Good morning. I'm David Young, Vice President of Investor and Rating Agency Relations. Welcome to Aflac's 2018 Financial Analyst Briefing. You will find an agenda and biographies of all presenters and panelists in the materials in front of you, as well as those posted online for today's event. However, before we begin our presentations this morning, I'd like to introduce the Aflac Incorporated board members who are in attendance today. Please stand as I read your name. Toshihiko Fukuzawa. Mr. Fukuzawa is President and CEO of Chuo Real Estate Co Ltd, where he also serves as a representative director, having previously served at Yushu Tatemono Co Ltd as President and CEO, where he also served as representative director, and Mizuho Trust & Banking Co Ltd as Deputy President and a representative director.
Mr. Fukuzawa brings extensive business and IT knowledge and experience with a wide range of Japanese financial services institutions and provides the board with valuable insight and expertise relevant to the company's Japanese business. He joined Aflac Incorporated's board in 2016 and serves on the Finance and Investment Committee. Doug Johnson. Mr. Johnson is a retired audit partner with Ernst & Young. In addition to being the lead non-management director, he is a financial expert and chair of the Audit and Risk Committee. Mr. Johnson also serves on the Executive Committee as well as the Compensation Committee. He joined Aflac Incorporated's board in 2003. Karole Lloyd. Ms. Lloyd is a certified public accountant and recently 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 and 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. Katherine Rohrer. Dr. Rohrer is Vice Provost Emeritus at Princeton University, having previously held several academic leadership positions at Princeton, including Associate Dean of the Faculty and Assistant Dean of the College. Serving on the Corporate Governance Committee, Dr. Rohrer brings a wealth of experience highlighted by commitment to academic rigor, financial management, and a focus on social responsibility, inclusion and diversity. She joined the board in 2017.
We will begin our meeting today with a strategic overview of Aflac Incorporated by our Chairman and CEO, Dan Amos, and then turn to Aflac Japan. Charles Lake, President, Aflac International, Chairman and Representative Director of Aflac Life Insurance Japan, will provide an overview of Japan's political economy. Masatoshi Koide, President and Representative Director of Aflac Life Insurance Japan, will then follow with a strategic overview of Aflac Japan, and Koji Ariyoshi, Director of Sales and Marketing, Aflac Life Insurance Japan, will complete the presentations with an update on Aflac Japan's sales and marketing. After which, we will have the first of three Q&A panels, followed by a break. Now, 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 and also includes reconciliations of certain non-GAAP measures. Definitions for these non-GAAP measures are included in the appendix of today's materials. Copies of the slides are also available at investors.aflac.com so you can follow along and make notes. At this time, I'd like to introduce our first speaker. Dan Amos has been with the company on a full-time basis since 1973.
In 1990, he became CEO of Aflac and Aflac Incorporated. In 2001, he was also named Chairman. Dan, the podium is yours.
Thank you. Thank you, David, and good morning, everyone. Here we go. As you know, Aflac has been an innovator and pioneer in the insurance industry ever since the company was founded in 1955. Although much has changed in the decades since, our customer-centric approach to business still evolves around one simple promise, and that is Aflac will be there for the policyholders in their time of need. We have a strong business model that revolves around creating relevant products and expanding our distribution to yield new customers. As consumer preferences evolve around what products and benefits they're seeking, we continue to adapt and ensure that we meet and exceed their expectations. We've expanded on these initiatives today.
I want to start out by saying that today you only have to pick up a newspaper or click on the internet to see the topic of social responsibility is top of mind. That's what many of our shareholders are asking about. As CEO, it's on my mind too. Now I'd like to address how we see social responsibility. In fact, being a good corporate citizen has always been on my mind, and has been a central part of our activities as long as I can remember. I don't think it's coincidental that Aflac has achieved success while focusing on doing the right things. Let's be clear, profits and shareholder returns determine whether a company is successful or not, but all things being equal, I believe employees, investors, and customers would rather do business with a company that is also a good corporate citizen.
I am still focused on the same responsibilities I've always been focused on, but this is the hot topic today, and I feel I have to address it. With addition to management team covering our business approach, outlook, and strategy, I want to give you another element of our company that is made possible because of our business results that we have achieved. Nowhere is there a better example of investors growing focused on social responsibility than BlackRock's CEO, Larry Fink's most recent letter to the CEOs. He said, "Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society." Excuse me.
Without a sense of purpose, no company, either public or private, can achieve its full potential." I can say that at Aflac, we have been working on social purpose to reach our full potential for more than 20 years. To prove it, since 1995, the Aflac family has been focused on the cancer center in Atlanta, Georgia. We have raised over $127 million, with more than half of that coming from our field force independent agents and our employees donating the money to the Aflac Cancer and Blood Disorders Center at Children's Healthcare of Atlanta. It's also been important in Japan. In Tokyo and Osaka, we have three parents houses that have supported more than 130,000 children and families over the last 17 years. We believe that our efforts have also helped our children and families with cancer and strengthened our brand reputation and our overall sales.
We're talking about our fight against pediatric cancer to the next level in a very innovative way that you may not have heard about. In January, it was recognized as the best unexpected product among the 3,900 plus vendors at the Consumer Electronics Show in Las Vegas. The buzz on it was so big that it generated more than 2 billion media impressions, and that's a lot of free press. To say that we're excited about it is an understatement, as I believe what we're about to show you symbolizes the mission to help others while making our brand even more outstanding as we move forward. We have been working on this project for over two years and will donate more than $2 million annually as part of the initiative. Let me show you more.
What if we could make a change in the lives of children with cancer right now?
I was told that, "I'm sorry, your daughter has cancer," and I was just in total shock. Everything's really new in the beginning. They have no idea what to expect.
Each year, more than 15,000 kids are diagnosed with cancer in the U.S., and the average length of treatment is 1,000 days. We thought about the need for emotional comfort for these children, and now we have the opportunity to bring the latest in social robotics into the field of medicine, bringing comfort and joy through this daunting process.
That's awesome.
What we try to do here is to give children the tools to understand what's going on and to empower them.
For our family and for Wyatt, the best use would be to help him communicate and a friend to comfort him when he's having treatment.
Play is natural to a child. Play is really how they learn and how they process.
We leverage play and some of the latest technology to create healthcare tools for kids with illness. Everybody knows the Aflac Duck. We wanted to bring the Aflac Duck to life into a caring companion for children with cancer. It responds and moves in a lifelike and natural way. They can feed their Ducks, bathe their Ducks, and when you tap these different cards to the Duck's chest, it behaves with that feeling to help children communicate their feelings. By the time the Duck is shipping, we will have spent 18 months designing, testing, and iterating with hundreds of families, doctors, and experts.
Hi, Levi. What do you think the Duck is doing?
Singing.
Duck is singing?
Yes. First and foremost, the Duck is a constant companion for children throughout their treatment journey. He's kind of cute. He's kind of cute?
Candy's going to do some breathing, and we're going to kind of match her breathing. Just a tiny bit faster.
Perhaps most important of all, the Ducks can share in the patient's experience.
Okay, actually. Good. Good job. Yeah, look at this. Happy is holding the other one.
Match her?
Yeah.
What?
I think it's so awesome. You just feel comfort with something like that.
I really like the Aflac Duck to be your friend, to help you get through all your tough times here.
I think the duck has the potential to have a huge impact on our patients, our families, and our healthcare program as a whole.
Technically, y'all going to make it happen to give everybody one or something? That's the goal.
If she has something to sit with her, something that can take her through it, a friend that will always be there, and it would help a lot of kids.
I think you can all see why we're excited about it, because we believe we're helping children. At the same time, you can hardly watch that and not think you want to do business with a company that's trying to help kids do that. In fact, each year, as you may have heard in the film, 15,000 kids are diagnosed, and the average treatment in terms of number of days is relatively short for adults. For them, it's 1,000 days. Going forward, our goal is to give My Special Aflac Duck to every child that is fighting cancer. After the story ran on Good Morning America last week, our phones have been ringing off the hooks from pediatric hospitals wanting My Special Aflac Duck for their patients. Even Vanderbilt said, "We'll pay for it.
We want them now." The positive impact of the Aflac brand has been enormous, this is exactly the type of thing that Larry Fink is talking about when it comes to making a difference. Koide-san, as president of Aflac Life Insurance Company, shared a letter with me about a brave 10-year-old Japanese boy who had been diagnosed with brain cancer about six years ago. He read in Japan about My Special Aflac Duck on the Consumer Electronics Show. If that doesn't tell you what the Internet's doing, it really shows you there. His letter emphasized the notion of how powerful this innovative expansion of the brand could be. Plus, it convinced me that we also need to take My Special Aflac Duck to Japan, which we hope to do early next year. This kind of innovative initiative reinforces that we are striving to achieve the financial objectives.
Aflac is also a company that is actively seeking ways to do the right thing to help its constituents. Most importantly, we believe these actions exemplify the type of company that people seek out to conduct business with. Remember, we don't sell a tangible product. It is nothing but a promise on a piece of paper. Or in today's times, you might say typed words on an electronic policy. But My Special Aflac Duck demonstrates the compassion our brand and lets people understand the kind of company we really are. At the same time, it gives us a symbol of Aflac that they can touch and feel. After seeing this and understanding what we're doing, I believe most people will want to be associated with a company that is doing something like this.
Ultimately, we believe that this is more sustainable approach to business, this is one that will ultimately continue to enhance shareholder value. Now, today, you'll hear more about other ways that we're applying technology to our operation. You most likely have heard me mention the introduction of One Day Pay. You'd almost have to be dead not to, as much as I talk about it, because this has been a groundbreaking initiative to process, approve, and pay eligible claims in just one day, and getting cash in the hands of the policyholders fast. One Day Pay has benefited customer satisfaction, increased referral opportunities, and differentiated us from the competitors who to this day have still not copied it. Most importantly, more than 90% of the policyholders that have used One Day Pay say they are likely to refer other people to it.
Today, getting 90% of the people to agree on anything is quite hard to do. One Day Pay is a symbol of Aflac's innovation and transformation, not just of our company, but of the industry. Today, we are leveraging technology like automation and robotics to reduce the risk of errors. It allows us to handle heavy work volumes without adding full-time employees to our headcount. We are always looking ahead to the next wave of digital and mobile innovations for reaching and better serving our customers, while at the same time improving our operation. This means that we will continue to address the evolving needs in each market as customer preferences continue to change. You'll hear much more about this throughout today, but our approach to driving long-term shareholder value is very straightforward. We are laying the foundation for growth through product development and digital distribution expansion.
As the pioneer in cancer insurance in both Japan and the United States, innovation has always been and continues to be the hallmark of our success. Every day, we think about how we can use technology to better understand the customer, to gain access to their trust, and exceed their expectations, and improve their lives. This innovative spirit allows us the creation of products and distribution expansion as well. We have fostered a culture of innovation to ensure that we offer products and solutions that are relevant today and in the future. In addition, we are taking actions to remain in step with customer preferences about where the customers want to buy their coverage. Our ability to adapt and innovate significantly contributes to our long-term growth and success. We are focused on digital advancement to improve the customer experience, driven by venture investments that are relevant to the core business.
We realize that a sustainable business model requires us to invest in our operations, and this is especially true in today's technologically advanced world. Today, you'll hear more about our leadership team, about how Aflac has and continues to incorporate technology into our strategy. I have always said that being a low-cost producer has and will ultimately continue to be what drives our ability to win. I believe technology is the only way to be the low-cost producer. We successfully completed our Aflac branch conversion to a subsidiary in April, and while it went almost unnoticed, we're very glad that it took place, and it better prepares us for the future. The conversion reaffirms Aflac's long-term commitment to serving our policyholders in Japan. It also better aligns capital within the legal entities.
We are now positioned to optimize our deployment of excess capital, and Fred and Max, our senior vice president and treasurer, will address this later this morning. This approach has yielded a tremendous management team currently in place, and I'm so glad that you'll have the opportunity to hear from some of the leaders today. We have a high priority on ensuring that we have the right people in the right place at the right time. As you've heard me say before, another critical aspect of my job is leadership development and succession planning. This incorporates the knowledge and skill set already inside our organization with the expertise and fresh ideas who have joined our company. In coordination with the human resources department, I prepare a formal overview of our succession planning process to present to Aflac Incorporated's board members every August board meeting.
This includes annual recommendations and evaluations of the potential successors, along with a review of any leadership development plans for such individuals. In recent years, you've witnessed our succession planning in action, and some leaders retire, and new roles are developed. I'm sure you know our veteran senior management team, including Charles Lake, Teresa White, Audrey Tillman, and June Howard. Their track records are outstanding. You also know Fred Crawford, and I view him as the most impactful addition to our team in recent years. He stepped into big shoes when Kriss left, and he has done an outstanding job. Fred's work speaks for itself. Koide-s an is a winner and is doing an outstanding job as president of Aflac Life Insurance Japan.
We are expecting big things from him and his team at Aflac Japan and in the future, including John Moorfield and Ariyoshi-san, and Kijima-san, who are here and will be on the agenda today. In January of this year, Teresa promoted Virgil Miller to head up the U.S. operation in Aflac Group, and he's doing a stellar job. Also, Rich Williams became Executive Vice President last year and Chief Marketing Officer, and Rich continues to build his distribution team, including Stephanie Shields, who was recently promoted to be Senior Vice President over our entire broker division, and Andy Glaub, who is a tenured person with us and does an outstanding job as Senior Vice President in charge of our field operation.
Over the last few years, Todd Daniels has been instrumental in bolstering our financial, our actuarial, and our risk team by hiring Al Ruggieri as Senior Vice President and Global Chief Risk Officer and Chief Actuary, and Joey Nichols, a Senior Vice President. These two have over 50 years experience in the insurance business, and they combined are doing an outstanding job and helped fill the gap that was left when Kriss left. Of course, there's Eric Kirsch, who's developed a world-class investment team in both New York and in Tokyo. You'll hear more from Hide Yamamoto, Senior Vice President and Chief Investment Officer of Aflac Life Insurance Japan, on a panel today. With all this emphasis on the rest of the management team, a lot of you may be wondering if I might be telling you that I'm retiring, and the answer is hell no.
I told you before that I am committed to staying until I'm at least 70 years old because I still enjoy building and watching the company grow with a strong management team, many of whom you'll hear from today. It has been our experience at Aflac that everyone wins when we surround ourselves with a diverse group of people. Each person at Aflac Incorporated's board, as well as our management team, brings different life experiences and different ideas to the table. Diversity ensures that we gain insight into how other people think. I firmly believe that fostering a diverse workforce isn't just the right thing to do, it makes good business sense. You can see diversity reflected in the composition of the board of directors, our leadership team, and in our employees. For example, 55% of Aflac Incorporated's board members are minorities or women.
34% of Aflac's key senior management team are minorities or women. More than of the 4,800 Aflac employees in the U.S., 66% of them are women, 34% are minorities. In 1997, Aflac became the first life insurance company in Japan to name a woman as an officer into the executive management position in Japan. Since then, Japan's executive management team has consistently included women. Aflac Japan's Women's Leadership Program began in 2014. Most importantly, that initiative has successfully helped raise the percentage of women in leadership positions from 17.6% to 29% in four short years. Our goal was to be at 30% in 2020, and I think you can see we should exceed that and we'll continue to push because we'll never be satisfied.
We are proud to say that Aflac Japan was the first life insurance company to be awarded by Japan's government the highest grade of certification for a company's promotional efforts for women advancement in the workplace. Of course, that's important with this being a major initiative of the Prime Minister of Japan. As you've seen from our second quarter earnings release, the first half of 2018 has been a good year. You're going to be hearing from some of the leaders to give you more details about our strategy and our outlook. Let me emphasize that we understand driving shareholder value differentiates the success or failure of our company, and we are committed to that. We are also committed to living up to the promise that we make to our policyholders.
Now, before turning the program over to Charles Lake, President of Aflac International and Chairman and Representative Director of Aflac Life Insurance Japan Ltd., I'd like to recognize him for just a moment because this is a really big deal. In April, Charles was selected by the Japanese government to receive one of the nation's highest awards, the Order of the Rising Sun, Gold Rays with Neck Ribbon. The award was originally established in 1875 and is awarded by the, no less, Emperor of Japan, to those who have made distinguished achievements in their respective fields. For you that are from the U.S., you will probably know it is very similar to the U.S. Presidential Medal of Freedom award.
Charles was decorated for his contributions to the development of the insurance and financial services industry, as well as helping strengthen economic relationships and friendships and good wills between Japan and the United States. He attended a formal presentation ceremony in May at Japan Financial Services Agency, or the FSA. The Imperial Palace. We are proud of him, and I'm glad to have him as part of the Aflac team. Would you give him a warm round of applause? Let's bring forward Charles Lake. Thank you.
Thank you, Dan, for that very kind introduction. Today, I will provide an update on Japan's macroeconomic, political, and public policy issues relevant to Aflac Japan to reaffirm that we continue to leverage our deep understanding of these matters in developing business opportunities for the company to ensure long-term growth for shareholder value. This presentation will provide the background and context for Koide-san's discussion of Aflac Japan's strategy. Before I discuss Japan's political economy, let me provide a brief comment on Aflac's global group governance. As you heard from Dan, and as you recall, on April 2nd of this year, Aflac successfully converted its Japan branch to a local subsidiary, Aflac Life Insurance Japan Ltd., which we refer to as Aflac Japan, as seen on the simplified organization chart on this slide.
The conversion occurred on schedule and within budget, and it has enhanced Aflac Japan's business development flexibility and aligned us more closely with widely accepted global regulatory frameworks and corporate structures. In addition, the conversion led to greater transparency around cash flows and has impacted capital management for the group, which Fred and Max will address later. At the same time, the conversion preserved Aflac Incorporated's global group governance and formalized the preexisting governance framework at Aflac Japan. This global group governance framework supports and enhances Aflac Incorporated's ability to manage the business soundly and prudently, while allowing flexibility at the entity level for consideration of local cultures, business circumstances, and regulatory requirements. Before concluding, let me emphasize one important point.
Based on my experience serving on numerous Japanese boards, including the Tokyo Stock Exchange, I am very pleased to note that Aflac Japan has successfully adopted best practices in governance that empower Aflac Japan executives with business development flexibility while providing appropriate oversight in the context of global group governance. I will now provide a brief overview on Japan's macroeconomic environment. A low birth rate and aging population continues to be among the most difficult challenges that Japan faces on the path to sustained growth. Japan's birth rate has long been well below the 2.1 per woman needed to sustain growth and currently stands at 1.43 per woman. Today, one in four Japanese citizens are over age 65, and by 2050, nearly 40% of Japan's population will be aged 65 and over. At the same time, the percentage of working age people has fallen.
These changes will affect every aspect of Japanese society and place growing pressure on Japan's finances and Social Security system. As society ages, spending on healthcare and public pensions are placing an increasing burden on the Japanese government's fiscal outlook. For fiscal 2018, the projected cost of Social Security benefits totals over 121 trillion JPY. Government expenditures on medical costs and elderly care, in particular, are projected to grow as the country's population continues to age. The public continues to have significant concerns about the long-term viability of Japan's universal healthcare system. This concern over the public healthcare system leads to opportunity for Aflac as we aim to create shared value by providing products to meet the changing insurance needs of consumers. Aflac's trusted brand and relevant products provide options for the millions who struggle to bear the financial burden of higher medical expenses.
Next, I will address Japan's political outlook and economic policy. As Japan confronts difficult challenges arising from its low birth rate and aging population, Japan has enjoyed a prolonged period of political stability. Nearly six years after returning to power, Prime Minister Shinzo Abe's ruling coalition enjoyed comfortable majorities in both houses of the Diet. On September 20th of this year, Prime Minister Abe was reelected to a third consecutive term as the President of the Liberal Democratic Party or LDP. In the near term, Prime Minister Abe will likely reshuffle his cabinet to ensure continued and effective policy priority implementation. This re-election positions Prime Minister Abe to become, in November 2019, as the longest-serving prime minister since the Meiji Restoration of 1868. With respect to economic policy, Prime Minister Abe continues to implement and enhance his vision for economic reform, dubbed Abenomics.
The Prime Minister's three arrows Abenomics strategy was designed to enhance Japan's economic competitiveness and includes bold monetary policy, flexible fiscal policy, and structural reforms or growth strategy. Since implementation began in 2013, the three arrow strategy has helped Japan achieve record highs in both nominal GDP and corporate profits. In an effort to support the growth trajectory, Prime Minister Abe's cabinet approved two respected economic reform plans. The new economic policy package approved in December 2017, and the Future Investment Strategy 2018 approved in June of this year. These two economic reform plans are spinoffs from the original Abenomics third arrow growth strategy. Let me elaborate. The new economic policy package released last December is a medium-term economic reform plan designed to enhance productivity with a near term 3-year period for intense and focused investment in tax, budget, and regulatory reform.
This period will go through 2020 and reflects the government's commitment to economic reform. The Future Investment Strategy, on the other hand, is a longer-term economic plan through 2025 and is focused on digital revolution. The plan lays out longer-term economic policies towards realizing a Society 5.0 or data-driven society. The Future Investment Strategy includes 143 pages of policy measures and 147 pages of implementation plans with measures to establish a next generation healthcare system, promote fintech and cashless society, use of regulatory sandboxes, and promote overall innovation in financial services. Later, Koide-san will discuss some of the ways in which Aflac Japan, with its innovative driven corporate culture and digital strategy, is acting on the business opportunities created by the government of Japan's reform measures.
Even as it is pursuing domestic economic reform measures, the government of Japan is also continuing to seek deeper economic integration with Asia and Europe through free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or TPP11, and the Japan-EU Economic Partnership Agreement. These major agreements will go into effect in 2019, putting Japan at the center of the world's largest free trade area, representing a combined GDP of roughly $28 trillion, or nearly 35% of global GDP, and more than 1 billion consumers. These developments, as well as other trade deals under negotiation can be expected to contribute to Japan's economic growth, strengthening its attractiveness as a destination for foreign investment in products and services, providing new avenues for Japan-based firms to access foreign markets and helping to generate a positive cycle of pro-growth reforms.
Another important component of Japan's structural reform and economic growth strategy is the transformation of the financial regulatory regime. Japan's single financial regulator, the Financial Services Agency or FSA, has spent the last 3 years preparing a comprehensive reform plan that emphasizes balancing regulation with economic growth. Key components of FSA's transformation efforts include shifting from a heavily rules-based approach to a principles-based approach to supervision, abolishing FSA's inspection manual, promoting customer-centric business practices, encouraging financial innovation through fintech, and further promoting corporate governance reforms. To ensure effective implementation of these policy measures in July 2018, the FSA completed its first major structural reorganization since it was founded in 2000.
The FSA believes that this reorganization will allow it to enhance strategy development across financial services, respond in a timely manner to changes in financial markets, develop a regulatory framework in line with technological innovation, and conduct more effective and efficient supervision through seamless offsite and onsite monitoring. The FSA leadership has even noted that the agency will now become the financial promotion agency instead of an agency known as the Financial Sanctions Agency. Aflac Japan has enjoyed a positive and constructive relationship with the FSA and is well-positioned, especially with the post-conversion subsidiary structure, to leverage the new regulatory environment to implement innovative business initiatives. Koide-san will discuss this further in his presentation.
Recognizing that stronger economic growth and fiscal consolidation measures will be necessary to achieve its fiscal goals, the government of Japan has delayed its target to achieve a primary balance surplus from 2020 to 2025, while staying on plan to implement the consumption tax hike to 10% in October 2019. In this regard, the Japanese government continues to implement measures as part of a program of integrated social security, healthcare, and tax reform designed to control the natural increase in social security costs. This reform program includes measures to enhance efficiency in medical and care services delivery system, improve productivity, and optimize benefits and burdens. These efforts are making it very clear to consumers that they must look to private sector supplemental cancer and medical products to help bear the financial burden of higher medical expenses.
In conclusion, I am pleased to note that Aflac Japan is well-positioned to take advantage of business opportunities that will be created by the emerging economic developments in public policy and regulatory changes in Japan. Just as we have anticipated change in the past and formulated proactive strategies, we are ready to leverage new opportunities in the coming years, maintain our leadership position, and continue to grow, especially with the post-conversion structure and governance. With that, let me hand it over to Koide-san to take you through an overview of Aflac Japan. As you know, after serving in numerous leadership positions very successfully within Aflac Japan, Koide-san assumed the role of the president of Aflac Japan in July 2017. Thank you very much. Koide-san.
Aflac Japan was established 44 years ago as the first company to offer cancer insurance in Japan. In the decades since, Japan has undergone significant change, social, economic, regulatory, and governmental. Aflac Japan has stayed true to its core values and endeavored to create new value for its stakeholders, including policyholders, shareholders, and society as a whole. Today, I will provide an update on Japan's third sector insurance market. I will then address Aflac Japan's standing in the market and our strategy moving forward. Japan's life insurance market is one of the largest in the world, along with the U.S. The third sector includes cancer, medical, and Income Support Insurance. It is a significant growing segment in Japan's life insurance industry, and Aflac Japan is the leading company in Japan's third sector.
As you heard from Charles' presentation, Japan's low birthrate and aging population are putting increasing pressure on Japan's national health insurance system. This pressure, combined with medical advancements and diversifying consumer needs, including greater cancer awareness, is resulting in a growing third sector insurance market in Japan. For example, the third sector has more than doubled in size in the past 15 years. As you can see, the total number of in-force policies of stand-alone cancer and medical products was over 60 million at the end of March 2018. Many companies see growth opportunities in this market. That said, Aflac Japan plans to further expand its position as the leading company in Japan's third sector market by leveraging our attractive products, broad distribution, and trusted brand. According to industry data, in 2016, 81% of Japanese citizens were covered by some form of life insurance product.
The market penetration for cancer insurance, which Aflac pioneered, has risen more than 6.6% over the last 10 years, and currently stands at 37.8%. Given that cancer is a leading cause of death in Japan, we expect product demand and the upward trend in cancer insurance product penetration to continue to rise. At the same time, efforts by the government at both the national and local level to promote cancer awareness will similarly contribute to increased consumer demand for cancer insurance. Medical insurance market penetration stands at 72.1%. Although this number is much higher than cancer, we continue to see opportunities for growth as consumers seek third sector insurance products to supplement Japan's strained Social Security system. The standalone cancer insurance market in Japan is growing. The number of standalone cancer insurance policies in force has increased to 24.5 million policies as of March 2018.
Aflac has maintained its leading position in Japan's cancer insurance market, and today holds a 62.9% share of the standalone cancer insurance market. This dominant position facilitates Aflac's cost-effective approach to product development, in which cancer product revisions are released every three to four years. These revisions enable Aflac to continue to offering products that meet changing consumer needs and support Aflac Japan's leading role as the market continues to grow. We expect to maintain and even strengthen this position, in large part through Aflac Japan's broad distribution channels and strategic partnership. Let me now turn to Aflac Japan's market share and overall market growth for standalone medical insurance in terms of policies in force. The total number of policies in force for standalone medical insurance products in Japan has grown year-over-year.
As of March 2018, there were 36.8 million policies in force, representing a 4.2% increase when compared to the end of March 2017. Aflac Japan's total market share in terms of policies in force was 16.1% as of the end of March 2018. Aflac Japan was not the first to enter the medical insurance market. However, Aflac was the first to introduce a standalone medical insurance product that offered long-term coverage for low premiums. In doing so, Aflac created a new market, which today is increasingly competitive. We expect to maintain and even strengthen this position, in large part through Aflac Japan's broad distribution channels and strategic partnerships. Looking ahead, various factors are converging to help create a growth market for Aflac Japan's core products and capabilities. The Japanese population is living longer, healthier lives.
When combined with a low birth rate, Japan's population will continue to age and shrink in numbers. Against this backdrop, financial pressure on Japan's national health insurance system will continue to rise, and diversifying consumer needs will continue to evolve with medical advancements and other social change. Aflac Japan's attractive products, broad distribution, and trusted brand are key sources of competitive advantage. Furthermore, Aflac Japan's scale efficiencies and expertise due to our focus on the third sector, especially cancer insurance, for more than 40 years, will enable Aflac Japan to continue to grow and thrive as the leading company for cancer and medical insurance in Japan. Aflac Japan has a history of developing innovative products to help relieve financial burdens and address consumer wants and needs. On April 2nd, for example, Aflac Japan launched two new cancer products.
Days One Cancer Insurance for Daily Living provides more comprehensive coverage to cope with medical advances and other factors, which Ariyoshi-san will address. Days One Plus targets existing policyholders seeking to upgrade their cancer insurance for more up-to-date protection. Regarding medical insurance, as I mentioned earlier, Aflac was the first to introduce a standalone medical insurance product in Japan that provided long-term coverage for low premiums. That product, Ever, enabled Aflac to pioneer the standalone medical insurance product market. In July 2016, Aflac Japan launched Income Support Insurance. Although the market for this product remains immature in terms of sales volume compared to the cancer and medical insurance, Aflac Japan is taking a long-term view. We will continue to increase awareness of Income Support and focus on those concerned about disability and home ownership.
Regarding first sector sales, we are continuing to offer profitable protection-type products, such as our recently launched product, Prepare Smart Whole-Life Insurance. This product provides beneficiaries, typically family members, with a predetermined benefit payment upon the death of the insured. This product enables Aflac Japan to provide agents with a full range of product offerings. In addition to maintaining an attractive product portfolio, Aflac Japan also aims to lead the industry in distribution channel diversity and reach. Aflac Japan has enhanced and expanded its distribution network to provide more opportunities to be where the customer wants to purchase insurance products. Our traditional channel, which includes approximately 11,000 agencies, has been a key to our success. We are also strengthening non-traditional distribution channels such as walk-in shops and visits by salespersons, primarily in urban areas, to further enhance sales.
Strategic alliances through partners such as Japan Post Group, Dai-ichi Life, and Daido Life continue to strengthen and evolve. As you know, Japan Post sells our cancer insurance through more than 20,000 post offices and 76 Kampo offices throughout Japan. To further enhance this strategic partnership, we have established close relationships with Japan Post at every level, from executive management to the sales frontline. Aflac Japan continues to implement education and training programs to ensure Japan Post sales representatives are even more knowledgeable about cancer and Aflac Japan's cancer insurance. These alliances ultimately improve Aflac Japan's market access, increase our touchpoints with existing and potential customers, and allow the company to associate with other trusted brands. Banks also allow Aflac Japan additional avenues to reach consumers and offer products in the places consumers want to buy them.
As of March 2018, Aflac Japan was represented at 372 banks, nearly 90% of the banks in Japan. These banks, in addition to local Shinkin banks, offer a broad range of financial services, including selling Aflac's third sector insurance. Aflac's brand has over 91% recognition in Japan. This broad recognition is attractive to our partners and helps us reach customers who aspire to have high-quality products and services for insurance for daily living. As we have discussed in previous briefings, Aflac Japan's mid to long-term strategy, called Vision 2024, provides direction through Aflac Japan's 50th anniversary, as Aflac Japan aims to strengthen its position as the leading company in the third sector and expand business into new frontiers consistent with our core capabilities and values. Our first step in realizing the Vision 2024 was the conversion of Aflac's Japan branch operations into a local subsidiary.
Following our conversion on April 2nd of this year, we have been working to further strengthen our ties with Aflac Japan's 15 million policyholders and business partners. The conversion was a complicated undertaking, and its success is testament to the coordination and hard work of many, including one of our directors, Ms. Yoko Kijima, who oversaw the process for the Japan side. As you heard earlier, Aflac Japan's post-conversion governance framework provides the Japan executive management team with greater business development flexibility, and we are cultivating an innovation-driven corporate culture. Against that backdrop, there are three themes I would like to highlight for you. First is to further strengthen Aflac Japan's third sector insurance business. Second is exploring new business opportunities consistent with Aflac's core capabilities and values.
Third is cultivating our innovation-driven corporate culture to make it possible to respond to customers' diversified needs and the changing circumstances in a timely and appropriate manner. We plan to strengthen third sector insurance business by focusing on three priority areas. First, expanding new annualized premium for cancer and medical insurance. Second, growing Income Support Insurance to develop new third sector markets alongside cancer and medical products. Third, strategically enhancing protection-type first sector products to strengthen third sector sales. With respect to first sector products in the context of Japan's low-interest rate environment, we have reduced sales of savings-type products and instead focused on protection-type products such as Prepare Smart. That said, we are strategically continuing sales of protection-type products to associates that offer comprehensive consulting sales to their customers. Such products continue to provide meaningful profitability and are aimed at driving third sector business growth.
Aflac Japan is continually exploring new business opportunities with a goal of providing customer-centric new products and services to maximize the value proposition of insurance for daily living. To achieve this goal, Aflac Japan is leveraging its competitive strengths, scale, efficiencies, and extensive experience to identify new third sector fields and explore new business opportunities. On September 19th, for example, Aflac Japan announced the release of a new health promotion medical insurance product that will encourage policyholders to maintain a healthy lifestyle by rewarding them with premium refunds if the policyholder's health age is lower than his or her actual age. This new product will target younger consumers and feature several characteristics that make it unique to the industry, including an online application portal primarily available on smartphone.
Aflac Japan developed a digital health platform for this new product, and we have incorporated value-added services from partners, including Medical Note, MRSO, and more. As you may recall from last year's briefing, Medical Note is a provider of online and telemedical advice services, and MRSO is a digital health venture that provides online health checkup reservation services. We intend to further expand this platform in the future. Consistent with the Government of Japan's focus on growth, and specifically the data revolution, Aflac Japan is further diversifying its sales channels and enhancing the customer experience by leveraging digital innovation to enable the company to even more effectively engage customers in the places and ways they prefer. Here are a few examples.
Last April, in conjunction with the launch of Days One, Aflac Japan introduced a new online system, DESMO 2.1, to support customers through the process of selecting and applying for insurance products. DESMO 2.1 offers customers instant underwriting results and allows them to choose multiple insurance products simultaneously. Aflac Japan is broadening the ways customers receive their insurance benefits and utilizing open innovation to enhance customer experience. In December 2018, we will begin phasing in a straight-through payment system to simplify claims evaluations. Straight-through payment will utilize biometrics and leverage Mitsubishi UFJ's online banking services for real-time bank transfer. The system will be supported by new technologies, and modification to existing systems will reduce manual checks and improve the accuracy and speed of assessment and payment operations. Beginning in November 2018, policyholders will be able to receive cash remittances at seven bank ATMs.
Aflac Japan currently offers policyholders the option of receiving cash remittances through bank account or postal transfer. This new option will further expand convenience, and we will start with premium refunds at roll-out. These initiatives and others like it are part of Aflac Japan's strategy to not only improve the customer experience but drive further expense efficiencies in our platform. In August, Aflac Japan launched the Aflac Innovation Lab in Minami Aoyama, a hub of innovation in Tokyo's Shibuya Ward, to serve as our base for new business development initiatives. We plan to use the facility to encourage out-of-the-box thinking, create an ecosystem with startups, and promote an innovative corporate culture. One of my priorities as Aflac Japan's president has been to ensure that the company has a strong talent pool.
In part, we are investing in our talent through existing initiatives to foster an innovation-driven corporate culture through diversity promotion and work-smart initiatives to bring in new perspectives and enhance efficiency. We are also enhancing our investment in employee development because their personal growth will ultimately contribute to Aflac Japan's sustainable growth. In this context, we are introducing a broad talent development program to strengthen future leadership and managerial abilities. Such initiatives include next-generation executive development, U.S. training, and other programs. These efforts are being overseen by Akiko Kubo. He is also a member of Aflac Japan's Board of Directors. In closing, I would like to emphasize that just as Aflac Japan has anticipated change in the past and formulated proactive strategies, we are ready to leverage new opportunities in the coming years, maintain our leadership position, and continue to grow, especially with a post-conversion subsidiary structure.
Aflac Japan has the right people and the right strategy to continue leading the third sector insurance market while pushing into new business frontiers. I hope my presentation today helped you better understand Aflac Japan's future. Thank you very much for your time. Now, I will turn to program over to Ariyoshi-san.
Since the next presentation will be in Japanese, please wear the earpiece, the devices for interpretation into English. Thank you very much. I will provide an overview of Aflac Japan's sales and marketing. Aflac Japan's third sector new annualized premium has increased continually since 2012. New AP for the third sector products has grown from JPY 64.4 billion in 2012 to JPY 87.4 billion in 2017, which means that our new business has grown at a 6.3% CAGR over the past five years. We have also secured 4.1% year-over-year growth for the first half of 2018. We will achieve growth for six years running if we end 2018 with positive growth. Together with this new business growth, the third sector premium income since 2015 has been on a growing trend, and the current third sector sales growth will be maintained, and the premium income or earned premium is likely to increase accordingly.
Please turn to slide four. Looking at second quarter 2018 third sector sales, Aflac Japan achieved significantly year-over-year growth of 16%, which was driven by the new cancer insurance products released in April 2018. For more than 40 years, since Aflac introduced Japan's first cancer insurance in 1974, we have revised our cancer insurance products to match the changing medical environment, the potential financial burden that serious illness can bring, and the advancement of healthcare medical technology. With the rise of new diagnostic technologies, we have witnessed early detection of cancer, which was essentially undetectable in the past. More advanced diagnostic capabilities suggest that there will be more cases of early-detected cancer. Moreover, depending on the type and stage of cancer, as well as the timing of detection, treatments may vary in terms of method, frequency, and duration. These factors lead to differences in financial burden among customers.
Cancer patients also tend to have more treatment options today, which can also affect the financial burden depending on the selected treatment. To cope with these changes, our new cancer insurance products are designed to allow customers to obtain the latest coverage that matches the changing medical environment and corresponds to their financial burden, which could significantly vary due to the advancement of diagnostic technology and more treatment options. No other company provides such coverage, and our unique cancer insurance leverages the expertise Aflac has accumulated over many years as a pioneer and leader in cancer insurance. This also helps explain why these products have been so successful and appealing to our customers. Let's go on to slide five. With the launch of new cancer insurance product, the largest contributors to the successful growth of cancer sales were the agency channel and Japan Post.
Let me explain the major initiatives we have undertaken for these channels. The agency channel manages a large portion of Aflac Japan's 15 million in-force cancer policies. Many among this group of policyholders have a propensity to update and/or increase their insurance coverage. As part of our new product launch, we rolled out TV commercials targeting not only new customers but existing policyholders as well. In addition, we carried out our biggest direct mail campaign to date, targeting existing policyholders. After sending out direct mail to existing policyholders, we made follow-up calls to invite them to face-to-face meetings. We also worked to guide them toward the most appropriate coverage by offering recommendations through a new digital application form. These agency channel efforts serve as an excellent reminder that there is still potential in Aflac Japan's existing policy market. Japan Post also significantly contributed to the second quarter sales growth.
Japan Post results can be attributed to the recent new product release, which is the first new product release since expanding to 20,000 post offices offering Aflac's cancer insurance. Another factor is Aflac Japan providing additional specific premium waivers, which had long been requested by Japan Post. Japan Post also front-loaded sales efforts to the second quarter, and all of these led to a dramatic sales increase. Thanks to these channel-specific initiatives, we successfully increased sales of our new products. Please go on to slide six. Under the low interest rate environment, competitors have reduced their sales of savings-type products and focused instead on protection-type products, mainly in the third sector. As a result, competition in the third sector is intensifying with the increase in the number of competing products.
However, Aflac Japan's third sector new AP is still growing sustainably, and it can continue growing in the future as well. The first growth factor is increased longevity and the aging population. With advancements in medical and greater attention to wellness, people are living longer. In addition, as Charles shared earlier, Japan's population is aging. As people age, the risk of cancer and other serious diseases, injuries, and need for nursing care increases. Therefore, we expect the need for third sector products to increase accordingly. The second factor is advancements in medicine and medical technology, through which the forms and methods of treatment are also changing. For cancer and medical insurance, the coverage that is better aligned to the current treatment environment is becoming a necessity. In the cancer sector, treatments are expected to advance and evolve even further.
With medical insurance, the focus of treatment is shifting from long-term hospitalization to outpatient treatment. As a result, there are cases where a customer's coverage does not meet the current treatment recommendations, hence the potential for adding benefits or revisiting into the latest coverage. By taking these changes as growth opportunities, we will strengthen both the products and channels that cater to customer needs, primarily in the third sector. Going on to slide seven. As for our product strategy, we will strengthen our products by focusing on two key points. The first is enhancing the product offering according to one's stage of life. The coverage that customers need depends on their stage of life. Young and single people mainly prepare coverage for themselves. Once they start forming their own households, they look for coverage for their families as well.
When they grow old, they need the coverage to live comfortably after retirement. We would like to enhance the areas where we can efficiently and effectively provide coverage options best suited to consumers' various stages of life. For example, we are looking to enhance the area where we can offer protection-type first sector coverage while simultaneously recommending third sector coverage options such as income support or lump sum and supplemental nursing care coverage. The second is enhancing coverage according to medical technology advancement. As discussed earlier, the new cancer insurance product offers comprehensive coverage, including protection based on the current medical environment, as well as coverage for expenses associated with changes in appearance due to side effects of treatment, et cetera.
In addition, by enhancing the product plans and infrastructure for existing policy holders, we also came up with a product design that allows policy holders to update their policy to the latest coverage to better meet their needs. By leveraging these features, Aflac Japan will expand its business with existing policy holders in addition to acquiring new customers. Aflac Japan has made a large number of existing policy holders, primarily consisting of cancer and medical insurance policies. We have reinforced our approach to this market through the comprehensive marketing campaign I discussed earlier and accomplished successful results, which we believe has brought us a new way of approaching the market. The outcome of the initiative shows that there is a strong potential for additional purchase and review of coverage, not only for cancer but also for medical as well. Going on to slide eight.
Aflac Japan has established a variety of channels and expanded its sales network to provide customers with choices in insurance application methods. Let me highlight the future initiatives in our largest channel, the agency channel and Japan Post. For the agency channel, we will further explore the existing policy market while building on the success of the new product initiatives I mentioned earlier. In order to maximize the potential markets owned by our agencies throughout the country, we have dispatched personnel to sales offices according to the characteristics of each agency and established a sales office structure that can provide effective support. Through these efforts, we are providing extensive support that matches the characteristics of each agency. Going forward, Aflac Japan will increase its involvement in the management of each agency to further help establish a robust management base and business structure.
For example, we will help improve the retention of agents and provide a framework for managing activities. In addition, we will strengthen efforts to establish infrastructure for ensuring efficient and effective sales activities and concentrate on the market of existing policies to spur the growth of agency channel. Japan Post has a community-based network across the country. Since entering into partnership with Japan Post in 2013, the number of post offices selling Aflac cancer insurance has increased steadily. As you know, Aflac cancer insurance is offered approximately through 20,000 post offices and approximately cover 100,000 agents. As I mentioned earlier, Japan Post contributed significantly to sales in the second quarter of 2018, partly because the new cancer insurance products were the first product launched since the number of post offices offering our products reached To the 20,000.
The individual post office production rate is increasing. We are aiming for stable results by continually providing support to Japan Post agents through education and training. Please turn to slide nine. I would like to end my presentation by explaining what this means in terms of long-term premium growth. We are looking to promote our first sector protection products, which are less interest rate sensitive and more profitable than first sector savings products. We expect to contribute to growth in earned premiums, though it has a comparatively lower volume than third sector products. Longer term, we expect earned premium for the third sector products and the protection type first sector product to increase steadily in a range of 1.5%-2.5%, backed by growth of new business.
Aflac Japan's recent conversion to a subsidiary early in 2018 reinforces our commitment to Japan. Aflac Japan will continue to be a company that can be relied on by Japanese policyholders, just as it has been for more than 40 years. Thank you for your attention.
Thank you, Ariyoshi-san. We will now have our first Q&A session focused on Aflac Japan. I would like to ask the members of that panel to come forward. Joining Dan, Charles, Koide-san, and Ariyoshi-san from Aflac Life Insurance Japan are Todd Daniels, Principal Financial Officer, John Moorfield, Chief Transformation Officer, and Yoko Kijima, Chief Administrative Officer, Diversity Promotion. They are also joined by Aflac Incorporated's Global Chief Risk Officer and Chief Actuary, Al Ruggieri. Before we begin the Q&A, there are just a few simple rules. We would like for you to raise your hand and please wait for a microphone before you begin to ask your question. Second, please tell us your name and firm for those that are on the webcast. Third, please limit yourself to one question so everyone has a turn. Suneet?
Thanks, David. Suneet Kamath from Citi. I think it was slide 10 of the presentation. It showed cancer insurance policy sales by count. It looked like Aflac's cancer policy count was pretty flat over all those years. It's hard to know specifically by just eyeballing it. With all the growth that you've seen in new annualized premiums, why aren't we seeing that translate into policy count?
To page 10. We have in-force policies, for that portion, we are gradually expanding. For that new product we launched this year, we had a positive result from that.
You've had Daiichi, you've had Japan Post, all these catalysts for cancer insurance. We've seen the sales growth, over this long time period, we're not seeing a real lift in policy count. I don't know if that's a phenomenon where you're just selling to the same policyholders and you're just getting an incremental premium as opposed to reaching new customers. That was the genesis of my question.
If an in-force policy is lengthened, we will see some lapse from the in-force policies. At this time, we have introduced a midterm addition of riders, by doing that, we are able to maintain the policies. What we promoted at this time this year is, of course, we will acquire the new customers, at the same time, we have promoted the more close communications and in the direct mail. Through that, we will have enhanced the in-force policies, and we can improve our values so that we can prevent any decline. There is not a specific event for the declining trend or flat trend. Over time, because from the beginning, we focus on the worksite sales, but when they retire, at a certain percentage, they will be in a shift from the group account to the individual account.
We had seen such a decline. At this time this year, we renewed their awareness of the cancer insurance, by doing so, we are maintaining the policies, we are also focusing on the in-force policy. By focusing that, we are trying to expand the values.
Follow up with
Through investor relations to get you exactly what that we always are looking at premium. Frankly, I didn't look at the policy number. We'll get it. As a general rule, we've been very pleased with our policy count and what's been going on. I will get that for you.
Ryan.
Thank you. Ryan Krueger, KBW. I had a question on the new health promotion medical product. Can you talk about how you see the potential growth for this new product and if you view it as more of a new test type of a market or if you think it can be something more meaningful?
This health promotion medical insurance that we talked about is a new product, we are trying to create a new market using this product. People who are very interested in their health and those people who are using digital methods, those customers in their 30s and 40s are the target. This health promotion type of medical insurance has just gotten started in Japan. From our perspective, this new category of health promotion medical and our product, we need to increase the recognition of this product, and that is the purpose of this product.
Eric.
Thank you. Erik Bass with Autonomous Research. I had a couple questions on third sector pricing. I guess first, can you talk about the level of margin that you're pricing new business for? Secondly, we've heard from some of the local competitors that they're beginning to factor in lower hospitalization rates into their pricing. I'm wondering if that's something that you have been doing as well.
Yeah, I'll start out and let anybody jump in as they wish. Third sector profit margins have been priced in similarly to the past. We've stayed in the range of the 15%-20%. We're also looking at our internal rate of return. The main reason is we've got a higher cost of capital in Japan as we put up reserve requirements at 25 basis points. We want to recognize that when we look at our overall returns. For IRR, we're in the neighborhood of 12+. Most of our products are in the 15% range. For lower hospitalization rates for this last cancer product, you probably heard we diversified the benefits across first occurrence hospitalizations and special outpatient.
We are reflecting lower hospitalization rates in our pricing, we're also providing more benefits that are outside the normal hospitalization benefits to stay current with the market.
Thank you.
Nigel.
Thanks. Nigel Dally, Morgan Stanley. I had a question for Charles. You talked about the escalation in Social Security costs facing the Japanese government. One of the ways they've dealt with that escalation in the cost in the past has been an increase in the co-payments for medical insurance. We haven't seen any of those for many years. Is that still an option on the table for the government or is it just too politically unpopular?
I had a little bit of a hearing problem, the question is about co-payments.
Yes.
The co-payment is a politically big issue as well because of the impact and visibility of it. That's not the approach in recent years that the government has taken to address the efficiency question because they would rather find other ways of quietly working on enhancing the productivity of the national healthcare system. The co-payment question is always out there, that's not the approach that's been taken in recent times. That is to say, as I talked about it in my presentation, that the government is not spending time and or talking about the need to be efficient in the delivery of the healthcare system.
The constant coverage in the media and so on about how that is being done, people find that out in some ways that they may not want to in terms of how the hospital stay being reduced first and the treatment strategy being pursued through visits rather than hospital stays and so on. Then de facto out-of-pocket expenses increasing potentially for certain individuals, and that's the approach that they're taking now. Down the road, the politicians always talk about co-payment as the most direct way to enhance the contribution that the citizens will have to make.
Jimmy.
Hi. Thanks. Jimmy Bhullar, JP Morgan. I had a question just on your overall third sector sales. Obviously, they've been fairly strong recently, but if you look over the last several years, cancer's done very well, but medical sales have been weak. I think down three years out of the last four, they've been down each of the last two quarters. The industry has grown, but your cancer business, you're producing less new business volume than you were a few years ago. Maybe if you could just give some reasons for that and what your outlook is for that product line.
As for cancer, yes, you're right. We are in a stable position for cancer. What is happening is that low interest rate, and that is impacting on the insurance sector. The first sector saving type, it is difficult to make it attractive. Other competitors are coming into the medical industry or medical market for their growth. They are putting the emphasis on that so that the share is more distributed among the several competitors, including Aflac. Still, we have the number one share in the medical market. Going forward, as long as the low interest rate will continue, medical insurance The competition is expected to maybe maintained.
Not that. Agents take the path of least resistance, which you've heard me say before. When the cancer insurance product is new and on the forefront, that's part of it. That's not a total three year, but that's recently been part of it because we don't distinguish which product we want them to sell. We're fine with cancer, we're fine with medical. I think it's a combination of those two things that has made a difference.
The new companies that are coming in or have been more proactive than they were in the past, are they pricing the business lower, or what's allowing them to be more successful than they were in the past?
As for the lower premiums, yes, some companies are providing that, and there is a need for that. However, for Aflac, the attractive protection or coverage, adding that is the strength of Aflac, and by doing that, we are trying to improve the unit price. There are the various needs, and each company is responding to that in a different way.
The point to that is that it is not existing competitors, it is new people that are entering the market. Well, what has been true in all industries is that when a new company or an existing company adds a new product, you have a spike in sales of their existing policyholders that they go back to because they have a relationship with them. It is a much easier sale for them. It falls off. It goes back to 2001. Everyone thought we were going to be out of business. What in essence we saw was when the major life insurers and even non-life got into our business, there was a spike where they went back to all their old policyholders and they said, "We now offer cancer insurance." They offered them, then it fell back off and it leveled off.
I would expect the same thing to happen, that whoever decides to get into the business, and as was said, it's predominantly because of low interest rate environment and they don't have enough product selection. They've gone back to those existing policyholders. They made their pitch. I look for it to fall back off and then level down like here. Whereas we're constantly creating new customers is the difference.
Just one more for Charles on the consumption tax going up by 10% in October next year. Is that a done deal you think? If it does happen, how does that affect your demand for your products, pricing, margins?
I'll answer the first part and the second part, Koide-san and Ariyoshi-san will get ready to answer. Most government officials and political leaders and media pundits and all are expecting the increase to be implemented as scheduled because the Prime Minister has already articulated that. There's no short of a global crisis or some sort of an event that makes that an action that they don't want to pursue, that's what they will do. We will know soon, certainly the budget process in Japan works in October, November, where the preparation has to take place. There will probably be a confirmation statement at some point in the next month or two, but that's what most people expect in terms of increase in consumption tax next year, October. Koide-san, Ariyoshi-san.
As for the consumption tax increase, there is, however, no impact on our product.
Pricing.
Pricing.
Thomas Gallagher, Evercore ISI. My understanding is some of the domestic Japanese insurers are now starting to buy up independent agencies. Curious if you view that as a threat to that channel for both you and other foreign companies. Then just a second part question on the Japan Post you mentioned the premium waiver. Was that which was being requested by the channel and what you came through and that's partly what drove sales there. Can you just specify what's happening there?
Starting from the non-exclusive agencies or independent agencies, the acquisition, for us, it is not a big threat. There are two objectives to that. Japan's large insurers, they did not want the non-exclusive agencies to really increase their share, so they wanted to control the market, and they're taking on the challenge from that perspective. The non-exclusive agencies themselves basically are selling multiple companies' policies. That's their basis. The attractiveness of these non-exclusive agencies is that, which means that they are not able to just recommend or promote just specific insurance companies' products. Even if large domestic insurers acquire these non-exclusive agencies, there would not be a big impact on us because the agencies will not be able to just sell one particular company's product. However, there will be opportunities for the insurance companies to learn about the agency's channel skills or agency sales business model.
That's the first one. Your second question was? The premium waiver rider, right? I'm sorry, I was not able to understand your question. Could you please ask again? Could you please elaborate your second question? I'm sorry, I was not able to understand.
I just want to understand the dynamics of why the premium waiver stimulated sales. What was it about the change in the process?
The premium waiver rider is a feature or rider that is generally attached to cancer insurance. For sales purpose, or when we sell the actual policies, it is easy to talk to customers about it. Particularly when you develop cancer, there will be a high treatment cost required, and the premiums will be waived once you develop cancer, and it's easy for the salespeople to talk about it, which means the product is more attractive, that was a request that we have received, and we have responded to that request.
The key on the premium waiver is that we didn't have that in the market before, and we do have it now. That's what's made it so attractive and popular this go around.
Humphrey.
Humphrey Lee from Dowling & Partners. Just to follow up to Erik's question earlier about pricing. I understand that you kind of bake in the lower hospitalization rate in your newer product. At the same time, my understanding is the change in the mortality table essentially should raise the pricing for a third sector product. It looks like your margin kind of still somewhere comparable. Given the negative impacts for the mortality table and then also lowering the benefits from the hospitalization rate, where do you find room to kind of maintain that margin that you have historically been able to achieve?
I think as I said before, we added benefits and riders and things to the current cancer offering, which made it more attractive, and we're able to maintain our profit margins with that product. We have reflected the standard mortality table. We're currently evaluating our medical product line and what we're going to do with the standard mortality table. We didn't revise it back in April when it went into effect. We're always looking at offering the most competitive hospitalization rates in our cancer and our medical products, while at the same time trying to diversify the benefits so that we can preserve our profit margins.
I guess essentially those riders are allowing you to pad your margin, so it kind of offsetting the negative impacts for the hospitalization rates.
Yeah. What I'd say is that all of our assumptions get brought up to date. Like when we did IOC, we'd put the lower cap hospitalization rates in first occurrence. This new structuring allowed us to take some of the first occurrence benefit and put it into the special benefits, which we assumed will get a little higher than we would've gotten in previous historical data, how many people will qualify. We're careful with those new assumptions we have to make. Every one of those assumptions, like for the cancer product, we would've taken our current mortality rates and put them into the product. In addition to addressing the table updates that the FSA has, we'd have our underlying experience built in. Pretty good up-to-date basis on our assumptions.
John.
John Barnidge, Sandler O'Neill & Partners. I can see how a lot of these investments in technology and changes in just how the market operates is driving down claim costs. Can you talk about maybe how you see technology in your venture capital fund investing, driving, and changing the distribution model?
Yes. Together with the health promotion medical insurance, there's a value-add service called Aflac Digital Platform. Medical Note is a provider of that, or Medical Note and MRSO are the two providers. They are the healthcare startups. From Aflac Corporate Ventures, we have invested into these companies, and we have an alliance to see whether we can do something together. We have discussed that, finally, together with this new medical insurance launch, we have established this digital platform. This is a corporate venture investment. It's not just a pure economic return that we are looking for. To our healthcare or medical insurance business, there has to be some kind of a synergy effect there. By using these technologies, new insurance product or services can be created as a potential.
By working with these companies or by investing into these companies, we would like to be providing new values to consumers. That is what we are aiming, and that is the kind of investments we are making.
is a little bit behind compared to the U.S. When we get to the U.S. section, they can talk about, have Teresa talk about Everwell or Fred's or whoever it's going to be, can talk about how that technology is impacting us and the positives. It's also beginning to take effect in Japan.
From sales perspective, what we are expecting is that with this kind of digital platform, our existing policyholders, especially with our groups and payroll groups, that we do have a large number of existing policyholders, and we are doing group solicitation. Up until now, we were distributing paper applications. Going forward, digital application will become available, which means that these customers, regardless of whether they are at home or they're at office, they are able to purchase our policies. This kind of new platform will be very effective for those customers we were not able to solicit. This is going to be a very attractive platform from that perspective.
From a technology perspective, we built the digital health platform to be extensible across all of our products and all of our services. Not only new external services that we may invest in like Medical Note, MRSO, but also within our current processing. We've been very intentional about, even though GAP is the first digital product to be offered, to make sure that we would be able to take advantage of the services that we're building. For example, for the group platform, where we have had traditionally a difficult time getting to the policyholder in any way other than paper. We're on an active, very aggressive agenda of eliminating paper wherever we can.
Alex?
Hi, Alex Scott, Goldman Sachs. I'm just interested, when you're talking about the new frontiers, this new digital platform, some of the opportunities that it may give you to expand your reach, new products, et cetera, to what extent is that kind of included in your premium growth guidance? I mean, is some of this upside that you're talking about or do we need to actually execute on that plan to maintain sort of the targets that were outlined here?
For this new health promotion product, as I responded to the previous question, so this type of product, and we need to increase the recognition, and we need to explore the new market, that is our target. With that target, we will launch this product in October. As Ariyoshi mentioned, and so the prospective, that is not including this benefit or effect. As for the technology-related question, so I like to do the follow-up. We like to create the new values and also the product and services. Also we like to improve the customer experience at the same time, so business operation efficiency gain, that is one of the objective as well. With the new technology, the call center or claims filings, we are introducing a new technology in this area.
Nakajima-san, could you explain that the mobile claims application and also the voice authentication for the mobile claims filing, through the internet you can file the claims. We are preparing for that at the end of this year for some claims, and we are going to do this, and we will implement that. As for the call centers, we have the automated response or the voiceprint authentication will be used, that we can do the ID confirmation, that we can reduce the time to do the ID confirmation by doing that. We will be able to have the good communication with customers. Also, we are able to talk with many more customers. That's our purpose.
Maybe just to follow up, is there any quantification you could provide for the expense opportunity there? The expense savings.
We may want to refer to Fred's speech with respect to the cost efficiency. However, part of our initiative, as Fred will say, is to help reduce our efficiency ratio or expense ratio in Japan to the levels that he's committed previously, which is the mid 19%-20% range, to maintain that going forward.
Thanks.
If we may, I'd like to conclude the Q&A panel at this point and take our first break. We will resume the programming at 10:05 A.M. Please enjoy refreshments out in the vestibule. For the second part of today's meeting, Teresa White, President, Aflac U.S., will provide a strategic overview of Aflac U.S., and Rich Williams, Chief Distribution Officer, will follow with an overview of the distribution and growth strategy for Aflac U.S. That will be followed by a Q&A panel. Now we will hear from Teresa. Teresa White 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 Columbia in 2013. In 2014, she was promoted to President of Aflac U.S. I'll now hand the podium over to Teresa.
Thank you. Our vision for Aflac U.S. is to be the number one distributor of benefit solutions supporting the U.S. workforce. Aflac is executing on a solid strategy to accomplish this vision. I'm excited about sharing it with you today. The bulk of my discussion will be focused on market trends and how Aflac U.S. is responding to those trends, driving growth, efficiency, and customer experience. Rich Williams, Executive Vice President, Chief Distribution Officer, will follow my presentation to provide additional insight regarding our plans for growth. Let's begin with a brief look at our market trends and landscape. Although the macroeconomic environment has shown marked improvement, the overall cost of healthcare has continued to rise. According to an annual Kaiser Family Foundation survey, family coverage premiums have increased 55% since 2007 and 19% since 2012. A family policy that cost $15,700 in 2012 cost about $18,700 in 2017.
Additionally, the average employee contribution for family coverage has increased 32% since 2012, while workers' wages have increased only 11.8%. While the general economy shows improvement, these trends continue to limit the spending power of many American workers. Looking at it from a standpoint of deductibles, the Kaiser Family Foundation calculates that deductibles have risen more than six times faster than workers' earnings since 2010. Meanwhile, in addition to shifting some of those premiums over, we see a number of companies also shifting more costs to employees through high deductible health plans and reduced benefits. In addition, employers are funding health savings accounts or health reimbursement accounts. However, only the larger employers are able to do so. The smaller employers simply are not able to increase their contribution to these accounts for their employees.
According to a 2017 Aflac WorkForces Report, many workers in the U.S. are not financially prepared to handle this steady increase in healthcare expenses and cost-sharing. In fact, 46% are not prepared for the out-of-pocket expenses associated with an unexpected illness or accident, and 65% have less than $1,000 for such expenses. Because of these out-of-pocket costs, more than one in five employees have had difficulty paying medical bills, they've delayed medical procedures, or they've avoided the doctor altogether. This means that many consumers are left financially unequipped to weather those catastrophic situations. With this as a backdrop, it's no surprise that the voluntary benefits market as a whole is projected to grow at a rate of about 7% compounded annually from 2018 to 2022, with sales through the broker distribution growing at a slightly faster pace. Aflac U.S. is well-positioned in the market.
Aflac is offered to more than 460,000 payroll accounts through our independent sales force of 8,500 plus average weekly producers and a growing network of regional and national insurance brokers. With about 13 million policies in force, our market share is around 19%. We continue building on our strength as industry leader by delivering innovative solutions that protect our policyholders and their families. Of course, our brand is at the heart of our success. It's a direct reflection of our core philosophy and desire to help people. The beloved Aflac Duck has been a symbol representing the promise that no matter what unexpected things life throws your way, Aflac is always there in your time of need. Thanks in large part to the Aflac Duck, nine of 10 people in the U.S. recognize the Aflac brand.
Our feathered friend has served as an effective door opener and catalyst to connect Aflac with thousands of consumers and employers. When you consider that there are about 171 million people in the U.S. workforce, but a little more than 7.5 million are covered by Aflac, this represents a tremendous opportunity. To capitalize on this opportunity, we've adjusted our vision from being the number one distributor of voluntary products in the U.S. worksite to being the number one distributor of benefit solutions supporting the U.S. workforce. With that, in addition to increasing access and penetration or participation in the worksite, we have the opportunity to increase access to the 24.3 million entrepreneurs, independent professionals, and contractors who make up the gig economy. Incidentally, this segment of workers is the fastest growing segment in the U.S. What's our plan to leverage this opportunity?
We're executing on a strategic playbook. We know that we must develop new and innovative products and services to respond to the emerging needs of the consumer. We must strengthen our core distribution and build new distribution methods to meet the needs of an evolving marketplace. We must take advantage of technology advancements to drive efficiency and positive customer experiences. Finally, we must connect with this new generation of consumer. That's exactly what Aflac U.S. is focused on delivering. We're balancing profitable growth, operational efficiency, and customer experience. As I mentioned earlier, Rich Williams will follow my remarks today to provide additional perspective on Aflac U.S. growth drivers to include distribution expansion programs that respond to the changing market trends. Additionally, he will provide insight and perspective on how Aflac is responding with products and solutions to match the needs of the new generation of consumer.
With that, I'll focus the balance of my discussion on how innovation and transformation are playing a key role in supporting our core strategic objectives. We know that automation and digitalization will reduce or eliminate some known risks merely by reducing the manual work. Aflac U.S. is responding to market trends by making key investments in digital properties and tools. These tools enable mobile claims filing and tracking, robotics, automation, chat capabilities, and a number of key group platforms. Ultimately, these investments will improve efficiency and customer experience. As we transform to more digital properties, we also understand that digitalization can introduce new risks to our business model, particularly in the area of cybersecurity. Aflac U.S. continues to make investments in our U.S. cyber program. We've adopted the National Institute of Standards and Technology cyber framework for our global security program.
Additionally, we've been maturing our security posture for the last four years. We see cybersecurity as a business imperative and an extension of our pledge to protect our customers and be there when they need us most. Now, as I turn to efficiency, digitalization provides the opportunity to minimize the expenses associated with running our day-to-day operations. At our 2016 financial analyst briefing, we shared that our goal, our expectation was to invest a total of $50 million from 2016 to 2018 as part of our strategy to drive efficiency with a portion of that spend being capitalized. Our investment has primarily been focused on transforming our Aflac Group operation in Columbia, South Carolina, which represents a very small percentage of our financials but presents the largest opportunity for growth and efficiency improvement.
This transformation not only allowed us to focus on key customer pain points, but it also allowed me as president to assess the team's ability to execute on a large-scale initiative. We've invested around $60 million thus far, but we've generated enhancements and a projected annual increase in earned premium of over $110 million in 2018 as compared to 2015. Additionally, we've observed an eight percentage point improvement in Aflac Group's expense ratio over the same time frame. We've made investments in digital enrollment, customer relationship management, and more importantly, a new end-to-end group administration system. At this point, we're focused on three areas. We're continuing to drive utilization of the new group systems. We're increasing digital capabilities for our customers. We're conducting an assessment of our individual product platform.
With workforce dynamics continuing to evolve, we're preparing to meet workers when, where, and how they want to do business with Aflac. We believe these plans will increase our overall operational efficiency and enhance our speed to market. Our long-term objective will be to retire some of the older, less agile system platforms as we adjust our business models to prepare for our future state. As I've mentioned in my previous remarks, I expect to see a slightly elevated expense ratio in the short term as we position ourselves to drive down our expenses over the longer term. We'll continue to reinvest our expense savings back into our U.S. IT roadmap. You'll hear Fred talk a little bit more about this later. The investments in our platform are a direct response to the needs of the new consumer. We believe that they are paying off.
This new consumer is more digitally capable, on the move, and places a growing importance on social purpose and flexible work environments. Our new tools allow us to create services that help this new generation of consumer to interact with Aflac with the ease, choice, and simplicity that they expect and demand. One example of that is One Day Pay. For eligible claims, Aflac U.S. can process, approve, and electronically send funds to claimants for quick access to cash in just one day. We recently enhanced our claim services to create a mobile app that allows claimants to file and track their claims by way of their mobile device. We've already seen approximately 220,000 downloads of the new app. We expect to see over 340,000 by year-end, which demonstrates the importance of this digital platform.
Everwell is another example of how Aflac is responding to the changing needs and preferences of the market. As you recall, Everwell is Aflac's proprietary platform designed to address the needs of small businesses. Everwell provides consumers a shopping experience and allows Aflac to offer partner products and value-added services alongside Aflac coverages. This further enhances the value proposition and integrates the communication, which improves the overall productivity of our independent sales distribution. As we continue to drive adoption of these new tools and capabilities, we're also taking advantage of the opportunity to leverage relationships with Aflac's strategic venture investments. Our equity investments at Aflac Ventures provide a great opportunity for us to understand and leverage new digital platforms to bring new ways and to deliver value to our clients. When we screen these equity investments, one of the most important factors is whether it can benefit our core business.
I'd like to share one example of a venture capital company that we've partnered with to bring unique solutions to the table for our clients, and that property is Wellthy. Wellthy is a decision support tool for employers. This solution provides comparison shopping for major medical plans in their areas, and it couples those with the Aflac benefits to provide the best financial solution for the employer and the best coverages for the employees. Our strategic and venture investments are aligned with our broader enrollment strategy and enhance the Aflac value proposition by enabling us to bring key capabilities to our clients. We're excited about the potential that we see with these relationships and believe that they will continue to boost our strong brand and set Aflac apart from its competitors. One of the key measures that demonstrates that our strategy is working is our premium persistency.
Our 2017 premium persistency hit an all-time high of 78.4%. We believe that our transformation investments and digital innovation have contributed to these results and will continue to do so into the future. Again, these are strong results, and I'm proud of the progress that we've made thus far. I believe that Aflac U.S. transformation and digital investments will drive access, participation, and retention. As we continue to execute on our strategic playbook, we anticipate stable premium persistency with earned premium results in line with our long-term goal of 2%-3% compounded annually. Let me turn the program over to Rich Williams, where he will provide additional insight into our growth objectives. Thank you.
Thank you. Good morning. Today, we'll talk about our strategic approach to growth in the U.S., which aligns with the significant market opportunities that exist. As you'll recall, Aflac's vision is to be the number one distributor of benefit solutions supporting the U.S. workforce. As Teresa stated previously, our vision has expanded because the market is changing and access to the workforce is evolving. There continues to be a significant need for our benefit solutions in the traditional workplace, and we are well-positioned to capitalize on this growth opportunity. At the same time, employees are no longer just at the work site, but mobile and oftentimes have multiple jobs. Employees and employers need benefit solutions, not just product sets, through a variety of access points.
Reaching the U.S. workforce where they are and how they want to be engaged is a key theme to the forward-looking approach to growth that I'll share today. The majority of my discussion today will focus on three things. Key market opportunities, how our distribution approaches are strategically aligned to capitalize on these market opportunities, and how we are preparing for the next generation of growth opportunities. Before I address the market opportunities for Aflac, I want to address something about our distribution composition, which is unique in comparison to our competitors and helps frame up our growth rates that differ from our competition. Our distribution is unique in that our sales have historically been agent-driven, unlike our competitors, who have been largely broker-driven.
The voluntary insurance market as a whole is growing at a rate of about 6%-8%, which is driven by broker growth between 8% and 9%. Aflac broker sales are actually growing at a higher rate than the industry and have more than doubled since 2009. At the end of 2017, broker sales represented more than one-third of Aflac U.S. sales, which stands in contrast to our competitors, where about 70% of their market sales come from brokers, with the remaining coming from 25%-30% agency approach. When you combine valuable coverage and broad distribution with the powerful brand we have, it's easy to see why we have a strong competitive advantage to capitalize on the market opportunity. To growth opportunities. To begin with, there are over 40 million small businesses across the U.S., and they need our solutions.
To attract and retain employees, small business owners need to differentiate themselves from competitors and provide additional incentives to their employees and their families to help mitigate rising healthcare costs. As Teresa stated previously, family coverage premiums have increased 55% from 2007, deductibles have increased six times faster than workers' earnings since 2010. With the strength of the U.S. economy, small business owners have an opportunity to protect their employees through the value of voluntary benefits without feeling a financial impact. Aflac, with a market share of 19%, according to Eastbridge Consulting Group's 2017 worksite voluntary report, is the leading provider to small businesses. At the same time, Aflac's overall penetration in the small business market is low, with only 10% of small businesses offering voluntary insurance.
We see this as a significant opportunity to meet the needs of small business owners and grow our market share even further. Capitalizing on this market opportunity requires broad distribution, by recruiting 16,000-plus agents a year, we're well-positioned to be the leader in this space. Turning to the brokerage market, Aflac has strong relationships and sales momentum with the national brokerage firms who typically serve larger clients. At the same time, there are more than 400,000 brokerage firms across the U.S., many of which are local and regional in nature, they're being asked by their clients to provide voluntary benefits for the first time. Many of these clients served by these local regional brokers are in the mid-market, which is key to our strategy. We're investing in tools, training, and capabilities to assist our core agency distribution in supporting these brokers to accelerate our broker sales growth.
With Aflac being the leader in voluntary benefits for decades, we have built a very large client base. Aflac has more than 460,000 accounts, this is a market of its own. As Teresa has mentioned, Aflac has not fully leveraged what it has to offer our existing accounts, we're always pushing to increase our participation rate. By better engaging and connecting with our existing clients, we're simply living out our brand promise in servicing them. The residual effect will be meaningful growth. For example, by increasing policyholder persistency by 2%, we estimate this would grow our earned premium $55 million-$60 million. You can see our rationale and our excitement for focusing on leveraging our business with our existing clients. Lastly, we focused our growth strategy upon the contingent workforce, which makes up the gig economy, I'll use these two terms interchangeably.
As the workplace and workforce are changing rapidly, Aflac is changing with them. The contingent workforce, which is the fastest-growing population of workers, does not have easy access to voluntary benefits. As a result, we're looking to different approaches, such as digital distribution, to meet this growing need. Now that we've covered the specific growth opportunities, let's discuss how we're strategically aligned to capitalize on this opportunity through, one, our independent career agents, brokers, account management, and partnerships, and digital. In order to capture the small business market opportunity, we'll continue to leverage our career sales team, which is comprised of independent career agents. These agents are primarily responsible for increasing our national footprint through the recruiting and training of our field force to successfully offer Aflac's value proposition to small businesses.
There will always be a need for our field force to have these one-on-one selling opportunities with small businesses, and we're going to continue to invest in this distribution approach and provide the field force with more tools and opportunities to sell our solutions and enjoy a long-term fulfilling career at Aflac. Our broker sales approach leverages our strong brand that appeals to both national broker partners and local and regional broker partners alike. We have a seasoned team of broker sales professionals who are Aflac employees, leveraging their expertise and relationships to build our broker business and service our broker partners. In addition, we're tapping into the many talented members of the independent career sales agent team who also work with brokers. The combination of both distribution approaches allows Aflac to reach clients through brokers in both large and mid-market clients.
We've also aligned our service to existing customers to deliver on Aflac's brand promise. The account management team is dedicated to supporting our existing accounts by leveraging our independent career agent field force and broker teams to offer an automated, seamless service process for all account segments. The digital distribution team is responsible for expanding Aflac's distribution methodologies and reaching the contingent workforce in many ways that Aflac is not reaching them today. This team actively pursues partnership opportunities, technology-driven lead generation, and other approaches that expand our distribution reach. These are our four strategic approaches, but I want to point out one important feature of this alignment. Product solutions is the foundation for all of the methods listed above. This is because it spans all distribution approaches. Let's go into a little bit more detail of our product solutions.
Our initiatives for product are centered on providing solutions to address the evolving customer needs. We are focused on delivering product enhancements to our current portfolio, developing new-to-the-market products, and offering innovative services to differentiate Aflac in the market. It's important for us to continue leading the market by innovating product solutions through periodic product enhancements. Further, as we continually listen to clients and brokers, we glean ways to strategically broaden our portfolio by expanding to products that meet a key need. Over the past year, we've added True Group Life and Disability Insurance as a vital need of our clients and brokers. Lastly, we're actively researching new-to-market products to anticipate the needs of the changing workforce.
This approach allows Aflac to continue to be the number one distributor of benefit solutions, supporting the U.S. workforce by being the first provider to know what the next generation of solutions customers need and deliver on the understanding of the market. In addition to new-to-the-market solutions and enhancements, we're expanding our product solutions to include more innovative services such as value-added services, because it provides customers with day one tangible value, even if the Aflac customer never files a claim. These services are a great complement to our core value proposition, and when the value-added services are offered in our accounts, we see an increase in employee participation of about 10% within our core product offering. This increase in employee participation is driven by the change in the workforce versus worksite solutions that Teresa and I both have mentioned.
Employee and employer needs are changing rapidly and offering value-added services within our products allows Aflac to solve for greater needs and customers recognize this. Aflac will continue to lead by researching and understanding market trends to find innovative ways to provide value-added protection that our customers need. Now to digital. As I previously shared, the contingent workforce is the fastest growing workforce segment, and the number of employees without access to voluntary benefits will only increase. Clearly, this is the growing part of the workforce needs solutions and ways to access that we do not broadly provide. As a result, we've created Aflac's digital distribution team to assess product and delivery solutions to meet this growing need. This creates an opportunity for growth creation as well as growth optimization, which will lead to an incremental sales lift.
Our approach to capitalizing on the market opportunity will involve building, buying and partnering to get the different components necessary to succeed. The key components include three things. First, customer-centric products, process, and technology. Second, technology to increase consumer access points. Third, consumer analytics. We'll certainly take a measured approach to pilot and test distribution approaches over the next 18 to 24 months to ensure a full understanding of the market and profitability before accelerating any such approaches. Successful execution of this strategy will allow us to engage customers through different mediums and to connect with or access customers where they want to be. This increased access to an evolving workforce will allow for acceleration of incremental sales growth for Aflac U.S. In closing, I reminded everyone in the beginning that our vision is to be the number one distributor of benefit solutions supporting the U.S. workforce.
We're very confident and believe the strategy outlined today aligns well with the market opportunity and Aflac's vision to grow profitably. Thank you.
Thank you, Rich. We will now have the Q&A panel for Aflac U.S. Joining Dan, Teresa, and Rich are Virgil Miller, Chief Operating Officer, Aflac U.S. and President of Aflac Group, and Aflac Incorporated's Global Chief Risk Officer and Chief Actuary, Al Ruggieri. Again, please wait for the microphone, tell us your name and firm, and limit yourself to one question to allow others an opportunity. With that, I turn to John Barnidge.
John Barnidge, Sandler O'Neill. This goes a bit back to my first question during the first Q&A. Are you able to quantify today what % of applications are digitally submitted, what % of claims are digitally submitted in the U.S. and Japan?
I'll ask Virgil.
Digital.
Yes. For the U.S., I'll speak for the U.S. only on this particular question. If you look at our % of applications, 70% of our applications are straight through processed without a human touch. That means that 90% of all applications are digitally submitted. Some of those that do not straight through process, kick out for pending reasons, need additional follow-up. 70% have no human touch to it. On the claims side of the house, right now, I'm going to give you two different numbers. If you look at what is One Day Pay submitted, it's 40% of all claims go through a One Day Pay process. Inside of our total claims number, though, most of our claims that are straight through processed are wellness type claims, and 70% of wellness claims are straight through processed also.
Suneet?
A question for Suneet Kamath from Citi. Question for Teresa on persistency. You talked about the improvement to around 78%, I think was the most recent statistic. Just based on your mix and where you see the industry, best in class, that kind of thing, where do you think you could take that persistency rate over the next couple of years?
I don't have a specific number that I can tell you where we can take it. Here's how I look at it. We have a number of surveys with clients to understand pain points. As we understand where their pain points are, we also understand why they would switch and where they would go or why they would leave Aflac. What we do is we have a strategic approach. We have a team of people, both on the sales side and on the administrative side, looking and prioritizing those pain points to try and make sure that we close those gaps. From my perspective, at this point, we've modeled stable persistency, but we're continuing to assess where pain points are so we can increase that persistency number.
In fact.
Remember one thing about persistency, which I know you know, but I'll just say this for everyone, is that we want to move persistency with the entire class of people in it. We don't want to move just the older, sicker ones. We've got to make sure when we improve persistency, we bring the younger, healthier ones with us. That's a very delicate balance that they work on, and that's why just an all-out number of 78, let's take it to 83, could actually be bad for us. You have to work that way.
On the contingent workforce, was there a comment that it's probably going to take 18 to 24 months before you identify what pilot programs you're going to be using, we really shouldn't expect any sort of sales impact until we get to that time frame?
I think the sales impact will be nominal. What we're looking for is the right target market, we're looking for the right product design, and then we're looking for financial viability. Nominal.
I think if we may go to Gerhard Moorfield to come back to John Barnidge's question in regard to digital in Japan.
For digital applications in Japan, approximately 30% of applications right now are processed electronically. Currently, no claims are processed electronically. However, next year, we believe that we will take the medical product claims to about 40%.
Thank you, John.
Let me say one thing about claims processing in Japan. The FSA has enormous stringent requirements for. They just basically want a zero tolerance for any claims issues to any insurance company out there. The checks and balances that we have are enormous in Japan compared to the U.S. for all companies. Anybody from Japan want to comment on how-
Our percent accuracy rate currently in Japan for underpayments is 99 point-
Excuse me, could you please use the microphone?
John, speak in the mic.
Our current accuracy rate for claims payment in Japan is 99.998%. We expect to exceed that again this year. That is a publicly published number, not on percentage, but on actual number. It's a very important number for the consumers, and we are the leader in the industry on accuracy.
Nigel?
Thanks. Nigel Dally, Morgan Stanley. I guess looking at the distribution, you still rely heavily on the agents even though the brokers have been growing. With the agency, one of the key drivers has been the ability to recruit. We've seen a very tight labor market. Just hoping to, I guess, color as to how the tightness of the labor market is impacting your ability to continue to recruit individual agents.
In general, when you have a tighter labor market, it's a little bit tougher to recruit to a commission position. However, I think we've seen some just moderate recruiting in some areas. We still feel good about moving, and maybe I should ask you to respond to what you feel good about, but I feel good about where we are from a recruiting standpoint. The reason I do is because our objective is to bring those recruits on to increase their productivity and to then drive them to a career path with Aflac. I feel like we're seeing that in the numbers. I'll let Rich respond.
The only thing that I would say is we've got Come out to say around 16,000 recruits annually. With the need in our business, there's a tremendous opportunity for them. We talked about that with the small business opportunity and a longer-term career working with brokers. As the workforce continues to grow, I think that that's a very reasonable goal to achieve on an annual basis.
Eric.
Thank you. Erik Bass with Autonomous Research. I had a couple questions on the employer penetration opportunity. I was wondering, first, if you could provide any data on kind of election rates of employees who are taking Aflac products in your existing clients and how that may have changed in recent years. Then secondly, I guess as you look at whether it's earned premium growth or sales, how much do you expect to come from adding new clients and new group accounts versus improving the penetration of existing accounts?
Right. First of all, we've mentioned at prior earnings calls with the invention of the adoption of Everwell platform, we're seeing an increase of about 10% improvement in participation rates. And adoption of Everwell, that is going to be our platform on a go-forward basis, continues to accelerate. I think the other question was around new clients versus existing clients. We typically write sales, almost two-thirds of our sales come from existing clients, then about a third from new accounts, and we don't see any major deviation from that going forward. We also see the opportunity, especially with our new product deliveries, to further cross-sell into our existing clients.
Thank you. That 10% base that you're improving off of, what would that kind of on an absolute number look like for kind of percentage of employees within a typical employer? How many would elect Aflac products?
Yeah. We'll follow up. I think Teresa had our participation number in her sort of pie chart, but we'll follow up.
Thank you.
Humphrey.
Maybe a question for Teresa. I'm Humphrey from Dowling & Partners. A question for Teresa. I think last year you talked about kind of the hurricanes in the U.S., Irma, Puerto Rico, have an impact on your kind of recruiting and sales efforts in the third quarter. Just thinking about for the hurricane in Carolinas, do you anticipate any impact in the third quarter or maybe even kind of spilling over to the fourth quarter?
We these days are really watching the hurricanes come through because they do disrupt the business. However, the disruption that we saw with the business this time with the North Carolina, South Carolina hurricanes were minimal. They were very minimal. We had some disruption in service. Obviously, the brokers and field agents were more concerned, as we wanted them to be, with their families and their safety. We had contingency plans specific to our employees in South Carolina, where some of them were relocated to Atlanta to ensure that we had business continuity. As to our sales operation, we believe that the impact was somewhat minimal. We will have some, but we believe it was somewhat minimal in the third quarter. I don't really see it moving into the fourth quarter at all.
Okay.
Joshua Shanker, Deutsche Bank. With the 2%-3% growth rate anticipated through 2020, is there a way of getting a little more granular? How much of that is agent growth? How much of that is policy sold per agent? How much of that is price? How does the 2%-3% growth rate compare to what you perceive as the growth rate of the addressable market?
What's behind the 2%-3% growth rate is moderate growth on the career agency side. We see most of the growth coming from the broker distribution. As it relates to the digital distribution, as you heard, we are still testing some things out. Really most of the growth, particularly on the broker side, is the mid and large case brokerage market, is where we see it. I forgot your second question.
How does Aflac's 2%-3% growth outlook compare to what you view as the growth rate of the addressable market?
We believe that when we talked about the 24.3 million that we don't address today, we believe that that's a market that we should be addressing. About 60 million workers have voluntary products based on Eastbridge. About 60 million have voluntary products. The addressable market is 171 million. First we've got to get that 60 million. Of that, only 7.5 have Aflac. We have to continue, and that's why you see most of our strategies are really trying to make sure that we're driving participation and penetration in the market. We've got to get to that 60 million who already understand the value proposition, and then that 171 million, we need to prove that value proposition.
Jay.
That's true. Dan made a comment that 60 million that I was talking about that have voluntary products, some of the products that are in that market, we don't sell. That is a great add.
Jay Cohen, Bank of America Merrill Lynch. You had talked earlier about the competitive environment in Japan. I'm wondering if you can make similar comments, what's happening in the U.S., and how is it changing, if at all?
When we talk about the traditional worksite and workplace, the number of carrier competitors absolutely dramatically increases. If you go back over the past 10 years, you'll see more than doubling the number of competitors in the space. I think similar to the Japan conversation earlier, I think the viability of them long term will certainly be one for us to watch. We're also expanding distribution opportunities, and that's why we talked about going after the workforce that's not in that current traditional workplace. We have sort of a multi-pronged growth approach.
Any other questions? Thank you, panelists. We are now entering the final portion of presentations this morning, focusing 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 Japan and Aflac U.S. Fred Crawford, Chief Financial Officer, and Max Brodén, Treasurer and Head of Corporate Development, will follow with an update on Aflac Incorporated's financial outlook and strategies for capital management. Now we will hear from Eric, who joined Aflac in 2011 as First Senior Vice President and Chief Investment Officer. He was promoted to Executive Vice President in 2012 and was named President of Aflac Global Investments earlier this year. Eric?
Good morning. As you know, the market environment has remained a challenge with low yields in Japan, higher hedge costs, and broadly tighter spreads across all fixed income asset classes. Conversely, opportunities presented themselves that Aflac Global Investments was able to execute on. Let me highlight major investment themes and how we were able to generate solid performance results, driving increased investment income while managing risks. One of our most important initiatives was implementing the three-pronged approach to the Aflac Japan Dollar Program. We successfully transitioned on January 1st, and since that time have achieved growth in the floating rate asset program, transitioning to short-dated hedges, tracking the duration of the floaters, and stabilizing the net income of the program.
With LIBOR increasing this year, our floating rate income is ahead of our budget, while hedge costs were predominantly locked in as we termed out our hedges for the year. Defending against low JGB yields, we have expanded yen fixed income to assets including private placements and Japan local corporate debt, allowing us to diversify from JGBs while picking up incremental yield commensurate with the credit risk that we carefully underwrite. We designate the majority of these assets as policy reserve matching for ALM purposes, which reduces potential capital volatility. Aflac Global Investments found new tactical asset allocation trades this year as a result of U.S. tax reform.
In Japan, we executed on a $1.2 billion switch trade, diversifying investment-grade exposure to stratify maturity dates and reallocate among new corporate bonds and floating rate transitional real estate loans while picking up $18.3 million of annual net investment income. For Aflac U.S., tax law made investing in municipal bonds favorable on an after-tax basis, and we executed a $500 million switch trade out of investment-grade corporates. We not only picked up income, approximately $3 million of after-tax income, but upgraded from BBB+ to AA. Through our strategic relationship with NXT, we were able to purchase a $1.1 billion bulk portfolio of transitional real estate loans at favorable terms early in the year, which helped accelerate the growth of our floating rate portfolio and improve income. Aflac Global Investments successfully converted into a legal subsidiary on January 1st as part of the broader Japan branch conversion of Aflac.
This conversion further promotes our business of asset management, leverages the success of the NXT equity investment we recently harvested and enjoyed a 15% return on, and promotes finding new ways to leverage Aflac Global Investments for unique investment opportunities. We are in the final stages of the regularly planned three-year strategic asset allocation analysis. While we don't expect significant changes, we are carefully analyzing which of any impacts there may be from the conversion of Aflac Japan to a subsidiary, given the changes on capital and dividend rules that go along with it. For Aflac U.S., we are carefully examining RBC and dividend rule impacts post the JLP conversion date. We expect our analysis to be completed during the fourth quarter. On this page, you can see the Aflac Japan portfolio year-over-year through June 30th.
I'll highlight that our new money was approximately split 52% to JPY and 48% to U.S. dollars, with U.S. dollar investments focused on the growth of the floating rate portfolio and loans. Floaters now represent 5% of the portfolio from 2% last year. New JPY assets were diversified but concentrated in JGBs for their ALM characteristics. On this page, we see similar portfolio details for Aflac U.S. Let me highlight the increased muni exposure resulting from tax reform and the switch trade. As a result of tax reform and working with our tax team, we learned muni income is 70% excludable from U.S. taxable income, therefore providing a beneficial after-tax advantage. With that analysis, we identified high-quality double A municipals and swapped out of lower-rated triple B plus investment grade corporate. We like trades that increase credit quality while enhancing income.
I'll also highlight growth in floaters, which we find attractive relative to fixed rate bonds and the fact that it also provides diversification benefits. Let me turn to the Aflac Japan U.S. dollar program. This slide should be familiar as we presented this last year. It lays out the foundation for the three-pronged approach. On January 1st, we officially segmented the portfolio into three prongs. Group 1's focus is on floating rate assets and short duration hedges with a strategy to closely match the duration of the assets and hedges. Group 2's focus is on long-term bonds with longer duration hedges, though we expect and are willing to have a duration gap between assets and hedges to reduce hedge cost volatility against the asset yields. Finally, Group 3, the focus of which is on all remaining long-term assets which are not hedged.
As you recall, we determine the amount of unhedged U.S. dollar exposure, or said another way, the hedge ratio, by gradually adjusting it over time towards the risk-adjusted economic surplus of Aflac Japan. Fred and Max will further describe that process in their remarks. Let's review implementation and key metrics. Over the past year, the portfolio grew by about $2 billion targeted to the floating rate assets, which now make up 24% of the overall program, up from 9% over the past year. You can see on the top right, growth in the U.S. dollar program is targeted in Group 1, the floaters. Group 2 and 3 stay stable in total size. Hedges are adjusted between them to maintain the 40% hedge ratio. The bottom left table shows the duration of our asset and hedges implemented within the new approach.
On the bottom right, you can also see income and hedge costs by Group. Group 1, the floating rate assets, enjoys a high average yield, which has actually increased during the year as LIBOR has ratcheted up above our planned assumptions. Hedge costs for Group 1 are running at about 2.39%, which is fairly lower than today's three-month hedge cost running at about 2.62%. You'll recall that we termed out our Group 1 hedges for existing assets last year in anticipation of rising hedge costs. Let me also comment that in July, we implemented a floating for fixed LIBOR-based swap to partially protect our income in the event LIBOR comes back to normal levels.
While not material to our expected results this year, you should know that we use tactical decision making and derivative tools when it makes sense to proactively manage this growing portion of the portfolio. As we approach the end of the year, the termed out hedges for group one will be rolled, and their costs will be closer to the current market levels. Offsetting this will be the higher amount of income we are already enjoying. The net income will be in line with what we would have expected had we just been rolling every three months all along. Our strategy allowed us to enjoy better 2018 results. As you know, investment results are impacted by a number of variables, some out of our control. Those out of our control, such as market factors listed here, have moved into a new regime.
We have moved from an accommodative central bank policy to a more restrictive one, given greater economic growth and inflation. We are now in more of a rising rate environment. While we have enjoyed a benign credit environment, that too will shift, though the timing could be a year or two out. Within our control are Aflac policies and the objectives you are familiar with, and certainly have an impact on how we manage the portfolio. In a moment, Fred and Max will address Aflac's approach to managing capital, liquidity, and other policies impacting the hedge program. Simple examples include the use of excess capital in Japan to support a larger unhedged U.S. dollar portfolio, as was the case in 2018. Alternatively, should we move additional capital out of the insurance subsidiaries, this has an obvious impact on general account net investment income.
In some cases, what is good for the shareholders may be headwinds to net investment income. While Aflac Global Investments must consider both these external and internal factors, we have a variety of active management tools at our disposal to add value and generate returns. I've listed a number out here, and we have an established track record of success with each of them. When we model these factors into how our portfolio is structured and managed, and assume the current market environment continues, our preliminary planning for 2019 shows general account net investment income is stable, with modest growth in the following years. Of course, any changes to these factors or Aflac policies may influence the results. We'll cover more on this at the December outlook call later this year.
I also wish to note that we feel well prepared for if and when the credit cycle turns, which will result in higher levels of impairments and losses for insurance companies and credit investors. As you know, we have managed the portfolio to be within well-defined risk limits. We have followed a strict set of underwriting criteria by our global credit team for new investments, and we continually review the portfolio for credit risk. While we won't be immune to a cycle shift, I am confident in our ability to outperform and have credit results that are within the forecast we have established and reflected in our capital planning and budgeting. In closing, the Aflac Global Investments team is focused on generating positive performance in all market environments.
Our challenge of finding unique and safe assets that fit our balance sheet and capital while protecting policyholders, is a large one. We will continue to evolve our asset management model, looking for growth opportunities that builds capability, outsource it, or even buy it through equity or joint venture opportunities. We believe this aligns well with Aflac's objectives of safety and growth. Thank you. Now I'll turn the program over to Fred.
Thank you, Eric. I appreciate that. Thanks to all of you for joining us today. Welcome, we appreciate your support and your interest in Aflac. As mentioned earlier, I'll be sharing my presentation with Max Brodén here, sitting to my left, your right, who is our corporate treasurer and head of corporate development. Max will provide a discussion of our capital plans in greater detail. I'll focus my time on our venture initiatives, core margin development, and will return later after Max is done to wrap up on our outlook for capital deployment plans overall. As Dan said earlier, our approach to driving long-term shareholder value is straightforward. We pursue growth through product development, distribution expansion, and digital advancements to improve the customer experience. We augment this by venture investments with application to our core business.
We seek to maintain our strong pre-tax margins through disciplined product pricing, stable investment returns, and leveraging a period of favorable benefit ratios to invest in our core platform for future growth and efficiency. Now having completed our Japan branch conversion to a subsidiary and better aligned our capital within legal entities, we're now positioned to optimize our free cash flow and deployment of excess capital generation. We are guided by our view of defending and building economic value. Examples include our shift from first sector savings to protection products, greater emphasis on value of new business metrics, and overall retention efforts. From a finance and investment standpoint, hedging strategies that reduce shareholder exposure to yen-dollar volatility, as Eric covered, our overall investment strategy and build of floating rate and alternative assets.
We look to build economic value while distributing a portion of that value annually through consistent dividend growth and share repurchase. Before commenting on margins, I want to spend some time on how we approach venture investing and incubation of non-organic business development opportunities. Two years ago, we formed Aflac Corporate Ventures and named Nadeem Khan as President of that operation. Many of you have not had an opportunity to meet Nadeem, but he's with us here today. Nadeem, if you don't mind, I think you're back in the corner over here. If you don't mind standing, please. I want to point Nadeem out. We've seen some questions already this morning about the nature of our venture investing, specific entities we're investing in, how they apply to the business. I thought I would point Nadeem out. He's certainly available to you to talk about our activities.
Nadeem comes with a rich background in strategic planning and corporate development and knowledge of Aflac's core business model. Aflac Corporate Ventures is a venture holding company that owns several key platforms. These platforms include our venture capital fund, which I'll touch on in more detail in a moment. In 2015, we acquired a technology business in Charlotte, North Carolina, called Empowered Benefits, now shortened to Empowered to denote its recently broadened scope. Empowered specializes in the benefit administration space and is the technology engine powering Aflac's Everwell enrollment platform in the U.S. We have since expanded this technology center to include digital innovation and the development of growth opportunities in digital distribution space. Empowered's location in Charlotte is not an accident. It is a vibrant fintech environment and the home, as you know, of both Bank of America and Wells Fargo retail platforms.
Finally, we're in the process of forming Aflac Corporate Ventures Japan that much, like Empowered, will focus on non-organic digital innovation and venture investing in Japan. As Koide-san outlined, this group is located near Shibuya, which is the digital technology center of Tokyo, not too far from where we are today. We have committed approximately $300 million of capital to our overall venture efforts, a subset of which is in our venture fund activity. Dan and I view this as a central piece of our strategic investment in future growth. There's also a risk management aspect of this. We guard against the risk of disruption by partnering in the development of next generation solutions. Focusing specifically on our venture fund investments, last week we announced the increase in Aflac's global venture capital fund from $100 million to $250 million.
We expect to put this capital to work over a three to four-year period as attractive opportunities present themselves. This slide captures our current activity as a $100 million fund investing in both the U.S. and in Japan. We source transactions in many forms and have reviewed over 1,000 opportunities since inception of the fund. Plug and Play and Carolina Fintech Hub are examples of accelerators we use to source transactions. At the same time, we naturally come in contact with interesting opportunities in our day-to-day business activities and are now a recognized name in corporate venture community. Recently, we have started to see attractive opportunities actually find Aflac as we bring both capital and potential for powerful growth to a target company. To date, we have funded or have commitments in place for nearly $55 million of this fund.
The common element of companies we invest in is technology or digital-based with a direct commercial application to our business. We are well diversified, and our holdings typically involve both equity investment and commercial contract with Aflac Japan or Aflac U.S. We increased the size of the fund as we are now moving beyond early stage companies with average investment size of $1 million to $6 million to later stage companies that may call for larger second or third round funding requirements. We're also investing in Insurtech funds requiring larger investments. This is all to provide greater diversification and stronger market coverage while showing our commitment to the space. Turning now to discuss our outlook for core insurance margins, I'll start with our business in Japan. We have started the year strong with pre-tax margins near record levels.
There are notable items influencing these results, namely the strong investment income results that Eric Kirsch mentioned, the introduction of our new cancer product, and timing of expenses expected to increase in the second half of the year. Our full year strong around 21%. The shift in earned premium is expected to continue lowering reported benefit ratios. We expect benefit ratios in the core lines of cancer and medical to remain strong. Claims trends continue to benefit from fundamental changes in Japan's healthcare system, including natural incentives to reduce total days in hospitalization. Therefore, we have lowered our expected benefit ratio range by 100 basis points. The shift in business mix applies pressure to our expense ratio, but the ratio is also influenced by continued investment in IT and digital advancements. We are projecting modestly higher lapse rates in selected lines of business.
This impacts earned premium and elevates DAC amortization, applying further pressure to expense ratios. However, this pressure tends to be offset by improved benefit ratio performance as you release reserves. Revenue is a key challenge in Japan with the runoff and paid-up status of first sector savings products. This in turn is very good for FSA earnings, cash flow, and economic value development. Last year, we established an enterprise approach and project management team to drive operating efficiencies across the company. We continue to periodically refresh our five-year estimates for our expense ratio as our efficiency efforts progress. We noted last year that we are targeting the midpoint of an 18% to 20% expense ratio by 2022. Post-conversion and with revised estimates for product mix, persistency, and capital management plans, we have modified that target and are now projecting a five-year goal of around 20%.
Very importantly, this is heavily influenced by the pace of business mix shift and calibrating lapse rates. Therefore, you should expect most, if not all, of this increase to be offset by a lower benefit ratio, thus preserving our strong pre-tax profit margins. Turning to the U.S., our overall profit margin is expected to remain strong, and we believe it's prudent for us to reinvest some of these profits back into our business to both defend and build market share. Benefit ratios have been trending favorably for the past few years. We think trends in healthcare utilization and hospitalization will continue in the near future as consumers struggle to afford higher deductibles and co-pays. We generally price our products for higher benefit ratios, and assuming the business performs to our pricing expectations, we would expect some natural upward pressure on our ratios from new business over the long run.
The expense ratio in the U.S. has been elevated recently as we have been actively investing in the U.S. platforms in both the group and individual business models. Realize that as you pull excess capital out of the U.S., you modestly reduce net investment income and impact the segment's revenue and expense ratios over time. As is the case in Japan, investment income has been a helper in 2018 relative to our forecast, which has benefited year-to-date margins. Earned premium is expected to grow in the 2%-3% range, assuming a 3%-5% compound annual growth rate in sales, and reflecting recent improvements in persistency. Having pulled out excess capital and related investment income, this translates into overall revenue growth of approximately 2%. In terms of the long-term 2022 forecast for expense ratio, we remain generally in line with what last year's long-term outlook was.
That was at the low end of our 33%-35% expense ratio range. There is upward pressure related to mix of business, as relative strength in broker sold business has a lower benefit ratio and higher expense ratio. Specifically, its broker sold group business that has that dynamic. We have set our core capital policies consistent with AA rating standards at the insurance company and A-rated senior debt levels. Any efforts to optimize our capital structure and lower our cost to capital starts and ends with our view of risk and the promises we make to our policyholders for financial soundness. Having finished the branch conversion and recognizing 2018 as a year of transition, we have turned our attention to optimization with the goal of yielding benefits in 2019. Four key areas of focus include the following.
First, we are reviewing our Japan dividend policy as a new subsidiary. We have a stated dividend policy of 80% of FSA earnings. However, this has resulted in a build of excess capital in recent years as FSA earnings have increased and credit conditions have been strong. Our overall low risk profile gives us an opportunity to increase the dividend capacity. Second, we are committed to our current RBC drawdown plan. We will work with the rating agencies and regulators to assess the risk profile of our U.S. business for more efficient capitalization. There's a lot of moving parts impacting RBC currently, but we expect to make a case for our low risk profile and ability to run at a more efficient level in time.
Third, we hold a level of excess capital and liquidity at the holding company. We can better leverage that idle capital to support a more efficient approach to reducing enterprise hedge costs and our shareholders' long-term economic exposure to the yen. Finally, Eric addressed our investment strategy. We continue to work towards the optimal amount of unhedged U.S. dollar investments to hold, and believe with rising hedge costs, this is an effective use of excess capital in Japan to improve net investment income over time. Let me now turn the presentation over to Max, who will go into more detail on these capital initiatives and the strategic rationale underpinning our efforts. Max, please join me up here.
Thank you, Fred. As Fred outlined earlier, 2018 is a year of transition, where we move capital around the group, get better capital alignment, and set us up for a more efficient capital structure in the future. During this process, we are traveling with elevated capital and liquidity levels at the holding company in order to facilitate this long-term goal. Post the branch conversion, we have continued to perform economic analysis of our business, balance sheet, and risk exposures. This includes comprehensive stress testing, which gives us comfort to execute on a number of capital management initiatives due to the financial stability of all our legal entities. In both Japan and the U.S., this includes a refreshed view of determining a dividend payout ratio. In the U.S., we continue to draw down our RBC towards 500%.
At the holding company, we are deploying capital to internalize hedge costs and lower the investor exposure to the JPY. All these projects have a common theme. They are driven and underpinned by an economic value perspective and framework, as well as disciplined risk management. At June 30th, 2018, we estimated Aflac Japan's SMR to be 950%. It is down from the SMR of 1,030% at March 31st, 2018, immediately before Aflac Japan's conversion to a subsidiary. The decline was primarily due to a reclassification of retained earnings to the other capital account within paid-in capital, triggering a temporarily lost tax gross up benefit of approximately 130 SMR points. We anticipate that this will rebuild within three years as retained earnings grows due to dividends being paid out of the other capital account. Earnings power remains strong, with FSA earnings growth expected to be higher than adjusted earnings growth.
This is important as FSA earnings drives regulatory capital formation and our dividend capacity. As a reminder, Aflac Japan is now governed by the Companies Act, which states that the dividend capacity is composed of retained earnings plus other capital reserve, less net after-tax unrealized losses on AFS. As our estimated dividend capacity is sufficient, we think our dividend payout ratio is likely to be in a range of 80%-100% in order to sufficiently fund growth while also giving room for higher payouts when the SMR ratio and economic conditions would allow such action. Our ESR, which is based on internal models, or in other words, our historical experience, in line with common practice for Solvency II, continues to be a guiding model for capital decisions and regularly reported to the FSA through our ORSA submission.
This ratio is in the 160%-170% range without any UFR, which we estimate would add 70-80 percentage points if incorporated. FSA field testing of an economic solvency ratio is influenced by the development of international capital standards, or ICS. This remains fluid and is not expected to be adopted before 2025. Our ICS ratio is currently lower than our ESR, primarily due to more severe prescribed morbidity and lapse risk charges compared to our internal model and our experience, but it is still at a healthy level. Overall, we have a strong economic capital position. Our U.S. RBC ratio and capital are developing according to our drawdown plan laid out last year, with $500 million of additional dividends over and above normal statutory dividends in both 2018 and 2019.
This means that we expect to end 2018 with an RBC of around 650%, and 2019 around 550%. This includes the impact of tax reform but excludes the impact of CECL changes. If we were to include our early estimation of CECL changes, this ratio would decline with about 40 points. Our statutory earnings are growing and are supported by strong benefit ratios and improved investment income, adjusting for assets moved to the holding company as a function of the drawdown. This gives us the opportunity to plan for statutory dividends in the range of 80%-100% of our statutory earnings. Over time, we would expect our RBC ratio to be below the 500% level as we recognize the strength of the earnings profile, low risk and stability of our operations, and low asset leverage, subject to discussions with rating agencies and regulators.
Investors often tell us when contemplating an investment in Aflac, there are two significant risks they evaluate and consider, the exposure to the yen and the level and volatility of hedge costs. At the holding company, we have launched an effort to reduce both these risks. As you know, in Japan, we buy US dollar corporate bonds and hedge them back to yen to synthetically create yen assets that match our yen liabilities. This also provides liquidity and benefit from capital relief due to the currency hedge put on. At the holding company, we have entered into forward contracts, which has resulted in the hedges becoming internalized by buying US dollars and selling yen. We are effectively lowering our overall economic exposure to the yen while the Japan balance sheet continues to hold a synthetic yen asset.
The accounting follows the same concept as the hedge costs in Japan, simply in the other direction. Effectively internalizing a portion of the hedge costs incurred. Ultimately, this reduces our risk hedge cost volatility, improves adjusted earnings as hedges are internalized, reduces GAAP net income volatility, and reduces the yen exposure on an economic basis enterprise-wide. There is a limit to how much we can do due to the capital intensity of this activity. As of June 30th, the Aflac Japan notional hedge balance was $9.8 billion, and the internalized portion was $1.25 billion, generating an income of roughly $7 million in the second quarter of 2018, booked in the Corporate and Other segment. Returns on capital are very attractive. Over time, we would like to grow the internalized portion. We will take a measured and risk-conscious approach.
I've outlined strong capital generation and capital levels in the insurance subsidiaries. When we move up to the holding company, liquidity levels remain healthy, with a total balance of $2.4 billion estimated at the end of 2018. When we determine any excess liquidity, we back out a minimum balance of $1 billion and $500 million that we currently have walled off to support our derivative activities, leaving a year-end excess cash position of $800 million-$900 million. As you know, liquidity levels always fluctuates throughout the year, driven by receipt of dividend payments from subsidiaries, which means that Q2 and Q3 tend to have the lowest ending balances. This liquidity is not trapped, though. It generates an income and supports our foreign currency risk reduction activities described earlier, which generates a very strong return on capital. Our debt maturity profile is healthy, with an increasing element of yen funding.
We have become a regular issuer in the global yen market, which is very beneficial to us. We offer a stable, highly rated credit to yen credit investors while achieving better matching of our cash generation and coupon payments, lowering the enterprise economic exposure to the yen, and achieving a lower financing cost. We do expect the yen debt market to play a significant role in our future debt-raising funding strategy. Leverage continues to travel at the lower end of our internal target of 20%-25%. As a result, we have $1.2 billion of senior debt capacity before we reach our internal leverage constraint of 25%. However, for value-enhancing activities, we could temporarily go above this range, and our possible debt capacity is higher than $1.2 billion, including sub-debt capacity, even without any disruption to our capital plans.
We remain comfortable operating in a slightly lower leverage target, though, despite having a low business risk profile, strong capital formation, and capital levels in our insurance subsidiaries at a healthy level. I have portrayed a strong capital and liquidity profile of the company. This means that we see more cash finding its way to the holding company level in the future for future deployment. If we properly execute on these projects, and assuming stable capital conditions, we will unlock a significant incremental amount of capital to be available for deployment in the 2019 and 2020 time period. We expect to internalize the economics of 10%-25% of our hedge costs. This number will fluctuate as we will refine this strategy further as we move into 2019.
An increase in the payout ratio from 80%-100% from our subsidiaries would add about $350 million from Aflac Japan and about $150 million from Aflac U.S. to deployable capital. Adding this up over two years, sum up to $1 billion of incremental deployable capital during the 2019 to 2020 time period.
This is a very significant amount. With that, I will hand it back to Fred to walk you through our capital deployment plans.
Thank you, Max. Let me pull it all together for you as to what this means for deployable capital. We generated a little over $6 billion in deployable capital in the three-year period ending 2017. Importantly, recall that 2015 was a period that included reinsurance benefiting FSA earnings in Japan and higher overall repatriation. In addition, this was a period of limited net impairments and realized investment losses. As we look forward to the next three years, we benefit from U.S. tax reform, adding approximately $250 million to our annual deployable capital and the drawdown of $1 billion of excess capital in the U.S. As Max covered, we have an opportunity to adjust our insurance subsidiary dividend policy. The range of annualized dividends paid by our insurance subsidiaries to the holding company of about $2 billion-$2.5 billion simply reflects the difference in 80% and 100% of regulatory earnings.
In the end, we see a three-year range in deployable capital of $6.5 billion-$7.5 billion. This all assumes stable market conditions and productive dialogue with regulators and rating agencies. With the exception of investing in core business growth and efficiency efforts, share repurchase continues to be the standard against which all other alternatives compete for our deployable capital. We want to remain tactical in our use of capital for repurchase within our guidance range. As Dan noted, we are committed to maintaining our track record of cash dividend increases. Our dividend policy is guided by growth in adjusted earnings per share, taken together with free cash flow generation and capital quality. We've allocated an opportunistic portion in our capital deployment plans.
We will look for opportunities to enhance our business through corporate development activities with a focus on digital distribution and leveraging our franchise strengths of brand, distribution, and scale. This includes our venture investing within Aflac Corporate Ventures, covered earlier in my comments. Our allocations illustrated here are not designed to be a precise estimate, but directionally how we would show our capital deployment priorities and approach. As is the case each year, we will give more precise guidance for 2019 on our December outlook call. Thank you for your attention. I'll now ask members of the next Q&A panel to join me and Max up here on the stage to take your questions.
Thank you, Fred. Joining Dan, Fred, Max, Eric, and Todd is Hideto Yamamoto, Chief Investment Officer of Aflac Japan, and June Howard, Senior Vice President of Financial Services and Chief Accounting Officer of Aflac Incorporated. As before, please wait for a microphone and tell us your name and firm. Please limit yourself to one question so everyone has a turn. Alex?
It's Alex Scott, Goldman Sachs. The first question was on the internalizing of some of the hedge costs. I guess I just want to better understand how you're sizing it and what it would do in a weakening yen environment. Would there be incremental buybacks to kind of offset the dilution to earnings in that scenario? How would you expect that to play out?
Yeah. In terms of the back-to-back program, as we call it internally, and internalizing hedge costs, we don't see that necessarily as playing into our buyback decisions and/or an equalization of the yen. We think of our results ex-yen impact. However, the main focus of that back-to-back is, yes, to increase both FSA earnings as well as GAAP earnings through internalizing the hedge costs, which are expected to rise over time. Also very importantly for you, the shareholder, is to reduce your exposure to yen-dollar volatility in either direction. One of the things, as Max mentioned, one of the governing issues that many investors struggle with in coming into our stock is they like the business model, and they like the risk profile of the company, but it requires you as a portfolio manager to also have some sort of view on the yen oftentimes.
What we're trying to do is reduce that economic exposure to a weakening yen over the long run. It also reduces the upside, if you will, of a strengthening yen over the long time, but that's the point. We're trying to neutralize that economically, and there's really three ways you neutralize that as a company. One is you increase your unhedged U.S. dollar portfolio in Japan and use it as effectively almost a U.S. dollar reserve to pay U.S. dollar dividends or economic value out of Japan over time. The second is you borrow in yen, which we do at the holding company to the tune of roughly, say, $3.5 billion worth of borrowing in yen. Then the third is this dynamic of internalizing your hedge costs or back-to-back hedging, which as we build that, has the effect of synthetically unhedging U.S. dollars in Japan.
When you add that up, we start to slowly neutralize the economic value of our Japan franchise to a strengthening or weakening yen. You can now start looking more carefully at the economic value creation of the company over time, our core business model, as a reason to invest or not. That's basically the fundamentals around it, but it doesn't necessarily play into our repurchase strategy.
Yeah, that's helpful. Maybe a quick follow-up on FSA earnings. Could you just help me understand the dynamic that's kind of moving those up faster than maybe the GAAP earnings? It looked like 2020 specifically, there was a bigger increase. I'm just interested in some of the dynamics that are playing out.
Max, why don't you go ahead and comment on the FSA earnings growth?
Yeah. The FSA earnings growth is driven by, to some extent, the slow sales growth that we have had in the last couple of years. When you then are facing lower new business strain, that drives up your FSA earnings growth.
Yeah. I think one other item, I mean, you've got a switch. You have a shifting mix of first sector savings-related product with large capital carry into third sector over time. That's naturally going to release some of the capital. First sector savings, as you can imagine, is more capital intensive because it's where really a lot of the assets are driven. That's one of the biggest charges that occupies our SMR ratio and our FSA earnings. We're effectively releasing that economic capital on a more robust basis.
I think the last thing I'll point out there is any accounting regime, you know your profits at the beginning and the ending of the period have to come out equal. For years, GAAP accounting, those profits come in sooner. We know we have more profits that are coming to us on an FSA basis before the end of time.
Ryan?
Thanks. Ryan Krueger, KBW. I'm just trying to think about normalized free cash flow at this point. Is that essentially the $2 billion to $2.5 billion of annual subsidiary dividends less, like, a couple hundred million of cost of the holding company?
I would say that's fair. The holding company is a little tricky to estimate at this point in time because we're building a level of capital, as Max suggested. We're investing some of that capital. You may recall from last year when we transferred upwards of $750 million to the holding company. We actually transferred an outright portfolio of yielding securities to the holding company, which is driving more investment income. That's a little fluid at the time, and as we build additional liquidity at the holding company, we'll have additional net investment income. The formula you're mentioning is correct.
When I talk about free cash flow, I'm essentially thinking in terms of the dividend flows out of the subsidiaries, making the assumption that internal contracts, where there's management fee contracts between the Japan subsidiary to the holding company and U.S. subsidiary to the holding company, that that from a cash flow perspective effectively eliminates that offset, if you will. You can think of it just purely as the dividend activity out of the subsidiaries at the end of the day.
Got it. In the $6.5 billion to $7.5 billion, that includes the $1 billion of potential upside that Max talked about. Is that correct?
Yes, remembering it's for two years, right? It's 2019 and 2020. It does not count 2018. 2018 is a very interesting year. We've talked about it being a year of transition. To put that in numbers, what that means is the repositioning of capital around the company. Probably the biggest takeaway from 2018 free cash flow was we kept JPY 60 billion, $550 million in Japan to support the lowering of the hedge ratio in Japan. We need more capital there because of the increased volatility to SMR and FSA earnings. That really dragged down the 2018 free cash flow or capital generation, if you will. It didn't drag it down, it just allocated it internally to bring hedge costs down.
As we go forward in 2019 and 2020, you have a more true cash flow dynamic, including the freed up and also a level of excess capital in both 2018 and 2019 being released out of the U.S.
Just last quick one. Did you assume some normalized level of credit losses in this outlook? Can you disclose how much that was?
Yeah. In 2018, of course, we're well into 2018 and haven't seen much of anything. 2018's enjoyed the good, the benefit, if you will, of effectively benign credit markets. As a matter of routine, we assume $200 million a year, and we allocate that about $150 million in dollar terms to Japan and $50 million to the U.S.
Ryan, if you look at the slides for both Japan and for FSA earnings and for the U.S. for statutory earnings, the shaded area is essentially the credit losses. Credit impairments becomes a very significant driver of where ultimately the dividend capacity will end up being.
Tom?
Thanks. Thomas Gallagher, Evercore ISI. The $500 million per year improvement here over the two-year period, it sounds like part of this is drawdown, maybe the majority is sustainable beyond that. I just want to get a sense for, if you could dimension how much of that do you think will be sustainable beyond 2020?
Yeah. I think very importantly is 80% the difference between $2 billion and two and a half billion a year is really that 80% of regulatory earnings versus 100% of regulatory earnings as a dividend policy. That policy is predicated on strong capital conditions, benign or stable market conditions. If we were to have a prolonged period like that, it is a sustainable level of regular dividend activity out of both subsidiaries. The real headwind to that, okay, would be just very simply instability in particularly the markets, asset losses, asset impairment. There's not a lot in our actual core business model that necessarily would inhibit that. I mentioned rating agencies and regulators, again, we see the ratios as remaining very strong.
On the regulatory front, I would footnote one element. That is in Nebraska, we continue to require an extraordinary dividend in both 2019 and as well as into 2020, just in order to manage that excess capital out of the U.S. Again, we have communicated very upfront and transparently, including laying out all of our multi-year plan with the Nebraska Department of Insurance and feel comfortable that we can manage that level. I think over time, what you'll see, Tom, in the U.S. is that we'll start to move down into the 4s in terms of RBC, in the 400s when you start incorporating C1 in there and pulling 100% of dividends out of the U.S. I know a question that's going to come my way is what's the RBC you can target over time?
We'll see it drift down a little bit below 500 depending on the year. We'll continue to manage that as we go forward. Right now, we think we can move the dividend up to 100% in the U.S.
If you take the capital generated off the back book, and this goes for both Japan and the U.S., objective number 1 is to fund growth. That's the best return on capital that we can get. After that, it is basically based on what marketing conditions are giving us in terms of credit losses, et cetera. Once we fund that new business strain, if we have stable market conditions, we are at a point right now where the products that we're writing are very capital efficient. The new business strain is relatively low, which means that we can operate at a higher level in terms of dividend payout ratio than the 80% that we used to have.
Just one follow-up, if I could. Fred, any initial thoughts on the new FASB rules and how that might affect balance sheet or earnings?
I'm going to ask June Howard. We're laughing up here because over the last 24 hours, we ordained June Howard, our Chief Accounting Officer, as the person to take the inevitable FAS 60 and new accounting question. We know that's a regular question. June's been gracious enough to obviously be involved in that process a long time, and join us on the panel. June.
Thanks, Fred. I know this is a topic that you've been waiting for all day long. Really, the standard, as you know, was just issued in August. There's a lot of complexities. At this point, a lot of the impact is going to depend on the transition method that we select. The FASB's given us two choices. At this point, we haven't selected one of the models. The first one is called the modified retrospective, which allows you to pivot off your 2018 reserve balances. The other option, which is a much more complex option, is to go back to original issue date and retrospectively apply the new standard. The impact on day one and ongoing, a lot of it's going to depend on that. At this point, we haven't selected a method.
We're really in the process of trying to look at the details in the standard, put a plan together for implementation, put together a resource plan. This will be a roughly three-year initiative. That's really all I can tell you at this point. I think just depending on that option selected will have either a bigger or smaller impact on your equity on day one and then on your earnings going forward. The one thing I will tell you is that earnings, as you might expect, will be more volatile going forward because you're going to be in a perpetual state of unlocking. You'll be updating your assumptions every single year and then updating your discount rate every quarter.
Just one follow-up on that, if I could. Is it fair to say, though, that the discount rate change will be a negative adjustment to earnings and book, but then you all have this big pad based on how strong your margins and your reserve development has been. That'll be a big release. Are those the two high-level kind of offsetting items to consider here?
Yes. Again, I go back to depending on the transition method that you select. Let's just assume you go with the retrospective, the fully retrospective approach. You're absolutely right. You'd have a release of your pad, and as you might expect the change in your discount rate, especially for our Japan business, discount rates now, a single A rate would be very different than what's probably sitting in our locked-in assumptions. You would expect that to be an increase to your reserve, and on day one, that actually goes through OCI in our equity. It would be a drag on equity.
Thanks.
Yeah. I might add that, June and I have been talking about this for a while. Max and I have been talking on the same front, that is, the word unlocking and volatility go hand in hand. I thought I got away from unlocking back in my career related to a FAS 97 business, unlocking is coming back again. What I know from that experience is it's going to raise the stakes on understanding free cash flow at the company, cash yield of the company, regulatory, financial performance. Frankly, economic value is going to surge in importance and disclosing all of the assumptions and details surrounding the build of economic value. Put succinctly, I think the new GAAP requirements have information content. They have a rationale.
There's good information content embedded in what otherwise is volatility, and we'll have to talk about that, explain it as to why it's moving around. At the end of the day, it's going to be about economic value and free cash flow. That's going to be the thing to hang your hat on as having most confidence in, we'll be focused on that.
I will say one thing on the discount rate. They are leaving it open somewhat to how you apply it. It's not prescribed as in you need to apply spot rates. You have a choice, spot rates, forward rates, or even a duration-adjusted single rate. We'll obviously investigate all those to see what fits us the best as we go through the modeling.
Peter.
Peter Deutsch with Fidelity Investments. Just a follow-up to Tom's question. Could you give us some idea of what the locked-in interest rate is in the Japan reserves versus where current single A Japanese bond yields are? I assume give us an estimate of the duration of the portfolio.
I think we can follow up with the required interest rate on a GAAP basis. I don't have it off the top of my head. I know it's in our 10-K and Q, as well as our overall duration. I think we can follow up with those statistics or pull them straight out of our queue.
Just one follow-up on ESR. Could you give us a sense of, I think you said 160%-180%. What's the right level? If the yen were to strengthen versus the dollar, how much of an impact would that have? Let's say a 10%-20% strengthening, what would that have on the ESR?
I asked Todd to chip in here as well. We're currently at 160%-170% without a UFR. We would be comfortable operating at a level that is sort of slightly below 200%. That is probably where we would be very comfortable operating above, including a UFR. We think that that is the best way to economically assess the ratio.
I'd say, as part of our integrated risk management framework in Japan, we have a targeted ESR ratio of maintaining above 140%, and 140% is kind of our management level. Always be above 110%. As far as sensitivity to the yen, I believe it's about 5-7 points. It's not overly sensitive to yen. On the UFR assumption, right now we're using a 3.5% rate as that long-term forward rate in the discounting. If you were to remove that, as Max said, it's a 60-80 point hit, so that's roughly 20 points for every 100 basis points.
The 5-7, that's for how much of a change in the yen?
I think it's 10, but I'll have to follow up with you.
Something I want to really remind this audience of is realize what we're talking about when we talk about an ESR model. We're talking about the company's internal risk and solvency model. Okay? I say that because, as mentioned during Max's comments, there is field testing going on, and there's an eye being given towards international capital standards and the various assumptions that are coming through around morbidity, lapse rates, et cetera. That's evolving. It's going to evolve over the next 5-6 years. There's a lot of discussion yet to be had before it settles into a ratio. Be mindful that this is our internal model, and similar to what many of you experienced in Europe with solvency models. It's akin to a regulator adopting our internal model with all of its documentation and support.
It shouldn't be confused with a prescribed ratio that may come through the regulators. We'll want to be carefully watching that. Right now, of course, we have a lot of confidence in our model. Given our size in Japan, particularly around things like cancer business, et cetera, and medical business, we have as good an understanding of the right capital charges and experience as anybody in the marketplace.
Erik.
Erik Bass with Autonomous Research. Fred, was hoping you could help just to clarify or walk through some of the moving pieces for your revenue guidance. I think we've gotten guidance for both U.S. and Japan in terms of earned premiums.
Erik talked about the overall NII being flat.
I guess in Japan, you're guiding to overall revenues down 1%.
Yeah.
Just wanted to square those pieces.
First of all, realize we're talking at a segment level, okay? That's not a big deal, but it's important because as we strip excess capital and more excess capital to our earlier comments out of Japan, and the U.S., we're stripping with it net investment income and revenue. Meanwhile, some of that net investment income is simply being recorded in the corporate and other bucket. As we install back-to-backs, right, or an internal hedging process, the other option could have been to bring down the hedge ratio in Japan, which would have implications for segment revenue, et cetera. There's certain things we're doing from a corporate finance and economic value perspective that are not necessarily friendly to revenue growth. Having said that, Japan is a pretty straightforward story. It's really about paid up first sector policies, and the natural runoff of first sector savings business.
The combination of those two things are overwhelming the steady growth rate, low single-digit growth rate of third sector and first sector protection earned premium growth rates. That's really what's bringing the minus 1% compounded annual growth rate, if you will. Again, that's a proactive decision on our part, meaning we have decided fundamentally that these asset intensive, capital intensive products are not really where we want to grow the business going forward. In the U.S., we're seeing 2% growth, and it's nothing more than plugging in the compound annual growth rate expectations for sales. We haven't really done too much with lapse rates. We've held that relatively steady over time to the degree we can improve on the lapse rates, that may help.
I might ask Todd, flipping back to Japan real quickly, you caught in my comments, and I think earlier comments, that there's a little bit of a tick up in lapse rates in Japan, and that is weighing a little bit on our forward earned premium estimates. Interestingly, it also plays around with reserve releasing, which helps your benefit ratio offset by more DAC amortization, which hurts you on the expense ratio. It nets out to generally offset each other and maintain a strong pre-tax profit margin. The line items move around with that lapse rate. I don't know, Todd, if you want to comment at all on that.
I think you pretty much hit it. You got DAC amortization on the newly issued policies that generally outweighs your benefit ratio. On the older policies, DAC's almost zero, so you have bigger reserve release if there's no cash value offset. Bottom line impact is almost minimal when the lapse rates tick up like that, especially in a lapse and reissue dynamic.
You're hearing a lot of discussion today. Two of the most common words you've heard throughout the day were words like digital, innovation, venture, and that's not a mistake. You're not looking at a company that is proactive and regularly looking at engaging in traditional M&A transactions. It's not something that we find a valuable use of our capital on a risk-adjusted basis, given what we have as a franchise. What we absolutely need to do and address is we do not have a revenue growth story right now. We've got to invest in those types of initiatives that can drive not only greater efficiencies in the model, but offer up an opportunity to enhance and build and penetrate new markets through digital means and other means.
For us, the good news is, yes, we're producing a lot of capital and cash flow as a company, as Max walked you through. The whole dynamic of building value over time is going to be what we do with that deployable capital, and do we do it smartly. Our view is, for a relatively small amount of capital at risk, we can invest in initiatives that offer up a larger outsized growth opportunity. It's a higher risk profile for that capital we deploy, but it offers up larger growth opportunity done right. That's kind of how we've chosen to invest from a corporate development perspective.
It appears that's the last question, and I'd like to call Dan up for our closing remarks.
Well, I want to extend a thanks to everyone who joined us today, including those who traveled. I know jet lag gets us all one way or another, and I appreciate you listening to all the comments and things that we had. I also want to thank the people that have come in through the webcast. I hope you've gleaned a lot from today's presentations related to Aflac's results, philosophy, and objectives. At Aflac, we manage our business for the long term while remaining laser focused on meeting our near and short-term financial objectives. As Fred mentioned, our approach is to drive long-term shareholder value is straightforward, the pursuit of growth, strong pre-tax margins, and capital optimization.
First, we will pursue growth by leveraging our strategic advantages in both the U.S. and here in Japan, and through product development, distribution expansion, and digital advancements to improve the customer experience. This is bolstered by venture investments relevant to our core business. Building on the leading position in both countries will help position us for growth going forward. Second, we want to maintain our strong pre-tax margins through disciplined product pricing and leveraging our period of favorable benefit ratios to invest in the platforms for future growth and for efficiencies. Third, having completed our Japan branch conversions to a subsidiary, we are optimizing our capital and deploying excess capital in a very disciplined way that supports our long-term sustainability. It goes without saying that we treasure our 35 years of consecutive dividend growth and want to continue that.
When it comes to capital deployment, I continue to believe that dividends and share repurchase are the most attractive means, and are those avenues we will continue to pursue. At the same time, we want to reinvest in our business to enhance organic growth. Within that framework, we will continue to drive shareholder value and do so by acting ethically and giving back to the communities in which we operate in. Ultimately, we believe this is a more sustainable approach to business that will continue to increase shareholder value. To wrap up, I just want to say that it is our people behind the results that brings it all together. As I mentioned, we place a high priority on ensuring that we have the right people at the right place at the right time.
I want you to know that we have a tremendous management team currently in place, and I'm glad you had a chance to hear from them as leaders, and I hope you'll stay for lunch and be able to talk to them a little bit more. By staying disciplined and focusing on doing what we do best, I believe we will continue to generate results that build for the long-term shareholder value. Now, as that concludes our presentation, I appreciate your participation. I hope that you'll join us on December the 3rd for our 2019 Outlook call. That's December the 3rd. For those that are here in person, I hope that you'll join us in the Venetian or Drawing Room for lunch. This concludes the meeting. Thank you very much.