 2015.

Thank you very much.

Thank you. The next question is coming from Mr. Jimmy Bhullar from JPMorgan. Sir, your line is open.

Thank you. Good morning. On the U.S. business maybe if you could talk about just recruiting and growth in the producing agent count because it's been weak for a while and I'm not sure if that's just lack of finding good candidates or are people not willing to give up unemployment insurance or what's going on that you're having a difficult time finding recruits in the U.S.? And then there was a question earlier on – new money investments in Japan. I don't know if you mentioned how much of your new money you're intending to deploy in the U.S. securities, whether it's corporate or treasuries?

Jimmy, let me start on the recruiting. We are really focused as Dan suggested in his comments. We're focused on a few very basic activities for our traditional sales force this year. We really want them to focus the majority of their efforts under 100 accounts size. We're also focusing on what we referred to as core brokers, it's really the local and regional brokers that Dan has mentioned, we're focused on asset management which is a fancy way of saying we want our career sales force to make sure they're getting the most out of their book of business, so that in effect they're not leaving business on the table by really calling on their accounts and managing their business properly. And then the other one is recruiting. Recruiting has always been a core component of how we build our sales force. Newer agents tend to be the ones that bring us the newer accounts where we have opportunities to really grow the business. I think one of the things that we've not only focused the activities squarely on recruiting but also on the type of individuals we'd like our sales force to recruit, because I do believe that there was some effort on our sales force that rather than recruiting the career agent that we typically built this business on, there were trying to recruit brokers instead. So we've really refocused their activities this year. On referral recruiting, nominations and getting the type of sales associates that have long been known to build this business. We have seen a bit of a turn. I think it's too early to comment with certainty but so far this year with that new focus, we're pleased on the kind of recruiting activity that we've seen. It's still down year-over-year but at a significantly lower rate of decline than what we'd seen throughout 2013. So we are focused on that. By focusing on that and also the training and getting those new agents to focus on the small business area, the accounts fewer than hundreds lives, we think we'll also be successful in pulling up the numbers of producing agents.

I'll just follow-up with three areas of focus. One area of focus really trying to make sure that our people who are recruiting in our career channel that those folks don't compete with trying to recruit brokers as well, so we basically focused the career recruit channel on really recruiting people for that career channel and then we moved a lot of the market, the people who were recruiting for brokers into a core broker channel which really supports the distribution channel or the channel segmentation and it also supports how the market has shifted as well. The other thing that we're doing is recruiting ads and you'll see some of those recruiting ads, there were very successful in the past for us with really getting interest for Aflac and with regard to recruiting. And so we decided to bring those back. The last thing is making sure that all of our goals for recruiting are aligned within the hierarchy. So any contest, any compensation is aligned across the hierarchy with regard to recruiting as opposed to one or two people holding the goal for recruiting. The comp is tied to it.

It's Eric to answer the second part of your question around the percentage allocation of new money. Just a couple of factors that go into that allocation. One is, when we discussed new money what we're discussing is cash flow from operations and maturities and interest from existing assets. But we also consider sort of the target balance of our asset classes at year end which ties back to the strategic asset allocation work. So, with regards to U.S. assets if you will as a target not necessarily meaning we're going to get there, 25% of the Japan assets would be our target for U.S. assets at the end of the year. When we calibrate what I discussed earlier, the new money statistics that we expect, SMR, we would currently expect no less than about 40% of our cash flows to be in U.S. dollars but again that would depend on market factors, SMR. And one other factor is during the year, which has already happened this year we may dispose of some securities like you know about Israel Electric, for instance. Those proceeds came in January, were invested into the U.S. program but that's not counted as new money but it would count towards our year-end target. So there's a variety of factors that go into that. And then finally I would remind you, I can give you some of these estimates, but as I said earlier, we will be more dynamic with respect to the risk factors in the market, what's happening with spreads, what's happening with rates. So, I think you’ll see us be more opportunistic as well as conservative from a safety standpoint depending on what's happening in the market, but certainly we’ll report throughout the year on how it all panned out relative to our expectation.

And the U.S. investments, those don’t qualify for policy reserves matching accounting treatment rate?

That’s correct. Those go into AFS.

Good. Thank you.

Let me point out that on a U.S. statutory basis the assets are held at amortized cost as opposed to mark-to-market, so it's not a big factor in RBC.

It's more the SMR’s would have changed though, right?

Yes, the SMR for Japan is sensitive to fair value.

Got you. Thank you.

All AFS securities, but in the U.S. we’re not on RBC for the U.S. operations.

Thank you. The next question is coming from John Nadel of Sterne Agee. Sir, your line is open.

Hi, good morning everybody. Just a quick follow up on the investment side. I don’t remember the exact amount out of Japan in terms of the new money investments in total from 2013. If memory serves it was effectively an all time record given the very strong sales in the first sector channel. How much is that overall new money investment going to decline in 2014 given the continued shrinkage of the first sector, the fact that third sector sales clearly require less from the perspective of investment income?

It's Eric. I can give you the numbers from last year and the projections this year in total cash flows and then perhaps one of my colleagues wants to discuss at that second level between sales. But to your comment earlier, last years cash flows were 1,118,000,000,000 yen, but that’s cash flow from operations, maturities and interests from the portfolio. So, there’s a lot of attribution within it. For this year again in total the projections are 771 billion yen.

Got it, okay. And then, I think the only other real question I have is, as you’ve done all this work around SMR sensitivity in calibrating especially post the shift to the PRM classification; can you give us some sense for how much the sensitivity of the SMR has come down especially relative to changes in interest rates?

This is Kriss; let me say that we have done a lot of work on that, we intent to go into that in some depth at the FAB meeting. I didn’t want to do it on this call. But let me just say that with our SMR at its current level in the mid 700’s, we believe that we’re well protected against the fall below the 500% to 600% which is kind of our overall low level operating objective. The way I am looking at SMR right now is that we don’t want to broach our fallback position which I’ll say is 500% to 600%. We clear like about staying at about 750% in today's market environment. There are very few scenarios where we’re going to pierce below 500% to 600% for changes in U.S. interest rates, changes in Japan interest rates, changes in currency rates. So, what we’ve done is to insulate ourselves against the low side of the SMR exposure due to volatility in those macro factors. And we believe that enhances our ability to give the investment team flexibility to pursue their plans without significant concern and it just gives us more assurance that we’ll be able to manage SMR levels in a way that will allow us to achieve our plans for profit repatriation, policy holder security and the like. So, we feel like the work we did between the third quarter and fourth quarter last year has well positioned us to manage in a very flexible way in response to significant changes in macro conditions.

I mean one our main objectives here is to never act like we had to do one time on share repurchase, to constantly be increasing it every year. And by having this bottom set we feel comfortable that we can continue to increase it unless something just unheard of happens.

Hey, John this is Ken. Let me just add, if you just look at the SMR sensitivity to yen interest rates, our -- as Kriss said we will talk more about it in our analyst meeting. It is significantly less than it would have been a year-ago for a couple of reasons. Number one is implementing the PRM category which insulated us from some yen rate risk. The other is that, now we’ve more dollar assets [proportionately] [ph]. So what does that mean, while as we’ve got more exposure to dollar rate risk? So and we’ve taken some actions to try and mitigate that risk on SMR as well. When you think of the market risks that influence SMR we’re exposed to yen rate risk, dollar rate risk, credit spread risk and currency risk. And the problem is those are somewhat correlated. You can’t just aggregate one risk on top of the other to come up with an overall sensitivity and that’s why we’re doing a little more work on it to give you a better indication of what kind of buffer we feel we should be maintaining to accommodate those risks.

Perfect, that’s really helpful. If I can sneak one last one in because it's related, it's just -- have you done any incremental hedging particularly around yen versus dollar as you look out to 2014 and beyond to insulate your expected profit repatriation from potential currency moves?

Yes, let me update you on that. Our current expectation is to repatriate about 97 billion yen. The last time we spoke we had hedged 47.5 billion yen at a little over 100 yen to the dollar. We have added incrementally another 5 billion yen. So we have roughly 52.5 billion yen hedged again a little over 100 yen to the dollar. We’ve elected to take -- use our yen cash flow from repatriation this year to service the 34.2 billion yen debt that we have maturing. And so what that does is that frees up about $400 million that we had on the balance sheet that we had previously year marked for share repurchase. So, when you look at the 52.5 billion yen plus the 34.2 you’re roughly 10 billion yen or so that it remains un-hedged. And I think it's unlikely that we’ll do much more for this year but we have already started thinking about ‘15 and taking actions to insulate against currency risk on that repatriation.

Perfect. Thank you so much for everything.

Thank you.

Thank you. Our next question is from Steven Schwartz of Raymond James. Sir, your line is now open. Steven Schwartz - Raymond James & Associates: Thank you. Good morning everybody. I guess this all ties in, but I do want to ask about what is going on, or what can possibly be done in reinsurance. I know, I mean you kind of started it in -- I think it was May at the FAB meeting, Kriss stated that he thought that the FSA was really against doing enforced block types of transactions to free of capital. But you’re sitting there with an SMR of 750, you’ve got PRM and you’re doing some interest rate hedging. There’s a lot of protection there. The reserves are way, way overstated in Japan relative to the U.S. which is probably overstated relative to reality anyway. You’ve got one competitor that’s done -- an American competitor that announced that they did a deal. RGA is saying that they’re seeing a lot of companies do this. I’m wondering Kriss, if you thought more about this or looked at this more?

Yes, we’re continuing to evaluate Steven. I don’t necessarily agree with all your comments you leashed, maybe I do but maybe not in order of magnitude. But let me just say that the -- the reinsurance we did at the end of September allowed us to achieve our objective of increasing the solvency margin substantially. We don’t feel like we need to do additional reinsurance to accomplish that. Right now we've got it in reserve in case we ever need to do it. What I do have my team exploring is the notion of doing a continuous program of reinsurance of this nature to alleviate to some extent the surplus drain we experienced relative to new business. And what I think that would do – what it will do is to minimize the volatility of FSA earnings in responses to changes in production levels. And it would also allow us to monetize to some extent some of the differences between the economic reserves which is how I'd characterize what you're trying to get to and regulatory reserves. Keep in mind though that reinsurance of the nature we did, those have a cost. You are selling a block of business in exchange for a premium and it does have a cost and I've quantified the cost for reinsurance in 2014 at about a nickel a share, about $30 million or so after tax. So it's not like it's free. Now let me say that relative to other companies, we don't have an internal reinsurance subsidiary where we can do this program on an intra-company basis. We've never been a reinsurance user to any great extent, we haven't needed to, we don't have a reinsurance subsidiary that deals on an arm's length basis with other companies which many companies do. So that's…

This is Teresa White. Really the issue is making sure that we build out, as Ken said that W-2 sales force that Dan Lebish is responsible for. We're building out because most of these large broker channels which you may know, they really go to market differently and it's not a product sale, it's really understanding how they go to market. And so the importance of those relationships is to really understand how each broker channel deals with the market and then how Aflac fits within the context of that. And so the initial relationship or the initial interaction is more us understanding, Aflac understanding their go-to-market strategy, understanding and educating many of the brokers on voluntary product and then there's a process of selling. What Ken referred to a while ago was a lot of the plumbing that was built for the six-year or so exchanges our platforms that we have today, there were specific cases that wanted Aflac. They asked for Aflac and they happened to have brokers involved. Now that's some of it but others are really where brokers have brought us in and utilized us against other competitors. So, right now that's why Ken is saying right now what we've got to do is establish that – work that sales force at Aflac Group so that we can ensure that – and we call those sales people BDEs, broker development executives, and they'll be regional vice presidents managing that process. But at the end of the day, the relationship is what's important and Aflac understanding their go-to-market strategy and how Aflac product fits.

The one thing I would say that's very important here is it was somewhat murky in our organization of how brokers and agents and the new things we're all bidding together. Now, what we did in October is we defined exactly the direction we wanted everyone to go. And we cut out certain things like for example these big brokers. They don't want our agents calling directly on them. That irritates them and they control the account and we've defined that better to stop that from happening. So these are things that are major in terms of how we handle it in terms of emotional and trying to motivate our existing field force and we've done that through more commissions and shifting them. And so all of this is just part of something that's unfolding right now that I'll ultimately think will enhance our sales. I think we're going to be much stronger. I think anyone that thinks that we're not going to be strong in the small market is mistaken because we've done so well. I think anyone things that with the big brand we've got, which everyone knows us in the supplemental industry in the United States will be mistaken when it comes to how well we're going to do with the brokers going forward. We just got to let them know that we understand their needs and we're going to fit products accordingly and that's where South Carolina will come into play with our new president over there, our new executive vice president over there and how he handles it. And Ken will be coordinating those two efforts.

Steven, I’d actually argue. I think the exchange part is the easy part because that's enrolling the business. The hard part what we have to work on is we have to have the relationships, we have to demonstrate to those large national brokers the value proposition for supplemental products, again why we should be the provider of choice and how we can effectively enroll that business and service that business and get them paid quickly, to have a pain-free experience. So, the enrollment itself through an exchange I don't see that daunting. It's everything that's leading up to the enrollment that we really are working on. Steven Schwartz - Raymond James & Associates: Okay. All right, thank you guys.

Steven, one other thing I want to comment on since we're talking about this new distribution strategy as Dan referred to it, we're going to do a spreadsheet and try to outline the various aspects of this. It will be available online just like we have other spreadsheets out there on investments and the such to help you better understand the market segments, the channels, the products within those channels that they'll be offering, enrolling conditions, et cetera. So that should be available on the website sometime this afternoon, we'll have that up there and I think it will help everyone understand better this new strategy in the U.S. Steven Schwartz - Raymond James & Associates: All right, I'll take a look. Thank you.

Thank you. The next question is coming from Mr. Tom Gallagher from Credit Suisse. Sir, your line is open.

Thanks. Kriss, I wanted to come back to the comments you were making about exploring captive re and I think the comments you used were to potentially stabilize J-GAP earnings and then dividend repatriation. Should we be thinking about this whole evaluation more as making sure you have stability or would there be a significant enhancement opportunity? For instance, the 1.3 billion to 1.4 billion or J-GAP earnings that you guys are run rating right now. I mean, if there is the possibility from this kind of transaction that you could increase that 50%, if you structured it the right way or is that not the right way to think about this. Is this more of a stability exercise than an enhancement exercise?

No there’s an opportunity for enhancement, Tom. I think you have to be measured in thinking about how much enhancement we’re going to have to balance cost and the overall results, and we always manage the business for the long-term as opposed to the sort term. So, I’m not looking for a quick pop on profit repatriation and a quick pop on share repurchase. I’m more interested in what we can sustain over the longer term. But there is an opportunity for enhancement and that’s one of our objectives.

Got it. But we shouldn’t be thinking about as you said …

(Indiscernible).

Yes. Okay, got it. So more of a measured enhancement?

Yes, if we got a 50% it wouldn’t be achievable year-to-year. If we went up 50% it would probably have to stay at that level, assuming we could even get there which it might be achievable, but I doubt that I’m going to go that far.

Got it. And then, just a follow-up for Eric. Your comment that you were positioning into shorter duration, securities I guess. I think that was just related on the USD allocations, not sure if that also applies to what you’re doing on the JGB side. My follow-up on that point though is, should we be thinking about this more a short-term tactical because ultimately you have to match your liability and you have very long duration liability. So if you’re shortening the duration today, how long would you be willing to deal with tolerance of the mismatch?

Sure. Now thank you, good questions, and to your first one, yes. That was with respect to the U.S. securities not our JGBs which are long -- the JGBs are longer in duration and more closely matched to the liabilities. The second part of your question, yes. This is more tactical and keep in mind that shorter duration is for the new money to the existing portfolio which is quite large particularly when you take the U.S. corporate program that we started as we called it, and what we used to call the Japan dollar portfolio. We’re now thinking of that as one big bucket. So that big bucket, is it approximately a 10 year duration? And we’re not changing the duration of that bucket, but the incremental new money is going in tactically the shorter duration which will bring the overall duration slightly down, but we certainly have to have that focus on ALM and matching assets and liabilities. So it is more tactical for this year at this point in time.

Okay, thanks.

Well, we’ve reached the top of the hour. If anybody has any follow-up calls, David and I will be in the office. So please give us a call. Otherwise we look forward to seeing everyone at our FAB meeting. The information is out there for you to register and thank you so much for joining us this morning.

That concludes today’s conference. Thank you for participating. You may now disconnect.