Good morning, welcome to Aflac's Financial Analysts Briefing, welcome to the NYSE. I'm David Young, Vice President of Investor and Rating Agency Relations. For those of you who have joined us here at the NYSE, you will find an agenda and biographies of all presenters and panelists in the materials in front of you. We have also posted these materials online for today's event. Before we begin our presentation this morning, I'd like to introduce the Aflac Incorporated board members who are attending today. Please stand as I call your name. Georgette Kiser. Ms. Kiser is an Operating Executive at The Carlyle Group, where she is advising across the firm, in particular, the firm's Global Technology and Solutions organization, by developing and driving IT strategies across the global enterprise. Prior to this, she served as a Managing Director and Chief Information Officer for The Carlyle Group.
Ms. Kiser joined the board in May of this year. Karole Lloyd. Ms. Lloyd is a certified public accountant and retired Vice Chair and Managing Partner for Ernst & Young, bringing more than 37 years of experience to Aflac. She serves as a financial expert on the Audit and Risk Committee, serves on the Finance and Investment Committee. Ms. Lloyd joined the board in January of 2017. Joseph Moskowitz. Mr. Moskowitz is a retired Vice President from Primerica, Inc. As a financial expert on the Audit and Risk Committee, he provides insight into the analysis and evaluation of actuarial and financial models. He also serves on the Corporate Development and Compensation Committees. He was elected to the board in 2015. We will begin our meeting today with a strategic overview of Aflac Incorporated by our Chairman and CEO, Dan Amos, turn to Aflac Japan.
Masatoshi Koide, President and Representative Director of Aflac Life Insurance Japan, will follow with a strategic overview of Aflac Japan. Koji Ariyoshi, Director of Sales and Marketing, Aflac Life Insurance Japan, will complete the presentations with an update on Aflac Japan sales and marketing, after which we will have the first of three Q&A panels, followed by a break. Before we begin today, let me point out 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 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 you can follow along and make notes. We will have three Q&A sessions during this meeting, as well as a final wrap-up Q&A at the end of the meeting, there will be ample time to ask questions. Please hold your questions until the respective panels, please remember, this presentation is being webcast live. As a courtesy, please turn off your cell phones and other electronic devices. 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. 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. He will now provide a strategic overview of Aflac. Dan?
Thank you, David, and good morning, everyone. This marks, as David mentioned, my 30th year as CEO, and I've had the privilege and opportunity to lead this company through some challenging situations and markets. Despite those challenges, a big part of Aflac's success can be attributed to the resilience and core spirit of our innovation as a pioneer in the insurance industry today. We cherish the culture of innovation that we have created ever since the company's founding in 1955. I believe the distinct and innovative spirit will continue to propel our success into the future. Let me kick off the meeting with an overview of what our products do in terms of being attractive in both countries. Although Japan and the United States are half a world apart, there are similar attributes that our products address and mitigate for citizens in both countries.
In particular, the aging population puts financial pressure on the healthcare environment in both the United States and in Japan. In both countries, rising healthcare costs are being shifted to consumers in the form of greater out-of-pocket expenses and healthcare co-pays and deductibles. In Japan, consumers have been actively looking for solutions to help bear their cost. In the United States, a similar dynamic as consumers come to grips with the reality that the healthcare cost that they must continue to bear. We are leveraging Aflac's innovative products, our distinct and extensive distribution system, our trusted brand to extend our success as a solution of choice for millions of people in Japan and in the United States. I also want to give you my perspective on where we are and what we will focus on today. Financially, we are as strong as we have ever been in our 64-year history.
Pre-tax margins are stable and as strong as any industry. Our capital position, by any measure, is robust. Our investments are high quality and diversified, and we have among the highest returns on capital and lowest cost of capital in the industry. This places us in a more defensive and sustainable position should any economic weakness come in the future. It also arms us with an ability to be opportunistic should conditions be right. As I mentioned, our core franchise strengths are envy of the industry in terms of our brand, our scale, and distribution breadth and depth. Despite all of these attributes, we remain challenged in growth of the top line. Some of this is the math of 64 years of success in the United States and 45 years in Japan.
It is also a function of the battle to grow in the face of a large in-force block of business that naturally lapses each year, consistent with the industry. Like all insurance companies, interest rates have not proved any boost or support in net investment income and have even resulted in pulling out of certain product classes in Japan for us. Thankfully, in our case, interest rates pose less of a threat to our financial strength than they do to some companies in our industry today. They are nonetheless a headwind to growth. As a management team and as CEO, we are dedicated to addressing these challenges. As you listen to the presentations today, know that we are first going to be transparent and upfront in recognizing the challenge and the reality of the top-line growth outlooks. We'll spell out our efforts underway to generate growth.
These efforts include defending the core with product development, distribution, productivity, and digitizing our platforms to close pain points in the system and drive efficiency. We will expand the core with tactical developments into new product lines and businesses that are natural extension of our existing franchise, and evolving the core by innovating, venturing, and incubating new businesses and approaches to our operating model, offering opportunity for strong growth. Every company is guided by core beliefs and business philosophies that often come from the top of the house. Those of you who followed Aflac for some time know that in my case, we never risk a lot for a little. As a result, you'll notice that in all three cases, we have something in common. They seek to leverage our core, what we know, and where we have a proven ability to succeed. We are measured in our approach.
We recognize what we're good at and where we are proven. Let me assure you that each and every officer you'll hear from today are being held accountable to deliver growth despite the headwinds. Excuse me one minute. Let me get up. I apologize. To deliver on the headwinds. We are here today, thanks to our people, and to bring it all together. We place a high priority on ensuring that we have the right people in the right places at the right time. I want you to know that we have a tremendous management team currently in place, and you'll hear the strong lineup of speakers and panelists today.
Next, you'll hear from Koide-san, who is doing an excellent job as President of Aflac Life Insurance Japan, and Koide has been in this role for two years, and I am counting on him and Ariyoshi-san, our Director of Sales and Marketing, for future growth. With the U.S., Teresa White is also doing a fine job as President of Aflac U.S., and you'll recall that Teresa brought on Rich Williams as Executive Vice President over distribution in 2017. I'm also looking for that U.S. team to grow our business. During the latter third of the presentations, you'll hear from the members of our corporate finance team, as strong a group anywhere in the industry. Fred Crawford is a natural leader who has made a tremendous impact on the company in his 4-plus years that he has been with the company.
His business acumen has greatly enhanced the financial division by building the strengths to transform the various functions into a strong organization that you see today. Within Fred's financial organization, we are fortunate to have an incredibly well-rounded actuarial function, and I cannot overstate the importance of our investments as one of the keys to our success. On that note, you'll be hearing from Eric Kirsch, who has spent the last seven years developing Aflac's world-class investment operation in New York and Tokyo. I am extremely proud of Eric and his team. Fred is also working with Max Brodén to leverage our low cost of capital and corporate development capacities through opportunistic capital deployment. Later on, Fred and Max will cover more on the perspective of corporate development, Aflac Corporate Ventures, and our global venture strategy.
To give more insight, Fred hired Max, and Aflac has benefited greatly from Max's deep and broad knowledge of the industry. In a short timeframe, Max has made great strides within the corporate development function. He has demonstrated a strong understanding not only of Aflac but of the industry. At the same time, he has been further enhancing the treasury department. His ability to balance those priorities and effectively execute the strategies is why we named Max Deputy CFO this past May. As I said before, I am committed to staying until I'm at least 70 years old because I'm still enjoying building and watching the company grow. Last week, I was at the CEO roundtable meeting where some of the CEOs asked me, "How do you stay around for three-plus decades?" I told them that you genuinely have to enjoy what you do.
You have to enjoy setting goals and achieving them. I think most importantly, you have to enjoy watching others become successful, and that is truly the thing I enjoy the most today. I realize now, as I think about getting older, that I'm going to make a horrible retiree, so I'm in no hurry to retire. However, I do believe that one of my key roles in leadership is to develop leadership and succession planning are an important part of my role as Chairman and CEO. I do, however, want to highlight how I'm in the process of redelegating some of the responsibilities. This has allowed me to shift some of the day-to-day operations that I took on two years ago when Chris retired and others.
I'm now in a position where I am shifting more responsibility so I can evaluate their success, which I expect to be nothing less than stellar. Now let me turn to one of the hottest topics in business, and that is growing in the minds of investors, and that is corporate social responsibility. 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 that Aflac is a trusted, respected, and powerful brand that people view positively. Accomplishing that is a delicate balance and must be achieved to satisfy all stakeholders. The target is always moving, and its business environment is always changing. I want to emphasize that we view each of our stakeholders as essential to our long-term success.
I don't think it's coincidental that Aflac has achieved success while focusing on doing the right things. In fact, I believe they go hand in hand. I'm proud of what we've accomplished in terms of both our social purpose and earnings results, which resulted in strong shareholder return. Last month, I signed the Business Roundtable statement on purpose of corporations, along with 180 other CEOs, because I think we've been taking this approach for my 30 years as CEO. I view this opportunity of doing good within the communities as being the right thing to do and also is a good business sense. We are always working to build a stronger brand, which ultimately gives us an opportunity for future growth. A strong brand also helps counter the negative perception out there among businesses.
You just have to listen to the news on a day-to-day basis to see that within the political landscape, many companies are portrayed as purely institutions that want nothing more than huge profits. No one should be surprised to see this politicized as we approach the election year. Make no mistake, profits matter, clearly. The point is, connections that you make in the community and positive brand image are ultimately what can translate into profits and growth and better shareholder returns. The desire to be viewed positively should also ring true with all constituents because all things being equal, people, including employees, investors, customers, would rather do business with a company that is also a good corporate citizen. Those of you who attended this meeting last year will recall that I discussed BlackRock CEO's Larry Fink's letter to CEOs, which was sent to me as well.
The reason I did it is to emphasize the importance of this topic. If it's top of mind for our investors, then I make sure it's top of mind for me. I think it's important to note that since I became CEO in 1990, even while embracing this approach, we have never missed an annual earnings objective. We have proven it, that you can do both. In addition to our financial results, that is the message I want you to walk away with today, is that we will continue to do both and ultimately enhance shareholder value. Let me mention just a couple of milestones along our corporate social responsibility history, just to prove my point.
First, it was 1990 when we introduced the first on-site corporate daycare center in the state of Georgia, that was for children of the Aflac employees and was truly unique at that time. Second, in 1995, when we made the initial donation to Egleston Children's Hospital that sparked what would soon become the Aflac Cancer and Blood Disorders Center at Children's Healthcare of Atlanta. Today, it has earned the recognition of being one of the top 10 pediatric cancer centers in America, according to U.S. News & World Report. Third, you'll recall that a year ago today, we introduced My Special Aflac Duck. In addition to supporting the treatment and research of childhood cancer, we wanted to give something that they could literally hold on to, that is the children, something that would bring them joy and help them during their difficult journey.
My Special Aflac Duck has been that something. When you think about it, we've done it for more than just accolades. When you see the article that ran in Forbes, published one month ago, calling My Special Aflac Duck the gold standard for CSR programs, we know we're right on track. Now I want to show you just a two-minute video. This two-minute video will prove to you that My Special Aflac Duck is not just a toy.
In January 2018, Aflac unveiled My Special Aflac Duck at the Consumer Electronics Show in Las Vegas, one of the only items at CES that was not for sale. The social emotional robotic duck took the world stage by storm, winning multiple awards, generating 800 news articles, and spanning the globe for a whopping 2.2 billion media impressions in just four days.
As My Special Aflac Duck then went into production and the various levels of quality control and grew from a dozen prototypes to tens of thousands of units, Aflac and Sproutel's teams continued to raise awareness for childhood cancer needs in the U.S. and introduced the potential of My Special Aflac Duck to legislators, child life practitioners, psychologists, oncologists, parents and patients, joining forces with the Children's Miracle Network Hospitals, and started working with an absolute champion while bringing attention to the fact that only 4% of the National Cancer Institute's budget goes to pediatric cancers. Aflac picked up further accolades along the way. Then, in September 2018 at the Aflac Cancer Center at Children's Healthcare of Atlanta, the duck took flight. In the following weeks, magic struck.
In South Carolina, Texas, Tennessee, Louisiana, Nebraska, Aflac delivering on its promise to distribute My Special Aflac Duck to the estimated 15,000 kids, three and older, newly diagnosed with cancer in the U.S. this year. My Special Aflac Duck is more than just a companion. It's hope with feathers. Time magazine thought so, too. South by Southwest thinks so, too. So do these dance marathoners, raising JPY millions for kids with health issues like cancer. With medical professionals now able to request ducks through aflachildhoodcancer.org/myduck, 2018 is just the beginning. Chemotherapy can be an isolating and painful experience. Join Aflac and the My Special Aflac Duck to bring real comfort and joy to childhood cancer patients today.
I believe that warm feeling of helping others will result in a stronger brand and consumers wanting to do business and even come to work for Aflac, especially the millennials. Most importantly, as we have proven, this will ultimately help us generate long-term shareholder value, and that is what is important. Before I turn the program over to Koide-san for an overview of Japan, I want to make a few comments. I had lunch with Nagato-san, president of Japan Post Holdings, just a week ago when I was in Japan. I want to emphasize that our alliance is strong, and our relationship with Japan Post is extremely valuable to us. We respect and have confidence in Japan Post's ability to fix the matters at hand and to come out stronger in the end. Our interests are aligned so that the approach is in the best interest of all parties.
Now I'd like to ask Koide-san to take the stage and give an overview of the market in Japan and Aflac Japan. Koide?
Thank you, Dan. Before I begin, I would like to provide an update with respect to Japan Post. First, as Dan said, let me reiterate that the strategic alliance based on a capital relationship is robust and sound, even as the Japan Post Group continues to work through issues surrounding the sales of Japan Post Insurance products through the Japan Post Company and Japan Post Insurance channels. I would like to make it clear that with the number of cancer patients on the rise in Japan, there is a strong need for cancer insurance across all age groups. Cancer insurance is an easy product for customers to understand, as it covers costs associated with cancer treatment, and it is attractive even in a low interest rate environment.
With the cancer treatment environment changing on an almost daily basis, we believe it is important to continually provide customers the latest coverage to ensure customer-centric business management. As we have stated previously, to ensure appropriate solicitation of cancer insurance through all our sales channels, Aflac Japan has in place frameworks for compliance, risk management, and appropriate management of customer complaints premised on the fact that the occurrence of violations is a continual risk. To date, no material systemic issues have been identified with respect to Aflac's cancer insurance sales through the Japan Post channel. However, in light of the recent circumstances, and from the standpoint of making absolutely sure, Aflac Japan is voluntarily reviewing cancer insurance handled by Japan Post Company and Japan Post Insurance to check for gaps under the issue policies that could be disadvantageous to customers in a manner inconsistent with the customer's intent.
Should we become aware of any practices that are inconsistent with our compliance standards, we will take the necessary action and steps to address it immediately. We plan to issue the result of our voluntary review on September 30th. Regarding the strategic alliance three pillars and consistent with Japan Post Holdings statement, Aflac is currently unaware and is not anticipating any disruption in our long-term alliance plans or associated capital commitment by Japan Post Holdings in Aflac's stock. While we do not speak on behalf of the trust beneficially owned by Japan Post, based on reporting we receive to register the shares for eventual 10-for-one voting rights, the trust appears to be on track with the intention it announced in May of this year, namely, to accumulate approximately 7% ownership on or before March 31st, 2020.
Regarding our cancer insurance sales initiatives and consistent with the August 22nd 8-K, we expect a temporary decline sales running at approximately 25% of normal daily volumes based on daily proposal and new annualized premium trends to date in the third quarter. Anticipate that sales in the Japan Post Group channel in 2019 may decline by as much as 50% from a very strong 2018 given our refreshed cancer product. Lastly, regarding the consideration of new initiatives for corporation, we continue to view 2019 as a year of planning and are making concrete progress on our joint investment initiatives. In summary, although we do expect some near-term sales disruption, the relationship between Aflac and Japan Post remains strong. We will continue working together to deliver mutually beneficial results for policyholders and shareholders alike.
Now, I will begin with an update on Japan's growing third sector insurance market and address Aflac Japan's standing, including how Aflac's innovative products, broader distribution, and trusted brand position Aflac for growth as the leading company for creating giving in your own way. Several factors are converging to create a growth market for Aflac Japan's core products and capabilities. Japanese citizens are living longer, healthier lives. Today, for example, one in four Japanese citizens is over the age of 65. By 2050, nearly 40% of Japan's population will be over 65. The current birth rate of 1.42 children per woman, however, remains low and well below the 2.1 children per woman needed to maintain a stable population. As a result, the percentage of working-age people in Japan has fallen and will continue to decline.
The combined result of these two trends means continually increasing financial pressure on Japan's national health insurance system, with implications for every aspect of Japanese society. For example, in fiscal year 2019, the projected cost of Social Security benefits will be over JPY 123 trillion. This number is projected to grow as the population ages and the government expenditures increase, driven in particular by medical costs and elderly care, and increasing by nearly 75% by fiscal year 2040, according to Japanese government projections. In order to address this situation in the era of the 100-year lifespan, Japan's Prime Minister Abe has proposed Social Security reform for all generations as part of his cabinet's growth strategy action plan. This strategy includes extending the retirement age, expanding when individuals can receive pension payments, and promoting overall Social Security reform, including medical and elderly care.
In addition, the expected October 1st consumption tax hike from 8% to 10% is another example of how the government is taking concrete steps to shore up the financial resources for Social Security commitments. Recognizing these challenges, the Japanese public is concerned about the long-term viability of Japan's universal healthcare system. This presents an opportunity for Aflac as we continually strive to create shared value by providing products that meet the changing insurance needs of customers. As we have shared previously, Japan's life insurance market is the second largest in the world after the United States. Aflac Japan is the leading company in Japan's growing third sector, which includes cancer, medical, and income support insurance. In the past 15 years, the third sector has more than doubled in size to more than 63 million in force policies of standalone cancer and medical products as of the end of March 2019.
This included 25 million standalone cancer insurance policies. Of that, Aflac Japan has maintained its leading position with a 62.3% share. In addition, there were 38.5 million standalone medical insurance policies in force, representing a 4.7% year-over-year increase from March 2018. Aflac Japan has a 16.1% share of this market. In 2016, 81% of Japanese citizens were enrolled in some form of life insurance product, according to industry data. Medical insurance penetration is 72.1%. Despite this higher penetration rate, we continue to see opportunities for growth as consumers seek third sector insurance products to supplement Japan's strained Social Security system. Although Aflac Japan was not the first to enter the medical insurance market, we were the first to introduce a standalone medical insurance product that combined low premiums with long-term coverage. In doing so, Aflac created a new market, which today is increasingly competitive.
Furthermore, the market penetration rate for cancer insurance, which Aflac pioneered, remains significantly lower at 37.8%, despite having risen more than 60% over the last 15 years. Given that cancer remains a leading cause of death in Japan, we expect product demand will continue to drive the upward trend in cancer insurance penetration. Efforts by the government at both the national and local levels to promote cancer awareness will further contribute to demand. As we approach Aflac Japan's 50th anniversary, Aflac Japan's mid to long-term strategy, Aflac VISION 2024, aims to strengthen Aflac Japan's leading position in the third sector and expand business into new frontiers consistent with our core capabilities and values. In addition, we have set a goal of cultivating an innovation-driven corporate culture capable of responding to the diverse and changing needs of customers in a timely and effective manner.
As the pioneer of cancer insurance in Japan, Aflac Japan has more than four decades of experience. Over the years, we have developed scale, efficiencies, and extensive expertise given our intense focus on cancer insurance, in particular, which we have leveraged to become the leading company in cancer and medical insurance in Japan. In addition, Aflac Japan's innovative products, broad distribution, and trusted brand give us a strong competitive advantage. Aflac Japan is continuously looking for ways to build on our leadership in cancer and medical insurance to provide customers with a range of coverage options based on their different life stages. In January of this year, for example, we introduced a mid-term rider addition system and released new lump sum riders for elder care, dementia, and income support.
In addition to coverage for different life stages, in June, we introduced special premium rates for medical insurance, making it possible to provide coverage through even more attractive premiums for our EVER medical insurance product for customers with greater health concerns. Going forward, our products will provide enhanced insurance to policyholders to cover the various risks of an era where an increasing percentage of the population expects to live to more than 100 years. In addition to providing innovative products that follow a policyholder through life stages, Aflac Japan also aims to continue to be where the policyholders want to purchase protection by having the most diverse and broad distribution. Our traditional channel, which includes more than 9,600 agencies, of which nearly half are Aflac exclusive, has been one of the keys to our success.
This channel has broad reach across Japan and includes affiliated corporate and independent corporate agencies, as well as individual agents. To further enhance sales, we are also strengthening nontraditional distribution channels through walk-in shops and visits by salespersons, primarily in urban areas. Strategic alliance with partners such as Japan Post Group, Dai-ichi Life, and Daido Life continue to strengthen and develop, and banks provide Aflac Japan further avenues to reach consumers. In addition to selling Aflac third sector insurance products, banks offer a broad range of financial services, further ensuring that Aflac Japan products are available in the places where consumers want to buy them. All of these relationships improve Aflac Japan's market access, increase our touch points with existing and potential customers, and allow the company to associate with other leading brands. Aflac's brand recognition is more than 91% in Japan.
This broad recognition is attractive to our partners and helps us reach customers who want high-quality products and services for insurance for daily living. Following our conversion to a subsidiary on April 2nd of last year Aflac Japan has implemented a governance framework that enables the realization of more flexible and responsive business operations. First, Aflac Japan is now able to own subsidiaries. This year, we brought affiliated companies, Aflac Payment Services, Aflac Insurance Services, and Aflac Heartful Services, under Aflac Japan's group umbrella. This move enhances Aflac Japan's group management efficiency and provides for more organic communication between companies. In addition, we acquire the agency, Tsusan Corporation, which aligns with our strategy to be where our customers want to purchase protection. Second, we are integrating agile style business processes into business operations with the aim of providing customers with enhanced value in a more flexible and speedy manner.
Finally, Aflac Japan has been able to diversify its sources of funding. In April, Aflac Japan issued its first yen-denominated perpetual subordinated bonds through a private placement in Japan. One of my priorities to ensure Aflac Japan has a strong talent pool of individuals who are ready to move up and take on new challenges for the future. Part of this has meant investing in our talent through existing initiatives to foster our innovation-driven corporate culture. As such, Aflac Japan is emphasizing diversity promotion and work smart initiatives to bring in new perspectives and enhance efficiency. We have introduced a broad set of talent development programs, including next generation executive development, U.S. training, and more to strengthen future leadership and managerial abilities.
We have increased investment in employee development because ultimately, the personal growth of Aflac Japan employees will contribute to the sustainable growth of Aflac Japan over the long term. Aflac Japan is also leveraging its competitive strengths, including its scale, efficiencies, and deep expertise to create a cancer ecosystem through which to provide customer-centric products and services. We are aiming to bring together the expertise of our various partners to provide customers with solutions for specific stages in life. Cancer ecosystem services will include early cancer screening, medical check and doctor appointment reservation services, cancer treatment support, information sharing, and more. We plan to continue to expand this platform and increase the number of growth-oriented new business opportunities in the healthcare area.
Consistent with the government of Japan's focus on growth, and specifically the data revolution, we are proactively engaging in product and service innovation, automation and process optimization, data analytics, and cloud services, and culture and organizational enablement. For example, in December 2018, we released straight-through payment, making it possible for policyholders to receive payments for certain claims as quickly as five minutes after filing a claim. Artificial intelligence, such as AI optical character recognition or OCR, was released in June 2019, and we plan to expand this technology to automate over 500,000 data entry transactions per month by 2021. AI search was rolled out to our claims departments in May 2019 and has reduced the amount of time claims staff spend searching for information in documents and databases by 41%.
We are also leveraging the Salesforce platform then to enhance Aflac Japan development and policy maintenance efficiency and provide our customers with a consistent experience across all channels. We are leveraging AI for data analysis, which is contributing to, among other things, improved sales results. For example, we have increased the success rate for calls following up on direct mailing campaigns by 270% by utilizing AI for data analysis. We are reducing IT infrastructure costs by moving to a private cloud platform and leveraging cloud services as our AI and machine learning infrastructure. As I mentioned earlier, we are transforming our organizational structure and mindset to support agile initiatives and develop a data-driven culture. Let me turn to Aflac Japan's efforts around operational efficiency. The top graph represents our long-term total expense ratio ranges to total revenue that you are used to seeing.
This is consistent with our U.S. GAAP financial reporting. The bottom chart attempts to normalize the ratios to adjusted earned premium by including the cumulative earned premium from policies which have become paid up since 2016. This is a better way to demonstrate how our efficiency efforts have economically benefited Aflac Japan. This metric removes the noise around limited paid products, mainly from WAYS and child endowment, and recognizes that these policies have very high persistency and remain in force after becoming paid up. You see the ratio trending down as we further implement administrative process improvements, build on our procurement efforts, and optimize our office space in Tokyo. The annual benefit is expected to be JPY 2 billion-JPY 3 billion per year for the five-year projection period.
A simple way to gain comfort in the top chart is, while our GAAP expense ratio range, as reported, is expected to climb, there is no measurable impact to pre-tax profit margins, as the increase is explained by paid up policies and the impact of business mix, where rising expense ratios are offset by lower benefit ratios in aggregate. By implementing such measures, we strive to maintain our position as a low-cost provider of third sector business. In closing, I would like to emphasize that Aflac Japan has a long track record of successfully anticipating change and formulating proactive strategies. Today, we again stand ready to leverage new opportunities for growth as we continue to lead the third sector insurance market and push into new business frontiers. Thank you. I will now turn the program over to Ariyoshi-san.
Thank you, Koide-san. Today, I will provide an overview of Aflac Japan's growth strategies. Before doing so, I want to address one of the challenges that we face, given our size as a leading cancer and medical insurer in Japan, and that is top-line growth. As you can see, we project third sector and the protection type first sector earned premium to be in the range of 0.6%-1.2% compound annual growth from 2016, 2021. This reflects justifiable conservatism and uncertainty in Japan Post channel sales assumptions, as well as reduced lapse and issue activity. As noted on the slide, these results are impacted by paid up medical and cancer products. For example, in years of new product refreshment like 2017 and 2018, the paid up policies serve to inflate the premium.
Once reached paid up status, have the opposite impact, where we see 2020 and 2021 impacted negatively by approximately JPY 10 billion per year. However, as Koide-san noted, we stand ready to leverage new opportunities for growth, and I am going to address our strategies with my presentation. While customers continue to show interest in cancer and medical policies, Japan's low interest rates environment has competitors shifting sales from first sector products, primarily saving-type products, to the third sector, which is primarily cancer insurance and medical insurance. As a result, competition in the third sector is becoming increasingly intense. In the cancer insurance market, Aflac has a large market share. However, in the medical insurance market, competitors are directing resources toward this area, which is diffusing market share.
Having said that, Aflac's market share in the cancer and medical insurance businesses, combined on the new policy basis, is a consistent 25%, which is an overwhelming share for a single company in this market. Within this competitive low interest rate environment, there are growth opportunities in the market for protection type products, primarily cancer insurance and medical insurance. One reason for this growth potential is the increasing longevity and the aging of Japanese citizens, medical advances and greater interest in health, and promoting longer average lifespans and life expectancy. For example, today, a 65-year-old man can expect to live longer for an additional average of nearly 20 years than he could in 1970. A 65-year-old woman can expect to live even longer. In both cases, men and women need to have savings that can cover at least 20 years after retirement.
However, a person's finance can be seriously impacted if he or she is afflicted with a serious disease like cancer. As a result, the demand for protection type policies is likely to increase in order to prepare people for risks associated with longevity. The second opportunity for market growth is the increase in number of cancer patients, along with advances in medical treatment technology. While sources of data can differ when looking, for example, at the data from the Ministry of Health, Labour and Welfare, the estimated number of people afflicted with cancer is increasing annually, with the latest figure being around 1 million people. At the same time, medical treatment and technologies are advancing rapidly in terms of both treatment form and means. For cancer in particular, treatment will likely become more advanced and diverse.
Viewing such changes in cancer and medical treatment, and associated demand as growth opportunities, we aim to purchase products and distribution channels to respond to these evolving customer needs by providing coverage in a timely manner that suits the recommended treatment. Aflac Japan also has three opportunities for growth which competitors lack. First, Aflac has the most policies in force in the sales sector market today, with more than 21 million policies. Of those, more than nine million cancer insurance policies and three million medical insurance policies have not yet been updated to the latest coverage. Such customers may not have sufficient coverage when the need arises. We are proactively informing customers of the latest coverage and are continually supporting coverage additions. This also drives us a natural level of lapse and reissue activity that we believe is clearly in the best interest of our clients' health and welfare.
Second, Aflac supplies insurance products to more than 30,000 corporate groups as a benefit package. Of 30,000, there are more than 3,000 corporate groups that have more than 1,000 corporate group members. In this market, we can conduct sales activities to sell all employees at once. The corporate group members benefit from discounted rates and can also use payroll deduction in paying their premiums. Aflac Japan has developed a framework for approaching these corporate employees. However, we have not been able to provide continuous sales approaches to some corporate groups. As companies are becoming more aware of the importance of employees' health and disease focusing on cancer, we are committed to engaging the corporate group market by preparing an environment where corporate employees can enjoy improved enrollment. Third, Aflac Japan has well-diversified nationwide sales channels.
With more than 9,000 agencies as our core distribution channel, we have walk-in shops, the bank channels, and alliance partners such as Japan Post Group, Dai-ichi Life Insurance, and Daido Life Insurance. Such a sales structure that enables customer contact through highly diversified channels is a unique strength not seen among rivals. I return to our product strategy. We are enhancing Aflac's products on two fronts. First, in addition to our cancer and medical insurance products, is the enhancement of our product lineup based on changes in customers' life stages. In 2019, we enhanced our nursing care and income support insurance products. Other than these products, we are also looking at expanding the coverage for postretirement life, and to secure postretirement funds. We plan to further enhance such offerings, positioning them as a coverage at different life stages.
The second front is enhanced coverage that takes into consideration advances in medical technology. Last year, in the cancer insurance domain, we successfully attracted customers by providing enhanced benefits designed to better align with new trends and the development in cancer treatment. We created new premium waivers when the insured is afflicted with cancer. Related to medical insurance, earlier this year, we introduced a system that allows policyholders to make midterm additions to their coverage plan, should they determine that it is currently insufficient. This enhances our ability to provide the latest coverage in a manner that suits customer needs while addressing advances in medical treatment technology. With this more flexible approach, we are aiming not only to secure new customers, but also lower biannual new product refreshment cost, improve the persistency, and increase penetration of existing policyholders by marketing promotion using TV commercials.
Aflac has enhanced its sales network and secured diversified sales channels, enabling customers to enroll in insurance where it's most convenient for them. Therein lies Aflac core sales pillar, the agency channel, which accounts for about 90% of sales sector annualized premiums in force. The agency channel has substantial number of policies in force. Therefore, we intend to increase our penetration into this existing policy market. Hereafter, we plan to provide broader support for sales personnel intention and activity management, leading to stronger agency management and business frameworks. In addition, we plan to enhance our IT infrastructure to realize more efficient and effective sales activities. Doing so will help us connect those initiatives to the growth of agency channels, engaging the existing policy market in particular. Aflac Japan strategic partners, namely Japan Post Group, Dai-ichi Life, and Daido Life, are all important partners.
We will continue to maintain our win-win business relationships with them by utilizing our cancer insurance as a way for their sales representatives to start sales talk. They can start proposing their core products. Regarding financial institutions, we focus on regional financial institutions that are deeply rooted to communities. We are committed to increase our shares by strengthening our relationship with them, by expanding the number of loaned employees, and providing training programs. The further enhancement of the agency channel is indispensable for Aflac's sustained growth. I would like to introduce several measures we are implementing for our agency channel. The first measure is the invigoration of the existing policy market, as although some agency have policies in force, they have few agents who approach existing policyholders, thus resulting in customers who are unable to update to the latest coverage.
Some agency have highly skilled agents who can provide consultative solutions to customers, but do not have enough customers to approach. In order to accelerate updated coverage to the latest condition and activating existing policies, Aflac Japan plans to establish a framework for approaching customers by helping these type of agencies work together. The second measure is engaging the corporate group market. We want to further engage this market by providing beneficial products to corporate group members and offerings an improved enrollment environment. In group solicitation, conventional method of distribution and collection of sales materials are inefficient in some cases. We are building a more efficient sales process by utilizing corporate intranet to establish an environment that facilitates improved enrollment by corporate group members. The third measure is enhance the productivity of agencies and walk -in shops.
Now we are more committed in providing support to agency management by placing a trainer to support sales, personnel retention, and activity management. Such efforts helped the establishment of and then linking such efforts to stronger agency management, business framework, and solicitation management framework. In addition, we plan to increase the number of Aflac's highly productive walk -in insurance shops. We would like to enhance agency channels sales through such initiatives, leveraging our efforts for realizing sustainable growth. Before concluding my presentation, it's worth noting that our sales and marketing department partners with both our corporate development group and Aflac Japan's Innovation Lab to invest in and develop new potential channels. In terms of corporate development, Koide-san mentioned the acquisition of Tsusan. This agency acquisition effectively advances our company-owned sales agent network and sets the stage to make similar acquisitions.
In terms of innovation, we continue to develop digital means of distribution. With its alternative product designs that best fit that form of delivery, as we look ahead to the future, delivering on our promise will remain our top priority. We believe Aflac Japan's innovative and evolving products, brand distribution, and trust brand are key sources of competitive advantage that will enable Aflac Japan to continue to grow and thrive as a leading company for cancer and medical insurance in Japan. Thank you.
Thank you, Ariyoshi-san. We will now have our first Q&A session focused on Aflac Japan. I would like to ask the members to come forward. Joining Dan, Koide-san, and Ariyoshi-san on stage from Aflac Life Insurance Japan are Todd Daniels, Chief Financial Officer, and John Moorfield, Chief Transformation Officer. Before we begin the Q&A, there are just a few simple rules. We would like for you to raise your hand. Please wait for a microphone before you begin to speak and ask your first question. Second, please tell us your name and firm you represent for those that are on our webcast. Finally, please limit yourself to one question so everyone has a turn. If you have a follow-up, just raise your hand and we will get to you. Thank you. Our first question, Suneet?
Thanks, David. Suneet Kamath from Citi. First with Japan Post, Dan, you mentioned a temporary delay in sales. For how long would you expect to see sales be negatively impacted by what's going on over there?
I don't think we know at this particular point. We're in the process of getting all the information. Of course, Japan Post drives those numbers, and we'll have to see. I would hope that we'll see things moving back to normal as the reports are finished, which should be by the end of the year. That would be my thought on it. I know certainly they want to get it behind them, so that's kind of the way I'm thinking at this particular point.
Okay. There was a slide that showed the earned premium outlook over the next couple of years, and if we just kind of look forward, it looks like that could be flat to down, just eyeballing the chart. Can you just unpack some of the assumptions in there in terms of what you're assuming for sales growth and lapsation, just so we understand that trajectory a little bit better?
I'll comment on that. I think our persistency assumptions have improved slightly versus what we saw last year. We are justifiably conservative in our sales projections going forward.
Okay. You can't quantify that, though?
Ariyoshi-san, do you want to quantify?
Sales.
Sales. Future sales.
Since we are not able to have a good outlook in terms of JP, we will not be able to quantify it at this point.
Cathy.
Hi, it's Alex Scott from Goldman Sachs. First question I had was on the benefit ratio. Could you dimension for us a bit the, I guess, improvement expected in the benefit ratio that's kind of been forecasted year-over-year? I know the mix shift to third sector is probably part of it. The paid-up policies you mentioned is part of it. I'm also just wondering how the lapse reissue element plays into it, because I think that was something that was brought up last year that had been aiding the benefit ratio. Just interested to know if you're kind of zeroing out lapse reissue, if there is some level expected, and what's kind of embedded there.
I'll talk about that. The lapse ratio, I'm sorry, the benefit ratio, I'll remind you, in 2018, the third sector improved 60-90 basis points from just favorable claim trends, and 50-100 points based on lapse and reissue. For the first half of 2019, we still see favorable claim trends, and it's probably 40-80 basis points in total benefit ratio, so it hasn't necessarily slowed down. The mix shift, which would be the result of the paid-up policies and going from first sector to just having more volume of third sector in the denominator, that's about 50-80 basis points improvement. That's, again, year-to-date this year. The lapse and reissue activity is about the same as it was, so you don't really have a pickup this year versus what you saw last year.
Got it. Just what you're forecasting out for the next couple of years, any movement one way or the other with lapse?
I think we're justifiably conservative when it comes to looking at future claim trend. We do have some of that modeled in there. We're hesitant to put the full amount that we've seen in the past. The lapse and reissue activity that we're modeling is based on updated sales forecasts. Given what we have out there now, it's going to be a little smaller than what we've seen in the past. We're going to continue to have that first sector to third sector mix shift. It's going to continue to slow down, not be quite as big as it has been the past two years, but that's also impacting it.
One thing that is important as you look at the continued improvement in the claims ratio or the loss ratio is that the old policies had very little with outpatient treatments. As we've written new policies, as the trend is moving to more outpatient treatment, less in-day hospital, we've moved people. It's an absolute advantage for people to change over a period of time. That's the one thing that we're not able to calculate, is what percentage will continue to buy better policies that fit today's medical treatments. We certainly make that available to them.
Got it. I just wanted to clarify one of the items that was mentioned on Japan Post. It sounded like there was a review you're doing that'll be done, I think it was September 30th that was mentioned. I just wanted to make sure I had that right. Will that be released with earnings or is that something that you will actually release on September 30th?
Our voluntary review will complete by September 30th, we are planning to issue a news release in Japan on the result of the voluntary review. Since we are planning to have it released on September 30th, we are not ready to share the content with you at this point. However, to date, what we have not found so far is that there has not been any systemic issue related to Japan Post or Japan Post Insurance sales.
John Barnidge.
John Barnidge, Sandler O'Neill. The cancer insurance market penetration's gone from 21.2% to 37.8% over the last 15 years. As you look out over the next 5 to 10 years as the National Health Service gets reformed and maybe more of the burden is placed on the individual, where do you see that potentially going?
It is difficult to predict to what extent the actual figure will increase or grow. Statistically speaking, in Japan, one in two will suffer from cancer. As I mentioned in my presentation, the top cause of death in Japan is cancer. Also the government is really promoting to have early screening of cancer to its citizens. The Japanese government is trying to raise awareness about cancer among the citizens. Considering all these factors, we do see that there will be a continuous need of cancer insurance among Japanese going forward as well. From the field level, what I can say is that the Japanese government, METI, is currently urging the companies to have their employees become healthy. Health management is very important among companies in Japan.
Ministry of Health, Labour and Welfare is also urging and promoting the companies to employ those people who are cancer survivors, and they're supporting it. I did mention about developing our group market. What is becoming quite a trend or become common across a lot of the Japanese companies right now is to convene like a cancer seminar or provide information to the employees as well as to companies. As extension of that, the companies are trying to leverage cancer insurance to sort of fulfill the gap, and that is becoming very common in Japan right now.
I'll go so far as to say, I can't see why it can't get above 60%. The fact of the matter is, it's the thing, whereas Americans, we think of heart attacks usually first, they think of cancer because it's one out of two. I think the number will continue to grow because you got an aging population and cancer is a disease of age. If we priced it right, which we've always been able to do, then it's going to be a natural thing that people are going to want it. In addition to penetrating the population, coming out with new policies that have higher benefits as time moves on will be important part of it too. That will be the things I think that'll continue to make the growth of the company.
Humphrey Lee from Dowling & Partners. A question for Todd. I think you mentioned that the earned premiums coming down is a function of some of the policies getting to paid-up status. I believe for last year and this year, you have some of the two pay medical products coming due, and then when you're looking ahead for 2021 and 2022, you probably have some 10 pay WAYS kind of reaching paid-up status as well. I was just wondering if you can provide a schedule in terms of how these kind of paid-up policies would impact premiums over the next several years.
Sure. I think as Ariyoshi-san mentioned in his speech, for 2020 and 2021, we have third sector paid-up, earned premium impact of approximately JPY 10 billion each year. On top of that, for first sector products, you have an additional approximately JPY 20 billion each year, and that's for 2020 and 2021. After that, for third sector, it tapers off quite a bit. We don't anticipate the sales to continue in that same volume, largely as a result of the NTA ruling that about to come out, I guess, and go into effect in October, which limits the amount that companies are allowed to buy. As far as paid up the 10 pay on the WAYS, I would expect it to be around the JPY 20 billion mark for the next couple of years.
Ian Ryave, Bank of America. Just wanted to talk about the expense ratios. Does it consider any potential costs related to the Japan Post situation, such as one, potentially lower earned premium, which you will potentially see the lower sales this year, and any remediation expenses that could be associated with it?
I'll take the first part. I think as far as the earned premium goes, it's reflective of what we have in our current sales forecast, and premium assumptions. So the earned premium is consistent with the chart you saw from Ariyoshi-san's graph. You'll note later, Max will give an overall forecast of the ratios from a higher level perspective. As far as remediation expenses, there are none that are considered to my knowledge.
Thank you. Tom?
Thanks. Thomas Gallagher, Evercore. Todd, can you expand a little bit, what are these paid-up third sector products? I guess I'm not familiar with those.
We sold a version of EVER in 2017. It was introduced with a two-pay version, which limited pay for two years. You pay a premium year one, a premium year two, and then your policy's paid up. A lot of those policies were paid at one time, similar to what WAYS was done back in 2012. There's a two-pay version, a five-pay version that exists. The same type pay structure was introduced for cancer when we launched it in April of 2018.
Got it. My follow-up is, can you talk a bit about what's going on in the non-Japan Post channel, in terms of your agency business? I think it was mentioned that competition was intensifying for both medical and cancer. If I go back, my recollection has always been you've emphasized competition around medical, not so much on cancer. Are you seeing a bit of a pickup there? Dan, just relatedly, while you have this big decline in Japan Post sales, can you redirect corporate resources to, I guess, stimulate sales through agency channels?
That's obviously one of the things that we'll be trying to do is to stimulate. Just to remind you, it is a 75% decrease. For the year, it's going to be 50%, but it has dropped off almost, I would just say, shockingly, because they're focused on fixing their issue. From that standpoint, that's the reason I believe that it will be taken care of and will be moving on, because it's in the best interest of everyone, by the end of the year or in the first quarter, that will be taken care of. We certainly are trying to push with promotional things on our other distribution channels to try to offset that to some degree. It's a big thing to swallow.
Competition in the agency channel, what's happening there? If someone could address that.
You referred to cancer insurance now, and our current share is still 60%, and that has not changed.
The cancer insurance is really not the competitive area. It's medical, and it really hasn't intensified. It's been at this level for several years now. It's just constantly intense. Not that it's gotten worse or better, it's just a constant thing that we have to be working on to stay competitive and constantly evolving any changes that might be taking place.
Hi, Andrew Kligerman, Credit Suisse. Dan, you were commenting on that benefits ratio question and talking about outpatient policies that were maybe more appropriate. Could you talk a little bit about what the mix is of those outpatient policies versus what I think in the past was more of a hospital indemnity-oriented product? With that, what I'm getting at is, what's happening with hospital stays? Is that coming down a lot, and how is that affecting the benefits ratio?
The answer is the number of days is still coming down. It's still about, what, three times higher, Todd, than the U.S.?
Yes.
It's still disproportionate by any means. I'm going to let Todd take the question. He can answer it so much better than I can.
A lot of our older policies focused on first occurrence and hospitalization benefits. Over time, probably as early as 2000, we introduced products that had more outpatient coverage, special outpatient-type benefits. Our latest introduction has more treatment benefits, I think that's the direction that the market is headed. That's where we can be most competitive and offer the most value. Hospitalization is also covered through medical policies, which is similar to a hip plan. You see some, what I would call ghost-type competition from medical products when it comes to pure hospitalization. The way we differentiate is by offering more robust outpatient and treatment benefits on our products.
Is there still a lot of the old policy, the pre 2005 policy in force?
Yes, we have quite a bit. I don't remember the numbers that were quoted in Ariyoshi-san's speech, but if you look at that, a lot of that is old cancer business, which would be prior to 2005.
Just lastly, there was a slide on the ecosystem, and I saw genetic testing in there, and I wonder, I don't know how that works in Japan, but is there a potential for anti-selection due to genetic testing?
We do not know for sure how this genetic testing thing will develop going forward. We do recognize, as you mentioned, there is a risk of anti-selection. However, genetic testing will be developed and rolled out more publicly in our society. Instead of us placing distance ourselves from the genetic testing and get lost in what is actually occurring in the market. Instead, as I mentioned, Putting a distance from ourselves, we really want to be engaged in what will go on in the genetic testing field so that we will be able to identify what the risks are and try to manage the risk for the future.
We're good at that. Our actuarial teams have been outstanding at being able to develop programs and make sure. I'll give you an example of an anti-selection is smokers. We don't have two rates for smoking, so every smoker ought to buy it, statistically speaking. The other thing is, we've always said that volume covers a multitude of sins. That if you're writing enough of the population, there's less anti-selection. It's when you write a small group. With Japan, the real issue has always been is cancer is the disease of age. Well, we've got it age specific, so that took care of the biggest issue of all. Once we've taken care of that, almost anything else we feel comfortable that will fall within the framework of actuarial calculations that'll be protected.
Our last question, Greg Peters.
Greg Peters with Raymond James. I wanted to go back to the expense ratio outlook slide. Before that, you spoke about digital innovation, automation, process optimization, et cetera. Those comments would lead one to conclude that there's going to be some improvement in your expense ratio. On the expense ratio slide, the expenses to normalized earned premium, definitely trending down. I was surprised to see over the next 4 years that your expense ratio outlook is going to trend up by 30 basis points. I'm just curious how to reconcile those factors.
I'll start. I think the overall story with the expense ratio in the top slide is to total revenue. As you know, with the interest rate environment, with what we just talked about with earned premium and the paid-up impact affecting that earned premium in the top chart, you've got revenue coming down, and expenses are also coming down. Your total expense ratio is relatively flat to up slightly over the 5-year period. The reason we showed the normalized earned premium chart was to take into account, eliminate the net investment income impact, try to isolate, eliminate the cumulative impact of the paid-up premium so that we can begin to see the economics play out. Indeed, we are going to start seeing this JPY 2 billion-JPY 3 billion a year over the projection period of economic savings to the company.
That's inclusive of a lot of the operational efficiency activities that we have in play.
Great. Thank you for that clarification. Just to follow up on Japan Post. As they go through their process, a couple of the other carriers suspended their sales and partnership with Japan Post. You guys elected to continue, and I'm just curious about the strategic thought process that went into that decision to continue selling your products through them as they were being challenged in the public marketplace.
Well, first of all, what I can say is that there's a characteristic feature of cancer insurance itself.
Well, first thing is that cancer insurance is needed by consumers, the sales is being done based on the needs of consumers.
Also, cancer insurance is easy to understand among customers because this is an insurance to cover your treatment cost for cancer. There will always be consumer needs, regardless of where the interest rate is. That's really the product feature that is appealing. Aflac, regardless of whether it is Japan Post Company or Japan Post Insurance, we are establishing and building very robust internal control framework for insurance sales. We have the same very robust internal control system or framework for cancer insurance sales of Japan Post Company and Japan Post Insurance. At the same time, we are trying to prevent any inappropriate sales of the cancer insurance under a robust internal control system. We have an internal control system established so that we already know that there will be a risk of inappropriate sales.
However, that is already incorporated in our internal control system, and by going through PDCA cycle, we are able to prevent anything worse happening.
こういう体制のもとで、これまで日本郵便、かんぽ生命によるがん保険の販売についてモニタリングしてきています。
Under this kind of framework, we have been monitoring cancer sales by Japan Post Company as well as Japan Post Insurance.
その結果、特に日本郵便、かんぽ生命によるがん保険の販売について、マテリアルなシステムリスクというのは、これまで発見していません。
As a result, we have not found any material systemic risk regarding cancer sales of Japan Post Company or Japan Post Insurance.
それから報道によると、今回のかんぽ商品の問題というのは、
According to media coverage, the issues related to Japan Post Insurance products is
解約新規契約で、募集人が自分の成績目的に、解約と新規の期間を意図的に操作をすることによる不適切な事例というのが今回問題になっています。
The issue identified in the media coverage is that there have been some inappropriate sales by sales agents by intentionally manipulating the period between the last policy and the new policy.
そういう点で、Aflacのがん保険は、解約と新規の期間の長さによって募集人の評価が変わるということはありませんし、
In Aflac's product case, there will be no difference in the sales credit for sales agents by changing the period between the surrendered policy and the new policy.
日本郵便、かんぽ生命の募集人は解約を取り扱えないので、解約時期を意図的に操作するということもできません。
On top of that, sales agents of Japan Post Company and Japan Post Insurance cannot surrender Aflac cancer policies.
そういう不適切な募集が生じる仕組みもないということです。
As a result, there is no mechanism for any sales agent to do any inappropriate sales of cancer insurance.
冒頭言いましたように、ニーズがありますから、お客様に最新のがんの保証を提供することが、お客様本位の業務運営だと考えています。
As I mentioned at the beginning, there are customer needs for wanting to purchase cancer insurance. It is our responsibility to provide latest cancer insurance coverage based on the concept of customer oriented or customer first business operation and business management.
以上のことを総合的に勘案して、がん保険については販売を継続するということで、これは日本郵政グループと合意をして継続しています。
As a result of all these different factors in a holistic manner, we have decided with the Japan Post Group that cancer insurance sales should continue through the Japan Post Group channel.
Thank you. That now concludes our first Q&A panel. We'll go to a break and resume at 9:55 A.M. to cover the U.S.
[Break]
All right. I think people are making their way back into the room right now, and it's about 9:50 A.M. I think we're going to have to invest in a gong to use at this meeting. We will now begin the Aflac U.S. presentation. We will hear from Teresa White first. Teresa joined Aflac in 1998. She was promoted to Vice President of Client Services in 2000, and Senior Vice President in 2004. She was promoted to Executive Vice President in 2008 and named Chief Operating Officer of Aflac Columbus in 2013. In 2014, she was promoted to President of Aflac U.S., and in 2019, she was named on Black Enterprise's list of the most powerful women in corporate America for the third consecutive year, and she has also been named among the most powerful executives in corporate America. I'll now hand the podium over to Teresa. Teresa?
All right. Thank you, David. Good morning, and thank you for the opportunity to speak with you today. Nearly five years ago, we embarked on a journey with the mission of delivering innovative solutions to our policyholders and their families. Since then, we've continued to execute on our strategy to accomplish that mission. What I really want to focus on today is where we are with our Vision 2020 strategy and our strategy for the future, and I'll start with the consumer landscape. Over the past few years, the U.S. workforce has changed dramatically. The workforce is better educated with more people having degrees than ever before. Many are carrying more debt than ever before, and most have less than $1,000 in savings. Households, in many cases, include elderly parents because multiple generations are living under one roof.
Even the definition of workplace has changed as people are working at any time, often from any place. Technology is how people research, buy, and communicate, and the cost of healthcare is causing people to worry more about their wallet than their health. In short, consumers are changing, the way we interact with those consumers must change as well. Now, based on this evolving workforce, we developed a playbook to leverage our core strengths. As you can see, Vision 2020 focuses on three pillars, growth, efficiency, and experience, supported by an enterprise risk management framework. In addition, we're improving and expanding our distribution to increase access, driving product innovation to increase participation, and investing in technology to provide effortless sales and service solutions that drive ease and increase persistency. Where are we with this strategy? As of this year, we've accomplished several key objectives.
First, we've expanded our distribution in three ways. We've deepened our relationship with brokers. In doing so, we've grown sales through our broker distribution by 36% since 2014. Broker sales now represents 37% of the new annual sales mix. We've also invested in our agency distribution through training, tools, and technology to increase agent productivity. In fact, agent productivity has increased more than 5% compounded annually over the last four years. Finally, we've launched a consumer market strategy to provide workers who are not at the traditional work site with access that they need to our benefit solutions. While this new channel only represents 2% of the total sales, we expect this to be a key growth market in the future. In addition to our distribution efforts, we've also expanded our product portfolio to include life and disability partnerships as well as value-added services.
These benefit solutions broaden our traditional core product set to increase participation at the work site. As a result, we've seen a significant increase in the group cases quoted, which supports our broker sales increases. Most recently, we announced the planned acquisition of Argus, which will provide us with network dental and vision capabilities. You'll hear more details regarding the Argus acquisition from Rich Williams shortly. We feel that this new offering will bring Aflac to the forefront of our core benefit enrollments, which we believe will increase both our access and our persistency. Finally, we've invested in digital capabilities that make doing business with Aflac easier for our customers, our distributors, and our employees. As you know, mobile technology is the new norm for service and communication in today's market.
Among other digital services, we now have mobile claims apps that provide customers with the ability to submit claims via their mobile devices, uploading supporting documents, checking status of claims, and confirming when funds are deposited. We also have mobile agent hubs, and it's a one-stop shop for our career agents. It gives them information on customer service tools, agency management tools, as well as incentive tools. We also provide online billing access to employers, and this allows our payroll accounts 24/7 access to view, reconcile, and pay their invoices online. During the last several years, we've also invested in the growth and development of our compliance and risk programs to enhance cybersecurity, process governance, internal controls, and data and analytics.
As we've stated in the past, these investments in technology, cybersecurity, and risk management are reflected in our planned expense ratio range of 36%-37%, peaking in 2020. We expect to begin realizing benefits from these investments in 2021, stabilizing our expense ratio over time to the range of 34%-35%. In fact, we're already seeing a return at our Aflac Group operation, which was the focus of many of our initial investments. As a result, we've seen a 13% compounded annual growth rate of Aflac Group earned premium from 2015-2018, which was ahead of plan. We believe the collective power of our brand, distribution, and solutions work together to drive consumer access, participation, and persistency, ultimately driving earned premium growth. We know that today's consumer needs Aflac.
In fact, more than 90% of policyholders who've used One Day Pay say that they are likely to refer another person to Aflac. With the numerous messages about healthcare in the media today, how do we reduce the noise to ensure that our brand stands out and resonates in today's market? I'd like to show you our approach to going beyond brand recognition to developing a better understanding of what we do in the market. Aflac's brand is more than just a logo or icon. It's a representation of a promise that we make to deliver value. With that in mind, this year, Aflac launched an integrated marketing effort with the goal of educating more consumers about the value that we provide. We call the marketing effort the Aflac Isn't campaign, which is designed to correct common misperceptions about our products and services.
Our goal is to increase knowledge and connection to the Aflac brand. Ultimately, we want consumers to understand why they need Aflac. This is a bit of a pivot from our historical marketing campaigns, where we focus primarily on driving awareness. With high brand awareness, our challenge is that not enough people know what we do. In short, we're well-known but not known well. The Aflac Isn't campaign attempts to educate our audience that Aflac is not auto insurance, not homeowners insurance, and not major medical insurance. Our latest series of ads pairs two legendary figures, the Aflac duck, a legendary advertising icon, and the University of Alabama head coach, Nick Saban, a legendary recruiter. These commercials align the journey of new policyholders with the journey of a new football team recruit. This three-spot series will play throughout football season and culminate during the bowl games.
I'm sure you've seen the first spot, I'd like to give you a sneak peek of our second spot called Campus Tour, which will launch in October.
We're honored to have you on campus for the official visit.
Aflac.
Coach Saban, how is Aflac's program different from health insurance?
Well, Aflac gives you money directly for things health insurance doesn't cover.
Aflac.
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In addition to continuing our national media focus, Aflac has also partnered with the NCAA Southeastern Conference and the SEC Network, creating new opportunities to drive brand awareness, affinity, and loyalty. SEC fans are arguably the most passionate in the nation, and even though most SEC schools are in the Southeast region, the fan base stretches from coast to coast. I won't ask you if you're an SEC fan because I know many of you are. Aflac's partnership with the SEC presents a unique opportunity to bring our brand promise to life within the context of sports injuries and the journey to wellness. Injuries are serious events, the positive aspect of any injury is the comeback. We'll draw the parallel between a player or a team's comeback and the comeback of policyholders who are sick or hurt. What we want our consumers to take away is simple.
When you get hit with out-of-pocket costs based on a health event, Aflac has your back. Each of you at this meeting today will receive an Aflac duck commemorating the partnership with the Southeastern Conference. At the same time, we also recognize that media channels have changed and expanded to more digital streaming. In addition to our traditional media, you'll also see Aflac show up in some non-traditional media like Netflix, Hulu, Facebook, and Instagram, again, to ensure that Aflac continues to be top of mind. Preliminary results demonstrate that this campaign is beginning to work with more consumers understanding what Aflac does. As our brand and marketing campaigns help consumers to recognize their need for Aflac, we continue to focus on our innovation and our innovation framework, which is both to optimize our current operation as well as to plan for our future operations.
At a high level, we have three facets to the framework. They're maximizing our core, where we're maximizing our core operation to drive productivity and ease. We're advancing our model by expanding our product portfolio and market reach, and then we're innovating for the future. You'll hear Fred talk a little bit more about the importance and how we're working with corporate development and Aflac Ventures to keep abreast of some of the potentially disruptive forces in the industry. Most recently, we added a seasoned insurance executive who will oversee our innovation process and identify opportunities for Aflac to evolve in this marketplace. As we look ahead to 2021, we know that top-line growth is a challenge for a company our size.
We still believe our Vision 2020 and its three pillars of growth, efficiency, and experience are the right strategy to achieve our 2%-2.5% compounded annual growth rate target for earned premium growth. We're expanding our portfolio and distribution reach through the acquisition of Argus Dental & Vision. We're advancing our opportunities to connect with consumers directly. We're reinventing our distribution. We're educating consumers to help them understand the Aflac promise, partnering with corporate development to bring new products and solutions, and utilizing Aflac Ventures to bring new technology to enhance the customer experience. Given that some of these initiatives have longer-term benefits for our business, we would expect an additional earned premium growth by as much as 100 basis points in the years following 2021. As I said at the start of my presentation, consumers are changing.
The changes that we've made in the last four years demonstrates Aflac's ability to change with them. While I'm pleased with the progress that we've made, we still have work to do. We have a lot of planes in the air that must land in 2020 to include the adoption of current technology across the U.S. platform. During the outlook call in December, I'll provide additional insight into how these activities will impact our financial results for the future. At this time, I'll ask Rich Williams to come up and review the Aflac U.S. growth strategy. Thank you.
Thank you, Teresa. Good morning, and thank you all for being here today. Last year, we outlined our strategic approach to growth in the U.S. and how it aligned with the market opportunity. We've made progress towards key elements of our strategy, but to be clear, near-term challenges remain. While pleased with last year's record sales year, we are off to a sluggish start in 2019, and the third quarter will be weaker than our expectations. As a result, we anticipate full-year sales results to be flat to down for the year and earn premium growth to be at the lower end of the 2%-3% range. There are clearly macro elements at play, such as strong employment that impair recruiting, as well as operational initiatives we've alluded to that have created short-term disruption.
At the same time, there continues to be a significant need for Aflac's benefit solutions in the marketplace, and we're well-positioned to capitalize on that opportunity. As a result, we expect to recover in 2020, which really is important to the overall long-term health of the distribution platform. The majority of today's discussion will focus on how we're both addressing near-term challenges and efforts to ensure we're well-positioned for future growth. For purposes of backdrop, I'll first discuss the market need and our alignment to the opportunity. Let's begin by discussing trends in the U.S. healthcare markets. Regardless of any economic view in the U.S., the overall cost of healthcare continues to rise. According to the 2018 Kaiser Family Foundation survey, the average premiums for family coverage have increased 25%, while the average employee contribution for family coverage has increased 29% since 2012.
This, coupled with increased deductibles, minimal wage growth, and gaps in consumer savings, expands the need for Aflac to help solve a significant employee challenge, which is cash for out-of-pocket expenses. When you look at the U.S. growth opportunity, the U.S. workforce has 174 million workers, and only a little more than 7.6 million have access to Aflac of about the 47 million, where we clearly are in these client relationships. This represents a tremendous growth opportunity, and we have adjusted our vision from being the number one distributor of supplemental products in the U.S. worksite to being the number one distributor of benefit solutions supporting the U.S. workforce. This vision positions Aflac to increase access and penetration across all segments. Historically, we've seen strong sales in the small business segment, but it remains under-penetrated.
Aflac U.S. has access to approximately 7 million of the roughly 42 million small business employees, yet our penetration is only about 2.6 million. This is a profitable market segment for Aflac, and we remain focused on increasing our leadership position in this space. In addition to the small business opportunity, the mid-market represents a significant growth opportunity. We currently have access to 6.4 million employees of the roughly 24.5 million workers in this space. Again, our penetration is just under 1 million. Therefore, we see a significant growth opportunity both in our current book of business as well as to workers without access to Aflac. Let's look at Aflac's U.S. strategic growth focus. Consistent with the market need and opportunity, we remain focused on our strategic growth areas to increase access and penetration. These areas are small business, the brokerage market, existing Aflac accounts, and consumer markets.
I'll share a little bit of context about each of these four areas. Of the approximately 5.8 million small businesses across the U.S., about 35% offer supplemental insurance to their employees. It takes a broad distribution reach to capitalize on this opportunity, and we intend to maintain our leadership position in this segment by recruiting 15,000-plus new agents a year and offering holistic solution sets. Turning to the brokerage market, Aflac continues to maintain strong relationships with the national brokerage firms who serve large clients, and we've seen consistent sales momentum in this space. We're also continuing to invest in growing our footprint with local and regional brokerage firms as there are more than 400,000 such firms, and approximately 50% of these actively sell supplemental insurance.
As we often reference, Aflac's existing large book of business has approximately 460,000 client customers, and we're focused on increasing account retention and policyholder persistency to grow profitable earned premium. We continually evaluate partnerships and alliances to ensure our brand is protected and that the sales we receive are profitable for the organization. Our persistency trend that Teresa referenced earlier illustrates the work that we have done to grow profitable new sales and to service our existing clients. We continue to see opportunities to leverage existing accounts and grow our participation rates. Lastly, the contingent workforce segment was introduced last year as a part of the broader consumer market strategy.
Our approach over the past year has been to test and learn before accelerating our efforts in this target market, and we're pleased to see stable trends in this workforce segment and believe our digital efforts will capitalize on the growing needs for our product solutions in this rapidly growing population of workers who do not have access to supplemental benefits. While a small base, we're experiencing favorable growth in this market, and we'll share more information at the end of this presentation. Let's look at our U.S. distribution mix. The Aflac U.S. distribution mix is unique in that our sales are primarily agent-driven, unlike competitors who have had largely broker-driven sales. As you can see on the far right, 2018 broker sales represent 37% of Aflac's total U.S. sales, in contrast to the competition where about 70% of market sales come from brokers.
The percentage of broker business, however, has increased meaningfully over the last decade, growing 10% compounded annually, and this growth has outpaced the market rate of 6%, while agency sales have declined 1.5% during this period of time. The overall distribution mix of Aflac U.S. is important when considering growth rates and how our composition continues to evolve. There is a long-term strategic advantage with the different approaches and size Aflac has to offer. The combination of a large career field force of independent agents, talented broker sales teams, partnerships, digital and other methods allow Aflac to increase access and penetration consistently within these profitable market segments. I want to talk a little bit about broker sales trends. Specific to broker sales, we continue to see strong results from our seasoned team of talented broker sales professionals who are Aflac employees.
We leverage their expertise and relationships in the market to build our broker business and service our broker partners. Our strong brand and fulfillment capabilities have helped us to generate 14% year-over-year growth in broker sales from the elite national broker partners. At the same time, we are focused on expanding our footprint with local and regional brokerage firms, which are meaningfully under-penetrated. In addition to growing our footprint, we've made significant investments in technologies, product solutions, and servicing to be a partner of choice for brokers. Brokers are continuing to enter the supplemental benefits space, and competition is at an increasing rate, and it is our goal to capture more of this market share. The investments we've made, along with our brand, have allowed Aflac to be highly competitive in a growth segment that has very high expectations. Let's look at producer trends.
Our agency distribution continues to be a vehicle for strategic growth for Aflac through our career sales team. However, as I alluded to at the beginning, we continue to see a downward trend in average weekly producers, and the impact of this decline is outweighing productivity increases we've achieved. This is creating short-term headwinds to achieving our stated sales goals. However, we are actively implementing changes to our agency sales force to stabilize average weekly producer growth so that we can benefit from the productivity increases. To address the decline in average weekly producers, we must continue to stabilize producer growth by the recruitment of newly qualified candidates and the development of our existing Aflac associates.
One way we have directed focus to these elements is by aligning certain compensation metrics for our sales leaders towards producer growth and by implementing enhanced training and testing requirements for individuals to become successful associates of Aflac. We do expect short-term headwinds while we align our focus, but we believe this will yield long-term benefits to average weekly producer and associate productivity. Speaking of productivity, the results are encouraging because we've been actively investing in tools and training for our associates to help them be more successful and stay with Aflac longer. One approach we have taken is providing training for our independent agents to work with local and regional brokers. As I stated previously, there's a significant broker network across the U.S., and their clients are increasingly requiring supplemental benefits to be offered.
Providing Aflac associates with the knowledge and tools required of brokers is just one way of capitalizing on this growing market and increasing associate productivity. In addition to compensation changes and investments in productivity levers, we continue to extend our product portfolio to augment our existing distribution teams and develop new distribution methods to move Aflac forward. Let's look at portfolio expansion. One way we're enhancing portfolio expansion is through our recent announcement to acquire Argus Dental & Vision. This property is Aflac U.S.' strategic entry point into the network dental and vision space. The dental industry is a mature and stable market that is currently seeing healthy compound growth. Specifically, with respect to preferred provider organization plans or PPOs, there is a three-year compound annual growth rate of 6%, and this design is where we're primarily interested based on market trends and its financial and risk profile.
This industry also sees higher employer benefit penetration rates, and the small business segment, in particular, is currently at 64% penetration among network dental. In contrast, this opportunity provides us to be on the front page of the benefit enrollment process and access a greater number of accounts because as we've mentioned, only about 35% of small businesses offer supplemental benefits. In addition to the network dental and vision assisting Aflac with increasing access in a growth area of the market, we believe this area of portfolio expansion will increase producer productivity from deeper penetration and cross-sell of Aflac's supplemental products. Furthermore, we believe it will assist with recruiting and retaining agents and expanding broker access, which will positively impact earned premium through new sales and increased persistency. Apart from offering network dental and vision, Argus has a stable and growing third-party administrator or TPA business that offers best-of-class administration.
Our growth approach will defend and build upon this TPA business under the Argus brand while leveraging Aflac's distribution and brand to accelerate sales of Aflac Network Dental and Vision. Our go-to-market strategy is threefold. First, we'll offer simplified plans through agents to small businesses. Second, we'll provide customized offerings through brokers in the mid to large markets. Third, we'll offer simplified direct-to-consumer products. This approach will support producer growth and accelerate access and penetration across all the U.S. workforce market segments. Back to Dan's original comments about taking a measured approach. We will take a phased and methodical approach to ensure release of this new Aflac product in a way that represents our brand with excellence and optimizes growth, efficiency, and experience. We'll begin with the 10-state rollout in the first quarter of 2020, and then have a complete national launch in the first quarter of 2021.
We expect this measured approach will allow Aflac to generate $300 million-$500 million in revenue over the next five to seven years. In addition to our Aflac Network Dental and Vision entry, we're increasing access through distribution expansion and a consumer market approach. As I shared earlier, 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. We're also seeing changes in consumer behavior that encourage providing innovative products and alternative purchasing opportunities. Specifically, 35% of consumers prefer to purchase online or carrier direct, and 39% of consumers prefer alternative channels versus the traditional carrier sales approach. The broader strategy to capitalize on this opportunity will utilize a differentiated platform while leveraging the Aflac brand. This allows for access into new growth markets, automates operational processes, and increases the quality of the customer experience.
We're focused on using multiple approaches with this unique product design to generate greater access and penetration while maintaining strong financial results. The execution of this strategy will positively impact new sales and ultimately earned premium. To provide an update on the progress that we've made in 2019, direct-to-consumer sales have increased 40% year-over-year, and we expect to continue to see accelerated growth in this segment. In 2019, we have launched direct-to-consumer products for accident, cancer, and critical illness, and we will further extend this product portfolio in 2020. The sales and financial results we've seen from these products are favorable and will continue our measured approach to fully understand this market segment. In 2020, we will launch new product designs and an end-to-end digital sales platform that will allow us to engage customers through different mediums and to connect with customers when and where they want to be.
We plan to build, buy, and partner and leverage our corporate development and Aflac Ventures teams to support this evolutionary approach and the work we have accomplished in 2019 has been foundational for future success. In closing, I'd like to remind everyone that our strategy remains consistent and is strongly aligned to the market opportunity. In order to address current challenges and drive towards sustainable growth, both in sales and earned premium, our strategy focuses on improving producer growth, expanding our broker footprint, moving to the first page of the benefits enrollment process for greater access to employees, and expanding distribution to include digital delivery and related partnerships that tap into the ever-changing U.S. workforce. We continue to make strategic advancements to our business model, and we are pleased with the progress we've made.
At this time, I'll turn the program back to David to begin Q&A with our U.S. panel.
Thank you, Rich. At this time, we'll begin the Q&A panel for Aflac U.S. Joining will be Dan Amos, Teresa and Rich, Virgil Miller, Chief Operating Officer of Aflac U.S. and President of Aflac Group, and Steven Beaver, CFO of Aflac U.S.
Hi, Andrew Kligerman, Credit Suisse. Earlier, you talked about expanding training for local agents to work with brokers. Could you talk about how you're doing that and facilitating growth as opposed to conflicts between those channels?
I'll be glad to do that. It's Andrew, right?
Yes.
Okay. All right. Thank you for the question. In particular, we're trying to develop career paths for our associates. You can envision after their first 12 months as a brand new associate, they need to choose options to be continually successful and grow with Aflac. Working with brokers is one possible career path. We also have opportunities for them to enroll business as well as work in strategic markets like public sector. Simply given the brokerage market opportunity, and that more brokers work in the space, it's a natural evolution for our associates to partner with brokers to write business.
Got it. Then, we keep hearing about your competitors growing in the voluntary markets, whether it's MetLife or Prudential or a number of other companies. How is that affecting your growth?
Really, what we see with MetLife and some of the other competitors, we see the effects at the larger case level. You see a lot more competitive pricing with larger cases.
Thank you.
Frankly, we pass up some of those cases. Let's be clear, we're still profit-driven.
Ian Ryave, Bank of America. Going back to the direct-to-consumer part of the business. The life insurance industry has probably not cracked the code for direct-to-consumer. For you guys, obviously, you're seeing success in this segment. Is it a function of just product simplicity, sense of your product mix? Is it necessarily the technology or resources you're putting behind it? Or is it even just brand awareness and just the Aflac brand that's really contributing to the success?
I think it's all three. When we think about product from an Aflac perspective, we're very concerned and measured about ensuring that we don't have anti-selection. We are moving in a measured way with testing our direct-to-consumer channel. The other thing from a brand perspective, certainly if your brand is well-liked, people will give you the opportunity or give you a look. I think that what we see is that we have a number of people who enjoy our brand, who trust our brand, we want to keep that. Product is the biggest thing that we look at. Technology now, to get better at it, which is what we're doing, we're testing and learning.
To get better at it, you have to understand the data and analytics portion of it to get more efficient and get more targeted in how you drive direct-to-consumer. Those are things that we're currently in the process of doing.
Great. Then just on the producing agent count, that's having a little bit of an issue right now, and it seems that it has a degree to do with the strong economy, that they're looking for other opportunities. How can we look at what's happening now with what seems like a very strong U.S. economy versus other economic cycles? Have we seen this happen with Aflac? Would you say this is anything different than what the broader insurance industry is experiencing?
I'll say a couple of things. First of all, if you go back to weaker economic times, it was easier to recruit and to bring on talent. That's sort of the counterpoint of view. Secondly, I think that our industry is becoming more primary, there is a real demand for talented people who are in this space, and we see competitors wanting our talented people as well. I think the other thing, too, is as we continue to try to recruit, we also have people who've had very successful careers with Aflac that are choosing to retire. Part of our goal is to replenish those who've been successful and who've moved on.
I think you all know this, but just to make sure, it's commission-driven versus almost full employment with salaries. Whereas in a weak economy, people will try that commission that they would normally not try if they could find a salary. That's not the only reason that we've got issues, but that certainly has exacerbated part of the issue here.
Great. Thank you.
That's a fact. Graham.
Graham Tanaka, Tanaka Capital. I don't know if this is for Rich or Teresa. You mentioned, as an example, the dental and vision markets, and just wondering what the longer-term profit margin expectations are in these new product markets relative to the basic core business competitively and the growth rate. I wasn't sure what the, like you mentioned, the $300 million-$500 million revenue lift in the next 5-7 years. Is that a per annum number? Thank you.
All right. I'm going to go to the first question, and I might ask you to repeat the second part, since it was a two-part question. The dental business is very attractive financially to us. We don't measure it necessarily on profit margin. It's more of a return on capital. It's very attractive from that perspective. It's also very predictable from a risk perspective, which fits Aflac's overall risk profile. That was one of the primary reasons in addition to being on the front page. Very stable, predictable, good return on capital. What was the second part of your question?
You mentioned a $300 million-$500 million lift in revenues over a 5-7 year period. I just didn't know if that was a per annum number forecast, or was that a cumulative. Thank you.
You will see in 5 to 7 years, we'll either be adding $300 million on an annual basis to $500 million on an annual basis. Yes.
Good answer, Rich. Good answers.
John Barnidge, Sandler O'Neill. The 24.8 million self-employed, no Aflac access, part of that's probably gig economy employees. What's the opportunity set there? How are you going to go about penetrating that market?
Currently today, we have two primary ways of doing that. We can use aflac.com, and digital means to doing that. We're also doing that through partnerships, through these alternative distribution vehicles that I mentioned, where consumers candidly just prefer something different than a traditional carrier sales approach. It's really either digital or through partnerships.
My other question, how important do you think having that first-page presence through dental and vision now will have for sales of the other products and then ultimately a higher persistency level? Thank you.
We're actually really excited and, as I mentioned, a measured approach in 2020. Obviously, all of us want to start as soon as possible. We want to do it in a measured way because it really does capture all three of our distribution vehicles, our agency sales force, brokers, and our direct-to-consumer. At the same time, it creates a halo effect. I mentioned the small business market, where dental is in 64% of small businesses and supplemental is only in about 35%. When we are able to enter into a dental opportunity, we're going to get the halo effect of our supplemental benefits. That's going to help our associates make more money. It's going to give them the ability to stay longer with Aflac and see a viable career.
Eric?
Hi, Erik Bass with Autonomous. I had a question on the expense ratio. I think a year ago, you had given a target for 2022 of a 33%-34% expense ratio. Now you're showing 34%-36%, I think, for 2022 and 34%-35% longer term. Just wondering what the change is and if it's something that's more top-line oriented or difference in your expense out.
Do you want to take that?
It's a combination of both. This is Steven Beaver, CFO of the U.S. business. It's a combination of both, as we invest in our platform to meet our customers where they are, we're experiencing some elevated costs, especially where we're defending the core, expanding the core, and then where Virgil's playing into evolving the core. There's some additional expense related to that. As you can see with the curve, we expect that to peak out in 2020 and then drop off from lower spend on those investments, as well as efficiencies that we expect to gain.
Just wondering if you could give a little bit more color on the third quarter sales, which you had said are coming in lower than expected. Are we looking at another down quarter for sales? Just what would be the primary factor to give you confidence that we're going to see a recovery in 2020?
I think first of all, we don't speak around quarterly guidance for sales results. We just wanted to share that we do see it being weaker and the primary driver is the decline in average weekly producers. I know in about a month, we'll have a more detailed call as the quarter finishes, that's the fundamental driver.
The last five weeks of every quarter dictates almost the whole quarter. It's amazing. We really don't have any idea, we just know that the last couple of weeks have not been quite up to the standard that we'd wanted it to be. I'll say that, we don't even have the final week in, which is always the biggest week of the quarter. We don't know the number yet. I just want to make sure.
The second part of your comment was regarding 2020 and the confidence of moving into 2020. What we're doing today from a recruiting perspective, development of the various strategies that you heard from Rich, we feel good that we're setting ourselves up for better results in 2020 as well as 2021 and beyond, and you saw some of that.
Yeah. Dan just reminded me as a part of my message earlier, our alignment for compensation plans for 2020 is towards producer growth, which is primarily recruiting as well as developing associates. That is basically that's how you drive sales behavior is alignment through compensation.
Alex?
Hi, Alex Scott with Goldman Sachs. The question I had was just around inorganic opportunities. There's a lot of focus on growth here and seems like a heightened sense of urgency to kind of get it going in the U.S. in particular. You've done some. You've got the Argus acquisition that's going to begin to come through. What's your appetite for doing something bigger, something that would maybe give you the ability to offer a full suite of benefits products? I would think for the same reasons that Argus is interesting from revenue synergies, you're spending a lot on tech and so forth.
Dan?
Well, I'll take that. I am very risk averse and believe that one of the reasons people like our stock is in tough times, we're positioned well. Fred can go into much more detail when their group comes up shortly because I count so heavily on him. My gut is you never say never, but it is not in my DNA to want to do something like that. I believe that the Argus is a great example, and Aflac Group is a great example of not trying to build a wheel, but buy one, but I don't need the whole car. I think by setting it up this way, that's the way we like to grow. As I said, never say never, but I like what they're doing.
I also just want to make a comment I'm the guy that's been around forever, and I know all the inner workings, and I like what the U.S. is doing. It is a transformation within itself of how we were totally driven by this field force, who we still want to keep, but we're bringing on this group, and now we're bringing on direct to consumer. It is tough having all those balls in the air and pull it off, at the same time, bring down expenses. We're no different from any other companies out there trying to do things. I think our plans for success are in the works, and I feel good about what they're doing.
When you see all the breakdowns internally about what's taking place, it's just a slow process of how do we keep that field force going in the meantime to where we can grow these other channels? Because let's be clear, we're doing very well in the broker business. That group platform that we bought 10 years ago, if we hadn't, we'd be in trouble. We have made strategic moves that are absolutely the right ones. We got a little overboard in going too low on the number of accounts that weren't making money because they were too small on a group basis. Virgil and Teresa have fixed that problem, turned it very profitable and doing very well. All in all, I think they're making the right moves. If you just look at the top-line sales growth for this year, we're not pleased.
If you look at the strategic implications long term, we're making the right moves. There is no doubt about that. We've got to continue to push and do that.
You'll hear Fred talk more about how we're funding transformation and innovation. The other thing that I think you don't realize is that we are looking at various properties all the time, whether they are small venture properties or whether they are something else through corporate development and Aflac Ventures. We continue to look at where we see our weaknesses, and we try and augment that through a buy or build.
Thank you.
Nothing really big.
Nothing really big.
That's right.
Humphrey Lee from Dowling & Partners. Maybe a question for Rich or Teresa. Can you remind us what is the lead time from a new recruit from being recruited to being productive? I think you talked about changing the compensation scheme for next year, focusing on recruiting. I cannot believe that you pay what you get. You're paying probably your most productive or the most veteran sales agents to do recruiting, pulling them away from generating new business. The trade-off is hopefully they bring in new people, have them be productive. How should we think about that trade-off, and how do you mitigate any kind of unintended consequences?
First of all, we need our associates to make money as early as possible in their Aflac career, or they won't stay with us. What we have done is we have aligned to their district manager, to their regional manager, to their market director, all the way up to the highest leaders in the organization, that everybody wins when our associates make money early and they open new accounts. I think that's sort of what was missing as we roll into 2020, is we have alignment on that, and the focus is on driving the growth and the productivity out of new associates and our existing veteran associates. I would say alignment is the simple answer to your question.
If I heard you correctly, our associates aren't recruiting for us. They're just selling. It's the management team that's got too into administration, and that now they're being tied more to recruits.
Thank you.
Looks like that was our last question. It's now 10:49. We'll take a 15-minute break and see you back here at 11:05.
[Break]
All right. Yes, we're going to have to get that gong. We're now entering the final portion of presentations this morning, which focuses on Aflac Global Investments and Aflac Incorporated's financial outlook and capital management. We will begin with Eric Kirsch, Global Chief Investment Officer, who will provide an overview of the investment strategy for Aflac Global Investments. Max Brodén, Deputy CFO, Treasurer, and Head of Corporate Development, will then provide an update on capital management. Fred Crawford, CFO of Aflac Incorporated, will follow Max with an update on growth investments and capital allocation. Now we will hear from Eric, who joined Aflac in 2011 as the Senior Vice President and Chief Investment Officer. He was promoted to Executive Vice President in 2012 and was named President of Aflac Global Investments last year. Most recently, Institutional Investor announced Eric as a finalist for the third annual Allocators' Choice Awards.
I now turn the podium over to Eric. Eric?
I didn't use to wear these eight years ago. Good morning. With my time today, I would like to provide you with highlights of the key investment themes driving our investment results. Over the past year, investment markets continue to face headwinds of lower for longer interest rates, equity market volatility caused by global economic growth concerns, trade wars, potential end of the bullish growth and credit cycle, and central banks continuing to move us to a financial system of negative interest rates. Despite these headwinds, our investment performance has exceeded targets in net investment income while achieving a low level of losses and impairments and maintaining high credit quality standards. We have had an up in quality bias, which has better positioned our credit portfolio for if and when the credit cycle changes. Our alternatives portfolio has been building, adding positive variable investment income.
Our hedging strategies have defended net investment income. We have developed a strategic plan for future growth of Aflac Global Investments, which should enhance our ability to source investment opportunities in the future. The key to excellent long-term investments results is a consistent investment process. As a refresher, we employ a disciplined strategic asset allocation process that calibrates Aflac's specific objectives, including capital, liabilities, risk limits, regulations, and other factors to develop optimal portfolio asset allocation ranges given our risk tolerances. SAA is supported by tactical asset allocation decisions implemented by our global credit, rates, and portfolio management teams, as well as our external asset managers. In aggregate, we manage at the strategy and security level to achieve investment targets.
This process has had a profound impact to our asset allocation over the years, resulting in a much higher level of diversification at the asset class, region, and security level. It also allowed us to introduce new investment strategies, such as Aflac Japan's U.S. dollar hedge program, the addition of private loans, and the build-out of our alternatives program. Our new money yields have stayed competitive, helping to offset the loss of income from maturing higher-yielding JPY private placements and an asset allocation of new money consistent with our SAA and market opportunities. Our investment process and portfolio structure has allowed us to position the overall portfolio conservatively, aligning with Aflac's business model and the interests of our policyholders.
In our view, we will have a headwind of lower for longer yields for the next few years and a possibility of negative yields even for 30-year JGBs in Japan, the part of the curve we primarily invest in. While not easy to navigate, there are a number of factors which will minimize the impact to our investment results. Based on our five-year plan, our new money cash to invest is forecasted to decrease versus the past few years. This is because a good portion of our portfolio cash flows will be required for operational needs. Second, we have less maturing proceeds from legacy high-yielding private placements coming due. From this overall lower pool of cash flow to invest, we expect less than 30% of our total cash to be invested in yen-denominated assets.
This is supported by our strategic asset allocation, which has modeled any new yen investments primarily being required for ALM purposes, asset liability management purposes. The remaining 70% will be used to reinvest in and marginally grow the allocation to U.S. dollar-denominated assets. Finally, our investment focus for yen investments will favor yen public and private debt, where as you know, we have grown our capability the last few years with great success. As you can see on this chart, we have consistently earned a spread over JGB yields commensurate with the credit risk we are taking. Even in this low-yield environment, we would expect to earn a positive yield to JGBs. We will continue to monitor the situation, but do not expect to make any investments in negative yielding debt. We are confident this strategy will help us in defending net investment income in this low-yielding environment.
Let me report that our U.S. dollar hedge program is turning in very good performance, and our three-bucket approach has done a great job of aligning hedges with floating rate asset income while also aligning our hedge ratio to the enterprise's risk appetite. As you know, we have locked in the majority of our hedge costs this year, 91%, which provided greater predictability. In addition, last December, recognizing the shift to a dovish position by the Federal Reserve, we chose to hedge about 75% of our floating rate income to defend income in the event of a decline in LIBOR, the benchmark reference rate for our floaters. Given the precipitous decline in LIBOR, this floating rate income hedging strategy has preserved about $15 million of income.
While it is early for 2020 planning, we have already hedged about 20% of our floating rate book, providing us options for further tactical decision making. Separately, for Aflac U.S., where we also hold floaters, we have hedged approximately 50% of our 2020 floating rate income. Let me also comment that the floating rate loans come with various LIBOR floors. So we have automatic income protection in the event LIBOR decreases further following Federal Reserve policy. Finally, it is worthy to note, based on our modeling, that if we let the portfolio and hedges just roll, our net income, meaning income from the floaters less hedge costs, would remain relatively stable. We would have some residual risk to the cross-currency basis reflected in hedge costs, but this too is manageable within our overall income targets.
Our strategic asset allocation results support about a 2.6% long-term overall allocation to alternatives, namely private equity and real estate investments, which are a good match given our strong capital and surplus. These asset classes can achieve double-digit returns, reduce overall portfolio risk through diversification, and enhance net investment income for the long term. We rolled out our program in 2016. As you know, it takes a few years to commit the underlying capital as we seek to achieve vintage year diversification and average into the alternatives market over 5 to 7 years. We have committed about $1.4 billion to our program, and of that, about $985 million is committed to underlying investments, of which $432 million has been called and is currently deployed.
In traditional fashion, that capital may take 3 to 7 years to be fully called and deployed. Hence, this is a gradual but important buildup of capital. As with new alternatives programs, we will experience a J-curve impact, earning less in the early years, but realizing higher rates of return as the program matures over 5 to 10 years. Real estate has a shorter investing cycle associated with it. Our secondaries and co-investment strategies to diversify the portfolio and mitigate the J-curve have rewarded us with good performance this year. It played a large part of our variable investment income, which year-to-date is about $18 million. We will continue to provide greater reporting and detail to this portion of the portfolio in our forecast for variable investment income.
As I have been describing over the past year, we have had an up and quality bias reflecting our concern that the credit cycle may have peaked, which brings the potential for increased downgrades, defaults, and losses. The timing and severity is difficult to predict, but our bias is a conservative one that employs good risk management. Where we have found opportunities to continue to reduce risk, we have acted. In fact, since 2016, we have de-risked about $7.3 billion in a variety of relative value and switch trades. For example, you can see on this chart that we lowered our aggregate BBB exposure from 24.6%-22.8% since 2016. In addition, looking within the category, you can see we lowered our BBB- exposure by almost half from 6%-3.1%, which is the category most likely to get impacted with downgrades to below investment grade.
You can also see we lowered our energy exposure from $7.2 billion-$5.5 billion, reflecting the continued volatility in this sector. While not shown on this slide, we have no exposure to commercial mortgage-backed securities or better known as CMBS, and minimal exposure to bricks and mortar retail credits that may be impacted from the digital online shopping experience. We have an excellent credit track record, and we feel confident results will be strong through a full credit cycle. On this slide, I have listed out credit underwriting statistics related to our growing transitional real estate and middle market loan portfolios. For Aflac, credit underwriting is our core competency, and we apply strict and high standards to these portfolios of loans. Our conservative strategy is designed to underwrite higher quality properties, first lien senior secured loans to earn a competitive rate of return, not necessarily the highest by design.
For example, you can see we have over 198 unique middle market borrowers, an average loan size at commitment of JPY 11 million to companies primarily levered below 4.75 times. In transitional real estate, we are geographically diversified and have loans to 127 unique issuers with an average loan commitment size of JPY 41 million diversified across industries and 83% of the loans have loan-to-value ratios below 70%. Our borrowers and their business plans are carefully monitored for compliance with all covenants and loan terms, if and when issues arise, action steps are followed through to protect our interests. While these loans are not immune to a change in the credit cycle, we expect overall performance to be strong given the diversification and conservative underwriting standards we practice. Let me turn to the future.
We expect the markets to continue to be a headwind with low yields, maybe even negative yields for 20 and 30-year JGBs, and a lower rate environment in the U.S., which is in stark contrast to a year ago. Our challenge to find good asset classes in terms of credit quality and a spread commensurate with appropriate risk will be our highest priority. We see our core competency in our external managers platform as a competitive advantage with a proven track record of finding new and best-in-class asset strategies and managers. Today, our platform has close to JPY 10 billion of externally managed assets, spanning relationships with 12 asset managers. Our expert investment and operational due diligence process ensures we partner with excellent managers who can deliver top investment results.
An example of leveraging our external managers platform for growth is our experience with middle market loans and transitional real estate, which included our equity investment in NXT to cement that partnership. While that equity stake was harvested at a profit, we believe Global Investments as a business within Aflac is positioned well to source new opportunities, particularly in light of the growing capital dedicated to private markets. We seek to find these opportunities and where it makes sense, 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 portfolio.
Global Investments and Aflac Corporate Ventures are partnering to assess innovation in the asset management business, which we believe is crucial to maintain a world-class investment operation. That initiative has just begun, we hope to have more to report over the coming quarters. Let me close with a message of confidence. While the investment environment will continue to be challenging, with potential risks surfacing at any moment, our portfolio is well positioned. Our teams will continue to source investment opportunities while meeting our conservative standards, yet providing attractive risk-adjusted returns, we will continue to protect net investment income and our capital in all environments. Thank you, and I will now turn the program over to Max Brodén.
Thank you, Eric. Turning to our core margins in Japan, they continue to be very strong as we enter 2019 and are underpinned by a familiar pattern of improved benefit ratios, which are somewhat offset by a slightly elevated expense ratio. When you dig into the numbers, there are two factors that are fundamentally important to understand. The first is the accounting impact of paid-up policies on earned premiums and shift in business mix. As policies reach paid-up status, we no longer account for the associated earned premium, while profits are recognized over the expected lifetime of the policy through amortization of a deferred profit liability. The second factor is that our focus on third sector sales have shifted the mix of business towards third sector products, which have a lower benefit ratio and higher expense ratio.
More importantly, trends that have been in place for a number of years, like shorter hospital stays, increased use of outpatient services, and stable incidence rates, have continued to support the downward trend of the core third sector benefit ratio. As you heard earlier, we are also investing in digital enhancements, both on the front and back end, to position for future growth, while at the same time delivering our quality offering in a more efficient way. As a result, we expect strong 2019 pre-tax profit margin of 21%-21.5%, with our benefit and expense ratios coming in toward the low and high ends of guidance, respectively. Our three-year outlook expects a continued downward trend in the benefit ratio due to favorable actual to expected underwriting of our large in-force block. We do expect our efficiency efforts to stabilize our expense ratio within this medium-term period.
Taken together, we expect an improved GAAP pre-tax profit margin for Aflac Japan. As you heard from Teresa and Rich, we see very significant growth opportunities in the U.S., on which we intend to capitalize. We are still in investment mode to position the business for the future with the likes of One Digital Aflac and Argus. We expect our expense ratio to remain elevated in 2019. We have benefited from a very favorable benefit ratio, which has supported a strong pre-tax profit margin of around 19%. Our build-out of Aflac Network Dental and Vision, as well as efforts to create a true end-to-end direct-to-consumer platform, are not friendly to GAAP earnings and expense ratios in the near term due to lower DAC and more capitalization rates, but they do build economic value over time.
As we look forward, we should see our elevated expense ratio begin to decline in 2021. At the same time, we expect the favorable trends in our benefit ratio to continue, which should result in an expanded pre-tax profit margin. Both our FSA earnings and SMR reflect the strong capital formation and cash flow generated by favorable underwriting associated with our in-force. While Aflac's liabilities generally have low sensitivity to interest rates 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 by stress testing earnings, cash flow, and capital levels to understand the true strengths of our business and balance sheet. As of June 30th, 2019, we estimated Aflac Japan's SMR to be 1,047%, which is up from 946% a year earlier.
This most recent measure increased with retained earnings as the outlook for FSA earnings continues to be strong and outpace the growth of U.S. GAAP earnings. Our FSA earnings benefit from very consistent, favorable actual-to-expected benefit ratios, just like our U.S. GAAP earnings, and also more capital-efficient new products than the current in-force. This leads to less new business strain and improves the earnings profile of the total block on an FSA earnings basis. Fiscal 2019 FSA earnings benefited from negligible impairments and elevated lapse 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 at the current FX rate. With respect to FSA earnings and FX sensitivity, with a significant portion of the dollar portfolio unhedged, a strengthening yen will have a negative impact on FSA earnings.
There can be periods of heightened sensitivity with respect to the timing of dollar asset maturities and even FX-driven impairments under extreme yen strengthening. We work to manage this volatility, recognizing that while less FSA earnings means less yen dividends, that yen is worth more in dollar terms, thus muting the impact to holding company cash flows. Since we are primarily a buy-and-hold investor, there is a strong pull-to-par effect in our investment portfolio, which leads us to look at our SMR excluding unrealized gains on AFS securities. At the end of this past June, the SMR stood at 925% when excluding the 123 percentage points of unrealized gains on AFS securities. 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.
We 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 in the 115%-130% range without an ultimate forward curve rate. We estimate that the UFR would add 80 points if incorporated. In line with our previously announced RBC drawdown plans, the associated final dividend will be paid to the parent in December. We continue to expect the RBC ratio of our main U.S. entity, Aflac Columbus, to end the year at about 500%.
When we stress-test capital levels of our U.S. entities, evaluate the risks of both the assets and liabilities on both the absolute and relative basis, and compare ourselves to peers, we believe that over time, we are likely to target an RBC ratio closer to 400%, given the strength of the earnings profile, low risk and stability of our operations, and low asset leverage. Even without a clear path or timing for changes to C1 charges, we feel comfortable with the current capitalization levels of our U.S. entities as we execute our growth strategies for the U.S. business. Statutory earnings remain solid with an upward trajectory despite the impact of the post-conversion RBC drawdown of capital and associated impact on net investment income.
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. We believe that a better understanding of statutory cash flows will be helpful as we approach the implementation of the new U.S. GAAP standard for insurance contracts or targeted improvements to the accounting for long-duration contracts, LDTI. Because this guidance will impact U.S. GAAP financial results and disclosures, it is important to emphasize that regulatory figures in the U.S. and Japan will not be impacted by this change. LDTI involves very heavy lifting from our accounting, actuarial, and IT departments around analyzing, modeling, and reporting associated with this overhauling accounting standard.
While still early for what we anticipate to be adoption in the first quarter of 2022, we have tentatively concluded that the modified retrospective transition approach is the best approach going forward for Aflac. I would like to walk you through how adoption can directionally impact our U.S. GAAP financial statements. As outlined in our 2018 Form 10-K filing, we believe that the impact could be significant, especially upon transition. I will caution you that the impacts are very sensitive to interest rates. On transition, the balance sheet is expected to see an increase in reserves due to a lower expected discount rate relative to our locked-in assumptions. With an equal negative adjustment to AOCI, driving shareholders' equity down with no impact to retained earnings. While we do not expect a significant impact on U.S. GAAP earnings upon adoption, we do expect earnings patterns to change post-adoption.
In simple terms, this new U.S. GAAP reporting convention will introduce additional asymmetrical interest rate pressures to our balance sheet without the ability to show a compensating economic impact of the same interest rate changes on our investments classified as held to maturity, because they are held under U.S. GAAP at amortized cost. In addition, this ALM impact, assuming the current low interest rate environment, is more than offset by very strong morbidity profits on the same policies. LDTI bifurcates the profit generation of the in-force block and asymmetrically accelerates these interest rate pressures through a lower discount rate. That is what you see impacting reserves and AOCI on a balance sheet at transition. The positive morbidity component will be earned over time, lifting future GAAP earnings under LDTI compared to the earnings pattern under the current accounting standard.
We drive value through a number of activities around the company. Financially, it comes down to a few important factors that incorporate all of the actions we take 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, or the value spread. We are an active manager of both components, and it's important to drive not only the level of ROE, but also the spread to the cost of equity. Ultimately, this is what creates value and drives share price performance. Lately, our ROE has been stable, but our cost of equity have developed favorably, leading to an enhanced value spread.
The expanded value has been generated from a higher absolute level of shareholders' equity, creating a greater value of dollars created each year. In other words, this is the economic value creation in dollars each year. This is supporting shareholder value in the long term. Given our strong capital ratios, we view this as a very high-quality value creation each year. This is how we drive shareholder value. One controllable risk impacting our cost of equity is the foreign exchange risk of the enterprise. Due to Japan being our largest profit generator, we inherently carry FX exposure to the yen. Historically, it's been quite high. We have taken steps in order to reduce it to a more economically manageable level. Our philosophy to hedging is to hedge and protect what we view as real economic events.
These can be classified as cash flows from the foreign entity to the holding company or future expected cash flows to come. We currently have three tools at our disposal to manage and optimize our exposure. Unhedged U.S. dollars in our Japanese investment portfolio, which stands at about $16 billion. Our corporate hedging program at the holding company, which stands at about $3 billion. Yen-denominated debt issued within the group, which today stands at about $4.4 billion. All of these tools serve dual purposes, reducing risk and enhancing adjusted earnings. In addition, each tool has at least one constraint. We are currently operating within comfortable corridors. All these activities are run through severe stress testing and evaluated through multiple economic and accounting lenses in order to maximize risk reduction, capital consumption, and ultimately, the return on risk-adjusted capital.
As we have increased the U.S. dollar exposure associated with our Japanese business, we do believe that we have reduced the economic exposure to the yen. We have broadened the investor base, reduced volatility in the value of Aflac, and finally, reduced the cost of capital. This over time, should lead to enhanced value creation of the company. In previous slides, I've outlined strong capital levels and capital generation in our operating subsidiaries. As we turn to the holding company, cash levels have increased. Our cash is expected to end the year at about $3.7 billion. We continue to view $1 billion as our minimum balance. We also back out $1 billion of cash into a walled-off portfolio of securities that can be used for collateral postings and potential derivative settlements. This supports our corporate hedging program in order to reduce our corporate-wide FX exposure.
This results in a very healthy, readily deployable balance of about $1.7 billion. This excess capital allows us to be opportunistic without disrupting share repurchase and provides insurance on maintaining our dividend track record in periods of economic weakness. Our debt maturities continue to be pushed out as we take advantage of low yields to refinance debt and shift denomination from dollars to yen. This diversifies our funding base, reduces interest expense, and better aligns our cash flows by currency with our debt denomination, thereby reducing the FX risk exposure of the enterprise. To sum up, I hope that you have gained a better understanding as to how we view our business as having a low balance sheet risk that generates stable margins and cash flows.
We've taken multiple actions to reduce the risk further as it relates to investment portfolio and foreign exchange risk, positioning us well for any economic or financial volatility. Finally, we're working toward implementation of LDTI and simultaneously evaluating the allocation and optimization of capital through an economic lens to produce long-term value. Thank you. Now I'll turn the presentation over to Fred.
Thanks, Max. Let me first just start by extending my welcome to all of you and appreciation for those of you who cover us. I appreciate all the time and energy you put into it, and those of you who are investors, I appreciate obviously the investment, but also the faith you have in management and the company. So, thank you very much. I'm going to focus my time on capital allocation, following off of Max's comments. Would particularly focus on opportunistic uses of capital to drive growth. I'll then briefly recap with observations on overall financial condition from my perspective to wrap up Eric's comments and Max's comments into one. Working from Max's capital dialogue with you, we have generated over $6 billion in deployable capital in the three-year period ending 2018.
Some of the recent three-year periods that we've shown you have benefited from reinsurance proceeds from Japan, if you recall those years. In more recent years, we've been moving excess capital out of the U.S. after the conversion of our Japan branch to a subsidiary. Importantly, those results in recent years have also benefited quite a bit from stable credit markets, which is not to be ignored. Looking forward to 2019 through 2021, we continue our U.S. capital drawdown of $500 million in 2019. For the time being, we've not assumed any further drawdown of capital in the outlook that appears here on this slide. The run rate range of annualized dividends paid by our insurance subsidiaries to the holding company is approximately $2 billion-$2.5 billion, or roughly 80%-100% of the combination of FSA earnings and statutory earnings in the U.S.
Our intent, as Max pointed out, is to dividend 100% of regulatory earnings absent any sort of credit cycle concerns. That's in part because we have the combination of additional excess capital at the holding company, which Max talked about, but also very strong ratios that support the investment and reinvestment in our business model. Therefore, our outlook for the three years ending 2021 is deployable capital of $7 billion-$8 billion. We first prioritize investment in our core businesses, of course. That's going to offer the best, highest risk-adjusted return for our company without question. After that, share repurchase is the standard against which all other alternatives compete for deployable capital. We are committed to maintaining our track record, of course, of cash dividends and dividend increases that you've enjoyed over 36 years now.
Our dividend policy is guided by growth in adjusted earnings per share. Also more so these days by free cash flow generation and overall capital quality. That's going to be particularly important as we move to new GAAP, where earnings per share takes on a different meaning, potentially for a lot of us in the industry. Pay attention to cash flow and capital generation, which remains extremely strong at the company. You'll see here an increase in the opportunistic use of capital, which includes corporate development activity that we've mentioned earlier today, venture initiatives, and business incubation. I'd like to focus some attention on this area, as we expect, as you can see, a greater allocation to this use of capital in the future. There's no avoiding the realities of math.
With nearly 25 million policies in force in Japan lapsing on average 6% and 13 million policies in the U.S. lapsing on average 22%, it's very difficult to drive earned premium growth beyond low single digits. By the way, those lapse rates, both in Japan and the U.S., are not unusual. Those are fundamentally at or better than industry averages. It's just the way the businesses operate. In order for Aflac to defend and grow the top line, we need to invest a portion of our excess capital to develop new products delivered in new ways, creating new markets that leverage our franchise strengths. You can see this from the slide that we have assumed an allocation of approximately 10% of our deployable capital towards opportunistic investments.
This is a meaningful commitment and strikes the right balance of investing to create options for growth while not placing large bets on developing business models. We are making growth investments in four ways. First is corporate development, where we take a buy-to-build strategy to look for platforms that we can leverage in Japan and the U.S. with Aflac's brand, distribution, product, and investment management capabilities. Second is new business incubation focused on greenfielding and potentially partnering to develop businesses that represent a natural extension of our current model and leadership position in developing ecosystems. The third area is Aflac Corporate Ventures, now recognized in the industry with platforms including our venture capital fund and a benefit technology business that is called Empowered, located in Charlotte, and the developing small business HR solutions that Empowered tends to focus on from a technology perspective.
Finally, we have developed a global venture strategy that is focused on digital and disruptive models in Southeast Asia and India, leveraging our cancer insurance expertise with limited capital at risk. Let's dive a little deeper into these categories. We are not, as you know, historically an acquisitive company. We need to have an active corporate development function to close gaps in our platform, pivot if necessary, and augment our organic business development activity. When faced with a buy, build, or partner decision, we often find buy to build is the best approach to controlling the outcome, lowering the capital at risk, and ensuring we properly leverage our strengths.
While we can never rule out, as Dan mentioned, the possibility of something more transformative at the right valuation, with our brand and distribution and product leadership, it's not often that we find value in a target company's goodwill assets. You can see this approach in our most recent U.S. acquisitions. We purchased platforms with domain experience and expertise, and we leverage our brand and distribution to grow the platform organically. When we purchased CAIC, our group business in South Carolina in 2009, they had approximately 1,250 groups generating about $90 million in annual earned premium. Today, our group business has 7,600 groups and is projected in 2019 to produce $650 million in annual earned premium. Interestingly enough, not next week, but the week after is the 10-year anniversary of that transaction.
This represents a 20% compounded annual growth rate over those 10 years, both in the number of groups and in earned premium. It's a powerful example of our ability to buy to build with success. With our announced Argus acquisition, we're entering the network dental and vision market, as we've talked about earlier today. Along with the growth in dental and vision markets, the transaction is focused on moving Aflac to the first page of the benefit enrollment process for employees. We continue to look for similar opportunities in group life, disability, and related HR services and service businesses. In terms of Japan, we would be very selective. There are very few gaps in our current business model and in a highly penetrated and competitive market. We are much more active on the venture side in Japan.
As Koide-san noted, we have seen recent opportunities to purchase agencies where ownership lacks a logical successor. We are effectively building out a company-owned distribution platform to further diversify our third-party platform in Japan. We completed one such purchase in 2019 for net consideration of JPY 3.3 billion. Finally, as Eric noted in his remarks, with the success of our external manager program, the next logical extension of that strategy is entering opportunities or entertaining opportunities to take a minority equity interest in key advisors coupled with investment mandates. We had a successful transaction with NXT, you may recall, and see other opportunities in the marketplace surrounding asset classes that are particularly strategic to our insurance general account strategy. Earlier, Koide-san and Teresa discussed our approach to investing in growth and innovation, which includes business incubation.
You can think of business incubation as developing our own startup company in areas where we have domain expertise or a unique ability to create a viable business. The first category of investment includes tangential opportunities to advance our core business model. In both Japan and the U.S., this includes consumer markets or digitally distributed supplemental health products directly to the consumer. In the U.S., we are in a more advanced stage in terms of committed capital and have established a regulated legal entity to house the new digitally distributed product online and through partnerships. We also look for investment opportunities in select ecosystems where we operate and exploring new models that have the potential to disrupt traditional market strategies.
A couple examples where we believe we have the right to pursue such opportunities are Japan Cancer Ecosystem and the U.S. Small Business HR Solution space, a natural extension of our Charlotte-based technology platform, Empowered. Overall, we see these incubation efforts as long-term development in nature and expect to allocate as much as $200 million in the next five years to include startup expenses, technology platforms, distribution, and capital in support of new businesses. We expect these areas of development to contribute to revenue growth rates in 2022. Three years ago, we formed Aflac Corporate Ventures. We have a $250 million corporate VC fund and expect to put that capital to work over the next two to three years as attractive opportunities present themselves. We source transaction in many forms, including working with accelerators like Plug and Play and Carolina Fintech Hub.
At the same time, we naturally come into contact with interesting opportunities in our day-to-day business activities, and we're a recognized name in the corporate venture community. To date, we have funded or have commitments outstanding in place for about $70 million of this $250 million fund. We are, as you can see on the slide, well-diversified. Our direct holdings typically involve both an equity investment and a commercial contract with Aflac Japan or Aflac U.S. With the increase in the size of the fund last year, we now include both early-stage and later-stage companies, and we lever the venture fund to accomplish the following. One, to drive strong investment returns, of course, and in cases where we have a commercial relationship, incremental returns in our core business.
The second is we look for opportunities to accelerate the digital efforts of the business segments to close pain points in our current platform. We develop an awareness of emerging technologies and ecosystems and disruptive models in the markets we serve in emerging global markets. Finally, partnering with Aflac Global Investments to explore nascent technologies and business models that seek to disrupt the asset management space. It's very important to understand that when you look at our business segments, that there is a close association between the venture fund and what we invest in the way of startups, and the digital advancements in those business segments looking to close pain points. Sometimes we're able to do it and develop it on our own. Oftentimes, we partner with emerging technology to close those gaps.
At the very end of 2018, we made an initial investment in Singapore Life and then made a follow-on investment in May of this year. The investment in Singapore Life is different from the traditional venture investment in the following ways. It's a larger direct investment in a single company, now standing at $36 million. We have deeper involvement with Singapore Life in the business, including a board seat. In fact, Max sits on the board of Singapore Life. We have jointly developed a cancer insurance product sold on Singapore Life paper and distributed digitally. Just out of interest, if you go on your phone, don't do it now, please listen to my comments. If you do go on your phone and you log into Singapore Life, you will scroll down, and you'll see traditional life policies and then you're going to see a cancer policy.
If you click on there and make sure you note that you're a Singapore resident, otherwise it'll stop you there, you'll see how that works. That cancer policy you're buying from Singapore Life is constructed and designed and engineered and 90% reinsured to Aflac. You're effectively buying an Aflac cancer policy on Singapore Life paper. Singapore Life is looking to expand throughout Southeast Asia, and we hope to support their efforts. We'd like to surround our investment in Singapore Life with other regional funds and direct investments that focus on digital insurance evolution, both in Southeast Asia as well as India. We think our approach to global investment and expansion is very well measured.
We have a limited amount of capital at risk with high payout potential and without significant investment of management's time, very importantly, not stealing away our focus on the core businesses in the U.S. and Japan. Before I move to Q&A with the rest of the panel, let me close with a few observations from my perspective on this morning's financial session and comment on what we're focused on with respect to financial management. We are being cautious in our approach to investments and capital management as the prevailing view among market participants is that we could be entering a period of economic weakness.
Our crystal ball is no clearer than your crystal ball, clearly, there are signs in the markets and yield curves, et cetera, that we could be entering choppy waters, we have gone out of our way to build a defensive position in that regard. You'll see the prudent approach come through in our capital ratios, excess capital on hand, and our approach to tactical asset allocation. These are not strategies that are friendly to ROE and EPS development, they do support our low cost of capital. We suspect, and frankly, I suspect, that our risk profile and prudent use of capital will become an important reason to invest in Aflac over the next few years. Growth is a key challenge we face, of course, as you know from listening to us today.
This is not helped by the math, as I mentioned, of fighting natural in-force lapse rates and the low rate environment. We are blessed with leading market share, strong margins, reliable capital generation, and a low-risk product and business profile. We invest in growth initiatives, we need to preserve these fundamental elements of our financial profile, which have served our investors well over the years. Financial strategies we are currently focused on include optimizing our Japan-U.S. dollar and enterprise foreign exchange hedging strategy. You heard Max cover that. Ensuring we have ample capital and liquidity on hand, not only for defensive purposes, but also to have an ability to go on the offense. We are carefully tracking our opportunistic or growth investments to ensure they meet overall return expectations in the form of revenue, expense efficiencies, and value creation.
Finally, refining our economic capital modeling to guide decision making and enhance reporting as we move into a new accounting model. In terms of the adoption of the new long duration contract accounting, it is early, as you all know. We have a very unique business model in the industry, and I think this is probably the most important point to understand with the adoption. Aflac is largely, as you know, a supplemental health company. We are a U.S. GAAP reporting company with 70% of our business and economics housed in Japan, and we have concentration in very long duration and highly profitable cancer policies in force. That is a very unique combination of characteristics when you're looking at long duration accounting adoption. Most, if not all, of the industry would love to have our business profile from a risk and return standpoint.
Under the new accounting, there are unusual noneconomic and timing outcomes. We'll work to provide a better understanding of the true economic value of our business to analysts and investors, which will include developing logical non-GAAP measures. In closing, I believe as a mature insurance company, a key driver of our report card 10 years from now will be how effectively we allocate capital. Significant value is connected to the balancing of corporate development opportunities, growth investments, tactical and disciplined stock repurchase, and ensuring stable dividend growth. With that, why don't we turn our attention back. I'll ask David to join us and we'll go to the panel.
Thank you, Fred. We'll now have our Aflac Incorporated Q&A panel. Joining Dan, Fred, Max, Eric, and Todd are June Howard, Senior Vice President of Financial Services and Chief Accounting Officer of Aflac Incorporated, and Steven Beaver, CFO of Aflac U.S. If you will, just please wait for a microphone after you've raised your hand, and remember to tell us your name and firm. Third, please limit yourself to one question. At the same time, if there was a question that you wanted to ask earlier in the day, wanted to ask it now, please do so. With that, I've got Thomas Gallagher in the back.
Thanks. Thomas Gallagher, Evercore. Just a couple of quick ones for Eric, just to start there. There were a lot of moving parts about how you're managing the portfolio, but a simple question for you, where do you expect NII to go in Japan in 2020 versus 2019 when you roll all that up?
Sure. A little early for us to give out precise numbers, but from a modeling standpoint, it's fair to say we have some headwinds and tailwinds. Headwinds of lower Japan yields, some tailwinds from the net income from the hedging program and variable income. Next year, it's going to be very tight range and fairly flattish based on what we know now. Obviously at the earnings outlook call, we'll be more precise.
Thanks. When I look at the, or I guess the question is for the Aflac Japan total portfolio, for that, I know you're going to continue to pivot into USD assets. How much of that portfolio is now in USD assets that you're hedging versus non, versus that are naked from a hedging standpoint?
Sure. You only need to look at the hedge ratio for that. About 65% of what we call the dollar program, which was on one of the charts, is unhedged. The remaining 35%, plus or minus, is hedged, which is the Group One, the floaters, and some longer-term bonds. The unhedged, even though it's unhedged, we do maintain collars around the majority of that exposure. Those collars are out of the money, think of them as disaster insurance or catastrophic insurance. If there's a large move, those collars would protect us, primarily they're unhedged.
The duration of the hedges, I'm just trying to think about what's the real risk to this type of-
Sure
structure. Would it be how long are the duration of the hedges? When do they roll? Is there a risk of those being repriced upward materially?
Sure. That risk is greatly mitigated. The majority of the hedges are on group one, where we have the floaters. You'll recollect the whole point of group one was to align the duration of the assets, which in this case is typically one or three months because the income resets, and align that with the duration of the hedges, which can be as short as a month or as long as nine to 10 months. We do have a little variability there. That's in a pretty tight range.
The predictability that we value by locking in hedges, which we've done the last two years, primarily is for more predictability from a budget standpoint, because if we did let it roll, the net effect would be fairly stable net income because the rolling will just adjust to the current market level, whether hedge costs are going up and down because our income will go up and down. That's the primary portion. What we call group two is a very small portion of the portfolio now, about 8%, and those are column seven to 10-year corporate bonds primarily. The duration of those bonds is about six years, six to seven years. The exact numbers are on the chart. The duration of the hedges is about two and a half years. There is some mismatch there.
Yes, let's call it on average two and a half year, those hedges roll off, we have to rehedge. Hedge costs could be higher. Keep in mind, we'll be reinvesting in the corporate portfolio, so if rates are going higher, we'll get some benefit there. Because it's only 8% of the program, even if hedge costs went up on that portion, it's not going to be a material impact to our net investment income for the whole income that we earn for the portfolio. It might have some impact, but it'll be minimal by design. Then finally, don't think of this as static, the whole program. Obviously, the hedge ratio may change. That's tied to the enterprise risk appetite, and we've done adjustments to that over time. The types of assets and the hedges could change over time as well.
As you know, over the past, call it five or six years, the program has evolved into a well-managed risk-managed program to better align those costs and those income.
Something that Eric touched on in his presentation, I want to make sure you understand. I think if you're in the audience just watching markets, you would sort of connect dots and say, "I don't get it." Meaning, with the rates doing what we all see in Japan and obviously having maturing securities, Fred gets up there and emphasizes along with Eric, the fact that we've been doing a significant amount of de-risking and that we're going to be in a defensive period. How does that not have a greater forward impact to the NII, particularly in Japan? There's one element of it that's real important to understand, I'd also invite Todd in on discussing this, and that is we are much better positioned now in terms of what we're being forced into the market to reinvest.
The amount of new money that we're having to put to work in the market is far less, there's some real fundamental reasons for that. One is, of course, we have stopped with first sector savings product that brings in a lot of premium. Remember, not only was it bringing in premium, but it was bringing in paid-up premium, so accelerated premium early on, and those products have ceased. One element of those savings products is child endowment, and child endowment product actually switches into an annuitization period once it matures, right? The whole idea of the endowment is that it builds and then it switches gears and pays out to the policyholder to help support educational payments. Those are now paying out. It has no real GAAP financial impact. It's a natural occurrence of the way the product works.
From a cash flow perspective, it greatly reduces your operating flows. Remember, we had the spike in paid-up third sector business, and now you're seeing some reduction, non-economic reduction in earned premium because the paid-up has stopped. Well, that money's already been put to work before the recent drop-down in interest rates. Because Eric's shop and our strategy is now roughly eight years old, a lot of the maturing U.S. dollar investments you have are simply being put back into U.S. dollars. In other words, it's not necessarily the case that we're pushing up the U.S. dollar allocation. We're simply reinvesting U.S. dollars into U.S. dollars. To be clear, none of this is adding to NII. It's really a matter of our ability to be defensive in the face of what you would scratch your head and say, must be hurting you.
We have far more staying power than we've ever had before.
That's helpful. Just sorry, Todd, the mic here. Just one last one for Max. ESR, the 115-130, is that potentially a gating constraint if it drops below 100, or is that at this point more of just a disclosure to the FSA?
It's more of a disclosure to the FSA at this point. We manage and we look at the ESR. We generally look at it including the UFR, which as I just said, would add 80 points to that ratio. That puts us in a very comfortable level even when we look at our total ESR.
By the way, I'll tell you something. This group we meet, this group meets every two weeks. We call it our financial leadership team. A conversation I'll bring you in on is we talk about the fact that we're going to be very transparent on all of our analysis that involves something akin to an Ultimate Forward Rate or a recovering Ultimate Forward Rate. The reason for that, the reason we're going to talk to you about with and without is because of what's on your mind, and that is might be the case that we go for a long time, and effectively a new dynamic of rates remaining this low for long.
Something I want to be very clear about is a company that relies solely on an ultimate forward rate, even though it's 40, 50, sometimes 60 years out, that is probably a mistake from a risk management standpoint. Make sure you're in good shape with or without those forward rates because they may cooperate, they may not.
Suneet.
Yeah. Thanks, David. Suneet Kamath from Citi. I guess, Fred, on the U.S. RBC-
-I think you talked about an ultimate target of 400. Can you just talk about the pace that gets you there, and then what are the factors that could accelerate or decelerate that pace?
Yeah. Just to be conservative, we did not throw into that $7 billion-$8 billion an additional drawdown to 400%. I think the calculation is it's somewhere between $300 million-$400 million for every 100 points of RBC in the U.S., to give you an idea of the amount of money. That's not in there. It represents an opportunity, if you will, in terms of additional deployable capital. It's hard to believe that $300 million-$400 million would be a rounding error, but when you're generating $7 billion-$8 billion, you might as well be conservative. One other thing that we've been doing is we've had to watch a lot of moving parts on RBC. We've had to make our way through tax reform, which you're well aware of. There's the C1 discussion is somewhere. I don't know where it is.
I do know that it has about a 50-point, roughly, impact to our RBC. When Max and I talk about managing RBC, it's there. It's possible we could bring it down. We've had very transparent conversations with the rating agencies about this, that our intent is to bring it down. We've got to watch a few things unfold to make sure we don't overreach.
My second question is just on the Japan Post buying of Aflac shares. I think you'd said that they're on track. Have they actually received approval from the U.S. government in terms of that program? I don't remember seeing anything on that.
That's right. What we had commented on early on when we made our announcement is that we would anticipate, although difficult to gauge, it's obviously in the hands of not only the regulators, but remember, this is Japan Post Form A approvals, not Aflac. We are there. We help guide, we assist, we help facilitate, but it's actually their regulatory approval process that they're going through, and we have to respect that. The early estimates were that it would be late in the year that we would receive final approval from both Nebraska and New York. All indications are that normal progress is being made. There's nothing that's been disrupted in our mind, but it is obviously in the arms of the regulators. Sometimes it even has to do with what's on their docket. As you all know, New York has an extremely busy schedule of approvals.
They tend to get the high-priority items or maybe items of high concern earlier up in their docket. We have to manage that process and work with them, but right now, our indication is late in the year.
John.
John Barnidge, Sandler O'Neill. One-third of your Aflac venture capital fund is focused on health and wellness. I can completely understand why that would be the case, can you give some examples of maybe the types of companies you look at or have invested in, and then on the commercial side, how you've incorporated it into the products?
Yeah. A couple examples, Nadeem Khan is with us also. I might ask one of our folks to give Nadeem a mic, just because he's particularly close to this. I'll give you a couple examples, why don't I talk a bit about Japan, then I can hand off, Nadeem can make a couple comments on the U.S., and certainly Teresa could weigh in as well. In Japan is an easier one to understand very clearly because you might have noticed in the cancer ecosystem slide that Koide-san had, you might have noticed some logos were parked in there under detection and genotherapy, et cetera. You'll see those logos appear again in my venture capital slide. Those are examples of companies that we've invested in that surround the cancer ecosystem.
Companies like Medical Note, which is effectively the WebMD of Japan, has particular expertise around information and so forth, and data on dread diseases, so-called critical illnesses like cancer. They also are advancing the ball on telemedicine because we think offering up telemedicine capability to our consumers will eventually be important in Japan. Right now, it's not regulatorily allowed or enabled, we think it's inevitable that it will become that, Medical Note is on the advancement of that, and we want to factor that into our offering, our service-related offering. MRSO is a company that you'll see on there. They're involved in the scheduling of treatments, we actually have had a long-term partnership with them.
Once diagnosed with cancer and on claim, there's a very complex set of obviously appointments and doctor visits and specialized visits that you have to schedule, they help coordinate that. They also are involved in export-type scheduling. People that are inflicted with cancer in China and other countries will often come to Japan for treatment, MRSO will escort that process in. That would be very clear examples. In the U.S., I don't know if, Nadeem, if you're able to comment at all on a couple topics.
Thanks, Fred. I think the two on U.S. I would point out is Sharecare. One on the wellness side, I think, John, the natural extension of distribution trying to upsell or cross-sell wellness with technology playing a big part with wearables and stuff. It's a natural fit for us to look into those opportunities.
The healthier you are, the health conscious you are, if you are buying into supplemental site, it's a perfect customer for us. We feel it just gives us more access. It cuts down the cost of acquisition of new customers. People who are healthy, who are using wearables and managing their health are people who we can target easily. It's balanced with both health and wellness, if you put it in that category. We've made a large check size. That's why the composition shows one third of our fund.
I think one thing I do want to be clear of, particularly in Japan, but also in the U.S., is that we have to sort of break out of the notion of if it's not in an insurance wrapper, it's somehow not an Aflac product. The game is being changed, services and capabilities that wrap around a product that transfers risk is becoming more and more important, and it's a differentiator. Even when we think about great partners of ours like Japan Post, there'll come a day where what we wrap around the cancer product in terms of solutions and service and capability is as important as the actual transfer of the risk itself. It's very important for us to keep advancing the ball in these businesses. Similarly in the U.S. around small business benefit ecosystem.
Jimmy?
Hi, Jim Bhullar, J.P. Morgan. I had a big picture question. If you think about your EPS growth and before the financial crisis, you'd grown consistently mid-teens. It slowed down in the last few years, it's been sort of in the low to mid single digits. Your revenues obviously are going to grow low single digits. Can you maintain the current pace of EPS growth or should we expect a few years out that it would slow down further if the margin expansion moderates? Conversely, what's the potential for EPS growth to pick up down the road in the next three to five years?
It's a balancing act. I'm going to artfully answer some of your questions and not others. Just to be clear and transparent because we don't give long-term EPS guidance. Look, if you look at the math, we have been essentially coupling a couple percentage type organic pure operating earnings growth with a boost from share repurchase, typically in the 2%-3% boost from share repurchase. What we have to be very conscious of as a company, and I've said this to you all before, if you come this morning to this presentation and you say, "Look, above all, my primary area of focus is growth." Aflac has all the other financial dynamics and risk dynamics as good as any in the industry, but the growth is the issue.
You can't also expect to rely 100% on EPS growth on the back of share repurchase, right? You've got to make some investments to build for that next trajectory of earnings growth. That's going to mean allocating capital towards growth initiatives. That's going to weigh down a little bit on the GAAP definition of EPS in the process. It's meant to design a profile that can bring higher growth rates later on. There's even businesses that we all know. I came from a company that was in this business that is good economic business not necessarily friendly to the conventional measure of EPS. The best example of that would be direct-to-consumer. As you all know, direct-to-consumer businesses do not DAC acquisition costs. They're expensed.
By definition, when you are growing to that $3 million to $500 million, that type of dynamic in building up a dental business, some of which is direct-to-consumer, you're building up a D2C platform, it's not going to be friendly to EPS. It's friendly to economics. I think where we're going to go is away from just flat dead EPS growth rates towards economically, are you building value or not? Now I'm not naive. I get the way it's played today. We do expect EPS to remain strong, sturdy, stable. We do everything we can to create growth rate. We're becoming more and more economic oriented. That's not always friendly to EPS.
Just on Japan and the Japan Post, I'm assuming that sales through the Japan Post of any type of product probably will stay depressed for a while, given everything that's gone on. Do you think it's realistic that over the next maybe year that things return to normal? Could there be a longer-term impact where people are just at least incrementally reluctant to buy from the Post and they're not producing as much as you might have thought?
I think it will return to normal. Well, what I should say is I expect to get a new product once these other issues are resolved. There's no guarantee, but that's certainly the way I foresee it. I look for production to regain its momentum later on after that's done. It's out of my hands, so we've just got to watch it and see. That's my gut.
Thanks.
Andrew.
Andrew Kligerman, Credit Suisse. Fred, earlier you were talking about the buy to build, at the end you mentioned the group life and disability area.
I think you have some small group life and disability-
We partner.
You partner.
Could you talk about that priority and what that opportunity might mean to Aflac?
When you look at the first page of the so-called first page of enrollment, the classic products that we're talking about here is, of course, your major med, and on the retirement side, your 401 and perhaps a medical savings account related dynamic. On the benefits side, the protection side of it, you're talking about true group life in short and long-term disability, and then of course, dental and vision. These are the items that are so-called front page. What distinguishes a front page from a second page is penetration. It's when you're up into the 60-plus percent penetration of employees within a given business. That's really the difference maker. We need to do that. When it comes to True Group Life and Disability, have to be very careful in that.
I realize that over the last number of years, there have been large-scale transactions that have been done in this space, they've typically been done by players who are able to get the cost out of it because they're combining it with their existing True Group platform. In some cases, covariance benefits because they're too long variable annuities and interest rate or asset-levered business and they want to get longer morbidity. We're already long morbidity. What ends up with Aflac is we're entirely acquiring based on the idea of revenue synergy. As you all know, those of you who have followed M&A, revenue synergy is probably the higher-risk component of the forecasting model when looking at a deal working or not working. That tends to then draw us down towards the buy to build.
There's another dynamic at play to be very careful about large deals is we're late in the cycle. I don't know how late. I don't think anybody in this room knows how late other than it feels like we're late in the cycle, which means be very careful about the valuation of what you're looking at. I am perfectly willing to be 20% wrong on a JPY 96 million acquisition, but I am not willing, and nor is Dan, to be 20% wrong on a multi-billion JPY transaction. I guarantee you, there is absolutely the environment to be at least 20% wrong right now because it is a seller's market. Not to mention, those businesses are different than Aflac. Aflac's benefit ratios tend to be insensitive to economic weakness.
The supplemental nature of our products, that's incredibly important because True Group Life and Disability, obviously disability, not so much life, but True Group Disability is sensitive to economic conditions. Do you really want to pay a high price heading into potentially weak economic conditions? Once again, where you can find buy to build, that is going to be a better formula for us, and it's particularly important for Aflac because in order for me to get the revenue synergies, it's going to have to work for the field. Okay? I guarantee you, large properties that are out there are not focused on how they fit and deal with what we call the field, the 20,000 licensed agents, and as Rich mentioned, the 7,500 or so producing agents. That's a unique model, and we have to uniquely build our acquisition around that.
Fred, are there those JPY 96 million acquisitions out there? Is there a scarcity of that, or do you think you're seeing some?
You have to work within the right circles, and you have to be patient, and at times you have to be creative. The answer is yes.
People like our brand.
Yeah.
They like our ability to bring them in and make them a part of it, but I think our brand plays a big role in that.
Alex?
Yeah. Alex Scott, Goldman Sachs. First question I had, just circling back on the floating rate investments. The exhibit you show on page 41, it looks like there's nearly 100 basis points from where you locked it in versus where the forward curves indicated at the end of the year. That's worked out really well for 2019. I'm just trying to think through, I know this hedge cost offsets, but is it going to be kind of a bumpy ride as we get into 2020 with the way that the timing works? I'm just trying to think through what to expect as those hedges roll off.
Sure. No, I don't think it'll be bumpy at all, we've done extensive modeling on this. If you look at the individual components, you might call that bumpy, meaning, gee, when we roll the majority of our Group one hedges, yeah, the cost is coming down tremendously. The same token, those floaters reset every one month or three month, depending on the type. Those yields are coming down. If you looked independently in those buckets, you might say, "Gee, that's bumpy." Ultimately, we're looking at the net number. The net number actually is not that bumpy. It stays relatively stable. There are some ins and outs, but on a relative basis, stable. That's the beauty of the program and answering Tom's question earlier, the beauty of the, I'll call it, the matching from a duration standpoint.
It really keeps it in a tight range based on the nature of these assets.
Got it. The other question I had was on LDTI. Sounds like you guys are a bit farther along in the process now. Can you give us an update on just how conversations are going with rating agencies, how they feel about some of the impacts that you're expecting for equity leverage, and the fact that cash flows should remain consistent?
We have been meeting with the rating agencies. A handful of them are here, actually here in this room with us here today, we've been going through some disciplined information to help the agencies understand the moving parts in our P&L and in our balance sheet. I think what's fortunate for us with the rating agencies, and frankly with all of you, is that there's a pretty good understanding of the economic value of what we put on our books. The businesses that can be the most painful in the new accounting are long duration cancer business of which we have concentration. The reason for that is because it's naturally a very long duration liability. You can only do so much to match the assets, so you have natural ALM mismatch. That is understood and priced into the product.
We tend not to look at ALM mismatch from an interest rate risk perspective. We look at under given interest rate movements, what does that do to the profitability of the product, and what does that do to capital at risk? It's a very low number because these are morbidity products. They're not to be confused with pension-like products that could be quite dangerous if you run ALM mismatch. The biggest challenge that we have with anybody that is a student of long duration targeted improvement is you effectively are accelerating the interest rate component if you believe the discount rate being applied, which is a question mark.
You're accelerating the interest rate component of the policy into the current period through AOCI, you're having to wait over time to take in the morbidity gains over time, that profitability, and it's on the same policy. Really what we're having to do is just walk through the dynamics, the engineering, to make sure that the rating agencies and frankly, you all of investors know that there's tremendous economic in a single cancer policy. If you isolate any component of the earnings drivers, you can get it and accelerate that into the current period, you can get a different looking answer. That's where we're spending most of our time, and we're with the agencies early because it takes a little more time to work through that and really understand it. If you ask the agencies, they'll tell you we're early.
I would just add that if you look at our leverage, including AOCI, obviously, there's a very significant potential impact here. We are making a case that you should really look at our leverage excluding AOCI, because we deem this to be a noneconomic impact on our balance sheet, especially when you then look at our capital levels that are not impacted by this. Our cash flows are not impacted by this. We don't see any impact to any debt covenants that we have. Overall, we do believe that this is a noneconomic event and should be looked at that way.
I believe we have time for one more question. Humphrey?
I will try to stay with just one question.
Thank you.
Humphrey Lee from Dowling & Partners. Question for Fred regarding your remark on the global venture.
It sounds like your plan is to partner with Singapore Life to expand in kind of the Southeast Asia region. Can you maybe elaborate a little bit in terms of what you are looking to do with them, and then also on a timeline perspective?
Essentially, if you play the ball forward, what will it look like? What will this strategy look like in that region? What it will look like is a measured amount of capital that involves both direct investment in companies together with partnering to private label, if you will, cancer critical illness insurance where we have a global expertise and are really the global leader in it, okay? Fund investments in the region, which help provide diversification as well as perspective on the developing activities in Southeast Asia and India. Singapore Life is in Singapore, and their business is currently developed in Singapore, but their intention is to expand throughout Southeast Asia. They've got a great list of investors, including Aflac, that are behind the company, and we certainly want to perform with them. Beyond that, though, we will surround it with some fund investments. It's measured.
It's a measured approach. It's very different than being directly in those countries. Dan has better perspective on this than I do, but I think we still have more than a few hundred policies in Hong Kong, and I think that was shut down.
20 years ago.
20 years ago. One of the things you want to do in this region when you are focused on U.S. and Japan is, it's as important to understand the exit as the entry. If you go in with minority investments in startup companies that are looking to disrupt the marketplace where there's a potential for high payout, and you go in with reinsurance that has natural recapture capabilities, you have both an ability to get in, grow, and build and enjoy in that growth rate. If you need to divert, move, or pivot or exit, it's an ability to do it. Once you buy a company and you go in and you go in with policies, you're there and you're there a long time, whether you like it or not. That's not the approach we want to take.
Just to be clear, Singapore Life is our distribution partner in this region. We are a product partner for them. We're very good at underwriting, pricing, and managing cancer risk, and that's what we do through developing a cancer product for them currently in Singapore. As Singlife expands, we intend to develop cancer products for the markets where they expand into, and we will then act as a reinsurer of those policies. This means that we do not have to be on the ground in terms of licenses, brand, et cetera, in any larger footprint and organization. Like Fred said, it's a very capital efficient way of gaining exposure to those markets with the risk that we are very, very comfortable with, i.e., underwriting cancer risk.
All right. I'd like to ask Dan to step up to the podium for some closing remarks.
Well, let me just thank you all again for coming. At Aflac, I just want to kind of sum things up and with what we want you to leave with, and that is that we manage our business for the long term while remaining focused on achieving our near-term financial objectives. Our approach to driving long-term shareholder value is straightforward. We pursue growth, strong pre-tax margins, and balanced capital deployment. First, we pursue growth by leveraging our strategic advantages in both the U.S. and in Japan through product development, distribution expansion, and digital advances to improve the customer experience. This is strengthened by venture investments that complement our core business. Building on the leading position in both countries will help position for growth as we move forward.
Second, we seek to maintain our strong pre-tax margins through disciplined product pricing and the leveraging of period of favorable benefit ratios to invest in our platform for future growth and efficiency. Third, we are optimizing our capital and deploying excess capital in various disciplined ways that supports our long-term sustainability as the key long-term driver. It goes without saying that we are very proud of our 36 years of consecutive dividend growth, and we want to extend that track record. When it comes to capital deployment, significant value is achieved through a balanced growth of investments, tactical and disciplined stock repurchase, and stable dividend growth. At the same time, we will reinvest in our business to improve organic growth. 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 focusing on doing what we do best, I believe we will continue to generate results that will build long-term shareholder value. With that, thank you so much for coming today. We appreciate you, and we'll be around for the box lunch if you have anything you want to ask us. Thank you very much.