Welcome to the Aflac 2020 Outlook conference call. Your lines have been placed on listen only until the question and answer session. Please be advised today's conference is being recorded. I would now like to turn the call over to Mr. David Young, Vice President of Aflac Investor and Rating Agency Relations.
Thank you. Good morning, and welcome to our 2020 Outlook call. Joining us this morning during the Q&A portion are members of our executive management team in the U.S. Dan Amos, Chairman and CEO, Fred Crawford, Executive Vice President and CFO of Aflac Incorporated, Teresa White, President of Aflac U.S., Eric Kirsch, Global Chief Investment Officer, Rich Williams, Chief Distribution Officer, Al Ruggieri, Global Chief Risk Officer and Chief Actuary, and Max Brodén, Deputy CFO and Treasurer. We are also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan. Charles Lake, Chairman and Representative Director, President of Aflac International, Masatoshi Koide, President and Representative Director, Todd Daniels, Director and CFO, and Koji Ariyoshi, Director and Head of Sales and Marketing. Before we start, let me remind you that some statements in this teleconference are forward-looking within the meaning of federal securities laws.
Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. The slides for today are available on the investors page of Aflac's website at investors.aflac.com. Today, Dan will begin by outlining the company's strategic focus and value creation. Fred will then follow with an outlook for our operating segments in 2020. Finally, Max will cover the financial outlook and capital management. I will now turn the call over to Dan. Dan?
Good morning. Thank you for joining us today. As CEO of Aflac Incorporated, I've seen some interesting and challenging times over the last 30 years, recent periods included for both the industry and Aflac. The industry as a whole is addressing the challenges of low interest rates and uncertainty in markets around the globe, while at the same time trying to generate growth. As I've said before, Aflac is not immune to these same headwinds, but I do believe we're better positioned than others to navigate through these challenges. Aflac has developed a number of franchise strengths over time and will continue to leverage these strengths to position Aflac better for the long term. One of the more recognizable strengths is Aflac's well-known and powerful brand. Many people most commonly associate our brand with the Aflac Duck, who by the way, will be turning 20 next month.
While about nine out of 10 people in both the U.S. and Japan recognize the Aflac brand, it's also a name that people have come to trust over the decades. As such, individuals and businesses are more receptive to hearing how Aflac's innovative products can provide value to them, and our well-established brand continues to serve as a very effective door opener. In 2020, brand efforts will continue to focus on building education about our products and services that simply put, Aflac helps with expenses healthcare doesn't cover. While we pride ourselves on entertaining consumers with our campaigns, we must also educate them with tactics in the channel that are meaningful and memorable. As a result, we will continue to connect with consumers in key media moments, including college football events, the NFL, as well as social media.
Along with Aflac's strong brand, we look to employ our diverse and productive distribution channels to generate future growth. In Japan and the U.S., we have focused a great deal of our efforts on being where consumers want to make their insurance purchasing decisions. We will continue to enhance the productivity of our current channels while exploring further distribution expansion opportunities. In 2020, this will include digital direct-to-consumer initiatives, developing new partnerships, and better leveraging existing affiliations. Certainly, one such partnership and question that many of you have is, when will we see a recovery in sales through Japan Post? We hope to gain further clarity when Japan Post Holdings provides an update on its investigation, which is expected at the end of December.
Fred will give some additional comments, but let me just say that 2019 sales are expected to be in the range of JPY 12 billion-13 billion. We are currently assuming sales further decline in 2020, and the first half of the year will be very slow, but recovering in the second half of the year. Continue to offer innovative products and high quality, customized service to provide our customers with affordable solutions to help protect their financial wellbeing. In Japan, this means tailoring products to fit consumers' stage in his or her life cycle. In the U.S., One Day Pay is a great example of our innovative spirit and how we place the customer first.
In addition, we have industry leading financial strength ratings, which are supported by our strong capital and liquidity positions and ability to consistently deliver stable earnings, strong cash flows to drive value for the shareholders. Of course, I believe what also lies at the heart of our success has been our strong leadership and governance. As I mentioned at our Financial Analysts Briefing in September, one of my key roles as CEO is developing successful leaders as part of the succession planning. As you saw from our announcement last month, beginning in January, Fred Crawford will step up to the role of President and Chief Operating Officer of Aflac Incorporated, and Max Broden will become Chief Financial Officer starting in 2020. With these promotions, I will be able to shift some of the day-to-day operations I took on two and a half years ago.
I'm in no hurry to retire, and I've agreed to stay past age 70 because I still enjoy building and overseeing the company's growth strategy. You'll hear from Fred today about the outlook of our operating segment and then Max on the financial outlook in capital management. All these franchise strengths have contributed to our industry-leading market share and scale in both Japan and the United States, which allows us to offer affordable, valued coverage to our customers. We are very proud to be the leader in supplemental insurance sales at the work site in the U.S. and to insure one out of four households in Japan. Thus, we look to build upon the leading position in both countries. For 2020, we will continue to focus on delivering profitable growth and executing strategy as an enterprise.
In fact, this is a critical time for executing strategy as we balance investment in various growth initiatives in both the U.S. and in Japan, while returning capital to our shareholders. That is why I created the role of Chief Operating Officer of Aflac Incorporated to work with the senior leadership team to ensure that we successfully cross the finish line. I believe we have the right leaders in place who will continue to guide and propel our operations moving forward. As you know, we've been investing in digital technology to drive efficiency, productivity, and customer experience. We will also continue to evaluate and invest in digital applications, ventures, innovative products, and services, particularly those that draw from our core competencies in cancer and medical insurance and serve small business to seed new growth opportunities.
As always, we remain committed to maintaining stable margins and allocating our capital to drive higher returns. You will continue to see this in both our investment strategy and our decisions to emphasize third sector and first sector protection rather than saving products in Japan. This includes our efforts to tailor products that fit the needs of various stages in life. At the same time, we aim to reinvigorate agencies in Japan to reinforce our distribution. In the U.S., our focus will be on building our Aflac Network Dental and Vision and moving to the first page of the benefits enrollments and our consumer market strategy, which Fred will share in a moment. We will also be investing in our agency channel to reinvigorate sales and improve productivity. We remain committed to returning capital to the shareholders in the form of dividends and share repurchase.
We recognize that smart investment in our platform is critical to growing earned premium and driving efficiency, which ultimately will impact the bottom line. We are equally committed to achieving significant value through a balance of growth investments, tactical and disciplined stock repurchase, and stable dividend growth. 2019 marks the 37th consecutive year of dividend increases. It goes without saying that we treasure our record of dividend growth and want to extend that track record. Within this framework, we will continue to drive shareholder value and do so by acting ethically and giving back to the communities in which we operate. By remaining disciplined and focused on doing what we do best, I believe we will continue to generate results that build long-term value for our shareholders. Now let me turn the program over to Fred. Fred?
Thank you, Dan. I'm going to spend my time today covering our operating segment forecast, strategic investments, and key drivers of segment pretax margins in 2020. In Japan, our medium-term product plans follow an overarching strategy of fitting to the customer's stage in life. Our product lineup needs to travel with the consumer well into retirement, given the aging population. 2020 will be a light year in terms of product refreshment. We do plan to launch a more simplified Cancer Rider for ease of sale and providing existing cancer policyholders an opportunity to upgrade their policy. We have set aside funding to strengthen our core associate channel. Investment includes both technology and marketing spend that seek to leverage our 21 million existing policyholders and 30,000 corporate groups to upsell and cross-sell more effectively.
Exploring adjacent lines of business includes niche areas that fit naturally with our current leadership position in protection products. We continue to innovate around Japan's cancer ecosystem in partnership with select venture investments. We believe there will come a time when the value of a cancer policy will stretch beyond financial reimbursement into additional value-add surrounding diagnosis, care, and recovery. Turning to the numbers, reported premium continues to decline, largely due to both first and third sector policies becoming paid up. While reported protection earned premium is expected to decline, when adjusting for paid-up policies, we anticipate marginal growth in both premium and policies in force. Japan Post sales expectations remain a key variable for 2020. 2019 sales are expected to be in the range of JPY 12 billion-JPY 13 billion.
We are currently assuming sales further decline in 2020 with the first half of the year very slow, but recovering in the second half of the year. For earned premium planning purposes, we have assumed sales in 2020 decline 20%-30% from 2019 levels. At this stage, Japan Post company's highest priority is responding to customers regarding Japan Post Insurance market conduct issues. That said, we have been told that the Japan Post Group hopes to normalize operations as soon as possible in early 2020. Although our 2020 sales plans with Japan Post have not been formalized, based on our experience and dialogue with Japan Post Group, we think that recovery in the second half of the year is reasonable. The distribution of earned premium continues to shift towards third sector, which will modestly lower our reported benefit ratio as compared to 2019.
We expect benefit ratios in our core lines of cancer and medical to remain strong, with claims trends benefiting from fundamental changes in Japan's healthcare system. We continue to invest in digital and IT administration with near-term efficiencies gained from process improvements reinvested back into our platform. With a modest decline in overall revenue, shifting business mix, and continued digital investments, we expect 2020 expense ratios to run a bit higher. Overall, profit margins remain generally consistent with our full year forecast for 2019. Turning to investment strategy, let me first start with a reporting item related to intercompany charges. In 2020, we'll be installing a traditional arm's-length pricing model where Aflac Global Investments subsidiaries charge market fees to the insurance segments. This has no measurable impact on our U.S. segment but does impact Japan, given the size of the investment portfolio.
We estimate about JPY 3 billion impact on annual investment income, which we report net of investment expenses. This has no impact to enterprise earnings but shifts a modest amount of income to the corporate segment. Focusing back on investment fundamentals, despite de-risking activity and the low rate environment, we expect to defend investment income at or near 2019 levels. 2020 is helped by a reduced volume of new money to invest, having de-risked the private portfolio in recent years and as operational cash flows have reduced with the pullback in first sector sales. While we forecast lower floating rate income from declining LIBOR, this is offset by lower hedge costs, hedging a portion of our floating rate income heading into 2020 and investing in loans with built-in LIBOR floors.
As you can see, we have an embedded return assumption for variable income, which includes private equity and real estate equity investments. Our variable income assumption factors in a building portfolio that is naturally still in the J-curve and a mix of co-investments and secondary investments. We continue to lower our hedge ratio, which we expect to be 30% as we enter 2020. This strategy delivers a sensible return on excess capital and reduces our enterprise exposure to a weakening yen. As we have done in previous years, we have locked in a portion of hedge costs to reduce volatility and will continually review. Our current forecast for 2020 is approximately JPY 23 billion or $200 million-$220 million in hedge costs. Turning to the U.S., we continue to invest in our existing platform, including product development and efforts to facilitate producer growth and productivity.
Examples include adjusting incentives and investing in training and retention programs to stabilize the decline in average weekly producing agents. We have introduced refreshed voluntary whole and term life products, recognizing this is an opportunity to increase our leadership position and is particularly important to our agents in the under 100 life market. Finally, we are enhancing the functionality to our enrollment platform, adding additional products, and keeping pace with the digital marketplace. We have come to the strategic conclusion that participating on the first page of an employee's benefit enrollment process is important to future growth in defending our leading voluntary supplemental product franchise. An initial step in that direction is the Argus transaction and our entry into Network Dental and Vision. Along with entering a growth market, we believe this product portfolio expansion will increase producer productivity and assist with recruiting and retaining agents and expand broker access.
We are taking a methodical approach beginning in 2020 with select states, followed by a national launch in the first quarter of 2021. We expect to generate $300 million-$500 million in revenue over the next five to seven years, recognizing there will be very little impact in 2020 as we build. We are actively investing in a consumer markets platform for the digital sale of insurance direct to consumers. There are more than 126 million employees who don't have access to Aflac's product solutions, and the fastest growing segment is the contingent workforce. Again, our approach is measured, recognizing that adverse selection is an ever-present risk when selling morbidity-based product through digital means and outside the work site. In terms of long-range innovation, we intend to leverage our franchise position that today supports over 400,000 small businesses.
We seek to participate in the small business HR solutions ecosystem with a focus on administration. This approach leverages our empowered technology and innovation platform in Charlotte. Advancing our digital platform, a strategy we call One Digital Aflac, seeks to close the pain points in customer experience. Much like in Japan, this effort also leverages our select venture investments, where commercial agreements augment internal development. Earned premium is expected to grow around 1%, coming off a weaker year in sales growth and reduction in persistency as we chose to exit certain relationships for economic reasons. We expect to recover in 2020 with sales growth in the low to mid-single digits. The rolling out of dental and vision, along with building our consumer markets platform, will have very little impact on sales and earned premium in 2020, but is expected to begin contributing in 2021.
We successfully closed on Argus acquisition earlier this month. Apart from the dental and vision insurance premium, Argus' annual administrative revenue of $80 million-$90 million will be recorded in other income and will not impact the premium line. We do expect this to be a growth area for the company, as Argus has a strong reputation for servicing Medicare and Medicaid dental and vision members on behalf of large healthcare companies. As I mentioned during our analyst briefing, our buy-to-build strategy lowers the capital at risk associated with large-scale acquisitions, but factors into near-term run rate expenses and pre-tax profit margins. 2020 is a building year, setting the stage for future revenue growth, and you can see this in our forecasted ratios. We believe trends in healthcare utilization and hospitalization will continue.
As more of the premium is driven by group accident and critical illness business, we see modest downward pressure on benefit ratios and upward pressure on expense ratios. The combined network dental and vision and consumer markets build impacts our expense ratio by roughly 140 basis points. Direct-to-consumer acquisition costs are not capitalized and deferred. Growth will be a natural drag on reported margins in the building years. Our expense ratio will be elevated as we have been actively investing in our U.S. group administration platform and One Digital Aflac. You will see the timing of this spend and other investments impacting the fourth quarter of 2019, where our expense ratio is expected to be above 40% for the quarter.
Net investment income for Aflac U.S. will naturally decline, reflecting the reduction in assets backing our RBC drawdown strategy as we move excess capital to the holding company for deployment. The low rate environment impacts results, including floating rates. We benefit from very low asset leverage in the U.S., thus less of an impact on overall revenues. Aflac Global Investments has developed into an asset management franchise we seek to leverage. We have a core competency in successfully building an external manager platform and a proven track record of developing new asset strategies and mandating best-in-class managers. We currently have 12 external managers covering seven asset classes and expect the platform will build to $13 billion in 2020. One area of leveraging external managers is our allocation to alternatives, namely private equity and real estate equity investments.
Our 2020 forecast assumes a program commitment of about $2.3 billion, and of that, about $950 million called and deployed. As Eric noted at this year's analyst briefing, where it makes sense, we will explore team lift-outs, joint ventures, and equity stakes in asset managers that will manage a portion of our assets. We will leverage our capital to grow their franchise where we can equally share in their economics. Core to our decision-making will be the ultimate benefits to Aflac's investment portfolios. We are announcing today an increase in our Aflac Global Ventures fund from $250 million to $400 million. With this increase, we are moving our $36 million investment in Singapore Life into the fund, and we'll set aside up to $150 million of the fund on global investments, including Southeast Asia and India.
As with Singapore Life, we will entertain partnering with growth and digital-oriented insurance providers to leverage our leadership role in cancer insurance. Overall, we have $160 million in funded or committed investments, and the fund overall is running at a modest, unrealized gain position. We would expect to put approximately $40 million to $50 million of capital to work in 2020. Recognizing the risk profile of these early-stage investments, we take a granular and diversified approach that includes a healthy mix of direct investments and fund investments for stability of returns. That concludes my remarks. I'll now hand over to Max for the rest of our financial and capital forecast. Max?
Thank you, Fred. Fred has provided an outlook for our segments through a U.S. GAAP lens. Before I provide what we expect for adjusted earnings per share in 2020, I would like to provide a view on an FSA and statutory basis. FSA and statutory earnings and cash flows are going to be particularly important as the industry adopts new U.S. GAAP Long-Duration Targeted Improvements guidance in 2022. Fortunately, we at Aflac benefit from strong FSA and U.S. statutory cash flow and capital generation. Both our FSA earnings and SMR reflect the strong capital formation and cash flow generated by favorable underwriting associated with our in-force. Recognizing most of Aflac's products do not build cash values with guarantees, our liabilities generally have low sensitivity to interest rates.
We must still pay close attention to the near-term risk of the low interest rate environment by stress testing earnings, cash flow, and capital levels to understand the true strength of our business and balance sheet. Fiscal 2019 FSA earnings benefited from negligible impairments and elevated labs and reissue activity, boosting the net earnings higher than our normalized run rate. We see fiscal year 2020 as a more normal earnings run rate, assuming low volatility around current FX rates. The strength and consistency of earnings, cash flow, and SMR lead us to continue to plan for a 100% dividend of FSA earnings from the subsidiary to Aflac Incorporated. Turning to the U.S., statutory earnings remain solid but off slightly from flat to declining revenues and investment in growth initiatives as detailed in Fred's comments.
During this month, we prepared to make the last dividend payment from the U.S. subsidiary to the parent holding company as part of our previously announced plans to draw down RBC to around 500% at the end of 2019. As we've said before, 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. This is likely to occur over time, though, as LDTI gets installed and we continue to finance our new business growth. Our belief is reinforced when we stress test the capital levels of our U.S. entities, assess the risk profile of our business model, and compare ourselves to peers.
The healthy RBC ratio leads us to continue to plan for a 100% payout ratio of statutory earnings from Aflac Columbus to the holding company, assuming stable capital conditions. At the holding company, we expect cash levels to increase to end 2020 with nearly $3.7 billion, which includes 1 billion as our minimum balance and another 1 billion of cash in a walled-off portfolio of securities that can be used for collateral postings and potential derivative settlements supporting our corporate hedging program. This results in a very healthy, readily deployable balance of about $1.7 billion by the end of 2020. The excess capital and liquidity supports our efforts to lower investors' exposure to the yen through enterprise hedging and allows us to be opportunistic in terms of corporate development without disrupting share repurchase and provide insurance on maintaining our shareholders' dividend track record in periods of economic weakness.
Leverage will remain around the midpoint of our 20%-25% policy range, excluding AOCI, but including any foreign currency translation losses. This is our internal preferred way to measure leverage, which compares to our headline leverage of 20.5%. In terms of capital markets opportunities, we will continue to tactically leverage our strong ratings, favorable spreads, and focus on Japan's debt markets to secure our low cost of debt and extend maturities as needs and opportunities arise. Since we intend to dividend 100% of FSA and statutory earnings to Aflac Incorporated, absent credit cycle concerns, we expect deployable capital in 2020 of approximately $2.3 billion-$2.7 billion, which will be used in one of three ways.
The approximate 10% allocation to opportunistic displayed on this chart is a meaningful commitment that strikes the right balance of investing to create options for growth while not placing too large bets on developing the business models. A recent example is Argus, which closed in November, where we are using a buy to build corporate development strategy. Be mindful that while our opportunistic allocation is low, we expect to have roughly $1.7 billion of excess and deployable capital at the holding company as we enter 2021. We reserve the right to entertain larger opportunities if relative returns dictate and are in the long-term strategic best interest of the shareholder. Share repurchase is the standard against which all alternatives compete for deployable capital. For 2020, we expect to repurchase $1.3 billion-$1.7 billion of shares. As you know, we also take pride in our track record for annual dividend increases.
As Dan noted in his comments, 2019 now makes 37 consecutive years of increasing the cash dividend to shareholders. Our dividend policy is guided by growth in adjusted earnings per share, but also more so these days by free cash flow generation and overall capital quality. Before moving on to our EPS outlook, let me just comment on our corporate segment expectations. The low rate environment has an acute impact at the corporate level for two primary reasons. Most of our contingent capital and liquidity is invested with an eye towards safety and liquidity, which exposes it to lower floating rates at the higher quality short end of the curve. Second, since we reflect the economic benefit of our enterprise hedging as effectively lowering our Japan-U.S. dollar hedge costs, the lower short-term rate environment means less relative earnings contribution to the corporate segment.
In addition, the call from Fred's comments that the revised method of arm's length internal asset management charges will shift income to the corporate segment. Together with the impact of our Aflac Global Ventures platform and traditional holding company costs, we expect 2020 corporate and other segment pre-tax loss of $50 million-$60 million. Turning to the overall enterprise picture for EPS. We are projecting a range for 2020 adjusted EPS of $4.30-$4.50 per share, assuming a foreign exchange rate of 110 JPY to the USD. When looking at our currency neutral adjusted EPS estimates for 2020 and normalizing for roughly $0.05 per share of items identified and called out in 2019, the range equates to relatively flat EPS growth for 2020. Our forecast for enterprise-wide variable investment income is approximately $60 million or $0.05 per share for 2020.
Recognizing this can be a volatile asset class under GAAP reporting, we will continue to provide quarterly detail to this portion of the portfolio and any material variance from forecasts embedded in our plan and EPS guidance. This outlook is somewhat consistent with what we've been signaling, given the headwinds related to low interest rates, proactive de-risking activity, and investments to address the challenges we face to grow the top line in both Japan and the U.S. Of note, our U.S. investments to build Aflac Network Dental and Vision, as well as the consumer markets business, represent a 1% headwind to adjusted EPS alone. Our strong capital base and confidence in building economic value over time supports repurchase activity, continuing a balanced approach to capital deployment that has served our investors well these past several years. Our financial playbook for creating value is straightforward.
Defend the attractive margins in our core supplemental health businesses, invest to drive top-line growth, and improve efficiencies. Finally, we continue to balance maintaining strong capital ratios with returning capital to our shareholders. Now I'll turn the call over to David so that we can begin Q&A.
Thank you, Max. Before we begin, let me please limit yourself to one initial question and one related follow-up to allow other participants an opportunity to ask a question, you may always get back in the queue by pressing star one. Operator, we will now take that first question.
Thank you, speakers. Our first question comes from the line of Humphrey Lee from Dowling & Partners. Your line is now open.
Good morning, and thank you for taking my questions. My first question is related to the expense outlook in the U.S. While I understand there will be high expenses for the build-outs of the dental and vision platform and the direct-to-consumer capability, the range of 37.5%-39.5% expense ratio is higher than the 36%-37% that you laid out at the FAB meeting. I'm just wondering what were the changes leading to the expectation difference over the past two months? Should we think about the outlook for 2020 as an acceleration of your planned expenses over the next few years for these build-outs?
In short, yes. The estimate that we provided at FAB at that time excluded the impact of the build-out of both the dental and vision platform, as well as the consumer markets or digital direct-to-consumer. It simply was the fact that we had not yet completed our planning process and the build-out plan, if you will, and its impact on 2020. That was the primary reason for that delta. Your assumption is correct, that what we are doing is really focusing in on the building year for next year. We're taking a gradual approach to the network build-out, state by state in the U.S. on the dental side. What we've learned in the past is that given the strength of our distribution, particularly as you come down market, we can bring a lot of business quick and a lot of groups quickly to a new platform.
We experienced that with our group acquisition back several years ago. We want to be very calculated in how we do this to make sure we ensure quality customer experience while we build it out. On the consumer side, direct-to-consumer, as you all are aware of, direct-to-consumer, because you're not DAC-ing the acquisition expenses, typically in a building period of time, not only 2020 but beyond, you'll have a bit of a drag on your GAAP EPS. The important thing is you're building economic value along the way, and that'll eventually come through our financials.
Got it. A quick clarification question related to corporate and other. Max laid out the pre-tax loss expectation of $50 million-$60 million, seems to be in part because of the revenue shift from Japan to corporate, given the arm's length transaction on the investment side. Looking at that, the $50 million-$60 million definitely running at a lower level than anticipated. I was just wondering if there are any other things other than the interest rate that Max's also kind of pointed out, any other factors that we should factor into corporate as we think about for 2020?
There is one other impact to the corporate and other segment, and that is a little bit higher of our corporate hedging program balance that continues to grow. That will have a slightly higher impact in 2020 than what it had in 2019. The shift of asset management pre-tax profits is about $30 million, and that boosts and improves the corporate and other segment pre-tax results.
Thank you. The next question comes from the line of Suneet Kamath from Citi. Your line is now open.
Thanks. I wanted to start with Japan sales. I think you threw out a number of a 20%-30% decline for next year. Is that on a consolidated basis for Aflac Japan, or is that just for the Japan Post channel? Just some additional color on that would be helpful.
Suneet, it's Fred. That's just the Japan Post channel that we're talking about. Again, this is really an assumption that we've embedded in the plan for purposes of scheduling out our earned premium and all the associated ratios that play off of earned premium growth. Right now, we do not have a formal plan in place that schedules out sales targets as we may traditionally have with Japan Post. What we do have is we have had dialogue with Japan Post Group, where they have provided us a level of confidence that they are both hard at work at resolving their sales issues through Japan Post Insurance, but also expect a level of recovery as we get particularly in the second half of 2020. We have confidence in that type of trajectory.
Let me just reiterate that we have put in place for planning purposes an assumption of about 20%-30% down from the 2019 sales levels in Japan Post of JPY 12 billion-JPY 13 billion.
Got it. Then just maybe a bigger picture question. It seems like you're guiding to, I guess, 1% EPS growth in 2020 on a normalized basis, but given the buyback activity, that would imply nominal earnings are declining. When would you expect to see, on a consolidated basis, growth in not just EPS, but in nominal earnings?
Yeah. What I would say, Max could add any color, we don't tend to project out beyond our 2020 timeframe. Clearly we're in a building period of time here where we are actively investing across both the Japan and the U.S. platform, we expect that to generate earned premium or revenue growth as we get out into the 2021 and beyond time period. As that takes place, Suneet, that's when you would expect to see some turn in operating earnings, just dollar-based, if you will, operating earnings then boosted further by deployment activity. It really is clearly the case that at this point in time, our EPS growth is supported by capital deployment, namely stock repurchase. Just note that those earnings are weighed down by significant investment in the platform, which we expect to yield revenue growth at our profit
Thank you. The next question comes from the line of Jimmy Bhullar from JPMorgan. Your line is now open.
Hi, good morning. Just a question on your expense ratio. I guess in the U.S., the two things that are sort of making it go up are just front-ending some of the expenses as well related to growth initiatives and the Argus acquisition as well. Should we assume that these expenses are elevated and then sort of drop beyond 2020? Or is this sort of the new normal and it really depends on what happens with the direct response build up on whether the expenses go further? Or just trying to get a sense of is the 2020 level an ongoing sort of new normal level for the expense ratio in the U.S.?
No, it's not the new normal level. The expense ratios in 2020 absolutely reflect an accelerated amount of build spend as well as continued spend on the platform, both digital efforts as well as closing out some of the technology spend, most notably around the group business and other platforms. We would not expect these elevated level of expense ratios to continue on as some sort of new normal. Eventually they will turn the corner, and we would expect that to happen as revenue starts to be realized from these investments. Again, we would expect more of a revenue build to commence in the 2021 time period as we build out particularly dental and vision.
One thing I would note is, in some respects, we want to see a drag from consumer markets because that will suggest that we are indeed growing that business successfully and at long-term economic values. Direct-to-consumer is a different type of animal in that it will naturally have a drag on GAAP-related earnings in years of building, and we would hope to build that business. Setting that aside, this is not the new norm for expense ratios.
Are you able to quantify whether dollar amounts or percentage of the basis points on the expense ratio that you consider sort of abnormally elevated expenses that you're front-ending in 2020 that won't recur in future periods?
It's a little difficult to quantify at this point in time exactly, but what you can take from our disclosures is that the dental and vision platform will eventually start turning more sooner than you would find consumer markets simply because of the deferred acquisition cost dynamics. The build year in that platform is not going to be a permanent item in our expense ratios, and we detail that the expense ratio impact from that platform is 80 to 120 basis points. Eventually you would expect that to moderate as we build the revenue side. Again, on the consumer market side, that is a business that naturally will continue to be a drag if you are growing. We would hope to grow.
Thank you. The next question comes from the line of Ryan Krueger from KBW. Your line is now open.
Hi. Thanks. Good morning. In terms of the $1.7 billion excess capital cushion at the holding company, I guess how are you thinking about that and the potential use of it over time? Is that something that, because I think your guidance suggests deploying just incremental free cash flow. I guess, would you anticipate over time deploying that into more opportunistic transactions, or do you want to run with some level of cushion there?
We recognize that at $1.7 billion, that's a fairly high number, and we would expect to deploy a portion of that over time. It will be done with discipline and with a focus on returns. We think about all deployment that we do, that being through dividends, that being through repurchase, or that being through what we call opportunistic deployment. Everything runs through the same return on capital lens, and that is really what is guiding us together with the underlying strategy from the businesses. As we find opportunities, this will be deployed over time. There's really no rush. We don't feel forced to do anything. Obviously if we continue to hold it, then it becomes a drag on return on equity. Given where we are in the economic cycle, we feel that that's still a relatively good risk reward.
Thanks. Is the $2.2 billion-$2.8 billion of capital generation a pretty good run rate, or is there anything unusual in there?
There are no significant unusuals in that run rate for capital generation.
Thank you. The next question comes from the line of John Barnidge from Sandler O'Neill. Your line is now open.
Thanks. I just want to stay with the opportunistic capital deployment. With that 10% of the $2.3 billion-$2.7 billion, would that include the $40 million-$50 million of expected capital deployed by Aflac Global Ventures? Or is that simply traditional M&A?
No, it would include that. We consider any increased amount of funding in the venture capital fund as part of our opportunistic deployment of capital. I would also add to the degree we look at anything in the asset management space, which I also commented on, that that also is considered opportunistic capital. Along with traditional tactical acquisitions, much like what we did with the Argus acquisition, those two items fall in the category of opportunistic.
Okay, great. My follow-up, talking about, I know you're rolling out in the 10 states for dental and vision next year. I'm not talking about actual sales expectations for that, but more around how much, if you can quantify it, should help maybe the core legacy products of the U.S., given the company now has a first page benefit enrollment product. More kind of like having it on the page helps you cross-sell the products on page two.
I'll let Teresa and Rich give some color on that from their perspective.
Okay. Good morning, John. I think, as we think about our distribution approaches, as Fred alluded to, first and foremost in the under 100 marketplace, this is a very powerful product for us to have. That will help our agency channel with a first-page enrollment benefit. Also from a broker perspective, in the mid-market especially, which is very attractive for us. I think longer term, as we continue to prove out consumer markets, we see that also as a potential product for consumer markets. Really it has the ability to lift all distribution approaches.
Thank you. The next question comes from the line of Erik Bass from Autonomous Research. Your line is now open.
Hi. Thank you. Can you comment on how the $80 million-$90 million of administration revenue from Argus that you guided to you, do you expect that to come in over the course of 2020 and maybe how that could grow over time?
That is the core business that we purchased. This is sometimes referred to as the TPA portion of the business that we acquired from Argus. That $80 million-$90 million of administrative revenue is the revenue that we expect them to achieve in 2020. It would come in relatively evenly throughout the year. I don't think you would see much movement, but somewhere within that band. That is a business that grows based on being mandated, administrative service contracts from the large healthcare providers, who want to outsource their Medicare and Medicaid dental and vision membership services, if you will, to Argus. Their revenue can be highly reliant on simply the wins and losses, in terms of that category of business.
It's a little difficult to predict, but I would tell you that from an overall revenue standpoint in the U.S., we wouldn't expect it to be material, but we certainly expect it to be a growth area. Argus has a terrific reputation in this space, a very strong track record of supporting Medicare and Medicaid businesses on behalf of these healthcare providers. We see it as a stable line of revenue and something that can grow over time. We certainly have built-in projections and incentives, including incentives around the purchase price, to grow that business into the future.
Thanks. Can you talk a bit more about the trends you're seeing in protection products in Japan other than cancer and medical? Do you see an opportunity to materially grow either the income support product or the non-interest sensitive life?
I may ask Japan to comment.
Yeah, I think that's a good idea. Go ahead. Koide, do you want to take that or Ariyoshi?
Koji will talk.
Okay.
In Japan, the strategy that we are taking is to provide the most optimal and best coverage for customers considering their lifestyle and the medical environment changes as well as Japan's social welfare environmental changes. On top of that, what we are planning to do is to strengthen and enhance coverage needed for each life stage of our customers. For example, to save up for post-retirement fund or maybe strengthening nursing care type of coverage. Although we will maintain our core center as a cancer and medical insurance, but we would also like to be strengthening the peripheral and surrounding coverage, as I mentioned.
Thank you. The next question comes from the line of Jay Gelb from Barclays. Your line is now open.
Thank you. With regard to third sector sales in Japan for 2020 overall, taking into account the expectation for declines in Japan Post, what's your overall expectation for third sector sales next year?
Koji?
As we've been discussing, we really cannot predict anything for JP at this moment. Basically, associates channel will be the core and the center of our story. As Fred mentioned earlier, we are planning to launch Cancer Rider at the beginning of the year next year. Since we have not launched this product yet, we are not able to elaborate the details of it.
この特約に関しては、代理店からも消費者からも非常に好評を得ています。
However, for this rider, we have gotten very good feedback from agencies as well as consumers.
来年に関しては、2019年度は、がん保険、2018年に発売したものの、E PLUSの第1クォーターの結果があったことに加えて。
すみません、ちょっと意味が分かりません。Sorry.
2019年に関しての第1クォーターは、がん保険のプラスの影響がありました。
In the first quarter 2019, we had positive impact of cancer.
その後、二つの特約を販売をしていきました。
Following that, we have launched two riders.
Medical.
Medicalを二つ、特約を販売しました。
These are two medical riders that we've launched.
来年に関しては、ちょうど商品の狭間の年になるということで、特約を一つ今計画をしています。
Next year will be a light year in terms of launching new products, but we are planning to launch this rider.
そういったことから言って、associate channelは今年比でやや弱くなるのではないかというふうに考えています。
In total, what we are thinking is associate channel is slightly weak this coming year.
その中でも、うちの専属の代理店っていう、専属の中型から大型の代理店というのは。
Among our associate channel, our exclusive channels, especially the mid-sized and large-sized exclusive agencies.
ここは比較的安定的に推移をしていますので。
These agencies are trending very stably or relatively stably.
個々の経営や販売活動を強化する。
Strengthening the management of these companies as well as sales.
ITの環境を強化することによって生産性を高めていきたいというふうに考えています。
By strengthening IT environment, we would like to be increasing the productivity of these agencies. That's all for me.
Fred.
Thanks, guys. One other comment I want to make is that we're going to have a little bit more clarity, at the end of the fourth quarter, hopefully. We can go a little bit more into detail. Just to let you know, we're on top of it, and we're pushing to have the biggest year we can possibly have. I have confidence that they're going to do everything they can to make it a good year for us. Again, we'll cover that in much more detail at the end of the fourth quarter.
Much appreciated. At this point, taking all that helpful information into account, should we hope for flat third sector sales in 2020 versus 2019?
I think flat would be a challenge. I think right now, embedded in our earned premium is a decline, okay, and somewhat related to the decline I mentioned earlier in Japan Post. Again, as Dan mentioned and as Japan mentioned, we really don't have as crystal clear a plan. It's quite fluid. We have to assume something for earned premium assumptions to make sure we understand how our ratios are running through and margins are running through. We'll start to formulate that better as we get a better window into Japan Post recovery dynamics and perhaps can comment on it during the fourth quarter.
Yeah, certainly, that would be a number I'd love to see. We'll work toward that.
Thank you. The next question comes from the line of Ian Ryave from Bank of America. Your line is now open.
Thank you. Just a couple questions on expenses. Overall, the expense ratio ranges you provide, how much does that reflect some discretion on how expenses materialize? In other words, you're making these investments in both Japan and the U.S. If, say, throughout the year you decide to push some of these expenses that would be for 2020 to 2021, I guess I'm just trying to get a sense if that's something that perhaps you'd update us throughout the year.
We will update throughout the year. We'll comment obviously on the reported results and then, where possible, give you an idea of how things are tracking. I would say the expenses that we're talking about here are within our control. We're proactively investing in the platform. We're not sort of a victim of it. Our technology and digital investments, we think, are critical to maintaining the health and future growth rates of the company. Of course, Argus and the consumer markets digital spend is also important. Again, remember, I would really step back and recall some of my earlier comments and comments I made at FAB, and that is we're proactively taking a buy-to-build strategy.
We could very easily and certainly have the capital to be sitting here and talking about large-scale acquisitions, both in the digital space as well as on the first page of the enrollment platform. We have proactively chosen that the more proper way from our perspective, in terms of reflecting on our business model, is to buy the capabilities and the domain expertise and then build it, leveraging our distribution, our brand, and our access to 400,000 small businesses. Because we have proactively chose that path to expanding the top line over time, that's naturally going to require leaning on expenses in the short run to build over time. The good news is that I'm not talking to you about massive amounts of goodwill and execution risk and integration risk on a large platform.
You just need to understand that as you think about our financials and our trajectory, we think this is the best route for the company. It mainly has to do with our unique small business platform. Most of the large-scale acquisitions are simply not occupying any space nor have any strategies dictated towards going down market. For us to properly leverage an acquisition, you've got to bring it down market. Okay? That's really behind our buy to build.
I think it's important to note that the restructuring to where I've got Fred at the corporate level working as Chief Operating Officer gives the independence to Koji and to Teresa to do their jobs, while at the same time having a master plan that will be overseen by Fred to kind of be a triangle of new investments that will ultimately enhance both Japan and the U.S., and they'll all three work together to achieve our goals. Someone's watching the money to make sure it's invested in a proper manner, and we will continue to do that with the ultimate objective to return better returns to the shareholders long term.
Got it. Thank you.
Thank you. Our last question comes from the line of Thomas Gallagher from Evercore ISI. Your line is now open.
Good morning. Just trying to back into some of these sales figures in Japan to the earned premium growth. It looks to me like even outside of Japan Post, you're not forecasting any sales growth. It's flat to maybe down a little bit, for the non-Japan Post channels. Is that right? If so, maybe talk a little bit about what's going on behind the scenes there on what's impacting growth.
Well, I'll let them talk about it, you're really talking about introduction of new products. We don't have a particularly new product other than the one Koji mentioned earlier for 2020. Hopefully 2021 will be the year you would see a surge in production based on the new products that would be brought out. As you well know, you've been around a long time, we can't talk about products because of the FSA and their rules and regulations about that. We can tell you that that's where we would look to see a modification take place, would be 2021, that's where you'd see more growth.
Tom, let me just add something, because I think you're looking at the slides and you're attempting also to back into things, which I appreciate. I understand that desire, just keep in mind a few things. One of the things we added to the Japan slide on purpose was the policy count in protection products, third sector and first sector protection, as well as the premium impact from paid-up policies. We did that to just remember that there is still a build of policies in force taking place, and these policies contain very attractive economic value. The appraised value of these policies on our books shouldn't be confused with what the premium pattern may be because of the paid-up nature of policies. The other comment I would make is the rider strategy.
We have gone specifically to a rider strategy on medical products, where instead of lapsing and replacing your policy through a new sale, you add a rider where the sale is only reflecting the incremental premium from the rider addition. When somebody adds an income rider to their medical product, it is that rider's premium that counts as sales. If they add a nursing care as an older individual, that rider sale. We are taking that similar approach on cancer, where we are adding a simplified rider for ease of sale, where there wouldn't be the replacement of a policy and a fresh sale and lapsed policy, but the addition of a rider.
The reason why you want to pay attention to policy count, therefore, is because this is designed to maintain policies in force and continue that build of economic value, even though it may not come through as attractive sales results. What we are guided by right now in Japan, in particular, is economic value. The two most powerful components of Japan to our enterprise is the amount of cash flow and capital generation as a strong, profitable, mature entity, and the lowest cost of capital among our U.S. peers, delivered largely because of our Japan franchise. We want to maintain economic value, we want to sell profitable products, and we want to make moves that may not reflect well in sales results, but strong economics come out the other end. That is really the focus, and that is playing into our sales results.
That makes sense, Fred. Thanks. My follow-up is just I noticed there is a bigger move into the USD floaters in the Japan portfolio. I guess my question on that is, since you are already short on assets versus liabilities in Japan, does that trend or does that strategy exacerbate your ALM mismatch? How do you think about that overall?
I don't know if we have Eric patched in by phone, welcome any comments he has on that. What I would say from an ALM perspective is that, remember, the majority of our products setting outside of the first sector savings products, okay? The majority of our liabilities and our products in force are not highly sensitive from a return perspective to ALM mismatch. That is really what is somewhat unique about our business model. The morbidity margin overwhelms any ALM dynamic related to the return prospects of the business. In Japan, just like in the U.S., we tend to be focused on the risk-adjusted net investment income we can create, realizing that we may have net investment income going up and down, okay, based on the rate environment as product rolls, old securities roll off and new roll on.
It tends not to be necessarily an impact-related item to ALM. First sector savings products are more matched products because there is that risk. The rest of our products are less sensitive to it. While we do favor long duration because of the rate environment there, the floating rate securities fit nicely in that profile.
Thank you. There are no further questions. Mr. Young, you may proceed.
Thank you. Thank you all for joining us for the call this morning. Before we end, I'd like to remind everyone about our upcoming fourth quarter earnings release on February fourth, and the teleconference on February fifth. Please feel free to contact our investor and rating agency relations department for more information and with any questions you may have in the interim, and we look forward to speaking with you soon.
Thank you. That concludes today's conference call. Thank you all for joining. You may now disconnect.