Hello, and welcome to the virtualinvestorconferences.com March 2018 event. My name is John Viglotti, Vice President of Investor Relations Products and Services at PR Newswire. On behalf of PR Newswire, as well as our co-host, BetterInvesting, we're very pleased you joined us for our first live presentation of the day. Before I introduce the presentation, a few quick points. Please submit questions in the question box below the slide. Also, once the Q&A session has ended, don't log out. You'll automatically be transferred into the Aflac virtual booth, where you can continue to ask Daniel questions via the chat and access the library shareholder materials, as well as links to the aflac.com website. Lastly, all presentations are recorded and available for 24 by 7 replay at your convenience.
At this point, I'm very pleased to welcome back our frequent speaker, Daniel Bellware, Senior Investor Relations Manager of Aflac. Welcome back, Daniel.
Thank you, John. It's a pleasure to join you for this investor conference. Today, I'd like to tell you about Aflac's strategy, operations, recent performance, and how we plan to return capital to shareholders. First, I'd like to remind you that some of the statements in this presentation are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they'll prove to be accurate because they are prospective in nature. Please look at our annual report on 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss here today. Our fourth quarter 2017 earnings release is available on the investors page of aflac.com and also includes reconciliations of certain non-GAAP measures.
We also encourage you to look at the appendix at the end of this presentation, which will likewise be posted on the investors page of aflac.com for more on our non-GAAP and forward-looking information. Aflac operates in the two largest insurance markets in the world, Japan and the United States. Our policies cover more than 50 million people worldwide. Our strategy has remained straightforward and consistent for many years. Aflac develops relevant insurance products and sells them through expanded distribution channels, which yields new accounts and customers. Aflac products provide a layer of financial protection against loss of income and assets based on qualifying health events. Our products pay benefits directly to the insured regardless of any other insurance they might have. Because the benefits are fixed rather than open-ended, they are not subject to inflation. Turning to operations, I'll start with our largest operating segment, Aflac Japan.
Aflac's operation in Japan 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 in that country. We were the pioneer of cancer insurance in Japan. Ever since then, the foundation of our product portfolio has been and continues to be, third sector products. The third sector product category primarily includes cancer, medical, and 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. 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.
This included one-time payment for hospitalization in addition to per-day payments. Another example was the introduction of Income Support Insurance in July of 2016, which advanced development of new markets in the third sector. Income Support Insurance provides the fixed benefit 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. It targets young to middle-aged consumers ranging in age from their 20s to 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 the sale of our 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.
We also offer select first sector products, including life insurance. We group our first sector products into two different categories, savings type products and protection type products. Savings type products, such as WAYS and child endowment, are products that primarily offer income benefits and cash surrender values. Protection type products like term life insurance are more similar to third sector products such as cancer and medical insurance and are the type of first sector products we focus on. They provide a layer of protection rather than an income benefit. At Aflac Japan, we have enhanced and expanded our distribution network to provide more opportunities to be where the customer 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.
Strategic alliances with partners such as Japan Post Group, Dai-ichi Life, and Daido Life continue to strengthen and evolve. For example, more than 20,000 post offices sell Aflac's cancer products nationwide, and Japan Post Insurance offers our cancer products through its 76 branches. These alliances ultimately improve Aflac Japan's market access and increase the touchpoints we have with Aflac Japan's existing and potential customers. Banks allow Aflac Japan additional avenues to reach customers and offer products in the places consumers want to buy them. At the end of 2017, Aflac Japan was represented at 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, trusted brand.
We continually seek opportunities to leverage that strong brand and highly regarded reputation through innovative advertising campaigns in our efforts to drive sales. In 2003, Aflac Japan began using the Aflac Duck. Its popularity continues to connect with consumers today. On an ongoing basis, Aflac Japan has seized opportunities to create separate and unique characters that interact with the Aflac Duck to market specific products and help drive sales. In 2016, we launched a commercial that promotes our new Income Support Insurance by pairing two Japanese celebrities, a male actor and a female comedian, that are both very popular with consumers in their 20s and 30s. By leveraging the popularity of the Aflac Duck and different characters over the years, about nine out of 10 Japanese citizens now recognize the Aflac brand. Let me update you on Aflac Japan's outlook and performance.
Our sales target is aligned with our focus on Aflac Japan's third sector products. We are pleased with the third sector sales increase of 4.1% for 2017. 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 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 refreshed core medical product in the first quarter of 2017, driving a sales increase 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. The third sector increase was more than offset by an anticipated reduction in first sector premium due to savings products reaching premium paid-up status. Operating revenue was stable. The benefit ratio declined due to business mix, but was within the range we provided in our guidance. 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 also improved slightly.
While Japan's population is covered by a national healthcare system, citizens still have significant out-of-pocket costs associated with healthcare. As such, we believe this provides a natural catalyst for future growth. Over the last four decades, Japanese consumers have seen healthcare costs increase amid an aging population and declining birth rate. This has put the national healthcare system under increasing financial strain, and consumers have been required to pay more out-of-pocket healthcare expenses than ever. The increase in medical expenses is projected to significantly outpace GDP growth in Japan. Because of the aging population and higher co-payments for medical expenses, the market for the third sector product has been steadily growing, a trend we expect to continue. Now let me turn to Aflac's U.S. operations.
Aflac is the number one provider of voluntary insurance at the worksite in the U.S., where about 97% of our products are sold on a payroll deduction basis. Our portfolio of individual and group products provides consumers with outstanding value. We offer businesses of all sizes the opportunity to provide employees a more valuable and comprehensive selection of benefit solutions. Employers have continued to shift the cost to workers in the form of higher premiums, deductibles, and cost-sharing. In fact, according to the 2017 Kaiser Annual Survey of employer-sponsored health benefits, as companies sought to keep premiums in check, deductibles have nearly doubled since 2010. According to 2017 research conducted by Lightspeed GMI, employees continue to face challenges related to the rising healthcare costs and general feeling of financial insecurity.
Nearly half of employees are not prepared to pay out-of-pocket expenses in the event of an unexpected illness or accident today. Furthermore, 65% of those surveyed responded they have less than $1,000 to pay out-of-pocket expenses associated with an unexpected serious illness or accident if it occurred today. Despite changes in the healthcare environment, one constant continues to be the need for our products. One reason is that no major medical plan, not even the best, is designed to cover all out-of-pocket expenses. Aflac has a sales agency force that drives about 63% of Aflac U.S. new annualized premium sales. Although broker sales have more than doubled since 2009, the broker channel still represented only about 35% of total U.S. sales in 2017.
This dynamic is very unique to the market, as many of our competitors have an inverse relationship between broker and agent sales, some with more than 70% selling through broker relationships. As in Japan, the Aflac brand is an important aspect of our strategy, and about nine out of 10 people in the U.S. recognize it. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts. Additionally, our groundbreaking initiative, One Day Pay, further enhances our brand and highlights Aflac's commitment to paying claims fast. Through One Day Pay, we process, approve, and pay eligible claims in just one day. We estimate that approximately 80% of our policyholders can use One Day Pay for their claims. In 2017, 100% of the approximately 2.1 million claims submitted using One Day Pay were paid within one day.
More than 90% of our policyholders that have used One Day Pay say that they are likely to refer other people to Aflac. We believe that will help sales in the future. Looking ahead, we will continue to leverage market-leading initiatives like One Day Pay that are designed to own the customer experience and further enhance customer satisfaction. We believe this will continue to boost Aflac's strong brand and set Aflac apart from its competitors. Turning to our U.S. performance, we are pleased with the sales results, financial performance, and strong profitability of Aflac U.S. in 2017. Our sales results reflect our focus on the growth strategy we implemented in both our sales agent and broker channel. The sales increase was 4.7% in 2017.
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, reflecting our investment back into the business. The profit margin improved slightly but was essentially flat. 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 of 171 million workers, we must consider the opportunity in the self-employed, public, and private sectors.
We see our growth coming from a few areas of opportunity. Increasing access and penetration in public and private sector employer groups, many who already have Aflac. Reaching the non-traditional workforce, which represents about 24 million entrepreneurs and growing. Continuing programs to retain our existing business. When you consider that a little over seven 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 discussion of changes to healthcare legislation, we believe Aflac U.S. has the opportunity to emerge better positioned from the ever-evolving healthcare environment. Like national healthcare in Japan, we believe that the trend towards more uniform coverage will initiate a better understanding of and appreciation for Aflac's products.
Our traditional focus has been on payroll accounts with fewer than 100 employees, and our individual sales agents are best positioned to serve this segment. We also believe our strategy for working with local, regional, and national brokers will better position Aflac in businesses with more than 100 employees. I'll spend the last portion of my discussion updating you on our consolidated financial performance and our capital management activities. Aflac Incorporated has a long history of delivering strong financial performance in the face of a fluctuating yen. Due to the significant contribution of Aflac Japan's operations to overall earnings, a weaker yen suppresses Aflac Incorporated's results as reported in dollars. However, Aflac's currency exposure is primarily translation-related as opposed to transaction and currency-related.
As such, we still believe that viewing our results excluding the impact of foreign currency is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. We believe that an analysis of 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 security transactions, impairments, and derivative and foreign currency activities, as well as other and non-recurring items. In addition, we will exclude from our definition costs associated with our announced Japan branch to subsidiary conversion project, which is expected to conclude as early as April 2nd, 2018, the first business day of Aflac Japan's fiscal year. On an operating basis, we have a long history of producing solid earnings growth.
You probably saw that recently, the Aflac Incorporated board of directors approved a two-for-one stock split facilitated through a 100% stock dividend. The split follows a year of strong share price performance and is on top of our announcement of the board's action to approve an increase in the first quarter cash dividend of 15.6%. This is the ninth split of the company's common stock since listing on the New York Stock Exchange in 1974 and the first in 17 years. Excluding the impact of these items and reflecting the stock split, 2017 earnings per share increased 6.2%, driven by solid overall margins in both the U.S. and Japan. Our continued focus on capital ratios demonstrates our commitment to maintaining financial strength and flexibility on behalf of our policyholders, shareholders, and bondholders.
Presented here are the two capital adequacy ratios required by our regulators, RBC in the U.S. and SMR in Japan. We estimate that our risk-based capital, or RBC ratio, at the end of 2017 remained high at approximately 830%. Additionally, our capital and liquidity position in Japan remains strong. We estimate that our solvency margin ratio, or SMR, was around 1,000% at the end of 2017. Capital deployment and financial soundness has always been important to our shareholders. As we've communicated, we have been and will continue to be very disciplined in evaluating capital deployment within a sound risk framework. We view our primary capital deployment options as dividends, share repurchase, and enhancing organic growth. Including dividends and share repurchase, we returned more than $2 billion to our shareholders in 2017. It goes without saying that we treasure our 35-year record of dividend growth.
We are 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 a first quarter review cycle. With tax reform driving an increased level of earnings and cash flow, our dividend reset is primarily driven by our overall capital position, outlook for stable earnings growth, and a balanced approach at returning capital back to the 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, assuming an average exchange rate of 112.16 yen to the USD. This slide shows how our 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 and $0.02 per share on earnings. Our objective in 2018 is to maintain our strong capital position while producing stable earnings and strong cash flows.
We believe that in both Japan and the U.S., our market leading position, powerful brand, strong distribution, and innovative products will provide support towards this objective. As we work toward our objective and goals, we have confidence in our business model, the fundamental need for our products, and most importantly, the future success of Aflac. I'd like to thank you, and now I'll be glad to start taking some questions. Okay. Let's see. I have a question here. When will the stock split take effect? The stock split will happen at the end of the day on March 16th for shareholders of record as of March 2nd, which is tomorrow. The following Monday, March 19th, is the first day that shares will be traded at that split adjusted price. I hope this presentation has not caused any confusion.
The numbers that we provided today are adjusted for the split, that going forward it'll be easy for you to see if we've met our goals. In our press release announcing the fourth quarter earnings, we provided guidance for 2018 that was not split adjusted. The board had not made the determination on the split at that point in time, since that announcement, we've adjusted the numbers for the split in the numbers that we present. I would like to remind everybody that the split is not an economic event. A shareholder is in the same position immediately following the split as they were immediately before the split. Their number of shares will double, but the share price will be half. Likewise, the dividend of $0.52 that I mentioned will be cut in half to $0.26.
This means that the dividend yield will remain the same as both the dividend and the share price will be half from the previous amount. I hope that clears things up. Let's see. Let's see if I've got some more questions here. Okay. Can you speak to the tax reform? Yeah. On the tax reform in our financial statements, when we announced our fourth quarter earnings on January 31st, we had estimated that the impact was going to be $1.7 billion. At the time, we mentioned that the number was subject to further refinements. As we've been compiling our 10-K, we did in fact, further refine that calculation for that impact, now we've revised that number to $1.933 billion. This amount shows up in the reconciliation on the appendix to this presentation, which you haven't seen yet.
When you look at the PDF file, either on aflac.com or in the virtual booth you'll see that number. Yeah, it is slightly different from what we had at the end of the quarter when we announced earnings. Let's see. Yeah, I think that there was a question about the dividend, whether that 15.6% dividend was a special dividend. No, it was not. That 15.6% increase in the quarterly dividend was done in conjunction with the resetting of our dividend calendar. As you may have seen, we increased our quarterly dividend in the fourth quarter along with our announcement of third quarter earnings. This has been our practice for quite some time to increase the fourth quarter dividend. We increased the fourth quarter dividend 4.7% in October of last year.
It went up from $0.43 a share to $0.45 a share. Our fourth quarter earnings release, we increased it again to $0.52. I think in the press release we said that the board of directors action to increase the dividend by 15.6% reflects overall strength in the company's capital position, along with an outlook for stable growth in earnings and deployable capital generation. This accelerated resetting of the dividend as we enter 2018 demonstrates our commitment to rewarding our shareholders. With that resetting, I would look for the next dividend increase in the first quarter of next year. I'd remind you that declaring the dividend is always a decision for the board to make are more of a one-off type thing. I wouldn't look for that again anytime soon. As we mentioned, we were resetting the dividend calendar.
We're getting awful close to our half hour mark, so I'll sign off, and we'll all be transferred into the virtual booth, and I can continue the chat from there. All right. Thank you all very much for participating.