Hello, and welcome to the virtualinvestorconferences.com, December 2017. My name is John Paglotti, Vice President of Investor Relations Product and Services at PR Newswire. On behalf of PR Newswire, as well as our co-host, BetterInvesting, we're very pleased you've joined us for our next presentation. Before I introduce the presentation, a few quick points. Please submit your questions via the question box below the slides. Also, once the Q&A session has ended, don't log out. You will automatically be transferred into the Aflac virtual booth, where you can continue to ask questions via chat and access the library of shareholder materials, as well as links to the company's website. Lastly, all presentations are recorded and are available for 24/7 replay at your convenience.
At this point, I'm very pleased to welcome speaker at the Virtual Investor Conference, Daniel Boulware, Senior Manager of Investor Relations of Aflac. Welcome back, Daniel.
Thank you. It's a pleasure to join you for this virtual 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. Before we begin, let me remind you that some 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 Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss today. Our third 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 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 U.S., and our policies cover more than 50 million people. Our strategy in Japan and the U.S. has remained straightforward and consistent for many years. Aflac develops relevant voluntary insurance products and sells them through expanded distribution channels, which yields new accounts and customers. Aflac's core products are supplemental and voluntary in nature. The benefit payments are not structured to build wealth. Rather, they provide a layer of financial protection against loss of income and assets based on qualifying health events. Benefits are paid 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's operation in Japan accounts for about three-quarters of our pre-tax insurance earnings. Today, we insure one in four Japanese households and are the leading provider of medical and cancer insurance in that country. Aflac has been operating in Japan for more than four decades. Since inception, the foundation of our product portfolio has been and continues to be third sector products, which primarily include supplemental health products like cancer and medical insurance. Our products are designed to help our policyholders with out-of-pocket expenses that are not covered by Japan's national healthcare system. Aflac Japan has a history of developing and revising innovative products to help relieve financial burdens related to changes in national healthcare coverage and remaining in step with consumer wants and needs.
To accomplish this while delivering sustainable growth, we continue to introduce new and updated products to the third sector insurance market. In February 2017, for example, Aflac Japan revised its EVER Medical Insurance product in response to customer needs. Under the revised EVER Insurance product, policyholders receive a one-time payment for hospitalization in addition to per-day payments. The new EVER also introduces a rider for surgical procedures specific to women and strengthens outpatient coverage. By the introduction of Income Support Insurance in July last year, we are developing new markets in the third sector. It provides a fixed benefit in the event the policyholder becomes unable to work due to significant illness or injury. This product targets young to 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 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 are more similar to third sector products such as cancer and medical insurance and are the types of first sector products we focus on. They provide a layer of financial protection rather than an income benefit. Aflac Japan also aims to lead the industry in distribution channel diversity and reach.
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 12,000 agencies, have been and will continue to be key to our success. Additionally, strategic alliances through partners such as Japan Post Group, Dai-ichi Life, and Daido Life continue to strengthen and evolve. For example, over 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 touchpoints we have with Aflac Japan's 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.
At the end of 2016, Aflac Japan was represented at 372 banks, 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. In addition, Aflac Japan has implemented nationwide a Model Sales Office program. This program is aimed at streamlining sales office workflow, enabling Aflac employees to devote more time to supporting sales associates. Best practices and lessons learned are then applied to other sales offices, helping increase sales more broadly. We plan to continue strengthening the Model Sales Office program in the future. 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. Our advertising is unique in an increasingly crowded and competitive market.
In 2003, Aflac Japan began using the Aflac Duck. Its popularity continues to connect with consumers today. On an ongoing basis, Aflac has seized opportunities to create separate and unique offshoot 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. The character portrayed by the female comedian holding the Aflac Duck is shown at the bottom of the slide. 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. Now let me update you on Aflac Japan's performance.
Our sales target is aligned with our focus on Aflac Japan's third sector products. We're pleased with the third sector sales increase of 5% for the first nine months. Sales through the third quarter of this year continued to benefit from the introduction of our revised EVER product in February. As we look ahead, Aflac Japan's focus will remain on selling third sector products along with first sector protection products, both of which are less interest sensitive and have strong and stable margins. Aflac Japan's premium income, net of reinsurance, decreased in the third quarter with growth in third sector premium offset by reduced first sector premium. The decline in net investment income reflected the stronger yen-dollar exchange rate on dollar-denominated investment income. The benefit ratio improved on business mix. The expense ratio was elevated due in part to lower premium income, while the profit margin remained essentially flat.
As you may be aware, Aflac's population is covered by a national healthcare system, but 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. 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 Aflac US operations.
Aflac is the number one provider of voluntary insurance at the worksite in the U.S., where about 98% of our products are sold on a payroll deduction basis. Our portfolio of individual and group voluntary products provides consumers with an outstanding value. We offer businesses of all sizes the opportunity to provide employees a more valuable and comprehensive selection of benefit solutions. According to Kaiser Health News, employers are expecting health costs to rise by about 6% in 2017, a moderate increase compared with historical trends that far outpaces growth in the economy. Employers have continued to shift the cost to workers in the form of higher premiums, deductibles, and cost-sharing. In addition to actions taken by employers, it's important to understand Americans' challenge to meet the increasing burden of healthcare costs.
In 2016, the Kaiser Family Foundation found that health insurance premiums and the cost of health services continue to rise at a pace that exceeds that of workers' wages. Additionally, according to the Aflac WorkForces Report published in 2016, 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. It's within that landscape that we believe consumers and employers will increasingly see the need for financial protection that Aflac's products offer. Despite changes in the healthcare environment, one constant continues to be the need for our products. No major medical plan, not even the best, is designed to cover all out-of-pocket expenses. Aflac has a career agency force that drives almost 70% of Aflac US' new annualized premium sales.
Although broker sales have more than doubled since 2009, the broker channel still represents only about 30% of total U.S. sales. This dynamic is very unique to the market, as many of our competitors have an inverse relationship between broker and career agent sales, some with more than 70% selling through broker relationships. While our broker sales are keeping pace with the market, our career agent sales are slightly above the market. Therefore, our distribution mix has a greater impact on our long-term CAGR of 3%-5%. We're very optimistic based on the indicators, but we'd like to see some 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. You may have seen our most recent commercials called Surgery and Dad's Choice, both of which use satirical examples of how one unexpected incident or medical event can negatively impact your lifestyle, demonstrating the need for Aflac's products. Additionally, our groundbreaking initiative, One Day Pay, further enhances our brand. Through One Day Pay, we process, approve, and pay eligible claims in just one day. In 2016, 100% of the nearly 1.8 million claims submitted using One Day Pay were paid within one day, and 95% of our policyholders that use One Day Pay said they are likely to refer other people to Aflac. These efforts reinforce the strength of our brand and demonstrate our commitment to delivering on our promise to our policyholders.
Now I'll turn to an update on Aflac US performance. Total new annualized premium sales increased to 3.8% through the third quarter of 2017. From a financial perspective, Aflac US continued to perform well through the third quarter. 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 in 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 work site, specifically in the private sector. We now view this a bit differently than we have done in the past.
As we look at the top line of this chart, which represents the entire U.S. working population, or 167 million, we consider the opportunity in the self-employed, public, and private sectors. Our growth will come from a few areas of opportunity. Increasing access and penetration in public and private sector employer groups, many who already offer Aflac, reaching the non-traditional workforce, which represents about 24 million entrepreneurs and growing, and continuing programs to retain our existing business. When you consider that a little over 7 million individuals have Aflac coverage out of the 49 million who have access to it through work, this represents a tremendous opportunity for Aflac. Despite the ongoing discussion of changes to healthcare legislation, we believe Aflac US has the opportunity to emerge better positioned from the ever-evolving healthcare environment.
Like national healthcare in Japan, we believe that the trend toward 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 career 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 from foreign currency is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. While the yen-to-dollar exchange rate weakened from 2013-2015, it strengthened in 2016 and has weakened again in 2017. Our continued focus on capital ratios demonstrates our commitment to maintaining financial strength and flexibility on behalf of our policyholders, shareholders, and bondholders. Presented here are two capital adequacy ratios required by our regulators, RBC in the U.S. and SMR in Japan. Our risk-based capital, or RBC, at the end of 2016 remained high at 894%. Additionally, our capital and liquidity position in Japan remains strong. Solvency margin ratio, or SMR, was 945% at the end of 2016.
We believe that an analysis of operating earnings, a non-GAAP financial measure, is important to an understanding of 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 derivative foreign currency activities, as well as other and non-recurring items. In addition, we exclude from our definition costs associated with our announced Japan branch to subsidiary conversion project, expected to conclude in mid-2018. On an operating basis, we have a long history of producing solid earnings growth. Excluding the impact of those items, earnings per share was running ahead of our expectations, driven by solid overall margins in both the U.S. and Japan. This allowed us to upwardly revise our 2017 operating earnings objective in the third quarter.
Let me provide you some details about our capital deployment. As we've consistently communicated, when it comes to deploying excess capital, the most attractive avenues include investing in the growth of our core business in Japan and the U.S., maintaining strong dividend and track record of dividend growth, and absent other compelling uses of capital, repurchasing our shares. Including dividends and share repurchase, we returned approximately $2.1 billion to our shareholders in 2016. The board of directors' action to increase the quarterly dividend by 4.7% demonstrates our commitment to rewarding our shareholders. We are very pleased that 2017 marked the 35th consecutive year of increasing our cash dividend. We still expect to deploy capital in the range of $2.0 billion-$2.2 billion to shareholders in 2017. This includes $1.3 billion-$1.5 billion of share repurchase.
This assumes that 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 2017, our objective is to produce operating earnings per diluted share of $6.75-$6.95, assuming the same yen-dollar average exchange rate as 2016. For 2018, our objective is to produce operating earnings per diluted share of $6.65-$6.95, assuming an average yen-dollar exchange rate of 112. This slide shows how our 2017 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 approximately $0.035 per share on earnings. Our objective in 2017 is to maintain our strong capital position while producing stable earnings and strong cash flows.
We believe that our market leading position, powerful brand recognition, and strong distribution in Japan and the United States will provide support towards this objective. As we work towards our objectives and goals, we have confidence in our business model, the fundamental need for our products, and most importantly, the future success of Aflac. Thank you for listening to this presentation. Now I'll be glad to take some of your questions. I think a couple questions have come in. Let me take a look. I have a question here about any fintech initiatives you can speak to reduce costs and drive revenue. Yes, we have spoken about that I think several times recently on our outlook call and our financial analyst briefing that we did in September.
We have been making some modest investments in some of these type businesses to help find ways to reduce our costs. Like I say, these have been pretty moderate expense, moderate amounts. I'm trying to remember. Let's see if I have anything. I'm thinking in the area of like $35 million or something, approximately. Yes, we have been making some investments in that area. Can I provide a status on the share repurchase program? This is in the middle of our quarter, so I really can't tell you any more than what we did at the end of third quarter. I think we were over $1 billion, around $1 billion in the third quarter. We're on track to get somewhere in between that, around that range of $1.3 billion-$1.5 billion, but I do not have those numbers available right now.
We will obviously tell you in the fourth quarter call. Premium growth rates. I have a question. Can we speak to anticipated premium growth rates for the U.S. in 2018? I believe that's going to be around, I think we've said 2%-3% increase in U.S. premiums. Let's see, another question. What is the reason behind the revenue decline in Japan? Mostly what you're going to see is a decline in premium, and that has to do with the limited pay first sector business that we had basically gotten out of. Back in maybe 2014, around about there, we basically stopped selling this limited pay first sector business. That was the stuff that was a little more interest sensitive and didn't have the same margins as our third sector products. A lot of those limited pay things were sold.
I think the biggest year would've been in 2012, and they were five pay. Basically, there would be a big decrease in 2017. I think the largest decrease is going to be in 2017, and there'll be other decreases to a lesser extent over the coming years as well. The biggest one you'll see is in 2017, and it's basically those five pay policies getting paid up. Now, there's some accounting that goes along with that as we have these five pay policies that will stay in force for longer than five years. What we have to do is set up a deferred profit liability. We talked about this in our financial analyst briefing, maybe last year or the year before, how this deferred profit liability gets released over time.
That's why, even though there's a decrease in premiums, and therefore a decrease in revenue, that you don't see a similar decrease in the profit margin. This deferred profit liability that we use because of GAAP accounting is getting released into the benefits. It's actually reducing the benefit ratio somewhat, and it's coming out showing that the profit margin is still very stable. Let me see if I had any other questions. A question about the dividend yield. I think someone was mistaken thinking the dividend yield was 4.7%. It's not. The dividend yield is about 2.1%. 4.7% was the increase in the quarterly dividend that we announced. The board had voted on increasing the quarterly dividend 4.7%. Again, that was the 35th consecutive year that we've had an increase. The actual dividend yield is a little bit lower.
Our stock price has been riding high recently. The dividend yield is now about 2.1% the last time I looked. Okay. Well, that seems to be it for the questions. Maybe I'll go out to the booth and hang out there for a little bit in the virtual booth and see if anybody has any questions. All right. I think we're ready to close this out. Thank you all for participating. Bye-bye.