Welcome our next presenter, Aflac. They're a return presenter to the Raymond James Institutional Equity Conference. We appreciate their participation. As a leading provider of supplemental health insurance products, not only in the U.S. but Canada, we think the company is well-positioned to benefit from an environment where there's a lot of pressure on employers and the benefits they provide their employees. This seems to be in an era where deductibles are rising and there's less coverage. Aflac is right at the epicenter there to provide assistance to consumers looking for additional coverage. From management today, we have David Young, who is their investor relations officer, Max Brodén, who serves as senior vice president and treasurer, Fred Crawford, who's the Chief Financial Officer. I'm going to turn the podium over to Fred.
Thanks, Greg. Thank you, and thanks everybody for taking a little bit of time out this morning to join us. It's a real pleasure to be here at the Raymond James Annual Investor Conference. We enjoy coming here each year. It's a great event. Thanks for taking the time. Before we begin, let me remind you that some of the statements in this presentation are forward-looking within the meaning of the federal securities law. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they're prospective in nature. Please look at our annual report in Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss today.
Our fourth quarter 2017 earnings release is available on the investor page of aflac.com. It also includes reconciliations of certain GAAP and non-GAAP measures. We also encourage you to look at the appendix at the end of this presentation, which will likewise be posted on the investors page of aflac.com for more on our non-GAAP and forward-looking information. With that, let's get started. Aflac, I want to start by a bit of an overview, talk about Aflac Japan, the U.S., some concluding remarks on capital management in Aflac Inc. Aflac operates in the two largest insurance markets in the world, Japan and the United States. Our policies cover more than 50 million people. Our strategy in Japan and in the U.S. has remained straightforward and consistent for many years.
Aflac develops insurance products and benefit solutions that consumers want and need and sells them through expanded distribution channels, which yields new accounts and customers. Aflac products provide a layer of financial protection against the loss of income and assets based on a qualifying health event. Aflac products pay benefits directly to the insured regardless of any other insurance they might have. Because the benefits are fixed rather than open-ended, they are not subject to inflation. Aflac Japan's segment accounts for about three-quarters of our pre-tax operating earnings. Today, we insure one in four Japanese households and are the leading provider of medical and cancer insurance there. Aflac has been operating in Japan since 1974. We were the pioneer of cancer insurance in Japan.
Ever since then, our focus and the foundation of our product portfolio has been on and continues to be what's called the third sector product of Japan. The third sector product category primarily includes our pioneering cancer and medical, and most recently, Income Support Insurance. These products help our policyholders with out-of-pocket expenses that are not covered by Japan's national healthcare system. To remain in step with consumer wants and needs, Aflac Japan has established a history of developing and revising innovative products. These products help relieve financial burdens related to changes in Japan's national healthcare coverage. We will continue to introduce new and updated products to the third sector insurance market. A recent example was Aflac Japan's February 2017 introduction of its revised EVER Medical Insurance product, which responded to what consumers were telling us they needed.
Under the revised EVER insurance product, policyholders receive a one-time payment for hospitalization in addition to per-day payments. The new EVER also introduced a rider for surgical procedures specific to women and strengthened outpatient coverage. Another example was the introduction of our Income Support Insurance in 2016, which advanced the development of new markets in the third sector. Income Support Insurance provides fixed benefits in the event the policyholder becomes unable to work due to significant illness or injury. This product was developed to supplement the disability coverage provided through Japan's Social Security system. This product targets young and middle-aged consumers ranging in age from their 20s through their 40s, a segment of the population in which we believe we are under-penetrated. By focusing our efforts on this demographic, we believe we are building relationships that lay the groundwork for sale of a cancer and medical insurance later in life.
We believe this product has the potential to gradually develop into a new pillar product over the long term. To complement our third sector products, we also offer first sector products, primarily protection-type products like term life insurance. In contrast to savings-type products such as WAYS and child endowment, protection-type products offer a layer of protection rather than income benefits and cash surrender values. As a result, protection-type products are less sensitive to interest rates and therefore more similar to third sector products such as cancer and medical insurance. At Aflac Japan, we enhanced or expanded our distribution network to provide more opportunities to be where the consumer wants to purchase insurance products. Our traditional channels, which include approximately 11,000 agencies, have been and will continue to be a key to our success. Additionally, strategic alliances with partners such as Japan Post and Dai-ichi Life continue to strengthen and evolve.
More than 20,000 post offices sell Aflac's cancer products nationwide, and Japan Post Insurance offers our cancer products through its 76 branches. Additionally, nearly 40,000 Dai-ichi Life sales representatives offer Aflac cancer products. These alliances ultimately improve Aflac Japan's market access, increase the touch points we have with Aflac Japan's existing and potential customers. Banks also offer Aflac Japan additional avenues to reach consumers and offer products in the places consumers want to buy them. At the end of 2017, Aflac Japan was represented in 374 banks, which is nearly 90% of the banks in Japan. These banks offer a broad range of financial services, including selling Aflac's protection type insurance such as cancer, medical, and Income Support products. To support our presence in Japan, Aflac has established a powerful and trusted brand.
In 2003, Aflac Japan began using the Aflac Duck. Its popularity continues to connect with consumers today. We continually seek opportunities to leverage that strong brand and highly regarded reputation through innovative advertising campaigns in our efforts to drive sales. By doing so, the popularity of the Aflac Duck and different characters over the years, about nine out of ten Japanese citizens now recognize the Aflac brand. Let me now update you on Aflac Japan's outlook and performance. Our sales target is aligned with our focus on Aflac Japan's third sector products. We are pleased with the third sector sales increase of 4.1% for 2017. As I mentioned earlier, sales benefited throughout the year from the introduction of our revised EVER medical product last February.
Looking ahead, Aflac Japan's focus will remain on selling third sector products along with select first sector protection products, both of which are less interest rate sensitive and have strong and stable profit margins. As I mentioned during our outlook call, we expect third sector sales to be down in the first half of the year. This is especially true for the first quarter, recognizing we introduced our revised core medical product in the first quarter of 2017, driving a sales increase at that time of 7.6%. As we prepare for the Japan conversion and delay product introductions until the second quarter, we believe third sector sales could be down in the high single digits for the first quarter of the year. We expect a strong recovery in sales as the year proceeds consistent with our December outlook call guidance.
Aflac Japan's 2017 premium income net of reinsurance was down slightly for the year. Third sector increase was more than offset by anticipated reduction in first sector premium due to savings products reaching premium paid-up status. Operating revenues were stable. The benefit ratio declined due to business mix, but was within the range we provided on our outlook call. As anticipated, the expense ratio was elevated due in part to lower premium income and reflecting our investment back into the business. The pre-tax profit margin improved slightly. While Japan's population is covered by national healthcare system, citizens still have significant out-of-pocket costs associated with their healthcare. As such, we believe this provides a natural catalyst for future growth. Over the last four decades, Japan consumers have seen healthcare costs increase amid an aging population and declining birth rate.
This has put the national healthcare system under increasing financial strain. Consumers have been required to pay more out-of-pocket healthcare expenses than ever. The increase in medical expenses is projected to significantly outpace GDP growth in Japan. Because of the rapidly aging population and higher co-payments for medical expenses, the market for third sector products has been steadily growing, a trend we expect to continue. Now let me turn to the U.S. segment. Aflac is the number one provider of voluntary insurance at the work site in the United States, where about 97% of our products are sold on a payroll deduction basis. Our portfolio of individual and group insurance products provides consumers with outstanding value. We offer businesses of all sizes the opportunity to provide employees with more valuable and comprehensive selection of benefit solutions.
Employers have continued to shift the cost to workers in the form of higher premiums, deductibles, as well as cost sharing. In fact, according to a 2017 Kaiser Family Foundation annual survey of employer-sponsored health benefits, as companies sought to keep premiums in check, deductibles have nearly doubled since 2010. Likewise, a 2017 research conducted by Lightspeed GMI noted that nearly half of all employees are not prepared to pay out-of-pocket expenses in the event of an unexpected illness or accident today. Furthermore, 65% of those surveyed responded that they have less than $1,000 to pay out-of-pocket expenses associated with an unexpected serious illness or accident if it occurred today. Most worrisome, they also report avoiding the doctor because of high medical costs. It is within this landscape that we believe consumers and employers will increasingly see the need for the financial protection Aflac products provide.
Despite changes in the healthcare environment, one constant continues to be the need for our products. One reason is that no major medical plan, not even the best, is designed to cover all out-of-pocket expenses. Aflac has a sales agency force that drives about 63% of Aflac U.S. new annualized premium sales. Although broker sales have more than doubled since 2009, the broker channel still represents only about 35% of total U.S. sales in 2017. This dynamic is very unique to the market, as many of our competitors have an inverse relationship between broker and agent sales, some with more than 70% selling through broker relationships. While our broker sales are keeping pace with or slightly ahead of the market, our distribution mix has the greatest impact on our long-term sales outlook.
We are optimistic based on the indicators, but we like to see the consistent performance before declaring any new trends. As in Japan, the Aflac brand is an important aspect of our strategy, and about nine out of 10 people in the U.S. recognize it. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts. The Aflac Duck has range that runs from the comical in our ads to the compassionate as the spokesduck for the Aflac Cancer and Blood Disorders Center at the Children's Healthcare of Atlanta. Additionally, our groundbreaking initiative, One Day Pay, further enhances our brand and highlights Aflac's commitment to paying claims fast. Through One Day Pay, we process, approve, and pay eligible claims in just one day. We estimate that approximately 80% of our policyholders can use One Day Pay for their claims.
In 2017, 100% of the approximate 2.1 million claims submitted using One Day Pay were paid within one day. Most importantly, more than 90% of our policyholders that have used One Day Pay say they are likely to refer other people to Aflac, and I believe that will help the sales progress in the future. Looking ahead, we will continue to leverage market-leading initiatives like One Day Pay that are designed to own the customer experience and further enhance customer satisfaction. We believe this will continue to boost Aflac's strong brand and set Aflac apart from its competitors. Turning to the U.S. operations, we are pleased with sales results, financial performance, and strong profitability of the Aflac U.S. segment in 2017. Our U.S. sales of $1.6 billion were up 4.7% in 2017 and reflect our focus on the growth strategy we implemented in both our agent and broker channels.
As we look ahead, we anticipate 2018 growth in earned premium to be around 2%-3% and new annualized premium sales growth of 3%-5%. As you can see, both net premium and operating revenues were up this year over last year. The benefit ratio improved, and as we anticipated, our expense ratio was elevated, again reflecting our investment back into the business. The profit margin did improve slightly but was essentially flat with the previous year. As shifts in demographics occur, Aflac is shifting as well. Our primary focus has been on the worksite, specifically in the private sector. We now view this a bit differently than we have in the past. As we look at the top line of this chart, which represents the entire U.S. working population, or roughly 171 million workers, we must consider the opportunity in self-employment, public and private sectors.
We see our growth coming from a few areas of opportunity. Increasing access and penetration in public and private sector employee groups, many who already offer Aflac. Secondly, reaching the non-traditional workforce, which represents about 24 million entrepreneurs and growing. Continuing programs to retain our existing business. When you consider that a little over 7 million individuals have Aflac coverage out of the 47.5 million who have access to it through their work or employer, this represents a tremendous opportunity for Aflac. Despite the ongoing discussions of changes in healthcare legislation, we believe Aflac U.S. has an opportunity to emerge better positioned from an ever-evolving healthcare environment. Like national healthcare in Japan, we believe that the trend towards more uniform coverage will initiate a better understanding of and appreciation for Aflac's products.
Our traditional focus has been on payroll accounts with fewer than 100 employees, and our individual sales agents are best positioned to serve that segment. We also believe our strategy for working with local, regional, and national brokers will better position Aflac in businesses with more than 100 employees. I'll spend the last portion of my discussion on updating you on our consolidated financial performance and our capital management activities. Aflac Incorporated has a long history of delivering strong financial performance in the face of fluctuating yen. Due to the significant contribution of Aflac Japan's operations to overall earnings, a weaker yen suppresses Aflac Incorporated's results as reported in dollars. Aflac's currency exposure is primarily translation-related as opposed to transaction and currency-related.
We still believe that viewing our results excluding the impact of foreign currency is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. We believe that analysis of operating earnings, a non-GAAP financial measure, is important to understanding Aflac's underlying profitability drivers. Aflac defines operating earnings as the profits derived from operations, including cash flows associated with notes payable, but before realized investment gains and losses from securities transactions, impairments, and derivatives, and foreign currency activities, as well as other non-recurring items. In addition, we exclude from our definition the costs associated with our announced Japan branch to subsidiary conversion project, which is expected to conclude as early as April 2 of this year, the first business day of Aflac Japan's fiscal year.
On an operating basis, we have a long history of producing solid earnings growth, excluding the impact of the items I mentioned previously and reflecting the stock split announced in February of this year. Earnings per share has increased year-over-year 6.2%, driven by solid overall margins in both the U.S. and in Japan. I know the importance you place on capital deployment and our plans for capital deployment rest upon our financial soundness. We are committed to maintaining financial strength and flexibility on behalf of our policyholders, shareholders, and bondholders, and demonstrated by the two capital adequacy ratios required by our regulators, RBC in the U.S. and the SMR ratio in Japan. Our risk-based capital or RBC ratio at the end of 2017 remained high at 831%.
As you recall from our outlook call, we will be managing down that ratio through 2019 to the 500% range as part of the conversion of the Aflac Japan branch to a subsidiary. We estimate that our solvency margin ratio, or SMR, was a little bit above 1,000% at the end of 2017. As we've communicated, we have been and will continue to be very disciplined in evaluating capital deployment within sound risk management framework. We view our primary capital deployment options as dividends, share repurchase, and enhancing organic growth. Including dividends and share repurchase, we returned more than $2 billion to our shareholders in 2017. It goes without saying that we treasure our 35-year record of dividend growth. I'm pleased that the board decided to increase the dividend by 15.6%, effective the first quarter of 2018. This after our traditional increase in the fourth quarter.
While the board reserves the right to look at the dividend on a quarterly basis, we plan to shift the dividend increase to the first quarter review cycle. With tax reform driving an increased level of earnings and cash flow, our dividend reset is primarily driven by our overall capital position, outlook for stable earnings growth, and a balanced approach to returning capital back to shareholders. We will continue to seek the right balance of investing in growth, repurchasing stock, and continuing our long record of dividend growth. We expect to deploy capital in the range of $1.9 billion-$2.2 billion to shareholders in 2018. This includes $1.1 billion-$1.4 billion of share repurchase. Of course, this assumes share repurchase remains the optimal use of excess deployable capital in driving long-term shareholder value.
Our focus remains on maintaining the solid fundamentals in our core business and building on our record of earnings growth. For 2018, our objective on a split adjusted basis is to produce operating earnings per diluted share of $3.72-$3.88 a share, assuming an average yen-dollar exchange rate of roughly 112. This slide shows how 2018 operating EPS might look at various currency scenarios. We estimate that every one yen move in the average annual exchange rate will have an impact of between approximately $0.015-$0.02 per share on earnings. In conclusion, our objective in 2018 is to maintain our strong capital position while producing stable earnings and strong cash flows.
We believe that both Japan and the U.S. are in a market leading position, they have powerful brands, strong distribution, and innovative products, and that this will provide support to accomplish these objectives. As we work towards our objectives and goals, we have confidence in our business model, the fundamentals, the need for our products, and most importantly, the future success of Aflac. With that, I'll stop and take any questions you have. Greg?
I appreciate the slide on capital management. Can you talk to us about the investment you're making in deployable capital to grow organically both in Japan and in the U.S.?
Sure. The question is, I think above and beyond our dividend and share repurchase, we're investing in organic growth and can I give a little description or some color on the nature of that organic growth investment? They fall into a few categories. One, I would say, when we talk about investment in our platform, what we mean is platforms such as the IT and operational framework of the company, both in Japan and the U.S., and I would say there the payoff is in part a better customer experience, but also gaining efficiencies in automation. We have had a multi-year program, both in the U.S. and Japan, of investing in those core platforms, many of which have aged over time and are due for upgrade and update. We expect to reap some efficiencies out of that.
From a growth perspective, we also continue to invest in new product development, launching new product categories such as the Income Support Insurance product in Japan. In the U.S., we continue to freshen our products. Probably what we're most excited about is investments we're making on the digital front. When you turn to digital and growth-related initiatives, they largely revolve around, A, setting up a venture capital initiative. We set aside $100 million in a formal Aflac Ventures fund. We've since made eight investments, putting about $30 million to work. While this is a relatively small amount of capital allocation in the overall scheme of our capital deployment, these investments are all tied to commercial activities in the company.
It tends to be the case that we have both an equity investment in the digital solution or alternative distribution platform, we are linking it to our commercial business, both in Japan and the U.S., to try to advance our core business. We're very excited about that initiative and what it delivers. Separate and apart from that, about two years ago, we acquired a company in Charlotte called Empowered. It was called Empowered Benefits. We recently rebranded it Empowered, and that is actually the platform of the company that we house a lot of the digital innovation and IT development needs of the company. They are the IT backing of our Everwell enrollment system for small businesses. Beyond that, they're looking to advance the ball on next generation employee-employer enrollment techniques, as well as other initiatives to address the market in a digital way.
Most of our core investment, both in Japan and the U.S., of an incremental nature, has been surrounding the digital delivery of our products, which we think is something that will trend positively in the future.
Just as a follow-up to that, there's a lot of information about things like AI becoming more integrated with financial services and how you spoke about some investment you're making in technology. Can you talk about the role, if there is any, of AI in your business? How do you feel like that might fit under your-
Yeah. While it is developing, I would say machine learning, AI, robotics, these are all developing initiatives inside our company. Like a lot of companies and peers I work with, we all seem to be in the same stage of the game, and that is concentrating and governing over those initiatives and applying them to our core businesses throughout the value chain. I would say areas where we have developed is we are using mobile technology, for example, primarily related to claims, mobile claims both in Japan and the U.S. That includes voice recognition technology, and that sort of related machine learning. Those are early in stage, but they have indeed been launched and are being used in the marketplace, and we think are improving dramatically the customer experience. We've made those types of process investments. They are still early.
I would suggest to you that they have not yet converted to returning on the investment, they are building right now as initiatives. Beyond that becomes the application of digital technology to, for example, agent-assisted and productivity improvements. We're not really at a stage in the game where artificial intelligence is outright replacing activities of, say, agents or advisors, or trying to do that. We don't know that that's actually practical, given the importance of the agent relationship with the customer, employer, and policyholder. We do believe that agent-assisted technology is very important to help them be more productive and build more of their business model and help the consumer and consumer experience. That's where we tend to be more oriented with the technology. Certain call center-related technology is going to be supplemented over time, we believe, with that type of artificial intelligence and interaction.
Again, assisting your call centers in being quicker, faster, more accurate, and informative with the consumer experience.
I think we have time for one more question.
Question on, in terms of where are you in terms of the investment in your platform, new initiatives? You mentioned the expense ratio, which elevated some upgrades needed and everything. Just in terms of can we expect the expense ratio to remain elevated for a few years or do you have confidence?
The question is around our U.S. expense ratio. Interestingly enough, we have roughly the same dynamic going on in Japan and Japan expense ratio as we do in the U.S. Number one is both in the U.S. and in Japan, recognize that some of the elevated expense ratio is related to reduced revenue. In the case of Japan, it's a proactive move to reduce first sector product that naturally brings your premium down but shifts the economics to a far better return on capital in our third sector business. As on a GAAP basis, you'll see the revenue decline, and of course, the low interest rate environment in Japan has also served to bring net investment income down. As that revenue comes down on a GAAP basis, your expense ratio struggles to keep pace, particularly if you're proactively investing in your platform.
That's the situation in Japan. Realize that the outcome of those moves are very positive in terms of economic development, even though on a GAAP basis, they pressure your expense ratio. Your question on the U.S. has similar but different dynamics. One is from a revenue perspective, revenue is growing. I would note that we've shifted a lot of excess capital and are shifting a lot of excess capital out of the U.S. up to the holding company. With that is a shift in investment income. You pressure your expense ratio because you've pressured your revenue by moving investment income out. Ultimately good for the shareholder because it's really meant to deploy that capital in a more productive way to add value.
Beyond that, though, is a steady rise in investment in the platform, many of which are investments I just described to you in the previous question. We've guided to a range of 34%-36%. Expecting to be at the high end or a little tick above 35% in the near future, and I would suggest to you over the next few years. Both in Japan and the U.S., we have five-year targets for expense ratios. In the U.S., the low end of 33%-35%, and in Japan, roughly the midpoint of 18%-20% or in the 19% range. That is a five-year goal. While elevated in the near term due to our investments, we would expect there to be a payoff both in the form of revenue growth as well as expense efficiencies to get to those ultimate goals over five years.
Great. We'll proceed to the breakout sessions. Thank you very much.
Great. Thank you all.