Hello, welcome to the virtualinvestorconferences.com December 6th event. My name is John Vigliotti, and on behalf of PR Newswire, as well as co-host BetterInvesting, we're very pleased you joined us for our next live presentation. Before I introduce the presentation, a few quick points. Please submit your questions in the question box below the slides. Once the Q&A session has ended, don't log out. You'll automatically be transferred into the Aflac virtual trade booth, where you can continue to ask questions via chat and access a library of shareholder materials, as well as links to the company's website and other key information. Lastly, all presentations are recorded and available for 24 by seven replay at your convenience. At this point, I'm very pleased to welcome back our next presenter, Daniel Bellware.
He's the Senior Manager, Investor and Rating Agency Relations for Aflac, which trades on the NYSE under the symbol AFL. Welcome back, Daniel.
Thank you. It's a pleasure to join you for this Virtual Investor Conference this morning. Today, I'd like to tell you about Aflac's strategy, operations, recent performance, and how we plan to return capital to shareholders. First, I'd like to remind you that some of the statements federal securities laws. Although we believe these statements are reasonable, we give no assurance they'll prove to be accurate because they are prospective in nature. Please look at our annual report on Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss here today. Our third quarter 2018 earnings release is available on the investors page at aflac.com and also includes reconciliations of certain non-GAAP measures.
We also encourage you to look at the appendix at the end of this presentation, which is likewise posted on the investors page of aflac.com for more on our non-GAAP and forward-looking information. Aflac operates in the two largest insurance markets in the world, Japan and the United States. Our policies cover more than 50 million people worldwide. Our strategy has remained straightforward and consistent for many years. Aflac develops relevant insurance products and sells them through expanded distribution channels, which yields new accounts and customers. Aflac products provide a layer of financial protection against loss of income and assets based on qualifying health events. Our products pay benefits directly to the insured regardless of any other insurance they might have. Because the benefits are fixed rather than open-ended, they're not subject to inflation. Let me start this morning with our largest operating segment.
Aflac's operation in Japan accounts for about three-quarters of our pre-tax adjusted earnings. Today, we insure one in four Japanese households and are the leading provider of medical and cancer insurance there. Aflac has been operating in Japan since 1974, and we were the pioneer of cancer insurance in that country. Since then, the foundation of our product portfolio has been and continues to be third sector products. The third sector product category primarily includes cancer, medical, and income support insurance. These products help our policyholders with out-of-pocket expenses that are not covered by Japan's national healthcare system. To remain in step with consumer wants and needs, Aflac Japan has established a history of developing and revising innovative products. A recent example was Aflac Japan's April 2018 introduction of its new cancer insurance product, which responded to what consumers were telling us they needed.
Our new DAYS 1 – Cancer insurance for daily living provides more comprehensive coverage to cope with medical advances and other factors. DAYS 1 Plus targets existing policyholders seeking to upgrade their cancer insurance for more up-to-date protection. More recently, in October of this year, Aflac Japan introduced its Aflac Health Promotion Medical Insurance. Of note, this is the first Aflac Health Promotion Medical Insurance in the industry in Japan to be offered and purchased online. With this innovative new product, a portion of premiums will be refunded if the policyholder's health age, as measured by health check items of BMI, blood pressure, and various blood tests, is lower than his or her actual age. We also offer select first sector products, including life insurance. One example is the introduction of our PrepareSmart Whole Life Insurance, introduced in July of this year.
This is an important product for our exclusive agencies as it helps build up a comprehensive insurance package that they can offer to their customers. This product features coverage at low cost in addition to non-smoker rates, allowing them protection at discounted premiums and is meant to be offered simultaneously with our core cancer and medical insurance products. At Aflac Japan, we have enhanced and expanded our distribution network to provide more opportunities to be where consumers want to purchase insurance products. Our traditional channels, which include approximately 10,000 agencies, have been and will continue to be a key to our success. Additionally, strategic alliances with partners such as Japan Post Group, Dai-ichi Life, and Daido Life continue to strengthen and evolve. For example, more than 20,000 post offices sell Aflac's cancer products nationwide, and Japan Post Insurance offers our cancer products through its 76 branches.
These alliances ultimately improve Aflac Japan's market access and increase the touchpoints we have with Aflac Japan's existing and potential customers. Banks also allow Aflac Japan additional avenues to reach consumers and offer products in the places consumers want to buy them. These banks offer a broad range of financial services, including selling Aflac's protection type insurance, such as cancer, medical, and income support. To support our presence in Japan, Aflac has established a powerful trusted brand. We continually seek opportunities to leverage that strong brand and highly regarded reputation through innovative advertising campaigns in our efforts to drive sales. In 2003, Aflac Japan began using the Aflac Duck, and its popularity continues to connect with consumers today. On an ongoing basis, Aflac Japan has seized opportunities to create separate and unique characters that interact with the Aflac Duck to market specific products and help drive sales.
Additionally, Aflac recognizes the growing importance of social responsibility in Japan. Since 2001, Aflac has sponsored three Parents House locations in Tokyo and Osaka. The Parents Houses provide home-like accommodations to families who must travel for medical care, similar to a Ronald McDonald House here in the U.S. Aflac has supported more than 130,000 children and families over the last 17 years. We believe that these efforts have not only helped children and families with cancer but also serve to strengthen our brand reputation and overall sales. By leveraging the popularity of the Aflac Duck and different characters over the years, about nine out of 10 Japanese citizens now recognize the Aflac brand. Let me update you on Aflac Japan's outlook and performance. Our sales target is aligned with our focus on Aflac Japan's third sector products.
We're pleased with the third sector sales increase of 1.8% through the third quarter of 2018. Sales benefited throughout the year from the introduction of our revised cancer product last April. Looking ahead, Aflac Japan's focus will remain on selling third sector products along with select first sector protection products, both of which are less interest sensitive and have strong and stable profit margins. Aflac Japan's 2018 premium income, net of reinsurance, was down 1.8% for the year. The third sector premium increase was more than offset by an anticipated reduction in first sector premiums due to savings products reaching paid-up status. This led to a decline in revenue of less than 1%. The benefit ratio declined due to business mix but was within the range provided in our guidance.
As anticipated, the expense ratio was elevated due in part to lower premium income and reflecting our investment back in the business. The pre-tax profit margin also improved slightly. While Japan's population is covered by a national healthcare system, citizens still have significant out-of-pocket costs associated with healthcare. As such, we believe this provides a natural catalyst for future growth. Over the last four decades, Japanese consumers have seen healthcare costs increase amid an aging population and declining birth rate. This has put the national healthcare system under increasing financial strain, and consumers have been required to pay more out-of-pocket healthcare expenses than ever. The increase in medical expenses is projected to significantly outpace GDP growth in Japan. Because of the aging population and higher co-payments for medical expenses, the market for third sector products has been steadily growing, a trend we expect to continue.
Now let me turn to Aflac's U.S. operations. Aflac is the number one provider of voluntary insurance at the work site in the United States, where about 97% of our products are sold on a payroll deduction basis. Our portfolio of individual and group insurance products provide consumers with outstanding value. We offer businesses of all sizes the opportunity to provide employees a more valuable and comprehensive selection of benefit solutions. Employers have continued to shift the cost to workers in the form of higher premiums, deductibles, and cost-sharing. In fact, according to the 2017 Kaiser/HRET Survey of Employer-Sponsored Health Benefits, as companies sought to keep premiums in check, deductibles have nearly doubled since 2010. According to 2017 research conducted by Lightspeed GMI, employees continue to face challenges related to rising healthcare costs and general feelings of financial insecurity.
In fact, nearly half of employees are not prepared to pay out-of-pocket expenses in the event of an unexpected illness or accident today. Furthermore, 65% of those surveyed responded that they have less than $1,000 to pay out-of-pocket expenses associated with an unexpected serious illness or accident if it occurred today. Despite changes in the healthcare environment, one constant continues to be the need for our products. One reason is that no major medical plan, not even the best, is designed to cover all out-of-pocket expenses. Aflac has a sales agency force that drives about 63% of our Aflac U.S. new annualized premium sales. Although broker sales have more than doubled since 2009, the broker channel still represents only about 35% of total U.S. sales in 2017.
This dynamic is very unique to the market, as many of our competitors have an inverse relationship between broker and agent sales, some with more than 70% selling through broker relationships. As in Japan, the Aflac brand is an important aspect of our strategy, and about nine out of 10 people in the U.S. recognize it. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts. You may have caught a glimpse of the Aflac Duck in many of his adventures throughout the U.S., and you're going to be seeing him in more. With our feathered friend continuing to find himself in new situations, we think he'll do a great job of drawing attention to the need for Aflac's products. He also has a compassionate side as the spokesduck for the Aflac Cancer and Blood Disorders Center at Children's Healthcare of Atlanta.
Aflac is now taking the fight against pediatric cancer to the next level in a very innovative way with the introduction of My Special Aflac Duck. My Special Aflac Duck is a social robotic duck that uses medical play, lifelike movement, and emotions to engage and help comfort children during their cancer care. It was recognized in January at the Consumer Electronics Show in Las Vegas as the best unexpected product among more than 3,900 vendors. In fact, the buzz was so great that it generated more than 2 billion media impressions, and just last month, My Special Aflac Duck was named to Time Magazine's list of the 50 best inventions for 2018. We believe My Special Aflac Duck symbolizes Aflac's mission to help others while making our brand even more outstanding as we move forward.
Aflac's been working on this project for two years and will donate more than $2 million annually as part of this program. Additionally, our groundbreaking initiative, One Day Pay, further enhances our brand and highlights Aflac's commitment to paying claims fast. Through One Day Pay, we process, approve, and pay eligible claims in just one day. We estimate that approximately 80% of our policyholders can use One Day Pay for their claims. In 2017, 100% of the approximately 2.1 million claims submitted using One Day Pay were paid within one day. Most importantly, more than 90% of our policyholders that have used One Day Pay say that they are likely to refer other people to Aflac. We believe that will help sales in the future.
Looking ahead, we will continue to leverage market-leading initiatives like One Day Pay that are designed to own the customer experience and further enhance customer satisfaction. We believe this will continue to boost Aflac's strong brand and set Aflac apart from its competitors. Turning to our U.S. performance, we're pleased with the sales results, financial performance, and strong profitability of Aflac U.S. in 2018. Our sales results reflect our focus on the growth strategy we implemented in both our sales agent and broker channels. The sales increase was 2.6% through the third quarter of 2018, with sales increasingly skewed toward the fourth quarter of the year. As you can see, the net premium was up 2.6% and adjusted revenues were up 2.5% this year over last. The benefit ratio improved, and as we anticipated, our expense ratio was elevated, but only slightly, reflecting our investment back into the business.
All of this led to an improved profit margin for the U.S. As shifts in demographics occur, Aflac is shifting as well. Our primary focus has been on the work site, specifically in the private sector. We now view this a bit differently than we have in the past. As we look at the top line of this chart, which represents the entire U.S. working population, or 171 million workers, we must consider the opportunity in the self-employed, public, and private sectors. We see our growth coming from a few areas of opportunity. Increasing access and penetration in public and private employer groups, many who already offer Aflac. Reaching the non-traditional workforce, which represents about 24 million entrepreneurs and growing. Continuing programs to retain our existing business.
When you consider that a little over 7 million individuals have Aflac coverage out of the 47.5 million who have access to it through their work or employer, this represents a tremendous opportunity for Aflac. Despite the changes to healthcare legislation in recent years, we believe Aflac U.S. has emerged better positioned from the ever-evolving healthcare environment. Like national healthcare in Japan, we believe that the trend towards more uniform coverage will initiate a better understanding of and appreciation for Aflac's products. Our traditional focus has been on payroll accounts with fewer than 100 employees, and our individual sales agents are best positioned to serve this segment. We also believe our strategy for working with local, regional, and national brokers will better position Aflac in businesses with more than 100 employees. I'll spend the last portion of my discussion updating you on our consolidated financial performance and capital management activities.
Aflac Incorporated has a long history of delivering strong financial performance in the face of a fluctuating yen. Due to the significant contribution of Aflac Japan's operations to overall earnings, a stronger yen magnifies Aflac Incorporated's results as reported in dollars. However, Aflac's currency exposure is primarily translation-related as opposed to transaction and currency-related. As such, we still believe that viewing our results, excluding the impact foreign currency, is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. We believe that an analysis of Adjusted Earnings, a non-GAAP financial measure, is important to an understanding of Aflac's underlying profitability drivers. Aflac defines Adjusted Earnings as the profits derived from operations, including cash flows associated with amounts payable, but before realized investment gains and losses from security transactions, impairments, and derivative and foreign currency activities, as well as other non-recurring items.
In addition, we exclude from our definition costs associated with our announced Japan branch to subsidiary conversion project that was completed earlier this year. On an adjusted basis, we have a long history of producing solid earnings growth. Excluding the impact of the items I mentioned previously, the third quarter 2018 adjusted earnings per share increased 21.2%, driven by solid overall margins in both the U.S. and Japan. Our continued focus on capital ratios demonstrates our commitment to maintaining financial strength and flexibility on behalf of our policyholders, shareholders, and bondholders. Presented here are two capital adequacy ratios required by our regulators, RBC in the U.S. and SMR in Japan. Our risk-based capital, or RBC ratio, at the end of 2017 remained high at approximately 831%. Additionally, our capital and liquidity position in Japan remains strong. The solvency margin ratio, or SMR, was about 1,064% at the end of 2017.
Capital deployment and financial soundness has always been important to our shareholders. As we've communicated, we have been and will continue to be very disciplined in evaluating capital deployment within a sound risk framework. We view our primary capital deployment options as dividends, share repurchase, and enhancing organic growth. Including dividends and share repurchase, we returned more than $2 billion to our shareholders in 2017. It goes without saying that we treasure our long record of dividend growth. You probably saw that earlier this year, the Aflac Incorporated board of directors approved a two-for-one stock split facilitated through 100% stock dividend. While not a return of capital, this has been a topic of great interest to our individual investors. This is the ninth split of the company's common stock since listing on the New York Stock Exchange in 1974 and the first in 17 years.
The split follows a year of strong share price performance and is on top of our announcement of the board's action to approve an increase in the first quarter of 2018's cash dividend to 15.6%. This after our traditional increase in the fourth quarter of 2017. While the board reserves the right to look at the dividend on a quarterly basis, we plan to shift the dividend increase to a first quarter review cycle. With tax reform driving an increased level of earnings and cash flow, our dividend reset is primarily driven by our overall capital position, outlook for stable earnings growth, and a balanced approach to returning capital back to shareholders. We will continue to seek the right balance of investing in our business, repurchasing stock, and continuing our long record of dividend growth.
We expect to deploy capital in the range of $1.9 billion-$2.2 billion to shareholders in 2018. This includes $1.1 billion-$1.4 billion of share repurchase. Of course, this assumes share repurchase remains the optimal use of excess deployable capital in driving long-term shareholder value. Our focus remains on the solid fundamentals in our core business and building on our record of earnings growth. For 2018, our objective on a split-adjusted basis is to produce adjusted earnings per diluted share of $3.90-$4.06, assuming an average exchange rate of 112.16 JPY to the dollar. As mentioned in our outlook call earlier this week, for 2019, our objective is to produce adjusted earnings per diluted share of $4.10-$4.30, assuming a foreign exchange rate of 110 JPY to the dollar. This slide shows how our 2018 adjusted EPS might look at various currency scenarios.
We estimate that every one JPY move in the average annual exchange rate will have an impact of between approximately $0.015 and $0.02 per share on earnings. Our objective is to maintain our strong capital position while producing stable earnings and strong cash flows. We believe that in Japan and the U.S., our market leading position, powerful brand recognition, strong distribution, and innovative products will provide support towards this objective. As we work towards our objectives and goals, we have confidence in our business model, the fundamental need for our products, and most importantly, the future success of Aflac. I'd like to thank you for listening in, and I'll be glad to start taking your questions. I do see we have a few. Let's see. There's a question on tax reform and let me see.
A couple of questions on tax reform. Let me try to kind of combine everything. The biggest impact that tax reform had for us, obviously, it increased our income because our taxes went down. It's not as big as you might expect. While the U.S. tax rate declined to 21%, that's our smaller operating segment. We still pay 28% on our Japan segment. Okay? Japan has a higher tax rate of 28%, and this nets down to something closer to about a combined 26% in total. There has been an improvement but not as big as you might expect. Of course, this has had a positive impact on capital deployment. Let's see. Okay, I think I had a couple of questions on dividends as well. Yeah. Yeah, we've had a very long history of dividend growth.
We're on the list for dividend aristocrats, if you're familiar with that, the S&P Dividend Aristocrats. You have to have been increasing your dividends for 25 years to do that, and we've increased our dividend for 36 years. We've been on the list for a while. Also, if somebody missed it, there was no dividend increase in the third quarter as I mentioned. You might recall last year we increased the dividend in conjunction with our third quarter earnings release by 4.7%, which we have been doing for many, many years, increasing the dividend in the third quarter. We increased it again in the fourth quarter earnings release in January. That time it was a 15.6% increase. At that time, we announced that we were resetting the dividend increase calendar to January.
I'd remind you that declaring dividends is always a decision for the board to make. That being said, we treasure our long history of increasing our dividend, and we've stated our intention to continue to do that. Okay. There was a question here about potential move to a national healthcare in the U.S. and how that would impact Aflac sales. Yeah. With the Affordable Care Act, which is probably the closest that we've come, our type of products were not subject to that. We did actually benefit from people becoming more familiar with their insurance. The topic of deductibles and co-pays which people only normally think about during open enrollment sort of became a hot topic around the water cooler, and it made it easier for us to explain what Aflac products do, which is help you pay those co-pays and deductibles.
We do very well in Japan, which does have a national healthcare system. That's the only thing I can comment on now, is maybe comparing what's happened in Japan and also the Affordable Care Act. All right. Well, we're getting down to the wire here, so I'll sign off for this right now, and we can all move to the virtual booth for additional questions. All right. Thank you for attending.