Ladies and gentlemen, thank you for standing by, and welcome to the Aflac 2020 Financial Analyst Briefing. I would now like to turn the call over to David Young.
Good morning, and thank you. Welcome to Aflac Incorporated's 2020 Financial Analyst Briefing, and thank you for joining us this morning for our virtual event. You will find an agenda in your materials, and we will try to keep the event moving with a couple of Q&A sessions and a break as well. We will begin our meeting today with a strategic overview of Aflac Incorporated by our Chairman and CEO, Dan Amos. Fred Crawford, President and COO of Aflac Incorporated, will then cover strategic execution before we turn to our segments in Japan and the U.S. Masatoshi Koide, President and Representative Director of Aflac Life Insurance Japan, will provide a strategic overview of Aflac Japan, followed by Koji Ariyoshi, Director of Sales and Marketing, who will then give us an update on Aflac Japan's growth strategy.
We will then have our first Q&A session, which will focus on Aflac Japan, allowing my colleagues in Tokyo to get some rest afterward. Those of you in the audience will be able to submit questions at any time through the webcast portal. Please be sure to include your name and firm, and I will pose the questions to our panelists, making every effort to address your questions within the allotted time. After the Q&A, Teresa White, President of Aflac U.S. and recently named President of Aflac Group Benefits Division, Rich Williams, will cover strategy and growth initiatives in the U.S., followed by a short break. After our break, Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments, will provide an overview of the investment strategy for Aflac Global Investments.
Max Brodén, CFO of Aflac Incorporated, will be our final presenter and address our financial focus and outlook. Before we begin today, let me remind you that some statements made at today's meeting 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 discuss today. Please look at our latest 10-K filing for some of the various risk factors that could materially impact our results. I would also note that we refer to certain financial measures that are not calculated in accordance with U.S. GAAP. Our most recent earnings release is available at investors.aflac.com and also includes reconciliations of certain non-GAAP measures. Definitions for these non-GAAP measures are included in the appendix.
Copies of the slides are also available at investors.aflac.com, so you can follow along and make notes. At this time, I'd like to introduce our first speaker. Dan Amos has been with the company on a full-time basis since 1973. In 1990, he became CEO of Aflac and Aflac Incorporated, and in 2001, he was also named Chairman. In 2013, the Harvard Business Review began recognizing the 100 best-performing CEOs in the world and has named Dan to the list for the past four years. Dan will now provide a strategic overview of Aflac Incorporated. Dan?
Thank you, David, and good morning, and thank you for joining us. As we entered 2020, we anticipated celebrating milestones including Aflac's 65th anniversary, the Aflac Duck's 20th birthday, the 25th year of supporting the Aflac Cancer Center and Blood Disorders at Children's Healthcare of Atlanta, and the 38th consecutive year that we increased the dividend to our shareholders. However, the first quarter hadn't even ended when we found ourselves in the midst of a global pandemic that ushered in so much uncertainty around the globe. Today, uncertainty remains as we await more details about a vaccine that could allow us to resume normal lives and the outcome of the Senate runoff elections in Georgia on January the 5th that could determine the direction of regulations, including corporate tax rates.
Regardless, today you'll hear from some of our executives about our plans to emerge in a position of strength and leadership. 2020 also marked my 30th year as CEO. I know at our past financial analyst briefings I've stated that I would continue in my role until at least 70, but I am here to tell you that I am still enjoying what I do, building and watching the company grow, and I look forward to more years of doing my job. As you have heard me say many times before, I do believe that one of my key roles, along with the Board of Directors, is to develop leadership and succession planning. We place a high priority on ensuring that we have the right people in the right places at the right time.
In doing so, we have focused on building a strong, deep bench of management prepared to take on more responsibility, many of whom will be presenting today. In addition, we recently announced a realignment of our U.S. operation that further enhances support of our strategy and targeted markets. This realignment also includes new roles within Teresa's leadership team as we focus on executing on our strategy. They have done an excellent job navigating these uncertain times, and they continue to work hard to position Aflac for future. Earlier, I mentioned the milestone we treasure, the 38 consecutive years of increasing the dividend. After the New York Stock Exchange closing bell yesterday, we announced a nearly 18% increase in the quarterly dividend. Along with navigating the pandemic, we are also accelerating investments in our digital roadmaps and integrating and building upon the recent acquisitions.
Together, these initiatives result in a period of short-term pressure on revenues and earnings. The dividend action by the board should speak volumes to you in terms of our near-term ability to defend against the pandemic and our long-term outlook for profitability and growth of our company. The topics you'll hear about today provide insight into our confidence in our ability to raise the dividend. I've always said that we're in the insurance business, which also means we're in the people business. That could not be more relevant given the world we're in. Our immediate response to COVID-19 embodied the spirit of the Aflac way. We acted swiftly, putting the safety and well-being of our workforce, policyholders, and communities in Japan and the United States first.
We did this through initiating work from home initiatives, enriching benefits relative to COVID-19, and providing financial support to agents and agencies as well as our communities. We have turned to examine the business impact and determined our course of action. Clearly, the lack of face-to-face opportunities was significantly limiting our opportunities for new sales, pressuring earned premium and revenues, which prompted us to pivot to virtual and digital sales methods and accelerate related digital investments. In the midst of this uncertainty, one thing is certain, and that is the need for Aflac's products is just as strong, if not stronger, than ever. Keep in mind, regardless of whether we're talking about an environment of universal healthcare like Japan or one with private major medical insurance, there is no plan that is designed to cover all of the out-of-pocket expenses. That's where our products come in.
We believe Aflac's powerful brand and wide-reaching distribution will boost our ability to be where people want to purchase insurance. In typical times, this is usually meeting face-to-face with individuals to understand their situation, propose a solution, and close the sale with what suits their needs. However, the pandemic clearly demonstrated the need to enhance our virtual sales tools. Over the last year, we've already made progress in this regard, and the pandemic prompted us to accelerate investments and initiatives to enhance the tools available to the distribution in both countries. For Aflac Japan and Aflac U.S., you'll hear more about the topic from Koji Ariyoshi and Rich Williams. From an operational standpoint, I'll start with Aflac Japan and its Vision 2024, which Masatoshi Koide will cover in more detail. Our goal in Japan is to be the leading company for living your own way.
This is a declaration of how we tailor our products to fit the needs of customers during the difficult stages of their lives and reach them where they want to buy through the agencies, the strategic alliance, and the banks. As I mentioned earlier, it also entails selling through virtual means. Turning to Aflac U.S. as part of Vision 25, we seek to further develop a world where people are better prepared for unexpected health expenses. The need for our products we offer is as strong or stronger than it's ever been. When nearly half of Americans don't have enough savings even to handle the unexpected expenses of $1,000, that confirms the need for our products. But we have to reach consumers.
At the same time, we know consumers' habits and buying preferences have been evolving, and we are looking to reach them in ways other than traditional media and outside the work site. This is part of the strategy to increase access, penetration, and retention, which Teresa will address. We've also been investing in new distribution opportunities through the recent acquisitions and partnerships, which Rich will cover shortly. These have included the 2019 acquisition of Argus, now Aflac Dental and Vision, and Zurich North America's group benefits business, moving us to the front page of the benefit enrollment process for employees while deepening the relationship with employers and policyholders. While having little effect on 2020 results, these position us for expanded capability as we continue to integrate these opportunities and look forward to 2021. Additionally, we recently announced a distribution alliance with Trupanion in a quickly growing market of pet insurance.
From an investment perspective, Aflac, as Eric will share, we have a high-quality, diversified portfolio that emerges from a disciplined process with strategic asset allocation. For years, Aflac Global Investments has incorporated responsible investing into the process with ESG scores for insurers. We recently elaborated on our approach through a responsible investment policy that Eric will cover shortly, along with other investment updates. Aflac remains strong in terms of our capital and liquidity. We are maintaining strong capital ratios on behalf of our policyholders in both the United States and Japan, while at the same time remaining tactical in our deployment of capital. I mentioned our dividend earlier, and this 38th consecutive year track record is supported by the strength of our capital and cash flows.
At the same time, we have repurchased $400 million of our shares in the third quarter and a little over $1 billion year to date. We have among the highest return on capital and lowest cost of capital in the industry. Max will cover more on this later. To place Aflac in a position of strength, we know that we must balance the growth investments with an eye toward reducing expenses in the long run. Fred, in his role as Chief Operating Officer, has been busy with an enterprise strategic planning process that incorporates Japan, the U.S., global investments, and corporate to ensure that we are staying true to our core as we pursue growth. My job as CEO is to run the company to achieve strong results, but it doesn't end there. My job is also to ensure Aflac is a trusted, respected, and powerful brand.
I don't think it's coincidental that Aflac has achieved success while focusing on doing the right thing. In fact, I believe they go hand in hand. I'm proud that we have accomplished in terms of both our social purpose and earnings result, which result in strong shareholder return. Aflac continues to receive a tremendous amount of positive feedback, letting us know that we've got amazing people doing great things for our company. These accolades confirm that a company can survive and even thrive while acting with purpose. As just a few examples, Fortune Magazine recognized Aflac Incorporated on its list of the world's most admired companies for the 19th year, and Ethisphere included Aflac as one of the most ethical companies for the 14th consecutive year.
Aflac has also been recognized by many publications, including Black Enterprise, a list of the 40 best companies for diversity for 13 years, and the LATINA Style list of the 50 best companies for Latinos to work in the United States for 21 years. Knowing the importance of ESG, I have asked Fred to take a more active role in overseeing our global ESG efforts, and Fred will update you on some of our latest ESG-related actions and disclosures too. At Aflac, we manage our business for the long term while remaining focused on achieving our near-term financial objectives. As a management team and as a CEO, we are dedicated to addressing the challenges of growth amid the global pandemic. Our presentations are transparent and upfront in recognizing the challenge and the reality of the top-line growth outlooks.
Our approach to driving long-term shareholder value is straightforward: pursuit of our growth, strong pre-tax margins, and balanced capital deployment. While the global pandemic has been very challenging, we will navigate these uncertain times by doing what we do best: being there for the policyholders when they need us most. Not even a global pandemic is going to deter from our mission, and today you'll hear a long-term vision and strategy that will chart our course. Now, let me turn the program over to Fred. Fred?
Thank you, Dan. I'll spend my time today discussing our approach to enterprise strategic planning, provide some color on our long-term targets, and comment on recent developments. As part of taking on my new role, we launched an enterprise strategic planning process. We conduct an annual strategic review on a segment basis each year.
This year was an opportunity to develop a coordinated enterprise effort. Our process included Japan, U.S., global investments, and corporate to include Aflac Ventures. The process included both internal resources and external consulting support. This slide represents a strategic overlay to then shape segment strategy tailored to the specific market dynamics and our capabilities. A few characteristics of our strategic work worth mentioning include: we play around the hoop, as they say in basketball, and tend not to take three-point shots, meaning we stay somewhat true to our core platforms and try to limit the amount of downside earnings and capital at risk. We understand growth and efficiency are the two largest challenges we face. Armed with a strong brand and market position, we have a mature insurance platform that requires us to expand our capabilities to drive incremental growth.
The Japanese market continues to hold opportunity but is a fully penetrated insurance market where we have leading market share, and is an aging and shrinking population. In our effort to grow in Japan, we need to realize that the two most important aspects of Japan to our shareholders are steady capital generation and a low cost of capital. We can't jeopardize these core attributes in the spirit of driving a more attractive top line. The U.S. holds considerable opportunity but requires investment. Approaching the market the same way will not yield a different result. We have to balance staying true to investing in our profitable core while moving into adjacent businesses with an omnichannel approach to distribution. In this case, the logical adjacent businesses are so-called first-page employer-paid benefits of life, disability, and network dental and vision.
As we entered into the planning process, we did not expect to be facing a pandemic. It was clear our strategic plans needed to address certain near-term realities as a Horizon 1. Efforts included securing our distribution model, support for our policyholders, protecting our employees, and addressing our cost structure. However, the pandemic served to confirm the importance of virtually all of our recent Horizon 2 investments. The need to accelerate our digital and paperless roadmaps for improved productivity, customer service, and business continuity, reinforcing our commitment to a fully developed digital direct-to-consumer platforms in both Japan and the U.S., finally, a realization that our face-to-face small business model in the U.S. is uniquely exposed and diversification is critically important to our future.
We had a naturally difficult decision to make: pull back in the face of revenue pressure or push forward, given the strength of our franchise and a view that this will be short-lived. We decided 2020 was a year to go on the offense, beginning with a $175 million investment to acquire a high-quality, full-service group benefit platform in March and ending the year with a $200 million strategic investment and associated alliance aimed at participating in the growing pet insurance marketplace. In addition to these opportunistic uses of capital, we have accelerated investments in the platform, including digital and paperless, and continuing uninterrupted our $125 million three-year build of a digital D2C platform in the U.S. Finally, we continue to look beyond the near term in creating options for future growth through venture investments and business incubation. I'll address the nature of the venture work in a moment.
We understand an important question has thus far gone unanswered. When looking at near-term investments, when can we begin to see the payoff and what are we solving for in the form of future growth and efficiency? This slide lays out our longer-range goals for sales, revenue, and expense ratios along with the key drivers. Max will provide greater detail on our margins and capital management in his comments later this morning. Coming off 2019 and setting aside the pandemic, we entered a period of building years. This is necessary as we transition from a maturing company back to growth mode. Our results, therefore, follow a logical path of reduced profitability while building, followed by top-line earnings and earnings growth as we reach scale.
The approach we are taking on this slide is to focus less on the path, which can be variable, and more on what to expect our five-year strategic planning process to yield come 2025. While 2025 ends our planning period, it is still early in realizing the benefits of our building strategy, and we certainly expect growth to continue from that point. In Japan, we are focused on returning back to sales levels commensurate with the 2016 to 2018 period, driven by pandemic recovery, refreshed product, and a recovering Japan Post. We expect third-sector earned premium to return to growth in 2024 as sales recover and the impact of paid premium subsidies. Building beyond 2025 depends largely on our product extension efforts, which our Japan team will touch on later. On the efficiency front, we look to reduce expenses by JPY 15 billion on a run-rate basis.
As we run off lower-return first-sector savings product and premium naturally declines, our efforts are designed to defend an expense ratio in the 21% range. Remember, third-sector products come with a naturally higher expense ratio and lower benefit ratio. While growth is naturally elusive in Japan, maintaining balance of economic value created and economic value distributed each year is an important concept to defend. For example, Koide-san Yoshizumi and Koji Ariyoshi soon will comment on product innovation and ecosystem development. Know that when we develop products in Japan, we are acutely aware of the risk-return trade-off and ensuring a stable outlook for Japan's franchise. Turning to the U.S., we are in growth mode.
Like Japan, we need to first recover from the pandemic's impact on face-to-face sales but expect recent acquisitions, associated product line expansion, digital direct-to-consumer, and our retention efforts to drive sales growth above $1.8 billion in 2025 and building from there. While our 2019 to 2025 earned premium CAGR, or compounded annual growth rate of 2%-3%, looks less impactful on the surface, remember that in the 2021 and 2022 period, we are recovering from pandemic-driven declines. Our expense ratio will be elevated for a period of time, but we expect to settle in the range of 36%. Teresa White and Rich Williams will provide more detail on our current and near-term efforts to drive towards these goals. Shortly after our earnings call, we announced a strategic alliance in the fast-growing market of pet insurance.
While further away from our core products, pet insurance has been on our radar over the past few years, given its steady rise on the list of voluntary benefit products requested by brokers, employers, and employees. We had a buy, build, or partner decision framework. After working with Trupanion over the last year, it became clear to us that there is no substitute for a dedicated operation focused on driving this specialized business. Trupanion brings a special culture of caring for pets, a significant technology and data analytics advantage, and proven ability to operate internationally. We purchased approximately 3.6 million shares of Trupanion at $55 per share, or 9% of the company, and agreed to a three-year lockup. We see the alliance rounding out our group benefit offering and eventually arming our agents with another attractive product to sell.
We will receive distribution income largely used to compensate and incentivize our salesforce and associated brokerage relationships. We are not taking underwriting risk or collecting premium on pet insurance policies. We believe this alliance is well-timed to capture the trend of more people working from home and will drive a halo effect of offering more opportunities to sell our core benefit products. Separately, we hope to mutually explore opportunities in Japan. The idea is to leverage the Aflac brand and products in one in four households, together with Trupanion's unique approach to the growing pet insurance market in Japan. Aflac Global Ventures has become a vehicle we use to explore advanced digital ecosystem and international opportunities. Aflac Global Ventures, which includes the formation and managing of incubated businesses, creates options for future growth and returns.
You will see this particularly in Japan, where we have proprietary data and a defensible leadership position in the cancer and health markets. These options may expire in or out of the money but are important to ensuring we remain aware both defensively and offensively. At four years old, the fund has more maturing to do. We are seeing some of our early direct investments complete follow-on rounds of capital raise and, in some cases, exit the portfolio via sale. Singapore Life announced the acquisition of Aviva Singapore for $2 billion and gains access to their 1.5 million customers. Singl ife remains our largest direct investment in the fund and part of a broader effort to further explore Southeast Asia and India. You can see from this slide we have taken a diversified approach to investing.
Consistent with any venture fund, we have realized small gains and losses, but overall, the fund is in a modest unrealized gain position on direct and fund-to-fund investments totaling $122 million. Finally, let me close my comments by following up on Dan's dialogue on ESG. Recognizing the importance, Dan has asked that I take an active role in overseeing these global efforts in partnership with our Social Responsibility and Sustainability Committee of the board. Corporate social responsibility, or today's more common description, ESG, has long been part of Aflac's culture. However, in some cases, our ratings have lagged the industry. This is not a result of any lack of commitment or accomplishments but reflects the need to focus and communicate in a way that easily translates to emerging social and environmental standards.
As we enter 2021, we have reinforced our approach to responsible investing, which includes screens as part of our general account investment process. In addition, we have identified over $1.7 billion of sustainability investments. Eric will cover our approach as part of his comments. We have pledged to achieve carbon neutrality by 2040, including the added challenge of capturing Scope 3 emissions. This is not only the right thing to do for our planet. Our efforts have saved a cumulative $20 million in energy costs since commencing on this journey back in 2007. Our record of supporting the fight against childhood cancer in both the U.S. and Japan is part of the fabric of the company. We have recently crossed over $140 million in contributions to this important effort.
We recently launched an ESG hub, making it easy for investors and rating services to see clearly our commitment to ESG standards, to include reporting under SASB and TCFD guidelines, and published board-approved policy statements ranging from human rights to the environment to our investment practices. Finally, on diversity inclusion, through Dan's commitment over many years, we are a leader in our industry, and our metrics speak for themselves. This effort is continuous, and we are busy looking for ways to advance the ball even further, including the broader social challenge of economic mobility. I'd like to turn the call over now to Masatoshi Koide to dive deeper into Japan's current environment and our strategic execution efforts. Koide-san Yoshizumi.
Yes. Today, I will talk about Aflac Japan's vision and strategies for growth.
Aflac Japan is the leading company in Japan's growing third-sector insurance market, which consists primarily of cancer and medical insurance. Long-standing market dynamics in Japan, such as an aging population, increased financial pressure on Japan's universal healthcare system, and the rapidly changing customer needs that were driven most recently by the COVID-19 pandemic have helped raise customer awareness of the potential financial impact of a health event. These trends are driving up customer demand for financial protection. Furthermore, the pandemic is prompting Japan to contemplate policy approaches for the post-pandemic world, including the rapid pursuit of digital transformation.
It is within this context that Aflac Japan is pursuing growth initiatives aimed toward creating shared value by offering products and services that meet customers' needs and address the challenges of a rapidly changing environment. Japan's life insurance market is the second largest in the world after the United States. In this market, Aflac Japan is the leading company in the Third Sector, which has more than doubled to over 65 million in force policies, including 25 million standalone cancer insurance policies and 40 million medical products as of the end of March 2020. Overall, insurance penetration in Japan is high. According to industry data, for example, more than 82% of Japanese citizens are enrolled in some form of life insurance product. Medical insurance has a penetration rate of approximately 73% and is becoming increasingly competitive. Cancer insurance, however, has a penetration rate of nearly 43%.
We continue to see opportunities for growth as consumers seek third-sector insurance products to supplement Japan's strained social security system. Furthermore, given that cancer remains a leading cause of death in Japan, we expect product demand to continue to drive the upward trend in cancer insurance penetration, which is being complemented by government efforts at both the national and local levels to promote cancer awareness. Aflac Japan has developed its strategic vision, taking into consideration the structural issues affecting Japan's business environment. Specifically, Aflac Japan aims to be the leading company creating "Living in Your Own Way" as set forth in Aflac Japan's Vision 2024, the same year that will mark the company's 50th anniversary in Japan.
To achieve Vision 2024, Aflac Japan has formulated a medium-term management strategy, which will actively leverage digital innovation and data science to support the implementation of our midterm strategies, which are enhancing flexible and agile operations under our governance framework, reforming Aflac Japan's human capital management system, implementing initiatives for growth, and maintaining a strong financial base and investment for growth. Aflac Japan is investing to increase operational efficiency while carrying out activities to expand sales of our existing products and also paying close attention to profitability and investment risk, which is especially important given the uncertainty ushered in by COVID-19. At a time when more people expect to live beyond 100 years, Aflac Japan is looking to develop products that provide protection to policyholders for the various risks during each stage of life, while also taking into consideration changes in public systems and the healthcare environment.
Against this backdrop and as part of its growth strategy, Aflac Japan is focused on the Third Sector pillars of Cancer Insurance and Medical Insurance and products designed for different life stages, including income support, nursing care, nursing and dementia care, death coverage, and more. Aflac Japan has also rolled out online application procedures in response to COVID-19, which has become the new normal. In addition to providing innovative products that follow a policyholder through life stages, Aflac Japan also aims to continue to be aware the policyholders want to purchase protection by enhancing, expanding, and deepening channels for the most diverse and broad distribution. Leveraging digital technology and artificial intelligence towards implementation of digital transformation, or DX, will be a key element of our overarching channel strategy, which includes our core traditional channels and strategic partner channels.
At the same time, Aflac Japan will seek to provide protection-type products through our non-exclusive agencies in line with their respective strategies. I will speak more about our products and distribution in a minute. Aflac Japan is driving initiatives for growth by promoting innovation. Specifically, Aflac established three incubation entities in 2020. Sudachi is a small-amount short-term insurance provider that offers insurance products in support of Aflac Japan's product strategy. Sudachi will develop innovative insurance products aimed at providing new value to Aflac customers. Aflac Japan is leveraging its competitive strengths, including its scale, efficiencies, and deep experience, to organize a cancer ecosystem through which to provide customer-centric products and services fitting for the new normal. Hatch Healthcare was established as an integral part of Aflac's cancer ecosystem, which is being organized to complement Aflac Japan's existing insurance business.
The cancer ecosystem will include services such as early cancer screening, medical checks, and doctor appointment reservation services, cancer treatment support, and more. To expand the cancer ecosystem, Aflac Japan is adopting different approaches to business development, including in-house production, business alliance, joint ventures, and other means. Lastly, Hatch Insight is a data analysis company that will utilize cutting-edge technology to analyze customer data. Through these entities, Aflac is aiming to promote synergies between insurance and non-insurance businesses with the goal of developing innovative products and services. Ultimately, by bringing together the expertise of our various partners, Aflac Japan seeks to provide customers with products and services that foster peace of mind and "Living in Your Own Way" amid the new normal. Aflac Japan is addressing the new normal by cultivating an innovation-driven corporate culture and utilizing digital innovation consistent with Aflac Japan's midterm strategy.
Even before the pandemic, Aflac Japan was aggressively developing and promoting its remote work capabilities. By the time COVID-19 emerged, Aflac Japan has built up experience so that when the government of Japan declared a state of emergency in April, Aflac Japan was able to have approximately 70% of its workforce off-site and still maintain all essential services, including call centers, which continue to operate above target service levels. Today, as we prepare for the new normal, we have greatly accelerated our digital transformation initiatives to meet the changing needs and values of society. We are aggressively moving forward with paperless initiatives, and as I will explain, I'll introduce virtual sales methods utilizing web-based consultation and application systems to make it possible to conduct sales even during a period marked by limited face-to-face interaction.
These and other Aflac Japan initiatives will ultimately help ensure a more sustainable, flexible, and resilient operational structure that will lead to increased efficiencies over the mid to long term. As I have noted, implementing a digital transformation or DX is an essential part of Aflac Japan's medium-term management strategy to ensure sustained growth and enhanced corporate value. Aflac Japan's DX strategy, or DX at Aflac, is to achieve new value creation to further grow our core businesses and beyond. Ultimately, DX at Aflac will enable not only digitalization but also transformation of Aflac Japan's human resources systems, organization, and framework. Implementation of this strategy entails cultivating DX specialists and further driving work-style change through the widespread adoption of agile operational processes and cross-functional teams.
Ultimately, we believe effective implementation of these strategies will enable Aflac Japan to continue being the leading company creating "Living in Your Own Way" and drive greater value to our policyholders and shareholders alike. Thank you. I will now turn the presentation over to Koji Ariyoshi.
Thank you. I will address Aflac Japan's sales strategy. COVID-19 and the ensuing emergency declaration significantly affected Aflac Japan's sales activity. However, while still in the midst of the pandemic, I can please say that Aflac Japan's sales appear to be on track to recovery. In our response to COVID-19, Aflac Japan has employed diverse communication tools, gradually expanded its face-to-face sales activities, and further enhanced its non-face-to-face sales capabilities and activities. For non-face-to-face sales, Aflac Japan accelerated the creation of a virtual sales system leveraging digital technology. On October 26, we implemented a new virtual sales tool that enables online consultations and policy applications.
Aflac Japan was the first major life insurer to roll out such a virtual sales tool. With the gradual resumption of activity, we are seeing signs of improvement. Aflac Japan's index for the volume of agency activity, for example, is improving, and since June, the number of proposals to customers has returned to levels in line with last year. In addition, the number of walk-in visitors to Aflac exclusive shops is also showing signs of recovery. Our agency channel has also benefited modestly from the gradual resumption of activities, as cancer insurance sales for the third quarter were up 3% compared to the previous year. Aflac Japan's product strategy is to create value for policyholders through four core initiatives. First, Aflac Japan will launch a new medical insurance product, EVER Prime, in the first quarter of 2021.
This competitive new product will provide extensive protection, including enhanced coverage for short-term hospitalizations and the three death threat diseases: cancer, heart attack, and stroke. With EVER Prime, we seek to capture a greater share in the highly competitive medical insurance market, and we believe that EVER Prime's competitive enhanced coverage will appeal to many. Second, Aflac Japan will enhance promotion of its all-in cancer insurance rider, which can offer a wide array of coverage. Sales results to date have confirmed the need for more comprehensive coverage among the middle-aged segment. Going forward, Aflac Japan will continue to promote this product to further increase our leading share in cancer insurance. Third, Aflac Japan is developing its life cycle products approach, namely continued refinement to existing income products designed for younger working population and existing elderly care products. Increasing uncertainty and an aging population have heightened concerns about income stability and nursing care.
Therefore, Aflac Japan will look to enhance its products to address these concerns. For example, we are considering coverage for the short-term incapacity to work, and we will look to combine nursing care coverage with services in developing a product set. Aflac Japan's ultimate aim is to leverage Aflac's strong reputation in cancer and medical to drive life cycle solutions that can mature into a third major category of sales and growth for Aflac Japan. Fourth, in 2021, Aflac Japan will utilize smaller-amount short-term insurance in areas that are difficult to cover with our existing products and services. One such example includes medical insurance designed for those not eligible for non-standard medical insurance. We believe that such products will enable us to capture new customers. Looking ahead, Aflac Japan will address customer needs through trial introductions of products and services that were previously not possible.
Aflac Japan's agency channels account for approximately 80% of our in-force AP and is our foundation for sales. Agency's continued success is essential for Aflac Japan's sustainable growth. As part of our growth initiatives for those agencies highly motivated to grow, Aflac Japan will provide management support to steadily expand businesses. For large Aflac exclusive agencies, Aflac Japan will help improve their productivity by providing recruiting and training support. In addition, Aflac Japan will collaborate with agencies to re-engage existing policyholders through a range of communications, including by direct mail, phone calls, and online consultations. For the bank channel, Aflac Japan plans to enhance its direct mail and telemarketing as a part of our response to the new normal and COVID-19. Regarding Japan Post channel, we will create opportunities for consultative sales where Aflac Japan's cancer insurance serves as a starting point for sales discussions.
In addition, we are also working with the Japan Post Group companies to promote digital transformation initiatives that will mutually benefit Japan Post customers and group companies alike. Aflac Japan is moving forward with major digital transformation or DX initiatives. First, as previously mentioned, Aflac Japan rolled out a virtual sales system consisting of web consultations and online application functions. Second is the expansion of online group sales. In group or worksite sales, Aflac Japan is establishing our sales structure through corporate client intranet sites, and efforts to expand online group sales are underway. We believe such an online presence will lead to even more opportunities, even during the new normal with an increasing number of employees working remotely. Third is to maximize the use of artificial intelligence to analyze sales activities results.
Aflac Japan will further accelerate efforts to identify customers who have a strong need to buy insurance and maximize the efficiency of solicitation approaches. Aflac Japan will also begin new initiatives to identify customers to whom we were previously unable to introduce additional policies due to their claims history. Lastly, Aflac Japan is also collaborating with the Japan Post Group on the promotion of a range of digital transformation or DX initiatives that have been initiated as a part of the strategic alliance framework. This concludes my presentation, and I will now turn it back over to David.
Thank you very much, Koji Ariyoshi. We will now begin our Q&A session. Just a reminder that you can submit questions online through the webcast platform at any time. This Q&A also will be focused on the presentations thus far, specifically Aflac Japan, given the late timing there.
I will now read our first question. The first few questions relate to Aflac Japan sales. So Dan, Koji-san, and Koide-san, these are directed to you. The first question comes from Tom Gallagher at Evercore. The target for 2025 Japan sales is below that of 2017 and 2018 levels. Is this because of a limited recovery expected from Japan Post, or why are you projecting that you can't get back to prior sales level over the next three or four years?
I think Koide-san wants to take that.
コロナウイルスによって生じた不透明性により、当社は2021年の具体的な販売ガイドラインは提供していませんが、このニューノーマルの環境下でWebを活用した面談申し込みの推進強化や、医療新商品の投入によって主力商品から新型コロナウイルスを取り除き、業績を回復していきたいというふうに考えています。その上で、中期的にはフレッドがプレゼンテーションの中のスライドでありましたように、中期計画では保証製商品で800億から900億を超える900億の販売を計画をしています。ですから、徐々に回復をしていくというふうに考えています。
Due to the COVID-19, due to the impact of COVID-19, since we are very uncertain about 2020-21, therefore we do not plan to give out any guidelines at this moment. However, the things that we are working on are going to accelerate our sales. For example, our virtual face-to-face sales and application, or launching a new medical product, etc. As Fred mentioned, in regards to the midterm plan of Aflac Japan, we are planning to get back to JPY 80 billion-JPY 90 billion in the medium term.
Yeah, and I'll add, yeah, just so, since Koide-san just referenced my comments, Tom, one of the things I would add is that, you know, as you can imagine, there is a level of conservatism, particularly as it pertains to the Japan Post distribution platform. The reason for that conservatism is nothing more than we're needing to speculate and estimate on the level and pace of recovery. Also, note that when you look at 2000, particularly 2018, remember that was a year where we launched a new cancer product in Japan Post, so you had a very sharp spike in sales in that system. That type of dynamic we would expect to continue into the future.
When we do reach years of refreshed cancer product in the Japan Post system once fully up and running again, we would expect to enjoy that type of sales performance, so we're being naturally prudent, I would say, in what we expect in these channels, particularly Japan Post, given that they're in a rebuilding mode,
and I would say we would not be happy with those numbers that we quoted. We want better, we're working toward better, and frankly, I think we'll achieve better, but I've got to take
the numbers they submit. The next question is a follow-on, and it comes from Humphrey Lee at Dowling & Partners, and his question is, what can you do to bring sales back to a higher level, or is this the new normal for Aflac Japan's sales pipeline/product offering?
Again, I think it's better since we've got the opportunity to have the Japanese speak to let them do it. So I'm going to continue with that.
先ほども話したように、こういうCOVIDの環境下においてもセールスができるように、我々はノンフェイストゥフェイスのデジタルを使ったセールスツールをまず開発をしています。
I mentioned earlier, under even this COVID environment, we have developed this non-face-to-face digital sales tool so that we can continue with our sales.
それに加えて、来年早々には新しい医療保険、非常に競争力ある商品もやっぱり投入をします。
And on top of that, we are planning to launch a very competitive medical product next year, at the beginning of next year.
ですから、こういった新商品もこういったWebを使って募集ができます。
And using the web tool, we are able to solicit these new products as well.
だから、こういった新商品やこういったCOVID-19に影響されないWebの募集ツールによって業績の回復を早期に図りたいというふうに考えています。
And we would like to recover and restore our sales at early point, taking full advantage of these kind of web solicitation tools, even under the COVID-19 situation, because that's what we plan to use for our new products. That's all.
The only point I'd like to add on that is, I hope you all remember that one of our things we try to do when we're talking to all of you is to be transparent and be conservative, and because our objective is whatever we tell you we plan on making, and so we don't go stretch too far when we're dealing with y'all. We try to keep the numbers conservative, so again, I say that just to keep it tempered in terms of what we're reporting out, but at the same time to let you know we are not satisfied and we'll continue to push, and that's a pattern that we've been doing for 30 years here. We've never gone out and pushed too hard, and these times being uncertain, we're just being very cautious.
Yeah, it's important to note that what you're seeing in the results we're showing there is really doing what we do at a core level in cancer and medical, particularly in driving that business through our current distribution channels. You don't see too much in that number related to incremental growth from newer initiatives. In Koide-san's comments and Koji's comments, there were a couple of very important notes to take note of. One is that their lifecycle product approach is something that we are very encouraged about, but will take time to develop. And lifecycle meaning that if you think of cancer and medical products, they largely home in on the middle age, if you will, of the sector. To get to the younger age sector, we've been relying on the income or a disability-like supplemental product to get at a younger working-age population.
On the other end of the scale, we've been developing and further reviewing our elderly care or care products, as we call that, to take advantage of the aging population. Again, in both cases, these are supplemental policies that rely. They play off the government-provided support. We, meanwhile, watch the government, and as Dan has mentioned before, we're seeing conversation take place about whether or not more of those economics need to be shifted onto the consumer over time, including as you age or become elderly, so there are a number of catalysts going on, plus also product development, but we tend to take a conservative approach to layering on success into those projections until we see more proof of concept and an ability to show results, so there is opportunity to grow above that run rate, but we are understandably conservative when we think of our forward view.
アフラック日本の小出です。
This is Koide from Aflac Japan.
単にCOVID-19からの回復だけではなくて、その後のニューノーマルの時代の成長に向けて、新しいがん保険、医療保険に加えて、今説明があったライフステージに合わせた商品展開、それからデジタルトランスフォーメーション、こういうものをレバレッジとして使って成長させていくつもりです。
It is not only that we are trying to recover and restore from COVID-19 and go into new normal, but we are seeing this as an opportunity to grow. That is, of course, in our new cancer product as well as the new medical product. And on top of that, as it was just recently mentioned, that we are planning to launch and sell products that really match our customers' life stages. And in addition, we will also be leveraging this transformation, and this is how we plan to go forward.
All right, thank you. Our next question comes from John Barnidge at Piper Sandler. Fred, what is the market opportunity for pet insurance in Japan? Is there a thought to partner Trupanion with the Singapore Life business?
There are, so let me answer the last part first. There are no plans to partner with the Singlife business in Asia on pet insurance, and that's primarily because our focus with Singapore Life is really backing the cancer product in Singapore. And that's part of a broader strategy, really an experimental strategy, if you will, as to whether or not we can take our arguably leading global position in cancer insurance and the knowledge and history we have in that and export elements of that through company partnerships or alliances like Singlife. So that's really the focus there. On pet insurance, I'll just make a couple of comments about statistics. In the U.S., pet insurance has a very low penetration, around 1.5% or so, and that's why there's a lot of discussion going on in the marketplace about pet insurance having a great and significant runway in the U.S.
Also, particularly in the worksite, as you can imagine, in fact, interestingly enough, even in our own employee surveys at Aflac, it ranks number two or three as one of the requested benefits that our own employees want to see going forward, and we don't think that's a mistake. We think that's a result of certainly the emergence of pet insurance, but also more people working at home and finding more work-life balance, and with that comes pets and caring for pets, and so that trend we think is considerable, and that's a trend that Trupanion sees and we see, and so the U.S. is where there's going to be, we think, a lot of opportunity, particularly obviously in the worksite. Japan has a penetration of pet insurance of around 8%, and so there's actually a higher penetration of pet insurance in Japan.
But our play there, we think, is really what I mentioned in my script comments, and that is Aflac is in one in four households, and there are pets in approximately one in four households. And we think that crossover capability is something that we can leverage over time. There is a broad array of insurance companies, small insurance companies, very niche players in Japan that address pet insurance, but there's really yet to be what I would characterize as a major player, major brand to go into the pet insurance space and try to capitalize on the opportunity in Japan. And we're going to eagerly look at whether or not there's a way to do that in partnership with Trupanion.
Yeah, I want to say one thing is that our focus is still on landing the planes, as we call it. We've got a lot of things going on that are positive, but in terms of Argus and buying it and getting in that and then the true group insurance, but this was too good of opportunity for us to ignore, and we've told them that it may take a little while before we can really get to it, but it's a good investment, and also it offers opportunity for the long run. But be clear, we're not trying to spread ourselves so wide that we can't accomplish our objectives on the other things. So they're front and center, and we'll continue to be as we move forward.
And our final question for this first Q&A panel comes from Nigel Dally at Morgan Stanley, who asks, "Koide-san, you mentioned that medical insurance has become increasingly competitive. Is that a recent development? From what I understand, it has been competitive for some time. Have new companies entered the market, and are competitors using price to gain market share?"
はい、小出です。おっしゃる通り、医療保険のマーケットはもともとコンピティティブではありました。
And as you mentioned, this is Koide. Medical market has always been very competitive.
しかし、低金利がずっと続いて、第一分野商品がやはりなかなかマーケットの成長が望めない中で、大手の保険会社がそういう第一分野のマーケットからこの第三分野、特に医療保険の分野に経営資源をシフトして、競争が最近さらに激しくなっているということがあります。
But it is also true that this medical market has become even more severe as this low interest rate has been persisting for some time, and there's really not much growth that we can see in the First Sector market. As a result, the large life insurance in Japan is shifting from First Sector to Third Sector, especially in the medical area, and that is really driving the competitiveness of the market.
例えば、乗り合い代理店に医療保険を供給するために、別の保険会社、子会社で作るなどの動きで、本体とは違う子会社で新しい医療保険を作って供給するなどの動きがあります。
So, for example, in order to resell medical insurance in the non-exclusive agencies market, you really have to have very competitive products. In order to do so, some of the insurers are establishing subsidiaries to develop more competitive products, new medical products, and have them sell through non-exclusive agencies.
以上です.
That's all for me.
Let me say one thing about competition. We've always had competition. It does get a little stronger, as Koide said, but the fact of the matter is, I wouldn't trade places with any insurance company doing business in Japan, no matter how big they are, because we've got the best strategy that you could possibly have in this environment that you're in. I'm convinced that we'll continue to penetrate because we're introducing good products that people won't need. I wanted to add one observation as well. First of all, the medical product is not very interest rate sensitive, so that certainly helps in this kind of interest rate environment.
And we stay true to our pricing discipline, and we still target a mid-teens IRR when we price new business on our medical product.
And Max, this is Todd. I just wanted to add one comment there. I think that the way we're competing in the medical market with this new product is enhancing benefits. So it did not exist, and that allows us to compete what I'll call up market in the non-exclusive agencies.
All right, and that concludes our Q&A panel for the first session. And I would now like to introduce Teresa White. Teresa White joined Aflac in 1998 and has taken on roles of increasing responsibility ever since, including being promoted to Chief Administrative Officer in March 2008, Chief Operating Officer of Aflac Columbus in 2013, and most recently President of Aflac U.S. in 2014, where she leads both the Aflac Group and Aflac Columbus operations. Teresa is responsible for creating the Vision 2025 for Aflac U.S. and driving execution of the long-term strategy while strengthening the growth and value proposition for Aflac U.S. I now turn over the virtual stage here to Teresa White. Teresa?
Thank you, David. Good morning. I'll start the U.S. section with a macroeconomic view of the market and then provide insight into how we're responding to some of the key market trends. We continue to see relatively high U.S. unemployment rates, with a large number of companies closing or issuing furloughs due to the COVID-19 pandemic. To compound this, 29% of Americans are concerned about the impact of this pandemic and the economy on their ability to afford expenses associated with healthcare. We've continued to see a shift in more health expenses to the consumer as a growing number of companies continue to offer high-deductible health plans to their employees.
Now, pre-COVID, we started to see an increase in workers working outside of the traditional worksite. The pandemic has only accelerated this shift and forced businesses to find alternative methods to interact with consumers. In fact, according to a new McKinsey Global Survey of Executives, companies have accelerated the digitization of their customer and supply chain interactions as well as their internal operations by three to four years. In short, consumers believe that insurance is more important today than ever before. Consumers are more concerned today about out-of-pocket expenses due to an unexpected health event, and the demand for simplified digital interactions has increased for businesses and consumers alike. Now, although Aflac has not been immune to some of these headwinds faced in 2020, I'm proud of the way that we've responded.
We have focused on expanding the Aflac value proposition and are positioning Aflac U.S. for growth in the future. In fact, in 2020, Aflac U.S. accelerated our roadmap of investments while staying committed to our strategic objective to increase access to the market, increase participation to Aflac products, and increase policyholder and account retention. Now more than ever, we believe consumers need our products, and we're taking advantage of the consumer sentiment to put Aflac U.S. in the best position to help consumers to prepare for those unexpected health expenses. Aflac U.S. has expanded our product portfolio to now include a full suite of individual and group products. We've added Aflac Dental and Vision products as well as true group Life and disability products. We've also made adjustments to our go-to-market approach to accommodate the many ways consumers buy within and outside of the worksite.
We've also accelerated our One Digital Aflac strategy to create a digital experience across the employee, customer, and distribution lifecycles. Digital makes it easy for customers to buy from Aflac, for the distribution team to sell Aflac, for our employees to work at Aflac, and for the Aflac promise to be fulfilled. To drive growth in 2021 and beyond, our mantra is optimization. We will be working to onboard and integrate our new group platforms, to retire our older systems, and drive the adoption of various mobile and digital tools and services. In the last two years, Aflac U.S. drove record new sales and premium persistency. Lower sales in 2020 due to COVID will cause revenue and expense pressure in 2021. Rich will talk a little more about the growth initiatives for reaching our 2025 goals of more than $1.8 billion.
However, what I want to do is briefly talk about our premium persistency. One of the biggest impacts that we can make on growth is to retain our existing customers. Our normal premium persistency is in the range of 78%. We believe this is an opportunity we have to address. In 2020, we began exploring the impact of service, product design, channel, and utilization on premium persistency. In 2021, we're responding with changes to our product portfolio, introducing new product categories and new product benefits that drive increased premium persistency. We're responding with tools and capabilities not only to reduce costs but to improve the service experience and perceived value, which also increases persistency, and finally, we're developing integrated operating models to reduce account and policyholder pain points that lead to defection. With that, we have set the direction for our strategy for the next five years.
We plan to increase our attractiveness in the large case market by accelerating an integrated platform and go-to-market strategy for a full suite of group benefits. We'll also strengthen our position in the small business market. COVID-19 has certainly shifted the selling and enrollment landscape in the small case market, and as a result, we've shifted to meet the demands with new digital tools and processes, providing our field agent channel with the tools they need to engage consumers virtually or face-to-face. In short, we are repositioning them in this new digital environment. And finally, we're executing on a strategy to reach consumers that we don't reach in the traditional worksite. We're building a consumer markets platform to test and learn with our end-to-end digital sales and service model. In addition to driving revenue growth, we're also taking action in a phased approach to address near-term expenses.
Phase one was a successful voluntary separation program from which we project an annual savings of $45 million-$50 million. Our next phase is focused on optimizing the enterprise. In order to deliver on our key strategic objectives, we're realigning the U.S. organization to drive accountability and ensure there is a key leader dedicated to each of our core objectives and that the right resources and talent are in play. Our success in the future depends on how finely tuned and focused our teams are. At the highest level, the following changes are effective January 1st. Rich Williams, who you'll hear from in a little bit, is Executive Vice President. He will be President of Group Benefits Division. He will lead Aflac Group and will continue to lead the newly acquired business of Aflac Dental and Vision and Aflac Group Life, Disability, and Absence Management.
Virgil Miller, Executive Vice President, will be President of Individual Benefits Division. He'll lead the teams who drive our Aflac Individual Benefits and Consumer Markets P&L. Steve Beaver, our CFO, will remain in his role where he's responsible for segment financial reporting, planning, and analysis. And finally, we will have shared services at a shared services organization that includes marketing, digital services, product development, and human resources that provide support for both P&Ls. We're a strong company with a clear vision, and each of us plays a key role in how successful we are today and in the future as we remain focused on delivering the Aflac promise. Our plans to focus on optimization also extend to our brand, which is one of the fundamental foundational enablers of successfully executing our strategy.
Our brand strategy has had to pivot and expand in two ways: where we market and who we reach. Today's media landscape has become fragmented, so we've had to change where we market. While we'll continue to invest in TV, we'll also be in spaces where more of our target audience is consuming content. In addition, as we enter 2021, we're expanding our reach to not only drive awareness with consumers but to employers and distribution as well. Our goal is to focus on our distribution, both the agents and broker partners, by understanding the needs of their clients and providing them with the collateral and digital tools that they need to reach more consumers. This will be multiplied by connecting with employers, showing them how Aflac can assist them with providing a more customized benefits package to their employees. In the past, our primary audience was the consumer.
We are investing an additional $20 million to increase awareness with our consumers, employers, and distributors. The end result is more access to workers both within and outside of the traditional worksite. Ultimately, our goal is to make our organization more effective, agile, and responsive not only to today's market but to the market of tomorrow. At this time, I'll ask Rich Williams to provide some more detail around the growth strategy. Rich?
Thank you, Teresa. Good morning. Today, I'll discuss where we see the market opportunity and our strategic approach to growth in the United States. Our strategy remains consistent with what we've presented in prior years but with natural refinements due to macro-level trends, Teresa shared earlier. We have made progress towards key growth initiatives, but near-term challenges remain with notable impacts from the pandemic.
While there is pressure on near-term results, the need for Aflac's benefits solutions in the marketplace has never been greater, and we're well positioned to capitalize on that opportunity. We expect a measured recovery in 2021 with improvement in the second half of the year as well as future years as we begin to see the environment and economy stabilize and recognize material impacts from our various growth initiatives. Let's begin by discussing the market opportunity. While the worksite has been impacted by the pandemic, there is still a strong and significant U.S. workforce with nearly 6 million employers and over 170 million employees. When looking at the voluntary benefits market, 60% of employers offer at least one voluntary product to their employees, with significant differences between market segments. Specifically, over 80% of larger employers offer voluntary products compared to less than 60% from smaller employers.
In addition, we're seeing an increase in interest for the products we offer, with 35% of employers considering offering voluntary products to their employees in the third quarter of 2020 compared to just 30% in the first quarter of 2020. This represents a tremendous growth opportunity, and we have made focused adjustments to our vision and go-to-market approach to support the market need. Our go-to-market approach has evolved along with the market. According to the U.S. Bureau of Labor Statistics, there's been a meaningful shift in employment by firm size over the last 20 years. In the early 1990s, over 40% of employment came from firms with fewer than 100 employees, and a little more than 35% of employees were with firms with more than 1,000 employees. When you look at these two segments today, you essentially see the reverse.
In 2019, a little more than 40% of employment came from firms with more than 1,000 employees, and roughly 35% of employees were with firms with less than 100 employees. The shift is sizable because there are more than 60 million employees in larger employers, and Aflac's current penetration is about 1.3 million. This is primarily a broker-driven group market segment, which we have steadily increased over the last several years, but there is opportunity to accelerate growth as we continue to expand our value proposition. Front-page group benefits are top products sold in larger cases, and we have made strategic investments in businesses to position Aflac more favorably during the enrollment process. Historically, we've seen strong sales in the small business segment, but it remains under-penetrated while vulnerable due to the pandemic.
We intend to strengthen our leadership position in this segment, which requires a broad distribution reach and an increased presence on the front page of the benefits enrollment. Successfully launching Aflac Dental and Vision and returning to pre-pandemic levels of absolute recruiting of more than 15,000 associates a year will help strengthen producer growth within our agency franchise, which is fundamental to our long-term success in this space. The final segment we have particular interest in are those 125+ million consumers who don't have access to Aflac, are not at the worksite, and who may not necessarily want to purchase insurance through traditional means. The pandemic has certainly accelerated consumers' purchasing preference to more digital, and that trend was occurring prior to the pandemic, with consumer preference increasing from 38% to 48% from 2016 to 2019.
In alignment with the market opportunity, we're strategically expanding our value proposition and focusing our distribution approach. In particular, in 2020, we launched Aflac Dental and Vision in select states to enter the network dental and vision market, and similarly, we recently announced the entry into Group Life, Disability, and Absence Management to round out our group benefits product offering. Combining these businesses with the build-out of consumer markets business allows Aflac to sell products with a completely digital experience and platform, which will provide Aflac U.S. with the ability to access consumers when, where, and how they want to be met with a more holistic and attractive value proposition. The impact of these initiatives is meaningful, with incremental revenue goals in excess of $1 billion in the next five to seven years.
To update everyone on our progress with Dental and Vision, 2020 has been a successful integration and soft launch year. Our intent was to have a phased and methodical approach to ensure we release this product in a way that we could optimize growth, efficiency, and experience. We had a 10-state rollout beginning in the first quarter of the year, and we have been successfully working through product filings and approvals in preparation for a national launch in the first quarter of 2021. network dental and vision will assist Aflac with increasing access in growth areas of the market. We believe this portfolio expansion will foster increased producer productivity from deeper penetration as well as opportunities for further penetration of accounts with Aflac's core voluntary coverages.
It will also assist with recruiting and retaining agents as well as expand broker access, which will positively impact earned premium through new sales and increased persistency. We will generate between $300 million-$500 million in revenue over the next five to seven years with this business. The most recent buy-to-build initiative is within our group benefits division, and we're excited to further expand our value proposition with Group Life, Disability, and Absence Management. group life and disability as an industry is a mature and stable business that is currently seeing compounding growth in the low single digits with favorable financial results. This industry sees higher employer penetration and persistency rates compared to voluntary benefits, especially at market, which provides Aflac with an opportunity to be on the front page of enrollment and access a greater number of larger accounts.
Similar to the Dental and Vision market entry, we'll utilize a phased and methodical approach to integration and growth of this business. We'll primarily operate in the 1,000-plus market, leveraging large case specialists during the first phase. Over time, we will move down market and expand access of this product set to the various producer groups within our distribution network. This approach will allow us to generate between $500 million- $800 million in revenue over the next five to seven years. In addition to our group benefits expansion, we're increasing consumer access through distribution expansion and a consumer market approach. As a result, we're able to serve the growing number of employees who are not at the traditional worksite, which has been accelerated during the pandemic.
To reemphasize the broader strategy for this business, we will capitalize on the market opportunity by utilizing a differentiated platform, administration, and operations while leveraging the powerful Aflac brand. This allows for access into new markets, automates operational processes, and increases the quality of the customer experience. As planned, 2020 has been dedicated to successfully building the fully digital platform and successfully working through product filings and approvals in each state. Sales results in the year have not been at the level we would like to see, but the pandemic has highlighted the need for this new platform and reaffirms our roadmap of product delivery. Particularly, our intention to launch a consumer markets life product will occur in 2021. We expect this business to contribute between $150 million in revenue by 2025.
In closing, we're taking a systematic approach to advancing our business model and actively addressing current challenges to drive sustainable growth in both sales and earned premium. We're pleased by the progress we've made and remain encouraged by the market opportunity we see. At this time, I will turn the program back over to David. David?
Thank you, Rich. At this time, we will pause for a five-minute break. We will resume the programming at 9:38 Eastern and resume those presentations with Eric Kirsch, Global Chief Investment Officer, and Max Broden, CFO of Aflac Incorporated, and then go into our final Q&A. Thank you.
In addition to visiting customers or having customers visit sales offices, meetings can now be held online. Mr. Tanaka, in addition to visiting you, it's now possible to explain everything to you online while you stay at home. Which would you prefer, a home visit or an online explanation? Oh, if I can stay at home and listen to your explanation online, then I'd prefer to do that. Thank you. Okay. We'll do this online then. The sales agent confirms the type of device the customer will use for the online meeting and sends a meeting link to the customer's email address. Both the sales agent and customer start Microsoft Teams, a video conferencing application on their PCs. Here is your current insurance policy, Mr. Tanaka. Please take a look. Okay. Using the screen sharing function on Microsoft Teams, the policy details can be explained just like in face-to-face meetings.
Both you and your wife currently have cancer insurance. Taking the current state of cancer treatment into account, can I show you how your insurance will help you if you were to get cancer? Yes, please. This is how sales agents can highlight words on the screen to clearly explain each point to customers, and you can upgrade your cancer insurance to the latest policy provided by Aflac. In your case, if you took out the latest policy, your monthly premiums would be... The planning tool is used to carry out a simulation and obtain an estimate of the monthly premiums. I see. We should take out the latest cancer insurance policy just in case. I agree. Okay. So would you like to apply? Yes, please. An application tool is used to select products and enter the necessary information. So now I will enter some information necessary for the application. We'll go through this together on the screen.
Please let me know if you have any questions. Information entered on the sales agent's screen is shown in real time on the customer screen. Wow. I had no idea you could do this kind of thing. Me neither. Lastly, I would like you to check the details of your application and the declaration. If there aren't any errors, please provide your signature. How do we sign? Do we have to visit you on another day? No. I'll send a text message to your smartphone. Please open the link in the message to see the details of your application and declaration and the space for you to sign. After confirming the details, please sign.
A new system known as Call View is used to display the details of the application and declaration in the space for the customer's signature. Customers can sign using a smartphone, making it possible to complete the procedure without a pen pad. Signatures are obtained using CallView, and application information is sent to Aflac via the application tool. That completes the application procedures. An insurance policy certificate will be issued after your application is processed. So I'll contact you again soon. Is that it? That was so easy. At first, I was worried about applying remotely, but that was so easy. I'm glad you found it to be easy. Please don't hesitate to contact me if you have any questions. That's great. Thank you.
With this new sales style, agents can confirm policy details, understand customer needs, provide proposals, complete applications, and obtain customer signatures all online. We will continue enhancing the tools used during this process with the aim of further improving customer satisfaction. Going forward, we will continue supporting the sales activities of Aflac Associates in order to meet the needs of diversifying work styles.
Welcome back. We're now entering the final portion of presentations this morning. Our next speaker is Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments. Eric joined Aflac in 2011 and is Executive Vice President, Global Chief Investment Officer. He was named President of Aflac Global Investments, the asset management subsidiary of Aflac Incorporated in January 2018, and is responsible for overseeing the company's investment efforts, including Aflac's investment portfolio and its investment teams based in New York and Tokyo. I'll now turn the call over to Eric. Eric?
Thank you, David, and good morning, everyone. This year, we'll go down in history with a global pandemic creating the greatest economic and investment market disruption of perhaps the modern era. While prior to the pandemic, we were approaching the 10th year of an economic expansion, we were preparing for the inevitable slowdown and had been defensively positioning our portfolio the last few years.
To date, our well-disciplined investment approach based on strategic and tactical asset allocation, disciplined credit underwriting, and sound risk management has proven effective. We put our portfolio through extensive stress testing under tough economic and market assumptions while finding further opportunities to reduce risk in the portfolio. As Federal Reserve action to fight the effect of the pandemic drove U.S. interest rates to historic lows, our floating rate portfolios experienced enhanced net investment income from interest rate swaps and LIBOR floors. We shifted our new money allocations to high-quality corporate bonds and yen credit investments, opting for safety as we watched credit markets. Finally, we have a growing alternatives portfolio, which had a sharp income recovery in the third quarter after experiencing a drawdown in the second quarter. This year was certainly one of unprecedented challenges. Rest assured, we will remain vigilant.
Our disciplined process and resulting solid portfolio have provided the foundation for strong performance during these volatile times. For Aflac Japan, our asset allocation over the past year has favored dollar assets, selective additions to yen credit, and a rising allocation to growth assets. On a consolidated basis, our credit quality remains high at an average single A-minus. Our triple B exposure is at 24%, and our below investment grade exposure is at a very manageable 6%. We are highly diversified by sector, with limited exposure to those we consider most vulnerable to credit stress in this environment, including energy, transportation, and consumer cyclicals. Our transitional real estate and middle market loan portfolios benefit from first-lien senior positions supporting solid assets. We have experienced fallen angels equal to around 1% of our portfolio, well within our estimates given the large amounts of rating agency downgrade activity.
Our conservative investment style and active management have served us well through the crisis. We have updated our stress test, which we first presented during our first quarter earnings call, with a focus on a second wave and potential economic market and portfolio impacts through 2021, in which we see a bumpy recovery. Outcomes will be highly influenced by a vaccine, fiscal, and monetary support. I am happy to report that under our base case, we estimate potential losses have declined 40% from $680 million earlier this year to about $400 million. Our portfolio and the most vulnerable credits held up very well during the height of the economic slowdown, and most have seen their business recover. We also benefited from nearly $1 billion of risk reduction to vulnerable names through a combination of de-risking, maturities, and tenders.
We expect some credit rating downgrades, continued negotiations with loan borrowers, and the potential for an increase in defaults. In the event a second wave is longer and deeper, our estimate for potential losses could increase to $500 million. We will continue to stay focused and actively manage our exposures. Our currency and interest rate hedging strategies have generated strong performance this year, with currency hedge costs right in line with this year's plan. As a result of the steep decline in LIBOR, you can see hedge costs will come down substantially next year as current pricing is around 50 to 60 basis points, a 75% reduction versus a year ago. For 2021, we have locked in about 50% of the forwards in our Group 1 bucket at a cost of 52 basis points.
As part of our enterprise hedging program and subject to market and capital conditions, we plan to reduce our hedge ratio to 20% next year, increasing our unhedged dollar exposure. Our current plan is to reduce our forward positions by about $2.6 billion and thereby move these assets to the Group 3 unhedged bucket. You will recall, to improve capital management and reduce settlement risk, we use derivatives, collars, and caps in Group 3, and this year, we also plan to add one-sided options to the toolkit to reduce costs further. Finally, we use interest rate hedges to protect our floating rate income, taking into consideration that most of our floating rate assets have built-in LIBOR floors. Because of the precipitous decline in LIBOR, a large portion of our loans hit their LIBOR floors.
This allowed us to monetize gains on our hedges, which is expected to add about $50 million to net investment income this year. While the middle market private lending asset class has received a lot of attention, it has performed particularly well across the industry. Our strategy focuses on the higher quality segment, including 100% first-lien senior secured loans with low leverage, and is almost entirely to companies that are supported by private equity sponsors. Our portfolio is highly diversified in terms of the number of borrowers, sectors, and industry exposure. These attributes are carefully managed by our specialized managers through strict credit underwriting and risk management practices. We have seen companies improve their liquidity, including private equity sponsors adding additional cash support when necessary to get these borrowers through the worst of the economic disruption.
Companies aggressively removed costs to mitigate the impact to their bottom line, and many have seen a sharp recovery in their businesses with revenues rebounding as the economy reopened. We did have 32 loans representing just over 10% of our portfolio, where we amended loan terms in exchange for extra protections as part of those negotiations, further solidifying our position. This asset class is not immune from the challenges created by the pandemic, and some borrowers remain vulnerable to an extended time of recovery. While we are encouraged by the strong performance to date, we have experienced about 540 million of new downgrades to Triple C. Year to date, we have realized only $7 million of specific losses on two loans to companies that had been struggling before the pandemic. Finally, we earn an attractive book yield currently at just over 6% in addition to earning some fee income.
We believe this asset class provides attractive risk-adjusted returns while adding diversity to our overall portfolio, which has been validated through this crisis. We have taken a diversified approach to commercial real estate, building a portfolio consisting of transitional real estate debt and commercial mortgage loans. Consistent with our overall approach to risk, our portfolio is entirely first-lien senior secured loans, all investment grade, with low loan-to-values and diversified across property types. Multifamily and office represent our largest exposures, in part due to our cautious approach to retail. As expected due to the pandemic, we have worked with borrowers to amend 23 loans, with about 16% of the portfolio having interest deferrals. In return for amendments and interest deferrals, we negotiate further protections with the borrowers to maintain our strong position relative to the asset.
Let me also review the unique underwriting characteristics of the transitional real estate portfolio, which we believe leads to better risk-adjusted returns. These loans are underwritten to high-quality sponsors who are managing a property through some sort of improvement. Examples of transition include upgrading a dated multifamily development and growing rents in line with other assets in the local market, or improving an office building with upgrades to improve the overall leasing profile. In all cases, there is a financially strong sponsor, a solid property, and a business plan that makes sense in context of the local market. Most loans involve future funding that is only dispersed as milestones in the transition are met, making these success-based additions. These characteristics provide us with strong protections. These loans are generally redeemed within three to five years, so they have relatively short maturities.
We are typically earning an attractive investment-grade risk-adjusted return with average spreads over LIBOR of 320 basis points. We are tracking hospitality very closely. Hotels have been hard hit from the pandemic, but we can report occupancy rates have improved during the summer across many of our properties. The combination of good assets, low LTVs, and solid loan structures provide us with strong protection and confidence that even under a second wave, we will ultimately experience few, if any, losses. Finally, it is worth mentioning that our retail exposure is primarily to properties anchored by grocery stores, national discounters, or home improvement stores, all of which are seeing strong economic activity. Our growing alternatives portfolio is primarily focused on private equity and real estate. Our program started in late 2016, and today we have committed about $2.1 billion, with around $688 million being invested.
It will take multiple years to get fully invested and reach our current target of about 2.5% of our consolidated portfolio. While our expectation is for a long-term return target of 8%-9%, the initial years are negatively impacted by the J-Curve effect and potentially lower returns. In the later years, we expect to outperform our overall plan targets through superior manager and strategy allocations. Our variable investment income was impacted in the second quarter from the equity market drawdown, but we had a strong third quarter and now expect to exceed our original 2020 plan. While our returns are likely to be volatile near-term as equity market valuations improve, assuming a recovery from the pandemic, we believe we will return to more normal income levels next year.
As you can see on the charts, we have already achieved diversification of our strategies, including traditional small and large-cap buyouts, investments in secondary funds, co-investments, and real estate strategies. I will also note that we are building our in-house capabilities to complement our external managers' capabilities. An important goal for Aflac is our environmental, social, and governance, or ESG, initiatives across the company. It is important that our balance sheet incorporate these principles as we are stewards of capital that can help make a difference. We have been practicing ESG principles for years, and it is most noteworthy in our global credit teams' analysis of issuers in which we invest. We apply our own proprietary ESG scores as part of our analysis and factor it into our investment decisions because issuers face various ESG-related risks that can affect their long-term performance.
Today, we have about $1.7 billion in various ESG-related investments, including green bonds, certain municipal issuers, infrastructure improvements, and minority and women-owned firms, to name a few. We are seeing growing investment opportunities, including with our external managers, fitting very well with our overall risk and return objectives. Global investments is an important business and contributor to Aflac's results. It is our mandate to seek asset classes that complement our strategic asset allocation, enhance our return, and improve our risk profile. Given the steady nature of our liabilities, we can expand our opportunity set to private markets, leveraging our strong credit capabilities and experience with middle market loans and transitional real estate. To achieve our goals, we will leverage our core competency in evaluating and selecting third-party asset managers. Today, we have relationships with 12 asset managers across eight asset classes involving $12.5 billion of outsourced assets.
We believe it is a strategic advantage to also own equity in money manager partners whose strategies make sense for our portfolio, but also whose firms will benefit from having a large mandate and robust relationship with Aflac Global Investments. To date, we have had success with our NXT Capital relationship, and early this year, we announced our equity stake in Varagon Capital Partners, a middle market direct lender who meets our stringent expectations for performance and has bright growth prospects ahead of them. In addition to the enhanced income from the asset class, we also enjoy equity income as we share in their profit growth. Looking to 2021, we expect net investment income to be in line to this year's result. Let me highlight, stable NII is declining, as you might expect.
Attribution includes headwinds from lower reinvestment yields and declining floating rate income, which is stabilizing due to LIBOR floors. Offsetting this trend is a higher level of variable investment income commensurate with the growth of our alternatives portfolio, consistent with our strategic asset allocation. Additional tailwinds include lower hedge costs, consistent with my earlier discussion. Of course, market conditions can vary during the year, which will impact actual results. We will be opportunistic but targeted in our approach. This will help us not only defend net investment income when global yields will likely remain depressed, but also grow asset management revenue, supporting the growth of Aflac Global Investments. In closing, I am very proud of our global investment teams in both New York and Tokyo, and I believe our strategy is well-positioned to grow the asset management franchise and add value for all stakeholders. Thank you.
Thank you, Eric. Today, I will begin by addressing our core margins in Japan and the U.S., as well as key drivers of earnings, before turning my attention to our strong capital position and focus on creating long-term shareholder value. Beginning with Japan, our core margins continue to be very strong as we entered 2020 and are underpinned by a familiar pattern of improving benefit ratios. This trend was somewhat offset by a slightly elevated expense ratio. In 2020, the pandemic has led to slightly increased benefit ratios as fewer policyholders have opted to update their coverage in 2020, and reduced sales and paid-out policies have reduced earned premium. At the same time, we have accelerated expenses tied to digitizing processes, going paperless, and transitioning our business model to deal with COVID-related activities.
The largest expense stems from our paperless initiative, primarily increasing expenses in 2020 and 2021, leading to annual efficiencies beginning in 2022. We expect these expenses to add up to JPY 4.85 billion in 2020 and JPY 4.65 billion in 2021, or roughly 30 basis points on the expense ratio. Beginning in 2023, it will swing to an expense saved of JPY 3.5 billion per year. This is an example of how we invest to get more efficient and drive long-term expense efficiency. All our ratios experience some level of revenue pressure due to the impact of paid-out policies and reduced sales during 2020, and we now forecast revenues to experience an annual decline in the range of 2 to 3%.
Looking out through 2022, we expect our total benefit ratio to be reasonably stable within the 68.5%-71% range, supported by the long-term favorable actual-to-expected claims experience, particularly on our large cancer block. Reported benefit ratio on our First Sector block runs north of 100% as the block has matured, and we don't book interest credited into the benefit ratio. This means that the mix of third and First Sector in force matters when evaluating the total benefit ratio. Over time, we would expect mix to have a favorable impact. Our interest-adjusted First Sector benefit ratio remains favorable to pricing assumptions, supported by a good mortality component. The decline in revenues further emphasizes the need for expense discipline as it brings added pressure to the expense ratio.
Taking all these components together, we would expect to continue to operate with an expense ratio in the range of 20.5%-22.5%. Adding NII to the equation leads to a projected pre-tax margin in the range of 20.5%-22.5%. Our U.S. business has very significant growth opportunities in group life and disability, dental and vision, as well as our core voluntary benefits offering on which we intend to capitalize. However, we are still in investment mode to position the business for the future. Therefore, we expect our expense ratio to remain elevated in 2021, pressuring pre-tax profit. Our U.S. revenues are facing some near-term headwinds due to reduced new sales, leading to an expected decline in 2021 before returning to growth in 2022. The U.S. benefit ratio benefited from favorable overall claims experience in 2020, which we anticipate will normalize in the range of 48%-51%.
Over time, growth of our new lines of business will push our benefit ratio higher as they grow as a part of our in force. The expense ratio will remain elevated going into 2021 and then begin its decline as investments phase in and new initiatives begin its revenue generation. In the 2020 to 2022 planning period, we expect the expense ratio to be in the 38%-41% range due to these investments, which we anticipate will help us achieve our long-term expense ratio of 35%-37%. The resultant pressure from expenses will near-term lead to a decline in profit margin, putting us in the range of 16%-19%, with 2021 towards the lower end of the range. Both our FSA earnings and SMR reflect a strong capital formation and cash flow generated by favorable underwriting associated with our in force.
While Aflac's liabilities generally have low interest rate sensitivity due to the predominantly inherent lack of building guaranteed cash value, we must still pay close attention to the near-term risk of the low interest rate environment and stress test earnings, cash flow, and capital levels to understand the true strength of our business and balance sheet. As of September 30th, we estimated Aflac Japan's SMR to be 957%, which is up from the 950% estimate of a year earlier. The SMR included 107 percentage points of unrealized gains on AFS securities. Since we are primarily a hold-to-maturity investor, there is a pull-to-par effect in our investment portfolio, which leads us to look at our SMR excluding unrealized gains on AFS securities. On this metric, the SMR is estimated to be 850% as of September 30th.
Given where we are in the economic cycle with a number of uncertainties, we find it paramount to run a wide range of stress tests in order to truly understand impacts on capital levels as well as earnings and cash flow when evaluating capital, subsidiary dividends, and future earnings power. We also continue to monitor our Economic Solvency Ratio, ESR, which is based on internal models and historical experience, similar to Solvency II. Our ESR continues to be a guiding model for capital decisions and is regularly reported to the FSA as part of our ORSA submission. Currently, our ESR is approximately 153% without an ultimate forward rate, which we estimate would add 85 basis points if incorporated.
I would also note that in addition to strong on-balance sheet capital, as reflected in our capital ratios, we do have significant access to off-balance sheet sources in case of need and for optimization purposes. This includes, but is not limited to, $1 billion of committed SMR revolver, JPY 120 billion of committed reinsurance, and debt capacity at both the subsidiary and holding company level. Overall, both FSA earnings and our capital ratios remain strong and have experienced relatively low volatility during this extraordinary year. As the pandemic works its way through the global economy, we will continue to evaluate the sources, levels, and structure of our Japan balance sheet. We expect to end the year with a consolidated RBC in the range of 550%-575%.
When we stress test the capital levels of our U.S. entities and evaluate the risks of both the assets and liabilities, as well as compare ourselves to peers, we believe that over time we are likely to target an RBC closer to 400%, given the strength of the earnings profile, low risk and stability of our operations, and low asset leverage. Statutory earnings have benefited significantly in 2020 from a low benefit ratio and reduced new business strain as a function of lower sales. This leads to a higher RBC ratio as well as improved future dividend capacity. As we move into 2021, we would expect a more normalized benefit ratio and earnings towards the lower end of our recent range of $800 million-$900 million, as the pandemic hopefully will have a reduced impact on our operations, driving new business strain higher.
We drive value through a number of activities around the company, but financially, it comes down to a few important factors, which themselves incorporate all the actions that we take on as an organization. These key drivers are how much capital we have, the return we generate on that capital, and the cost of holding that capital. Key to driving value is the spread between return on equity and cost of equity, the value spread. We are an active manager of both components. Ultimately, this is what creates value and drives share price performance. The stable value spread has been generated off of a higher absolute level of shareholders' equity, driving a greater value of dollars created each year. In other words, this is the economic dollar creation each year, which drives shareholder value long-term.
Given our strong capital ratios, we view this as a high-quality value creation stream that we generate each year, driving long-term shareholder value. Management of our consolidated balance sheet is a function of risks and opportunities we experience and could face in the future. When further breaking it down into each local balance sheet, we intend to hold capital where it makes the most sense and generates the best economic return on capital for the time being. These actions can be to reduce risk, boost income, or support strategic initiatives. In Japan, we see great value in a steady dividend provided by strong cash flow generation from our in force. We calibrate our capital base in order to secure an uninterrupted dividend flow even in stressed scenarios, as it supports not only corporate capital deployment but also supports our overall low cost of capital.
Furthermore, our strong capital base, both from an SMR and ESR lens, creates flexibility when opportunities arise, both from the asset and liability side of the balance sheet. In the U.S., we continue to operate with a temporarily high RBC ratio as we still see economic uncertainty, and we build out our growth initiatives discussed by Fred and Rich. As a company, we face both revenue and expense pressures that we are hard at work addressing. The positive is that we have placed well-priced policies on the books over many years, which generate very significant cash and lead to increased short-term capital generation. This gives the opportunity to not only continue what has been 38 consecutive years of increasing the annual dividend, but also step up our capital deployment. Therefore, this morning, we announced a Q1 2021 rebasing of our quarterly dividend by 17.9%- $0.33 per share.
This increase reflects our confidence in our balance sheet and long-term profitability of the franchise. As a result, we expect total capital deployment from 2020 through 2022 in the range of $8 billion-$9 billion, a meaningful increase in deployment compared to our recent history. We still see significant economic uncertainty brought on by the pandemic, and this influences the way we manage both the asset portfolio and invest our capital. Yet, we have confidence in our capital position and continue to actively make investments to benefit our shareholders and grow the long-term value of our franchise. Good examples are our recent acquisition of Zurich's group benefits business and our capital and strategic partnership with Trupanion. Long-term, we see great value in these opportunistic investments. Before we move to Q&A, let me address the topic of earnings per share guidance.
As you are aware, we dropped specific EPS guidance in 2020, given the pandemic and expected volatility. Up until last year, we were one of a few in our peer group that maintained EPS guidance. With pandemic conditions continuing into 2021 and the industry soon adopting new accounting standards, we do not think it makes sense to bring back the practice of providing EPS guidance. However, as you witness today, we will guide on key earnings drivers and capital management plans that form the building blocks. Further, as we look to the fourth quarter of 2020, I would leave you with a few observations. We anticipate the fourth quarter earnings will be challenged by revenue pressure in both Japan and the U.S., as well as accelerated investments in the platform as detailed today and during our third quarter call.
For example, we see revenue down in both Japan and the U.S. in the 2%-3% range as compared to Q4 2019, with expense ratios in Japan in the 22% range and in the U.S. approaching 44%-45%, which includes a one-time charge of approximately $45 million or 2.8 percentage points on the U.S. expense ratio, primarily related to our voluntary separation plan. In summary, our strong morbidity margins form a foundation of predictable cash flows that, well managed, translate into very significant value creation through a strong ROE with a material spread to our cost of equity, creating long-term shareholder value. With that, let me hand it over to David to begin Q&A.
Thank you, Max. We will now hold our final Q&A panel. Joining Dan, Fred, Teresa, Rich, Eric, and Max are Todd Daniels, CFO of Aflac Japan, Steve Beaver, CFO of Aflac U.S., June Howard, Chief Accounting Officer, Al Razzetti , Global Chief Risk Officer and Chief Actuary, Virgil Miller, Executive Vice President and President, Individual Benefits Division of Aflac U.S., and Brad Dyslin, Global Head of Credit and Strategic Investment Opportunities. Our first question comes from Suneet Kamath at Citi. And Max, how should we expect Third Sector earned premium to trend between 2020 and 2024? And then also, what about total earned premium growth during that same period?
Yeah, thank you for the question, so in the near term, we would expect to trend towards a decline of 2%-3% for total earned premium, with Third Sector earned premium to be slightly negative. The reason for Third Sector earned premium to be down in the near term is both the reduced new sales having an impact, but also the paid-up impact primarily around a portion of our medical policies that follow a similar impact that we have from our First Sector block when it comes to paid-up status. Over time, we would expect our sales to rebound and also less of an impact from the paid-up policies on our medical block, which should drive a mid-term growth in our Third Sector earned premium in the 1% range.
Thank you, Max. Suneet's follow-up question is in regard to U.S. sales, and it is $1.8 billion of sales by 2025, is a fairly large increase from where you are today. Can you give us a sense of the glide path? Can you give us a sense of how much of the growth to $1.8 billion of sales is from new initiatives such as Aflac Dental and Vision, Aflac Group, and Trupanion?
I think Teresa and Rich or Rich, why don't you handle it?
I'll be glad to take it. Thank you, Suneet, for the question. So first of all, from a glide path perspective, we shared in our comments that we expect the first half of 2021 to be less favorable than the second half, and that's typically dependent upon the environment and the implementation of a vaccine, and then improving further in 2022. I think in that trajectory of exceeding $1.8 billion in sales by 2025, I think the glide path will start to pick up from 2022 to 2023 going forward.
In terms of contribution of sales, we outlined the revenue from each of the elements for dental vision, group life, disability, and absence management, as well as consumer markets, and you will see their contribution being weighted towards 2024 and 2025.
Thank you, Rich. This next question comes from Jimmy Bhullar at J.P. Morgan, and Rich, you may want to stay here on the line. It's in regard to what does management expect the virtual sales initiatives to start lifting sales? Is a recovery in sales dependent on a return to normalcy?
Okay. Thank you for the question, Jimmy. So first of all, as we've all said today, our sales are very face-to-face at the worksite dependent. We have quickly adjusted to a virtual sales environment, and in particular through call center as well as through video meetings. And so we've shared that those two methods have increased adoption and growth of over 100%. And so really, 2020 is really the impact of the environment and increasing adoption.
So I anticipate that you'll see a combination of two things. The first thing is you'll see the environment improve in the second half of 2021, and we'll see an improvement for agent-assisted face-to-face sales. Then you'll also see us come out stronger with our virtual tools and adoption. And so those will be new solutions for our agents.
Thank you, Rich. Our next question comes from Tom Gallagher at Evercore. Eric, a question on your CRE deferrals of 16% that adds up to over $1 billion. Do you expect most of these to be restructured and/or foreclosed? And how do you feel about potential outcomes on this portfolio?
Sure thing. Thank you, Tom. I'll start the answer, and if Brad would like to add anything, he can. Firstly, none of these interest deferrals will result in any sort of foreclosures. These are relatively minor property-by-property and nothing material or major. And also, let me emphasize, as I said in the speech, when we do these interest deferrals, it is a bilateral negotiation, and we're typically getting some other protection in the negotiations with the borrowers that further protect us. We do expect ultimately full interest to be repaid, and none of these will result in potential foreclosures. Brad, do you want to add anything to that?
Yeah, thank you, Eric. The only thing I would add is that the bulk of these are in our hotel exposure and transitional real estate, and we are seeing the recovery there, and these deferrals are simply to help protect liquidity as we see that recovery continue to take place. But I would reiterate Eric's point that we currently expect to collect all of that as part of the overall loan term.
Thank you, Eric. Our next question is for Teresa and Rich. And the question comes from Andrew Kligerman at Credit Suisse. How does Aflac expect to boost persistency to 79%-80% from around the current 78%? Aflac has previously cited likely near-term persistency pressure from COVID and the recession.
Thank you for the question. One of the things that we've, and I think in my notes or in my talk I talked about was how we're looking at our benefits and introducing new types of categories of benefits, as well as doing some things within our control from a product perspective, changing some of the benefits to increase persistency. Now, the business mix for true group and Dental and Vision are higher, about 90% true group and about 80% Dental and Vision. What we believe is that as we bundle those products, as we sell those products alongside our traditional core benefits, that we will see a lift in premium persistency. So that's one way. The other thing that we see is that the utilization of our benefits, we have been going out and talking to consumers about utilizing their wellness benefit, for example.
As we look at the data, people who utilize our benefits have a higher persistency than those who don't. And so we believe that we can make headway from that perspective in driving utilization of the benefit, and that actually is a part of the benefit ratio that you see over time going up as well. And then the last thing is just really service ease. We've seen a correlation or an indication that if we make it easy for people to use their products, to have any interaction with Aflac, answer questions, et cetera, we'll see a higher persistency, those people who are engaged with our products. And so those are the three things that I'll offer as how we look at premium persistency.
Thank you, Teresa. Andrew's follow-up question is, what is Aflac seeing in terms of competitive pressures and pricing in the voluntary benefit space? Many companies appear to have recently entered or stepped up efforts in voluntary product lines, an area in which Aflac has historically been dominant. Rich?
Yeah, I'll take that question. So first of all, I think it depends on market segment. Obviously, in the larger case segment, that's where you typically tend to see more competitive pressure from a pricing perspective. And then also, as you look at 90-plus competitors in this space, that's certainly significantly more competitors than there were, say, five years ago. 11 of those 15 competitors, or excuse me, 15 of those competitors of the 90 offer group benefits and other products like that. So I think from a competition standpoint, the additions we've made make us very viable as a carrier of choice. Thank you, Rich.
Max, our next question comes from Ryan Krueger at KBW. His question is, what is your outlook for 2021 corporate segment earnings?
Thank you, Ryan. We're not guiding specifically on the outlook for that segment, but I would say that if you look at the run rates that we have had for the third quarter, I think from a quarterly standpoint, it is not too far from where we would expect us to be on a quarterly run rate going forward. Keep in mind that the main driver that moves around the corporate segment bottom line result is interest rates. So at the corporate level, you have a significant investment portfolio sitting invested at the short end of the yield curve. So any moves in short-term yields have a quick and pretty significant impact on the revenues that are being generated and therefore the bottom line pre-tax earnings.
So if you start with third quarter as an example, as a baseline, then you can make some projections around that. But just keep in mind that net investment income can jump around a little bit based on where interest rates are going.
An d Max, Ryan has a follow-up in regard to capital management. Would you consider more meaningful non-US M&A over time to improve the growth outlook?
So we believe that we are operating in two attractive markets when it comes to supplemental health insurance, and we do very well in these two markets. Over time, we're not blind to the rest of the world. We see trends that are going on, and if there are areas where we could play and be a very strong player, of course, that would long-term be attractive to us. But I think it will also be pretty small in terms of scale.
We generally want any sort of entry outside of our core offerings, even within the geographies we are, to provide overall. They should be low-risk. And what I mean by that is both limited capital used and also it should not take up too much of management's attention. Therefore, we have sort of contained our international expansion plans within the Aflac Ventures portfolio. This way, we both contain it from a capital and management attention to limit the overall risk to the franchise. But still, we're able to plant seeds for the future. One of those examples are obviously our partnership that we have with Singlife, which is both a capital investment and a way for us to export our knowledge when it comes to underwriting of cancer risk. So I would expect that any sort of international expansion to be similar to that.
And Max, while we're on the use of capital and its deployment, Nigel Dally at Morgan Stanley is asking, with the $8 billion-$9 billion of capital deployment, what does that assume with respect to credit losses? Does it reflect the stress case that Eric talked to? And after the dividend reset, should we expect future dividend growth to be more in line with earnings growth?
We intend to have long-term dividend growth in line with our earnings growth. It has to be that way for an enterprise long-term. So we would expect that to be the case for us as well. When it comes to capital deployment, we hold significant capital buffers, and that means that we can absorb some impairments and losses associated with the investment portfolio and still maintain a fairly stable dividends and cash flow to the holding company and then ultimately deployment of that capital as well. So both the capital held at the subsidiary levels and the significant capital and cash position at the holding company creates a significant buffer to absorb any unexpected events coming from either the asset side or the liability side of the balance sheet. I would also point to the U.S. statutory earnings that you see us showing and also our FSA earnings that you see. They do include a buffer for future expected credit losses.
And when you start to, when you use your glasses and you really try to eyeball what those are, you quickly see that, yes, they are lower than what Eric talked about earlier. But what Eric described is stress test scenarios. They are not annual base cases.
Thank you, Max. The next question comes from Erik Bass at Autonomous Research. And Max, you may want to answer this and ask Teresa and team to join in. But his question is, you provided targets for dental and the group life disability businesses, revenue targets, that is. How do the margins on these products compare with the margins on the rest of the U.S. business?
So these products, clearly from a U.S. GAAP standpoint, will generate lower pre-tax margins. But keep in mind that they're fairly capital-light, and they can generate significant return on capital for us. This is also part of a broader strategy that we expect will drive increased sales and earn premium from our core voluntary benefits offering as well but I'll let Teresa or Rich or Fred to jump in and further elaborate on that.
One thing I would say, just a few things to keep in mind so the nature of those businesses will tend to be, just if you break down the margins, they tend to be higher benefit ratio products in general, lower expense ratio products in general, and that then yielding, as Max said, a lower margin, a pre-tax profit margin. It's not uncommon for pre-tax profit margins in those businesses to be at or below 10% marginally, so for example. However, remember, these are far more persistent businesses and so the persistency level on these businesses are often north of 80% or sometimes even better.
It's very different. These employer-paid policies or front-page benefits are very different in the way our voluntary products work really when you break down the margins. This is a long-winded way of saying the economic value of these products when put on our balance sheet is a good solid economic value, an excess of our cost of capital, but it will behave on a GAAP basis differently than our current products. Now, a couple of other things to realize on a GAAP basis is direct-to-consumer, as many of you know, you don't have DACing involved, so you're not DACing acquisition costs like you would with normal sale of products through agents and brokers. During a growth period of time, you'll naturally see that weigh down on your GAAP results, even though the economics of what you're putting on your books are quite attractive.
DT C has a different dynamic related to it. And then the group benefits business that we bought comes in at around $120 million of earned premium that's being added to our run rate earned premium, but it comes in on a loss basis because it's a building business. That's a business of scale, and so it takes a while to get that business to scale. So for a period of time, it'll be a drag on GAAP results. But again, the premium we're putting on our books has real economic value priced appropriately for the market.
Thank you, Fred. And the next question comes from Suneet Kamath. And Eric, Suneet at Citi is asking, can you provide more color on the $450 million of CCC-rated middle-market loans? Why should we not be concerned with this portfolio?
Sure thing. Let me take the second part and then hand it to Brad on the CCC-rated loans. Again, these are a highly diversified portfolio. We particularly invest in the higher quality segment of the direct lending market. These are all first-lien, senior-secured loans, diversified across industries, as you can see on the chart, and very small exposures on a per-loan basis of about $13 million. Strong companies, strong underwriting, low leverage. And in addition, these companies are backed by private equity sponsors. So there are multiple levels of protections from the particular loans that we make to the liquidity and profitability of these companies. And we've lived through the worst of the pandemic. We've seen them been able to raise cash. We've seen them been able to cut expenses to manage their business through the pandemic. We've seen private equity sponsors step up to the plate and support them when needed.
Whenever any of our loans needed an amendment, we got something in return to further our protections. We saw for most of these companies, their revenues come back strongly as the economy did open. We have exposures, as an example, in healthcare. Initially, when the pandemic started, those companies were challenged because of the complete shutdown. As soon as it opened up, those businesses thrived, so high underwriting characteristics, good actual history. As mentioned in the speech, we've only had two loans where we've actually taken losses, and that amounted to $7 million. And those particular two companies had had some troubles pre-pandemic. Let me turn it over to Brad to talk about the CCCs and any other comments he'd like to add.
Yeah, thanks, Eric. Most of the CCCs, the new CCCs, were companies that were directly impacted from the pandemic through social distancing, through shutdown efforts across the country. And when they saw their revenue and cash flow go from their current run rate to a fraction of what it was, all of their traditional credit metrics, as you'd expect, got hit pretty hard, whether it's leverage metrics, whether it's liquidity or cash flow. And when those metrics get that hard and they have to start looking to their sponsor, looking to their equity owners to put more capital in, or there are amendments to the loans, as we've highlighted, that results in downgrades at the rating agencies. They really have no choice but to take them down. And we do expect a lot of these are going to come back and be upgraded.
But rating agencies generally respond much slower to upgrade than to downgrade for reasons that really make sense, because when you have a shock like this, you want to see some traction in the recovery before you move ratings back up.
And I would just add, sorry, David, to conclude, we get paid excellent relative value to be in this asset class, as on the slide shows over 6%. So it's not that we don't expect over a cycle that we may have some losses and/or defaults. And in fact, that's reflected in our CCC reserves, which we discussed earlier this year. But through the strict underwriting process, the active management, we certainly expect to perform much better than those CCC reserves. Importantly, as part of our overall asset allocation in terms of the fit and the overall portfolio and where we take risk, this is really a great diversifier to the overall portfolio, not very well balanced in terms of our overall exposure.
Thank you, Eric and Brad. Our next question, Max, comes from Marcos Holanda at Raymond James. Marcos asks, what does the sustainable ROE profile for Aflac look like as the RBC ratio in the U.S. reaches 400%?
I think our ROE, given our significant presence in Japan, obviously our return on equity will always be impacted by movements in the yen, and especially when you look at more long-term. But I would say that given the profile of our products and the profile of our balance sheet over time, I would expect that our franchise should generate mid-teens ROE, and that's where you've seen us operate more recently.
Thank you, Max. Our next question comes from John Barnidge at Piper Sandler. And Fred, what John is asking is, does the 2025 sales target reflect any level of sales and thus fees from pet insurance? And given your slide on Trupanion, I thought you might be able to answer that.
No, I'm actually glad you asked the question just to be very clear about it. We don't book any sales or premium related to this alliance. The sales and premium are all booked by Trupanion. This is really a co-branding alliance, and so it works that way.
The way in which we see growth on our P&L over time is the degree to which we can leverage having a pet solution to drive a halo effect on the rest of our core benefit business, whether that be greater penetration, greater attach rates, if you will, drawing more attention to our direct-to-consumer platform as we move to offer pet insurance on DT C and branding energy, because obviously co-branded would be out there branding together with Trupanion. But you should not expect to see us reporting pet insurance sales and pet insurance premium as we go forward. Obviously, the biggest piece of our actual return running through our financial statements is our $200 million investment in returns we would expect to get over time related to that investment.
Thank you, Fred. Our next question, Max, comes from Eric Bass at Autonomous Research. Eric asks, "Max, last year you guided to run rate insurance subsidiary dividends of $2 billion-$2.5 billion. Now you expect these to be $2.2-$2.7 billion annually. What are the primary drivers of the improved outlook?"
It's simply improved underlying statutory profitability of the business. We have more of our entities are generating higher statutory earnings, and that has improved overall the outlook for us. In the U.S., as an example, our group platform will improve slightly its statutory earnings profile, while our main entity, Aflac Columbus, continues to grow statutory earnings at a higher clip than its U.S. GAAP earnings. You see an improved profile there.
Also, when you think about Japan, the FSA earnings and the dividend capacity for Aflac Japan continues to strengthen somewhat, as the relatively low growth drives low new business strain, while at the same time the composition of the in force is throwing off very strong FSA earnings. This is a function of both the Third Sector block becoming a greater proportion of the in force, but also we have an old block of cancer policies that actually has a CSV or a cash surrender value attached to it that is quite capital intensive. As this part of our Third Sector block runs off, it drives very strong FSA earnings, and that is also helping to improve FSA earnings and the dividend capacity up to the holding company.
Thank you, Max. Our next question, Dan, comes from Suneet Kamath at Citi. Suneet is asking whether the new medical insurance product in Japan will be available through Japan Post.
No, not at this time. We have structured a deal with them where it's dealing predominantly with cancer insurance, and I would expect a new cancer policy in the future, but not medical at this particular time.
And a follow-up to that question from Suneet, and Todd may be able to answer this. What level of contribution from Japan Post is assumed in your target of JPY 80-JPY 90 billion of annual sales?
Yeah, we're not.
Yeah, thanks.
Go ahead, Fred.
Suneet just said we're not breaking that down. And the reason for that is because we're not really in a position to forecast the level of sales n behalf of Japan Post. We obviously have a level that is assumed in the number, but at this point in time, we're not comfortable breaking down the specifics of that. Other than what you should anticipate is a slow recovery in sales and a recovery that, as we mentioned earlier, is conservative, therefore lower than the levels we enjoyed within the system prior to the pandemic. Now, can we do better than that? Do we hope to do better than that? Is Japan Post working hard to allow to do better than that? Yes. But we're being conservative and simply mapping out a slow recovery in sales over the course of that timeframe.
I do want to reiterate that our relationship with Japan Post is as good as it's ever been. Now, how does that translate into sales? I can't tell you at this point. But I am optimistic that we will regain momentum and come back with Japan Post. There is nothing that tells me or that makes me think it won't happen. It's simply the pandemic and the issues that they had that they are addressing. But as soon as they are over, I would be extremely disappointed if we don't pick it back up to strong levels.
Thank you, Dan. Our next question comes from John Barnidge at Piper Sandler. And John is asking, how should we be thinking about the continuation of COVID claims utilization and the favorable tailwinds continuing into 2021 within outlook guidance? Considering mass vaccination in the population will take time, along with potential secular changes that may become permanent in nature.
Let me give some color to that, and I'll ask Max to jump in as well, and anybody from the U.S. side, Steve or others. But just a couple of things I would say is it's interesting. When we did, we refreshed our stress testing of the liability side with the notion of a so-called third wave of infection. And I'm assuming, by the way, your question is really related to the U.S. because that's really where the pressure point is. Obviously, we're not seeing much of anything impactful in Japan. But in the U.S., what's interesting is when we did our stress test, we've actually cut in half our estimates of hospitalization rates because we continue to see far less in the way of hospitalization, even with rising cases. Even more impactful than that, we've assumed one-sixth the level of movement to ICU once hospitalized. And again, we think that is related to advancements in treatment and getting at some of the symptoms early.
Regrettably, of course, there are still significant numbers of people that do require ICU, and of course, there's been fatalities. But when looking at the overall population of our policyholders and how we have seen the trends come in, we've moved those assumptions off significantly from our early stress test. So that bodes favorably. I think for a period of time, you will have this dynamic of reduced level of claims from people going into the hospital on more routine dynamics, but that is slowly changing. And as Max mentioned in his comments, we're expecting benefit ratios to return to more of their normalized levels even in the fourth quarter of this year. That's embedded in our numbers we provided for the fourth quarter forecast. And therefore, we're not so much expecting that to be a continuation.
And so my view is that you'll start to see benefit ratios normalize in 2021 with not as much of an impact from COVID and not as much of an offset of people not going to the doctor on routine visits.
Yeah, just to add some color on that. So John, that's exactly the way we think about it, that for the full year, we would expect a normalization. Now, from a quarter-to-quarter basis, this could clearly jump around a little bit for us. And it all depends on consumer behavior. So if we have continued significant spread of the virus that's impacting how policyholders behave in terms of going for routine visits, if hospitals start to shut down elective surgeries, more and more local communities go into something akin to lockdowns or shutdowns, all of that can potentially have impacts on our claims activity.
So in the near term, it may lead to more similar trends that we've experienced in the second and third quarter where our benefit ratios clearly were impacted by low claims activity. But you could also have, let's call it a post-vaccine world, that you have a significant pent-up demand for a number of claims. You should also keep in mind that we are a significant cancer player in the United States as well. And cancer claims or sorry, cancer is not taking a break from COVID. And not only are you seeing less screenings, as an example, you also potentially could see an increase in severity when it comes to cancer claims. So there's a lot of moving parts where this could, from a timing standpoint, move around quite a bit. But overall, when we put all of that together, we do think that 2021 overall should see a normalization in the benefit ratio.
Thank you, Max. And another question here from Tom Gallagher, Max. Tom at Evercore is asking, would Aflac consider doing larger strategic M&A versus the smaller deals done to date?
So I would say that when you think international strategy, I answered that earlier, that we want to keep that contained within our Aflac Ventures operation. When you think more strategically, and I'll let Fred fill in the blanks here in a second, my perspective would be that we operate in very, very attractive niche markets in both Japan and the U.S. And part of the reason why we've been successful historically is the focus that we've had, not only being focused on an attractive market, but just the pure fact that we've been very focused.
When you diversify and you go into any sort of other sort of large-scale M&A, that will generally tend to bring on more distribution channels, more products, more platforms, and that can easily complicate both the operations and execution. So I would say from a financial standpoint, the bar just gets higher when it comes to large-scale M&A.
Yeah, and I agree completely, and I mentioned in my comments that from a strategic standpoint, using basketball terminology, we like to play around the hoop, and a large-scale acquisition is, in our framework, taking a three-point shot, and a lot of things have to happen very well, particularly because you're buying in at a premium. It's a seller's market in many of these businesses because you have so many buyers that are seeking to diversify towards our industry, not away from it for diversification.
And so you end up looking at the price, and it's priced to perfection. And there's no such thing as a large-scale acquisition that works to perfection. No such thing. And so when it comes to capital at risk and earnings at risk, we've preferred the buy-to-build strategy. That requires patience. That comes with near-term dilutive dynamics related to the building process. But we think that works better for us at Aflac than putting on a large-scale acquisition. And we also can't be distracted. Dan mentioned earlier that we have to remain focused on building out dental and vision in our group business. And so one of the things we're keenly aware of right now is avoiding distraction. It actually led to the way in which we entered the Trupanion Alliance. That alliance is designed specifically to lower any distractions or large-scale deployment of people and focus.
It's largely on the back of Trupanion doing what they do well. And for us, it's an investment and an introduction into the distribution platform that we have. And so that's the type of investments. Our venture investments, our international investments are also designed that way. We're not sending people. We're not selling product in-country. We're not setting up administrative platforms or doing anything of that like. We're making strategic investments to participate in those markets but not run businesses in those markets. And that's because we have to stay focused on what we think the real prize is, which is growth in the U.S. So it's a buy-to-build strategy. Strategic investments are a different matter.
And again, large-scale acquisitions tend to be problematic in part because in order for us to get synergy benefits related to either expenses or revenue, on the revenue side, we're going to have to bring it down into the agent spectrum. I mean, if we can't make something work over time in the medium-sized to small business arena and also leveraging our agents, which is really the special weapon that we have in the U.S., is our field agents and small businesses, then the acquisition tends to not be as accretive over the long term. That means even with a big acquisition, we're still building. We're still having to make dilutive investments to bring it down into the small business arena. So we just find buy-to-build is a much better controlled environment for us to do the expansion at a lower risk to capital and earnings.
Thank you, Fred. Our next question comes from Humphrey Lee at Dowling & Partners. And it's in regard to earned premium CAGR. He's asking, for the earned premium CAGR of 2%-2.5% through 2025 in the U.S., the outlook is largely unchanged from previous guidance despite the investments made and acquisitions. With the revenue outlook for dental and vision, group life and disability in DTC being quite positive, why shouldn't we see a stronger premium growth CAGR? You have to be very careful to read the footnotes on that CAGR to understand what really we're talking about there.
If you have a 2-3% CAGR based off of 2019 earned premium, recognizing that 2020 and 2021 are actually a reduced earned premium in the U.S., these new businesses that we're bringing on and the earned premium that Rich walked through are quite a considerable addition to the earned premium growth pattern going forward. So what I would encourage you to do is take earned premium as of 2019, go ahead and do your 2-3% CAGR out to 2025, and you'll see a company that's moving from a 6-ish type, $6 billion type handle on earned premium to approaching $7.5 billion in earned premium. That's a pretty big step up in value in the U.S. So it's a considerable growth rate. But remember, we're having to take a little step back here related to the pandemic before we move forward.
Thank you, Fred. Humphrey has a follow-up. Looking at the outlook for U.S. expense ratio, the long-term guidance is now 35%-37% compared to the previous 34%-35%. With the addition of group life and disability products that have higher benefit ratios but lower expense ratios, I would have thought that the long-term expense ratio would trend down over time. Why is this not the case for Aflac U.S.?
Let me kick it off, and I'll ask the U.S. management team to chime in as well. But one of the factors that you need to keep in mind is that we do have pretty significant growth expected coming from our consumer markets business. Fred mentioned earlier that acquisition expenses related to a direct consumer platform are not backloaded. This means that the more successful this platform is, the more the expense ratio is going to go up.
That's a pretty meaningful impact on the expense ratio. Also, throughout the planning period, the buy-to-build strategy, especially around group life and disability, continues throughout the planning period. We just closed on this transaction, so we are now entering an investment spend phase for group life and disability, which means that it will take time until we get to scale in that business, and Rich quoted some earned premium numbers that we expect these businesses to generate. It will take time for us, obviously, to get there. Even when we reach 2025, I would not call, especially not the group life and disability business, even at those levels, to be at an at-scale level, i.e., that they are earning the kind of profitability and having the kind of expense ratio that we would want this business to have long term. It will take longer than 2025 to get to that number. So just keep that in mind when we are talking about the expense ratios, both in the near and the midterm.
One other thing I would add is just a basic issue, which is the old guidance did not have Argus in it. And so the acquisition of Argus, which is a TPA, literally just bumped our expense ratio by 100 basis points because that's the nature of that business. It's not a risk-taking business. It's a TPA. And so you almost have to kind of reset the base or rebase the expense ratio. That's a good business. We like it. It's a business we hope and intend to grow. But it is a TPA business, and it factors into our expense ratio, both revenue and expenses, in a different way.
All right. We are at the top of the hour. I have one more question here, Max, coming in from Nigel Dally at Morgan Stanley. Nigel is asking, with dividends and capital, you're being tactical with buybacks given the uncertainties associated with the pandemic, but have decided to be more aggressive with dividends. Why now on the decision to significantly raise the dividend?
We think that with the recent acquisitions that we have made, we have now a platform in the U.S. that we have invested and built. We will obviously continue to build it, but we now have a platform that we truly can execute on. We think from a capital standpoint, you can see that in my slide. I have slightly lowered the expected allocations opportunistic deployment. In other words, that means that we think about how much we're going to spend on acquisitions to probably be a little bit lower in the near term than what we have been in the most recent history. That gives us a stable foundation for increased capital deployment going forward and specifically around dividends. And I'll let Dan to—did you want to make a comment on that?
Well, my only comment is we wanted to show the strength of the company and our ability to pay going forward. And we put our money where our mouth is in saying, "And we want you to leave this meeting today knowing that we're excited about the future. We think we've got strong financials." And by proving that, we've increased the dividend. And if we had any question about worrying about it, we would not have done it.
So the way to really think about it is, like Dan said, we do have a strong foundation. We do believe strongly in the franchise going forward. We have a stable capital and strong capital position and also very stable and strong capital generation. So when you put all of that together and the capital levels, we do feel that we have an opportunity to meaningfully step up our capital deployment. And we obviously are doing that today with the increase in the dividend, but also the total expected capital deployment going forward for the next two years.
Thank you, Max. That gets us to a few minutes past the hour. I want to thank everyone for joining us today. And as always, our investor and rating agency relations team is here. If you have any questions, please reach out. We're happy to help in any way that we can. Until next time, be safe. Thank you.