Good morning and welcome to Aflac's 2017 Financial Analyst Briefing. I'm David Young, you'll be hearing from our speaker shortly. First, I'd like to introduce some of you to our board members and officers who are in attendance today. Please stand as I read your name. 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's board in 2003. Carol 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.
Ms. Lloyd joined the board in January of this year. Joey Moskowitz. Mr. Moskowitz is a retired executive 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 both the corporate development and compensation committee. He was elected to the board in 2015. In addition to today's speakers, officers participating from the United States include Chris Cloninger, president of Aflac Incorporated. Todd Daniels, executive vice president, global chief risk officer, and chief actuary. Audrey Tillman, executive vice president and general counsel. Rich Williams, executive vice president and chief distribution officer. Max Broden, senior vice president and treasurer. June Howard, senior vice president of financial services and chief accounting officer. Takaya Hiromori, vice president of Aflac International, and Delia Moore, director of investor and rating agency relations.
Joining us from Japan are Koji Ariyoshi, executive vice president and director of sales and marketing. Before we begin today, 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.
Copies of the slides are also available at investors.aflac.com, you can follow along and make notes. We will have three Q&A sessions during the meeting, as well as a wrap-up Q&A at the end of the meeting, there will be ample time to ask questions. Please hold your questions until those panels, please remember this presentation is being webcast. As a courtesy, please turn off your cell phones and other electronic devices at this time. I'd like to introduce our first speaker, Dan Amos. Dan 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 will give a strategic overview of Aflac. Dan?
Thank you, David, and good morning, everyone, and thank you for joining us. I think we can all agree that the political and business landscape has certainly changed in the last year or so. I was in Washington Tuesday evening, and I can certainly tell you and confirm that things have changed dramatically there. While the evolving macro environment in the United States and Japan can and does influence our business, it's important to note that we remain focused on doing what we do best, and that is providing protection products to help consumers when they need it most. Despite the geographic distance, the concept of our product is universal, and there are many similarities that make our products identically suited for both countries.
We want to ensure that we are the first company that people think of and the first company that people turn to for our types of products. What's been true for more than six decades is what's separates Aflac from our competitors, our underlying focus on relevant voluntary insurance products that generate solid, consistent profit margins and cash flows. Our disciplined approach has been a primary contributor to our success for many decades, and I believe it will continue to drive our leading position in the industry and in the future. Our business is built around what we see as the most attractive segment of the two largest insurance markets in the world today. The opportunities are vast in Japan and the United States. You'll hear more about the specific opportunities today, underlying our positive outlooks are our compelling market trends that we see.
The aging population puts financial pressure on the healthcare environment in both the United States and in Japan. In both countries, the growing burden of healthcare is being shifted from consumers through greater out-of-pocket expenses and healthcare co-pays and deductibles. In Japan, consumers have been actively seeking solutions to help them bear the cost associated with healthcare. In the United States, the healthcare landscape has similar dynamics as consumers come to grips with the reality that the healthcare costs that they have to bear. We are leveraging Aflac's innovative products, our extensive distribution, and trusted brand to extend our success and the solution of choice to many millions of people. Now let me provide you with an overview of the fundamentals we believe are necessary to produce long-term shareholder growth and value, generating profitable growth, investing in our business, advancing a legacy of innovation, and finally, ensuring sound financial management.
First, let me talk about our efforts to generate profitable growth. Aflac Japan, our largest earnings contributor, has more than four decades of experience with voluntary products, and we are leveraging that experience and expertise for success in the current environment. For several years now, Aflac Japan's operations have intensified to focus on third sector products, which are less interest rate sensitive and more profitable than first sector products. In fact, given the ongoing extremely low interest rate environment, we have aggressively repriced our WAYS product as well as other first sector products. In doing so, we have successfully orchestrated a controlled pullback in the sale of first sector products, more specifically savings-type products, without negatively impacting our core third sector franchise. Although this lowers our premium income and revenues in that category, it enhances our long-term economic value.
Additionally, we will continue to develop third sector products specifically designed to maintain our strong market share, provided they meet our risk management standards that we've set forth. Our new medical product has been successful, and we will continue our pattern of refreshing our core cancer and medical products to defend and build upon our leading position. Last week, I was in Japan and met with many of our sales associates. I continue to believe that the income support insurance has the potential to be our third pillar next to cancer and medical insurance. As you know, this is conceptually a new product, not a revised product, and it remains in the early stages. As with any new product, it takes time to get our veteran people to try anything new as it puts them outside their comfort zone.
I believe our field will continue to embrace it as it is a needed product that will continue to grow. Our approach may evolve as the market develops, but I believe that the income support has great potential for Aflac. With respect to generating profitable growth in the United States, we have more than 60 years experience. We must evolve with what is a dynamic market there. We continually evaluate the market, and we develop products and services that consumers want and need. Teresa will cover this in more detail shortly. This includes our true group product partnership that bolsters our portfolio but do so at a reduced capital requirement. With the strength and expertise in voluntary insurance, we are partnering with other insurers to add offerings that complement the Aflac products we all know about.
Added value services are becoming more popular in today's world, such as fraud and identity protection, medical counseling services, and Telemedicine, just to name a few. Most importantly, value-added services allows us to reach more employees and educate them about our products and our services. Finally, investments in our current and next generation of enrollment tools, particularly the Everwell product that you've heard us talk about. In addition, we must consider how consumers want to purchase our products and services, which has led us to explore new means for reaching working Americans and to invest in those platforms. These three initiatives all have something in common, enhancing the solution we offer our distribution partners, our employees, and our policyholders. At the same time, we must focus on pricing discipline and long-term expense structures to drive short-term and long-term profitability.
Second, the strategic business investments we will make enhance operational efficiencies and leverage our brand and distribution opportunities. In both the United States and in Japan, operations will continue to invest in technology and innovation to improve on productivity, to enhance customer service, to aid distribution networks and enrollments, and then build on a strong brand. We have a strong legacy of innovation at Aflac. We pioneered voluntary worksite insurance in the U.S. We founded cancer insurance market in Japan and helped drive the development of the third sector health market in Japan. Most recently, we created a successful distribution channel, like our alliance with Japan Post, and expanded that across all of Japan. In the U.S. through brokers, that gives us, Aflac, more access to the large and mid-size markets where the employees are located. Today, well-established markets and companies have faced unprecedented disruption due to technology.
Even though the insurance market has been slower to change, we believe that innovation is imperative to the future of our growth. For that reason, we continue to make tangible investments in innovation through our venture capital initiatives. The final fundamental reason in building long-term shareholder value entails sound financial management of the company. I know how important capital deployment and financial soundness is to all of you. Deploying capital prudently has always been a top priority. Historically, we have considered capital deployment options mainly for enhancing our organic growth, dividends, and share repurchase. We have been and will continue to be very disciplined when evaluating capital deployment. Absent more compelling alternatives, we still see these as the primary avenues for deploying capital. It goes without saying that we treasure our 34-year record of dividend growth.
We will continue to concentrate on maintaining a low risk profile and a transparent business model for you. Finally, the completion of the Japanese branch in mid-2018 will lead to greater transparency. Aflac has come to be known for its industry-leading ROE, and we have among the lowest cost of capital in the insurance industry today. We will continue to work hard to preserve and leverage our unique competitive position within the insurance industry. We certainly won't alter the conservative posture of our balance sheet. By staying disciplined and focused on doing what we do best, I believe that we'll continue to generate results that build for the long-term value. With these fundamentals firmly in place, let me now expand on two of the most important assets, our brand and our people. Our brand serves as a catalyst and a door opener for future opportunities.
It's our people who open those doors and make those strategic strategies a reality. While we have phenomenal brand, it's important to differentiate our company from the competitors. We continue to be innovative in creating different ways to leverage our powerful brand and tangible results. An example of that in the U.S. is the One Day Pay initiative, launched in 2015, that allows us to process, approve, and pay eligible claims in just one day. It's important to understand that One Day Pay isn't a marketing gimmick. There is no doubt that American consumers need cash quickly. Paying claims fast and fairly helps set us apart from the competition. We've seen One Day Pay enhance customer experience, increase our brand loyalty and trust, therefore, increasing persistency of our business.
Both One Day Pay and the Everwell platform are also driving account penetration in enrollment periods, and both are seeing increased uptake. At the same time, value-added services, which are also important to the customers, will increase our engagement at enrollment. In Japan, Aflac's brand has served us well for many years. As product innovator and trusted brand, we have experienced a tremendous amount of success leveraging the strength of our brand to ultimately drive sales and create the leading market shares in both cancer and medical insurance. Our remarkable results underscores the importance Japanese consumers place on selecting the brand they know and trust. We have built a strong brand over a long time in both countries, but the brand can get tarnished or destroyed in just an instance. All you have to do is be reading The Wall Street Journal right now to see that.
I believe that protecting the brand is one of the most important responsibilities I have as CEO. As you've heard me say before, another critical aspect of my job is leadership development and succession planning, which is not an end within itself. It is an ongoing process. This process incorporates the knowledge and skill set already inside the organization with the expertise and fresh ideas of people who join our business. You can rest assured that our board has in place and oversees a formal process for succession planning. This includes annual recommendations and evaluations of potential successors, along with a review of leadership development plans for such individuals. More recently, you've witnessed our succession planning in action as some of our very loyal, long-time employees have retired or moved on to the next chapter of their lives.
I presented a high-level view of the leadership team on this slide. I'd like to highlight a few of the recent changes. First, you'll probably note that our veteran leaders, Charles Lake, Teresa White, and Audrey Tillman, who have guided the company with their expertise and experience for a combined of nearly 60 years. In addition, Fred Crawford as CFO is a great example of adding value, experience, and expertise, as well as a fresh perspective to an already seasoned team. I like to tell people that Fred has been here for a little over two and a half years. The fact is, it seems like he's been here 20 because of his contribution and his knowledge of the company. As a result of the recent changes in the organization and realignment, certain responsibilities in Fred's role has changed and added certain aspects.
Fred assumed responsibility of corporate IT and corporate ventures. In addition, he assumed the management oversight of the conversion of our Japan branch to a subsidiary, which is targeted for completion in mid 2018. On July 1, Koide-san also transitioned seamlessly into the role of President and Chief Operating Officer of Aflac Japan. I attribute Koide-san's smooth transition to his nearly 20 years of rising through the ranks at Aflac Japan's leadership, the years he spent working closely with Charles, Yamauchi-san, and others. Because Koide speaks fluent English and has an Ivy League law degree, I believe he will be able to handle even more corporate responsibilities as we move forward. As you may have seen in the recent press release, we hired Rich Williams, a newly created role of Executive Vice President and Chief Distribution Officer to Teresa White, reporting to her.
The development of this position is part of the natural evolution of Aflac U.S.'s operation strategy. Having Rich in this position will enhance our ability to focus on the alignment and growth of our current distribution models and help prepare us for future growth. We have also taken steps to strengthen our bench and add fresh perspective in the financial and the actuarial area. For example, a year ago, we added two highly regarded and qualified Senior Vice President Actuaries with managerial experience, each having more than 25 years in our field. We see them both as playing key roles in Aflac's future. Most of you know that we hired Max Brodén earlier this year as Senior Vice President and Treasurer. He is responsible for overseeing corporate finance, investor and rating agencies, and U.S. corporate development. We will be counting on Max.
Finally, Chris, as you know, will be retiring as President of Aflac Incorporated at the end of the year, but he has agreed to serve as special advisor to both Fred, Koide-san, and me through the end of 2018. To sum it up, change is an inevitable part of business environment, but ultimately, creating and nurturing the culture of an organization is a very important part of leadership. Our ability to adapt and innovate at all levels is what continues to propel our long-term growth and our success. I am convinced now more than ever that with change comes opportunity, and I'm more excited today about the future of Aflac than I have ever been. We have maintained our focus on controlling the things that we have the power to control, but we also know that we must adapt to change.
Through our venture fund and corporate development, we are keeping our eyes and ears on emerging trends that might be disruptive or complement our core operations. We are being prepared to take action when appropriate, and you'll hear Fred talk more about this in a moment. While the macro environment and events in the world change, the one thing that has not changed is the confidence we place in our distribution and our product strategy, and the value and peace of mind that our products bring to the policyholders. By keeping our finger on the pulse of consumers' needs, and distinguishing Aflac from the competition, we've maintained our market leadership in Japan and the U.S. We can and will control our efforts to build our business and take care of our customers and our distribution network. By doing this, I believe we'll continue to enhance shareholder value.
I want to reiterate to all of you how proud I am of the accomplishments of our management team, our employees, our sales organization in Japan and in the U.S. They've worked hard to generate our results so far, and I expect to achieve our 2017 objectives as well. Thank all of you for being here, and I hope you get a lot out of this morning's presentation. Thank you.
Thank you, Dan. We will now turn to Aflac Japan with a presentation by Charles Lake, Chairman, Representative in Japan, and President of Aflac International. Charles joined Aflac in 1999 and became Deputy President in 2001, President in 2003, Vice Chairman in 2005, and Chairman in 2008. In 2014, Charles also assumed the position of President, Aflac International. He is also President Emeritus of the American Chamber of Commerce in Japan. Before joining Aflac, he practiced law in Washington, D.C. Charles will provide an overview of Japan's political economy.
Good morning. In recent years, Japan has experienced historic stability and consistency in its political leadership. Backed by this development, the Government of Japan has initiated key public policy measures designed to address long-standing structural problems and regulatory impediments to economic growth. With renewed confidence at home, Japan has also proactively engaged in international macroeconomic and regulatory affairs. Today, I will provide an overview and update on Japan's macroeconomic, political, and public policy issues relevant to Aflac to reaffirm that we are continuing 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. An important structural context in understanding Japan's public policy challenges is its declining birth rate and aging population.
Japan's birth rate has long been significantly below the 2.1 children per woman needed to maintain its population and currently stands at 1.46 children per woman. Today, 1 in 4 Japanese citizens is over age 65, and by 2050, nearly 40% of Japan's population will be age 65 and over. At the same time, the percentage of working-age people fell to 60.3% in 2016, the lowest level since 1951. It is estimated to fall to 51.4% by 2065. This change will affect every aspect of Japanese society and place growing pressure on Japan's finances and social security system. Spending on healthcare and public pensions is placing an increasing burden on the Japanese government's fiscal outlook. Government expenditures on medical costs and elderly care, in particular, are projected to grow as the country's population continues to age.
To address this challenge, the government has pursued an agenda of integrated social security, healthcare, and tax reform with a view towards mid to long-term structural adjustment. At the same time, the public continues to have significant concerns about the long-term viability of Japan's universal healthcare system. A recent survey of doctors released on June 30, 2017, by Nikkei showed that 52% of doctors surveyed answered that they did not think Japan's current healthcare system is sustainable. This is just one example of the type of analysis that drives a public policy debate. While troubling to Japan's citizens, concerns over the public healthcare system are an opportunity for Aflac to create shared value by offering products suited to 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.
Koide-san will discuss this further. As Japan confronts difficult challenges arising from its declining birth rate and aging population, Prime Minister Shinzo Abe enjoys comfortable majorities in both Diet houses. To ensure that he can maintain power, the Prime Minister announced his decision to dissolve the Lower House of the Diet and call a general election vote on October 22nd. The Liberal Democratic Party, or the LDP, maintains an approval rate of 37.7%, compared to 6.7% for the potential challenger and largest opposition party, the Democratic Party of Japan, according to recent surveys. The Prime Minister clearly determined that this is the moment to call the election, even though the current term will last until December 2018. The ruling coalition, which currently holds 323 seats, must win 233 seats at a minimum to maintain control of the Lower House.
During the election, national security and economic policy will be front and center. With respect to national security, Prime Minister Abe has broad experience, having overseen the passage of national security legislation in 2015, as well as multiple increases in Japan's defense budget. The Prime Minister has also pushed for close coordination with the U.S. in response to regional security threats and has repeatedly reaffirmed the U.S.-Japan alliance. This alliance structure is an important aspect of the framework that provides peace and stability in the Asia-Pacific region. On the economic policy side, since regaining power in late 2012, Prime Minister Abe has captured the world's attention with his vision for economic reform, dubbed Abenomics Three Arrow Strategy. The three arrows concept, taken from a samurai historical analogy, emphasizes the combined strength of the three arrows over the single arrow used separately.
Abenomics includes the three major components, one, bold monetary policy, two, flexible fiscal policy, and three, growth strategy, and is a sophisticated package of policy measures designed to provide solutions while addressing the reality of Japan's political economy. The first arrow has entailed an open-ended policy of monetary easing by the Bank of Japan to overcome Japan's persistent deflation and achieve economic growth. The Bank of Japan has continued its ultra-accommodative monetary policy of quantitative and qualitative monetary easing with a negative interest rate and yield curve control. These policies are aimed at exiting Japan from deflation and supporting economic growth. Bank of Japan Governor Haruhiko Kuroda has evolved this policy package with the goal of creating inflation consistent with a 2% target around fiscal 2019.
The second arrow of flexible fiscal policy measures means near-term fiscal stimulus to end deflation while achieving fiscal consolidation in the mid to long term. In that context, the Abe administration continues to take steps to enhance Japan's fiscal position. This year, the government set a new target for reducing government debt as a percentage of gross domestic product. That said, the government has not yet established a clear pathway towards achieving a fiscal surplus. For fiscal 2017, the government enacted a record budget totaling nearly JPY 100 trillion, demonstrating the challenges it faces in reaching a fiscal surplus. The third arrow of Abenomics focuses on structural reforms to the economy and is the most important component to achieve sustainable growth.
The comprehensive policy package includes measures designed to change corporate and labor behavior to promote capital efficiency and productivity, as well as deeper economic integration of Japan with Asia and Europe through free trade agreements such as the Trans-Pacific-11 and Japan-EU Economic Partnership Agreement. In relationship to corporate governance, a new corporate governance code, institutional investor stewardship code, and new stock market index called JPX-Nikkei 400 have been adopted to pressure listed Japanese companies to use their capital more efficiently and to differentiate and showcase companies in terms of profitability and management. With respect to labor productivity and practices, Abenomics has made promoting the active participation of women an important tool to limit decline in labor force and support economic growth. This includes increasing women's leadership roles, not just increasing their economic participation.
This is exemplified by the target of having women in 30% of corporate leadership positions by 2020, in accordance with the Act on Promotion of Women's Participation and Advancement in the Workplace. The Japanese government's Womenomics efforts go hand in hand with measures it is introducing to improve productivity and reduce inefficient overtime work. In March 2017, the government formulated an action plan on work style reform with this objective in mind. Although significant work remains in Japan on labor practices, particularly in promoting women to corporate and political leadership positions, progress is being made in workforce participation. With Japan now enjoying a larger female participation rate in the workforce than the U.S., with Japan at 68.1% compared to 67.3% in the U.S., according to the Organisation for Economic Co-operation and Development, or OECD.
As noted earlier, the Abe administration also continues its action plan to reform public pensions, a critical component of Social Security reform. Significant reform effort has been directed at healthcare and nursing care, such as reform of long-term nursing care insurance, including an increase of out-of-pocket co-pay percentage from 20% to 30% for certain high-income participants, and an increase of maximum monthly out-of-pocket expenses for high-income elderly patients, which are examples of new measures scheduled for implementation in August 2018. Along with Social Security and healthcare reform, the government has pursued tax reform in an integrated manner. As part of this, on April 1st, 2018, the effective corporate tax rate will be reduced by 0.23 percentage points to 29.74%. The planned consumption tax increase to 10% has been delayed until October 2019, just ahead of the run-up to the 2020 Tokyo Olympics.
Furthermore, the government has committed to make revisions to the individual income tax and asset taxes to enhance their income redistribution effects and appropriately reflect diverse work styles. Despite the numerous measures that just was discussed, many international observers have concluded that Abenomics has not lived up to its initial hype of 2012. Yet, for those of us who have been longtime students of Japan's political economy, the Abe administration strategy has delivered tangible results, particularly in comparison to the multiple administrations that preceded it. For example, in its August 2017 monthly economic report, the Cabinet Office determined that Japan remains in a state of moderate recovery, noting that private consumption, business investment, exports, and industrial production are improving.
Compared to the end of 2012, when Prime Minister Abe assumed office, corporate profits have increased 75%, stock prices are up 89% as of August 2017, and the unemployment rate is at a historical low of 2.8% as of July 2017. That said, one must acknowledge that macroeconomic results have yet to be achieved, with inflation remaining well short of the government's 2% target, currently at 0.5%. Wages in real terms have remained stagnant, and GDP growth remains under 2% annually. Nevertheless, one positive aspect of stable political leadership and continuity, rather than the annual change of prime ministers Japan experienced for nearly two decades, is the discipline to the Japanese government bureaucracy to continuously update and revise the structural adjustment measures in a form of trial and error with accountability.
Ultimately, this is what Japan requires to address the challenges posed by a declining birth rate and an aging population, and is one reason that other countries, particularly in Europe, have continued to watch the lessons learned from Japan's economic policy experiment called Abenomics. Let me now shift my discussion to Japan's financial regulation. Under the leadership of Commissioner Nobuchika Mori, the Financial Services Agency, or FSA, has launched significant reforms to financial regulation. Prime Minister Abe's cabinet is very supportive of these measures as they are consistent with economic growth and Abenomics, especially in light of the fact that the FSA is an integrated single regulator of banking, securities, and insurance industries, as well as capital markets, accounting, audit services, with a significant impact on the Japanese economy. In various policy speeches, Commissioner Mori has provided his vision for reform based on four major principles.
First, the most fundamental point for regulators is that they should be guided by the ultimate goal of promoting national welfare by finding the best ways to contribute to the sustainable growth of the nation's economy and wealth. Second, regulators should improve the financial and capital markets environment and eliminate obstacles in a forward-looking manner to facilitate the growth of players who create new value that can be shared with customers and provide solution to societal issues. This approach is also known as creating shared value or CSV, which will be discussed further by Koide-san. Third, when addressing new issues in user protection, regulators should take timely and appropriate measures but should also avoid premature and excessive intervention. Finally, the fourth principle is that innovation should be embraced.
Thus, regulators should not revert to the old convoy policy of Japan's past that protected the slowest ships, in this case, the weak financial institution in the convoy. To implement this new vision of balancing financial regulation with growth, the FSA is expected to announce this fall a new white paper on financial regulatory policy, which will involve historic shift in regulatory focus from an emphasis on strict compliance with minimum standards to the adoption of global best practices. To ensure implementation, the FSA will also restructure itself in 2018, with the elimination of the Inspection Bureau being particularly symbolic.
As part of this effort, the FSA is also taking steps to adopt an integrated domestic and international approach to leverage the unique role that the FSA plays in international institutions that develop and set global regulatory standards, including at the Financial Stability Board or FSB and at the International Association of Insurance Supervisors, or IAIS. In the context of these regulatory developments in Japan, we see no near-term material impact on Aflac's business operations. At the same time, these changes will ultimately provide positive long-term pro-business benefits to Japan's financial and capital markets, which is good for Aflac. On the international regulatory front, as we have discussed at previous analyst briefings, Aflac is not a global systemically important insurer, or G-SII, or an internationally active insurance group, or IAIG. However, Aflac actively monitors international regulatory trends.
In this regard, international regulatory trends show regulator preference for subsidiary form and heightened interest in assessing the effectiveness of insurance group governance frameworks, including with regard to allocation of roles and responsibilities and the decision-making process of the group. You'll hear more about Aflac Japan's conversion to a subsidiary structure in Koide-san's presentation, but I would note that the forthcoming conversion will result in the establishment of a corporate form comparable to our peers in Japan, with Aflac Japan joining the regulatory herd. As Aflac continues to embrace robust governance and supervisory mechanisms consistent with global financial regulatory trends, Aflac's executive management team welcomes the opportunity to participate in its international supervisory college with our regulators from Japan and the U.S. Aflac's fifth supervisory college will be attended again by top executives from Aflac Incorporated, Aflac U.S., and Aflac Japan, and will be held in Nebraska in October.
In conclusion, Aflac Japan is well-positioned to take advantage of business opportunities that will be created by the emerging economic developments and regulatory changes in Japan. Just as we have anticipated change in the past and formulated proactive strategies such as those developed in response to bank channel deregulation or postal privatization, we are ready to leverage new opportunities in the coming years, maintain our leadership position, and continue to grow. Thank you.
Thank you, Charles. Our next speaker will be Masatoshi Koide, President and Chief Operating Officer of Aflac Japan. Koide-san originally joined Aflac Japan in 2008. In 2015, he was promoted to Executive Vice President, and Deputy President in 2016. He assumed the role of President and Chief Operating Officer of Aflac Japan in July of this year. Koide-san will give an overview of Aflac Japan.
Good morning. Since Aflac Japan was founded more than four decades ago, Japan has undergone significant social, economic, regulatory, and governmental change. At Aflac, we have always believed that with change comes opportunity. Aflac Japan has consistently leveraged its unique resources and expertise to create social value by ensuring policy holder protection while pursuing profitability and long-term growth for our shareholders. As I assume responsibility as Aflac Japan President, creating value by providing insurance for daily living will continue to be our focus into the future. I will begin my presentation today with 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 the second-largest in the world next to the U.S. Aflac Japan is the market leader in the third sector, which includes cancer, medical, and now income support insurance.
The third sector represents a significant growing segment in Japan's life insurance industry. As you can see, the total number of in-force policies of standalone cancer and medical products was close to 60 million at the end of March 2017. As shown on the slide, the market size more than doubled over 15 years. Against that backdrop, and I will explain, we believe the growth of this sector will continue as cancer awareness increases and Japan's Social Security system continues to be strained. The third sector is expected to continue growing as consumer demand increases for third sector products that supplement the public social security system. Since many companies see growth opportunities in this market, the landscape remains competitive. That said, Aflac Japan is determined to further expand its position as the leading insurance company in Japan's third sector market by leveraging our attractive products, broad distribution, and trusted brand.
Regarding insurance product penetration, in 2016, 81% of Japanese citizens were covered by some type of life insurance. In cancer insurance, which Aflac pioneered, the current market penetration is 37.8% and has been trending upwardly. Over the last 10 years, the penetration rate for cancer insurance has increased more than 6.6%. In the context of an aging population with cancer as a leading cause of death among Japanese citizens, we expect the need for cancer insurance to continue to intensify, further increasing demand and the upward trend in cancer insurance penetration. We believe that this trend will be further propelled by recent efforts by the government at both the national and local level to promote cancer awareness. Regarding medical insurance, the penetration stands at 72.1%.
Although this number is much higher than cancer, we continue to see opportunity for growth as consumers seek life insurance products to supplement Japan's Social Security system. The standalone cancer insurance market in Japan is growing. The number of standalone cancer insurance policies in force has increased to 23.9 million policies as of March 2017. Aflac has maintained its leadership position in Japan's cancer insurance market. Today, for example, Aflac Japan holds a 63.7% share of the standalone cancer insurance market. In the cancer insurance space, Aflac Japan's dominant position facilitates a cost-effective approach in which the company releases cancer product revisions once every three to four years. These revisions enable Aflac to continue offering products that meet changing customer needs and have supported Aflac's leading role as the market has continued to grow.
We expect to maintain and even strengthen this position in large part through Aflac's strategic partnerships with Dai-ichi Life, Japan Post Group, and Daido Life. Let me now turn to Aflac Japan's market share and the 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 2017, there are 35.3 million policies in force, representing a 4.8% increase when compared to the end of March 2016. Aflac Japan's total market share in terms of policies in force is 16.7% as of the end of March 2017. Although Aflac Japan was not the first to enter the medical insurance market, the company quickly rose to become the market leader following the 2002 launch of our medical insurance product EVER.
I'm pleased to say that we have held that number one position ever since. Looking ahead, factors including the aging population, financial tightening of Japan's national health insurance system, increasingly diverse consumer needs, along with efforts to improve cancer awareness, are converging to help create a growth environment for Aflac Japan's core products and capabilities. Next, I will describe Aflac's competitive advantages in the growing insurance market. As Charles and I discussed, Japan is changing, and Aflac Japan views this change as opportunity. Aflac Japan is uniquely positioned to leverage its competitive strengths, specifically its attractive products, broad distribution, and trusted brand, to continue to grow and thrive as the market leader in cancer and medical insurance in Japan.
Aflac Japan has a history of developing and devising innovative products to help relieve financial burdens related to changes in the national healthcare coverage and remaining in step with consumer wants and needs. To accomplish this while also delivering sustainable growth, we will continue to introduce new and updated products to the third sector insurance market. In February 2017, for example, Aflac Japan devised 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.
As for the first sector sales, we focus on profitable protection type products, including our GIFT product, which was devised in February of this year. Of the insured, this product provides beneficiaries, typically family members, with a monthly benefit until the insured would have reached a predetermined age. Second, in addition to maintaining an attractive product portfolio, 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 a key to our success in 2017. Additionally, strategic alliance 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 touch points 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 customers and offer products in the places consumers wants to buy them. At 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 Aflac's 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 supporting sales associates. Best practices and lessons learned are then applied to other sales offices, helping increase sales more broadly. We plan to further strengthen the model sales office program. Aflac's brand has over 91% recognition in Japan. This broad recognition is attractive to our partners and helps us reach customers that aspire to have high-quality products and services for insurance for daily living. Aflac Japan's growth over the years has been based on a simple strategy of providing customers with relevant, innovative products, making these products available through effective distribution channels, and continuing to find ways to reach out for new accounts and customers. As we introduced last fall in Tokyo, Aflac Japan has formulated a mid- to long-term strategy called Vision 2024 that provides direction through Aflac Japan's 50th anniversary.
Vision 2024 is based on Aflac Japan's core capabilities, values, and principles, which guide our strategies as we leverage Aflac Japan's unique resources and expertise to create value for all stakeholders. These values include the commitment to be there for policyholders in their time of need, our founding principle to relieve the economic burden of cancer, and brand promise to support policyholders in creating living in your own way. Aflac Japan reflects creating shared value in our management strategies. Through creating shared value, a concept co-developed by Harvard Business School Professor Michael Porter, Aflac Japan aims to recognize opportunities for innovation and growth by treating social issues such as fighting cancer as business objectives. Vision 2024 provides direction 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.
To this end, Aflac Japan developed a three-year business plan to begin working toward Vision 2024. Here are some of the key themes of the plan. First is the execution of Aflac Japan branch conversion to a subsidiary. Second, Aflac Japan will further strengthen its third sector insurance business. Third, we will explore new business opportunities that are consistent with Aflac's core capabilities and values, which I will discuss later. Fourth, we will pursue operational efficiency. For example, we will improve efficiency in operational processes by further utilizing information technology and standardizing operational processes. Through this initiative, we will enhance customer satisfaction while also improving operational efficiency. Finally, we will cultivate our innovation-driven corporate culture to make it possible to respond to customers' diversified needs under the changing circumstances in a timely and appropriate manner.
Aflac Japan's conversion to a Japanese subsidiary, which was announced in December last year, is a key area of focus in the three-year business plan. Our expectation is that this process will be completed in mid-2018. The conversion forms a key to our sustainable growth but will have no material impact on global governance and day-to-day operations. As we have indicated before, the benefits of this conversion include bringing enhanced business development flexibility and reduced strategic risk, a consistent regulatory framework aligned with global standards, and improved transparency of cash flows and capital. We view the conversion as Aflac's second founding in Japan. It is an opportunity we plan to use to deepen our engagement with stakeholders throughout the country. The process is proceeding smoothly and according to plan in terms of both timeframe and budget.
We also 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, conducting strategic enhancement of protection-type first sector products to strengthen third sector sales. With respect to first sector products, to manage the negative interest rate market conditions, we have taken steps to limit saving-type product sales, and sales declined considerably as a result. 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. These priorities are aimed at driving third sector business growth.
Against the backdrop of a growing third sector and market leadership, along with our sales and operational initiatives, we expect CAGR to be in the range of 4%-6%. As we leverage the three-year business plan to implement Aflac Japan's Vision 2024, and in the context of market leadership, an attractive product lineup, diverse distribution channel, and widely recognized brand, we continue to believe our long-term compound annual growth rate for third sector products will be in this range. Aflac Japan is continually exploring new business opportunities. In the context of rapidly changing social and individual needs, we plan to leverage Aflac's market-leading position and extensive experience to identify new third sector fields and explore new business opportunities. The goal is to pursue customer-centric new products and services to maximize the value proposition of insurance for daily living.
For example, in 2017, Aflac invested in new ventures, including MRSO, which provides online health checkup reservation services, and Medical Note, which provides online and telemedical advice services. Aflac Japan also launched a collaborative venture with Hitachi aimed at promoting early cancer detection and treatment. We are actively pursuing investment in digital initiatives and have hired a chief digital officer to help drive such initiatives. Through this, Aflac Japan aims to strengthen its third sector leading position and expand into new frontiers consistent with Aflac's core capabilities and values. Learning an efficient operation is critical for sustained success, so Aflac Japan is fundamentally re-examining its processes and operations while strengthening procurement and purchase capabilities. In doing so, Aflac Japan will focus on development of efficient cost structures.
By leveraging efficiency improvements, Aflac Japan will redirect a portion of the funds generated back into the organization for further efficiency enhancements and growth. Aflac Japan is creating an innovation-driven corporate culture. For example, Aflac Japan has implemented diversity promotion and work smart initiatives to bring in new perspectives, promote innovation, and enhance efficiency. As we have noted in past briefings, Aflac Japan's Women's Leadership Program began in 2014 and has successfully helped raise the percentage of women in leadership positions from 17.6% in 2014 to 26.2% as of July this year. Our aim is to have women occupy 30% of Aflac Japan's leadership positions by 2020. Aflac Japan is the only life insurer to be awarded by the government the highest grade of certification for a company's promotional efforts for women's advancement in the workplace.
Aflac Japan's Work Smart initiative aims to improve employee efficiency and enhance productivity, freeing employees up to take on new challenges, further develop their skills, or even create innovative solutions to daily issues. In closing, I wanted to briefly reflect on my first quarter as President and Chief Operating Officer of Aflac Japan. Having been with Aflac for nearly two decades, I have communicated with Dan frequently, and our communication and interaction has increased in my new role. Along with Dan's regular trips to Japan and my trips to Columbus, Dan and I initiated weekly one-on-one meetings via telepresence every Sunday evening, which has allowed us to build a strong rapport within a few months. These telepresence meetings allow us to have a fireside chat on topics which can potentially impact our results, ranging from geopolitical events to macroeconomic conditions and anything in between.
These meetings have proven to be invaluable to me. They have helped me expand my knowledge base as well as a better understanding of Dan and how to work together most effectively to maintain close ties between Aflac Japan and U.S. headquarters. I hope my presentation today helped you better understand Aflac Japan's future. Thank you very much for your time.
Thank you, Ariyoshi-san. We will now have our Q&A session for Aflac Japan. We have three simple rules. Please wait for a microphone before asking your question. Please identify yourself by name and also your firm. Please limit yourself to one question so everyone has a turn. Allow our panel to get seated, our microphones to get out here in the crowd.
Just making sure you have it.
We will begin our first question with Jay.
Thank you. Jay Gelb from Barclays. My first question is on the near-term as well as long-term outlook for third sector sales growth in Japan. It was a very strong first half with regard to new sales growth, and I am wondering if you could just provide a bit more insight in terms of why the near term or perhaps long-term growth rate wouldn't accelerate somewhat. I have a follow-up.
Well, I'll start with it, then anything Koji wants to add. We're going against tough comparisons, and especially in the fourth quarter, that we'll be dealing with. That's the predominant reason that we feel that. Also with Japan Post, we set objectives that we hope they'll achieve, and they're running way ahead, and they've been very good about hitting those objectives that they set. They generally are very proud when they hit them, and they kind of then hold a little powder for the next year or whatever. That's a possibility, too, that could take place. All in all, I think it's predominantly the tough comparisons that we'll be going against. Koji?
We're starting from cancer insurance. The needs of cancer insurance is increasing, especially among the young females. I strongly believe that cancer will still grow significantly since the penetration rate is only still at 37%, and the interest for cancer insurance is very high. In terms of medical insurance, although the penetration rate is high, and since the medical technology is advancing, therefore there will be new needs for the older policies that we have sold in the past. Another thing is that when younger people take out their first insurance, they'll start out with medical insurance. As the Japanese population ages, there are more increasing needs for medical insurance as well.
We believe our business will expand going forward with the background that Japanese citizens will have to sort of do self-help in terms of the insurance or the healthcare, because the government expenditure on healthcare will keep on increasing. As a result, our Third Sector needs will increase going forward as well.
Koji, the question that he's specifically asking is, you're doing very well right now, why will it slow down a little bit? My answer was, is that because of the tough comparisons, especially in the fourth quarter.
Well, first of all, the growth area of the insurance company is said to be the Third Sector. Large domestic insurers are also focusing on Third Sector. As a result, the share will be divided by multiple companies. We are growing both in medical and cancer insurance, little by little. The needs as well as the momentum of sales will keep on increasing as we develop new products as well as we renew our products. We hope to gain momentum once again by renewing our products at appropriate timing.
I want to mention one other thing about new products, because I think this is important. When I was in Japan last week, I called on the Shinkin banks, which is, you have the-- they're the smallest group, and then you've got the regions, and then you've got the mega banks. The Shinkin banks, in regard to the MIT product, we had one bank sell 2,000 policies. What they're doing is they're adding it on to younger people that are getting home loans. They're saying to them, "You want to make sure you protect your income to where you can keep the house if something
A catastrophic hit. That's going to take time, but I see down the road in a few years, that product really grab and hold, because once it takes hold, I think you're going to see a lot of results. I won't call them by name, but one of the largest Japanese property casualty insurers congratulated this group. I didn't have anything to do with it, so I give them all the credit for this new product, saying they wish they had come out with it first. Getting veteran people to change over is difficult. It won't see an immediate impact, but once they change One thing I found about the Japanese is they're slow to move, but when they move, they move in masses. Once it takes hold, it will be. I saw that with the Aflac brand changing to the Aflac duck.
They were slow, but the minute they did, they moved so quickly that their name recognition and their ability to use it passed the U.S. Now, of course, they're about the same, but that's how important it is. I still stick with what I said about for the remainder of this year, but I do think long term, those others will be impactful. We go against a tough first half of next year. I can say that, too. All in all, I still feel like we've got Koji in the leadership, and he has agreed to stay through 2020. I negotiated that with him while I was over in Japan, so that means three years and three months, I've got him at least. He has always been a winner, and I don't think he's ever missed a sales objective. I feel good about that.
Just so you know, the MIT is code name for the income support product. Sorry. Yeah.
I just had a very quick follow-up, and thank you very much for those answers. The medical insurance policy in force growth for the industry in Japan is growing at a very fast clip, but it looks as if the industry is growing faster than Aflac in Japan in the medical space. Could you explain that?
First of all, the large domestic insurers used to have their medical insurance sold as a rider to their first sector. Now they are selling it as a standalone product. As a result, it looks as though the standalone medical insurance number is increasing. As a result, companies like Aflac and other insurance companies that have been selling standalone medical product, looks as though our growth is slower than the market's overall growth. However, Aflac has been maintaining and is maintaining the number one position under such circumstances as well.
One other thing to add with the medical strategy, I think it's important, is that the latest repricing we did was targeted towards younger customers. This is the strategy on getting the customer becoming an Aflac customer for life and able to cross-sell and upsell them. We really targeted the 20 and 30-year-olds with the latest pricing, and that's been successful.
Nigel.
Nigel Dally from Morgan Stanley. Just wanted to follow up on Japan on Japan Post. Now that we've seen rollout to all of the post offices, should we be expecting the sales to plateau from here, or is there the opportunity to further deepen penetration and continue growth into the next several years?
I think, Charles and I had lunch with the CEO back in, I guess, August or late July of Japan Post. He continues to be very enthusiastic about further penetration. There's no doubt that certain areas are doing well. Other areas they really haven't taken off like they can. This is a situation where a low interest rate environment actually helps us because Japan Post has nothing to sell, because they predominantly sell very interest sensitive products. Their interest in wanting to sell our products because they want something profitable for themselves, has worked out very well for us. I would say that we continue to see growth. The percentage growth will, of course, slow down. Continued growth, I think, for the next few years, I'm optimistic about.
Tom.
Thanks. Thomas Gallagher, Evercore ISI. First question is just a follow-up to the point made that there's been a switch from riders to standalone products in medical. Has that had much of an impact on the market? Has that put pressure on pricing or margins? Or is that more or less just a marketing issue as opposed to a pricing dynamic issue?
By the way, that happened about three years ago
It didn't just happen overnight. They'll answer it, but I want to make sure you knew that.
Okay.
It's a marketing issue. It's more of a statistical issue and not a pricing issue.
My follow-up is, in cancer, it also looks like you've lost a little bit of share, but it looks like that's because the market's expanding. Can you comment at all what's gone on the cancer side? Have you seen more competition? What do you attribute the market growing as much as it has been to?
Well, as Mr. Koide mentioned earlier, as with medical, same thing is happening in cancer market. What I mean by that is that the large domestic insurers, which used to have cancer as a rider, is now selling standalone products. There are life insurance company subsidiaries that sell mainly through the internet. Excuse me. Correction. There are some distribution companies that have internet sales capability. This internet company is selling or adding one-year term cancer insurance to their membership. I believe that company alone is selling about 400,000 or adding about 400,000 cancer policies. That is free of charge. In terms of the number of policies, market looks as though if it is expanding, however, that is not really affecting our share of sales in cancer.
Sorry, what company was that's selling that free of charge?
Rakuten.
Rakuten.
Thank you.
Let me make sure you all got that, is that it is a little bit like value-added services. They are giving them one-year term cancer insurance for younger people, which is what they are skewing toward. After that, they have to pay for it if they want it. We don't know what impact it is going to have, but our young people with the new policy we are selling, sales are up. Your question would be, well, if they are giving something away. They are doing it for all ages, but because it is skewing younger, is it hurting your sales? What I want to tell you is the new product that we introduced, cancer, for younger ages, sales are up in that area for us, so it is not impacting us. That is what is skewing that number up so much.
Let me just add a little bit of information. The cancer insurance this internet company is offering is one-year term cancer insurance with first occurrence benefit of JPY 50,000. In 2015, there was 329,000 policies that have been offered by this company. That is really pushing up the overall number of policies in the market.
Thanks. Sean Dargan from Wells Fargo Securities. I wanted to go back to Dan's comment that Japan Post has nothing to sell. Given that apparently the U.S. will not be a signatory to TPP, what is preventing Japan Post from developing their own cancer product?
It has nothing to really do with the trade agreement, but the domestic law of the government of Japan, law that governs Japan Post. It is still, as you know, state-owned enterprise in the sense that the shares are at the holding company level, more than 80% or so now. It may be reduced as shares are sold further. Because this is a privatization of a former government agency, now public company. In that process, the government of Japan wanted to make sure that the privatization process did not distort competition in the marketplace with respect to all private firms. It is not a trade agreement that makes the transition what it is.
That transition, as long as the shares are owned by the government as it is moving towards privatization, full privatization, Japan Post has to go through a special review process, more review process than a domestic or foreign firm operating in Japan. In that review process, the additional review process is about the balance in terms of achieving the policy goals of not distorting competition. That's point one. We now have a strategic alliance. The cancer product is offered to complement the Kampo products. Yes, the point that Dan made is so true, the distribution channel has other products. The negotiation that was concluded led toward the formation of a strategic alliance relationship that is so multifaceted, that's the basis in which they are offering, selling cancer, and now producing results internally.
Believe it, we believe it's a win-win deal. That's all going to be helping us continue to work together. It's a number of factors, the law, as well as the fact that we have a demonstrated record of success with Japan Post that is going to continue to make this relationship a strong one, in my view, in all of our view, in the discussions that we've had with multi-level executives as we go out. Yamauchi-san, myself, Koide-san, we have gone out to every branch of Japan Post and met with our leaders, and their leaders, and we are convinced of that.
I think another thing is to look at Dai-ichi Life. They did the deal with us in 2001, they haven't gone into competition with us. They see it as a short-term impact on their financials of helping in a positive way. I think you also see that with Japan Post, that right now they want profitable things that, as they've gone public, makes them look good, and they look good right now, and we look good. It's a win-win for both of us.
Just one follow-up. Where are we in the timeline of the privatization of Kampo?
That is ultimately a decision of how the Government of Japan, the Ministry of Finance, and Japan Post Holdings proceed with the sale of the shares that the government owns. Japan Post Insurance is a subsidiary separately listed on the Tokyo Stock Exchange as well. That's another management decision as well as government's decision. No one can say this is the point that the privatization will take place. We have, I believe, ways to go. In the meantime, if they do decide, and the Japan Post Insurance operation is more free to offer new products just like any other private company, then where are the focus is going to be? I speculate that it is in the areas that they have been traditionally very good at for a sector, not why go into cancer.
That's still down the road in my view, because this is a strategic alliance that's working so well. If you have something, even in a Japanese saying, what's not broken is not normally fixed. That's how I see it.
The only final point I'll make is that they are our customers, and we are going out of our way to make sure they're happy with us. That plays an important role, and I have to give Yamauchi and Koide credit for that in making sure that we've got the sales organization, the training aspect, doing all the things we need to do. We take care of them. We don't take any chances. We did that with Dai-ichi Life. We're doing that with Japan Post. We're doing that with Daido Life. Of course, Japan Post is much more important in terms of right now the magnitude of what they're doing. All of them are important, and we're giving them that tender love and care to let them know we appreciate them, and they sense it, and we're going to continue to do that.
Thank you. I think that's a great ending point, Dan. I want to thank our panelists. We will also have Q&A at the end, I'd like to now take us to a break. We will resume at 9:45 A.M.
If anybody had a question they didn't get answered, we can stay right here for a minute. I saw a hand go up, so we'll do it if you want. Okay. Oh, I'm sorry.
Very good. I hope everyone was able to enjoy the break. Now we'll introduce our next speaker. We will hear from Teresa White. Teresa 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 Columbus in 2013. In 2014, she was promoted to President of Aflac U.S. This morning, Teresa will give an overview of Aflac U.S. Teresa.
Thank you, David. For many years now, the vision for Aflac U.S. has been to be the number one distributor of voluntary products in the U.S. worksite. Today, that vision has changed. Our vision for Aflac U.S. is to be the number one distributor of benefit solutions supporting the U.S. workforce. Why the change? The workforce has changed. Employees are no longer just in the worksite. The market has changed. Consumers and employers want benefit solutions and not just product sets. Aflac must change. I believe that we have a solid strategy in place to accomplish this vision, and I'm excited today to be able to talk with you about it. The bulk of my discussion will focus on our growth initiatives. However, you'll also hear about our investments in new technology which support our objectives of operational efficiency and customer experience.
Let's begin with a brief look at our market landscape. Although the macroeconomic environment has shown measured improvement, overall health care coverage has continued to rise. Family coverage premiums have increased 32% since 2010. A policy that cost about $14,000 in 2010 cost about $18,000 in 2016. The average employee contribution for family coverage has increased 78% over the last 10 years and 32% since 2010. In 2010, an employee would contribute almost $4,000 toward family coverage. That increased to over $5,200 in 2016. In 2016 alone, we saw average health premiums increase 3% from 2015 while workers' wages increased only 2.5%. Although the general economy shows improvement, these trends continue to limit the spending power of the American worker.
Meanwhile, we've seen a number of companies continue to manage their healthcare costs by shifting more of those costs or more of those expenses to their employees through high deductible health plans. At the same time, many are looking to bridge the gaps in coverage by offering voluntary benefits. As a result, we anticipate a strong positive outlook for the voluntary market. Healthcare reform continues to be a hot button issue with no clear agreed upon alternatives. Although there have been many amendments that have been considered, there have been no solutions presented at this time. For now, the Affordable Care Act continues to be the law of the land. According to the 2016 Aflac WorkForces Report, 65% of employees have less than $1,000 to pay out-of-pocket expenses associated with an unexpected serious illness or accident. This leaves many consumers financially unequipped to weather those catastrophic health situations.
This can be alarming, especially when you consider that a broken leg can include on average over $2,500 in medical expenses not covered by your major medical plan. With this as a backdrop, we believe that Aflac benefits will continue to remain relevant regardless of changes to healthcare reform. As Dan said earlier, Aflac pioneered the voluntary insurance category more than six decades ago after identifying the need to lift the financial burden from cancer patients, helping them to fight for and preserve their quality of life. Lifestyle has a significant impact on a person's health and well-being, and our research shows just how important lifestyle is to today's consumer.
When I say lifestyle, I'm talking about personal experiences, being with friends and family, their travel, their hobbies, their passions. Our recent commercials speak to how an accident can alter your ability to pay for a vacation, or a major surgery can change a consumer's financial situation. No one knows this better than a family member who has dealt with a critical illness. Aflac understands the needs that exist once a health event occurs, and we seek to support our policyholders by easing the financial impact and being there for our policyholders when they need us most. We want to help our policyholders quickly get back to the lifestyles they had before their medical event, and I believe that our strategic playbook supports this objective. As I said earlier, our vision is to be the number 1 distributor of benefit solutions supporting the U.S. workforce.
What does this look like? We must develop new and innovative products and services that 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, and we must connect to this new generation of consumer. Let's talk about this next generation of consumer. According to the U.S. Census Bureau, while baby boomers continue to decline in population, Generation X has stabilized, but both millennials and Generation Z are growing. What do we know about these consumers? Well, according to a study by Employee Benefit Advisors, millennials are typically more digitally capable, on the move, and place a growing importance on social purpose, flexible working environments, and entrepreneurship.
44% of millennials expressed interest in flexible work schedules, and a quarter of them indicate that they would like to work from home. Given this shift in demographics and evolving preferences, we believe that our brand strategy supports this growing segment of the working population. We are also seeing change occur in the workforce with new genres of entrepreneurs, such as freelancers, independent professionals, contractors, and consultants. This group works from their home offices, innovation labs, or shared office spaces. In fact, in Charlotte, home of our Empower Benefits business, we participate in a fintech technology incubator where new entrepreneurs are given workspace and a platform to start building their own small businesses. Companies are invited to mentor these entrepreneurs, provide investment capital, and provide insight into specific business models. These entrepreneurs and their small businesses are introducing new ways to solve old problems.
They also provide insight into the needs of a small business from startup to maturity. With almost 90% of Aflac in-force accounts in the small business segment, this provides an exciting opportunity for Aflac to interact with this new generation of small businesses. As these shifts in demographics occur, Aflac is shifting as well. Aflac's primary focus has been on the worksite, specifically in the private sector. This means that now we are looking at things a bit differently than we have done in the past. As you look at the top line of this chart, which represents the entire U.S. working population, our 167 million, we must consider the opportunity not just in the private sector, but also in the self-employed and public sectors.
Our growth will come from three areas of opportunity, increasing access and penetration in the 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. How do we plan to take advantage of this opportunity? Our 2017 key initiatives are designed to support our growth, efficiency, and customer experience. Related to growth, our 2017 initiatives include distribution expansion, Everwell adoption, and product portfolio expansion. This includes the development of key systems, products, services, and tools to support our career agency and broker distribution partnerships.
The goal of these programs is to drive producer productivity through increased account access and employee participation. At this point, our strategy is working. We have seen increased producer productivity with new and veteran career agents. This increase in productivity is being driven primarily by our Everwell adoption. If you recall, 20-plus years ago, SmartApp was that innovative technology of the day that allowed our agents to eliminate paper applications and reduce time to enroll. Today, Everwell is just as important as SmartApp was back then. Everwell provides a holistic product and service offering for our small business clients, thereby driving higher employee participation. With 32% of our sales in the small case market written via Everwell, we have exceeded our target of annualized premium written for the first half of 2017, and our goal is to be at 40% by year-end.
Additionally, we've invested in training and developed incentive programs for our veteran agents. As a result, we've seen an increase in both veteran productivity as well as existing account premium sales. While our sales in the large case broker market were strong in 2016, if you recall, we fell short in the mid-case market. This led us to increase the number of broker sales reps by 25% this year. We've completed the onboarding of these positions during the first half of 2017 and expect to see the results during the second half of the year. Year to date, we continue to lag behind what we should be able to capture given our market leadership and distribution strength. We're making some adjustments to our current approach to ensure that we can capitalize on this mid-market opportunity.
Additionally, we made the public sector one of our key areas of focus as we entered 2017. While the market grew in 2016, our sales in public sector were relatively flat. Accordingly, we developed a targeted strategy with customized training and marketing. We've executed that strategy during the first half of the year. We expect to see positive results during the latter half of 2017, and year-to-date results are moving in the right direction. You'll note under next steps on this slide that our plan is to assess new distribution growth opportunities. With that in mind, as you've heard, we've hired a new Chief Distribution Officer, Rich Williams, whose scope will include new growth initiatives for Aflac U.S. and continued development and alignment of our current distribution strategies. This includes our compensation programs for sales performance, training, and retention. Rich, you want to stand, please?
Rich brings over 20 years of insurance experience and expertise. He has strategically delivered double-digit sales growth in the industry. We're delighted to have him on board here at Aflac in this strategic role. Thank you, Rich. Turning to our product offerings. Our initiatives are centered on providing solutions to this evolving customer need. In addition to designing and offering best-in-class core products, we're focused on expanding our product sets to gain new access points with the mid-case employers and broker partners. We're also offering innovative benefits and services to attract, retain, and educate new customers and existing clients. The goal of these initiatives is to drive increased quote activity, employee participation, and ultimately increased lift in the sale of our core products. To date, in addition to our regularly scheduled product revisions, we've expanded our product offerings to sell a product design that Aflac has not traditionally sold.
As we continue to sell more in the mid and large case markets, our brokers and larger employers want a one-stop shop for voluntary benefits. They've prioritized life as a must-have for Aflac to compete for many of their bids. In response, as of August 2017, we've expanded our group life portfolio to include three products: whole life, universal life, and True Group Term Life. We know that the power of our brand is a differentiator when we're offering the full suite of products. With that in mind, we made the decision to work with key partners to bring these life products to market as Aflac products. This is our entrée into offering True Group products. Partnering allows Aflac to minimize our risk from a financial perspective while providing the desired benefit designs our mid and large case clients expect.
It also positions Aflac to have one of the broadest life insurance portfolios in the industry. To date, these partner products are helping provide lift for our core product sales by exceeding mid-year targets of 41% above the targeted new AP growth. As I said earlier, we're also offering innovative services to attract, educate, and retain customers while providing day 1 tangible value, even if the customer never files an Aflac claim. Value-added services complements our core value proposition while increasing employee participation and quote activity. When value-added services are offered in our accounts, we see an increase in employee participation of about 10% within our core product set. Going forward, Aflac will continue to research trends and find other innovative ways to provide the valued protections our consumers need. Turning to efficiency. As the voluntary market continues to grow, scale and efficiency become increasingly important.
With workforce dynamics continuing to evolve, we're preparing to meet workers when, where, and how they'd like to do business with Aflac. As we've discussed, we're making technology investments to support the U.S. operations. It's essential more now than ever that we minimize the expenses associated with running our day-to-day operations while serving our customers with the ease, choice, and simplicity that they expect and demand. With the majority of our expenses allocated to personnel, balancing our customers' needs and wants with the expense control objectives that we have can be particularly challenging. We're continuing to employ alternative solutions such as utilization of nontraditional workforce, resource sharing, reallocation of staff, or elimination of non-essential processes. By striking that balance, we're able to maintain strategic operational agility and to reinvest some of those associated cost savings back into our technology roadmap.
Additionally, there are numerous digital entrants in the market who are not only challenging the doctrines and practices of traditional insurance distributors, but they're also a lot more agile because they don't have a lot of the legacy systems to deal with. According to a recent Accenture study, the best way for incumbents in the market to win is to continue to enhance their core model while investing in digitalization for the future, and that's exactly what Aflac is doing. Our objective is to retire our older, less agile system platforms as we adjust our business models to prepare for our future state. We believe these plans will increase our overall operational efficiency and enhance our speed to market.
We're continuing to invest in our core business systems through our technology roadmap, supporting our enterprise enrollment, producer compensation management, recruiting, and pre-sales tools, as well as our core group systems like policy administration, billing, and claims. Now, you've heard Dan say that he's seen more change in the last five years than he saw in his first 35 years with Aflac. At this rate of change, we also understand that organic growth is not always the best or only solution. We're also working with our corporate development area to make strategic investments. Many of these investments have the potential to strengthen our core model with bolt-on opportunities or provide complementary services and products. Fred will briefly touch on corporate development and venture capital in his comments later.
With all of this as a backdrop, I expect to see a slightly elevated expense ratio in the short term as we position ourselves to drive down our expense ratios over the long term. It's hard to believe that we introduced One Day Pay almost 3 years ago. We blazed the One Day Pay trail because we knew that getting cash in the hands of our policyholders matters to them, and we made it matter to us as well. We paid a little over 1 million claims through One Day Pay during our 1st year. By the end of this year, we expect to pay almost 2.2 million claims in 1 day. SmartClaim, our online submission technology, is projected to receive 55% of all eligible online claim submissions this year.
More importantly, 95% of our policyholders that have used our SmartClaim system say that they're likely to refer others to Aflac. Over the last 2 and a half years, we've received a tremendous amount of feedback from our policyholders on One Day Pay. I'd like to share a letter from policyholder LaDonna B. "On Christmas Eve, I fell down coming off the front porch and fractured a bone in my knee. I contacted Aflac customer service to get some additional information about our policy. The customer service rep was very friendly and helpful. I submitted all the reports via the internet SmartClaim process on the Aflac website. The claim was paid in 1 day, just like Aflac states it would be. We're so blessed for this policy and the fast customer service of Aflac. I will definitely be recommending Aflac to all my family and friends.
It is truly a company who does what they say. In today's society, that's a big plus to me and my family. Thank you, Aflac, for making the claims process easy." One Day Pay differentiates us, our brand distribution and solutions are competitive advantages that distinguish us from our peers and allow us to deliver on the promise to be there for our policyholders when they need us most. We will continue to leverage these advantages because we believe that experiences are too important to a person's health not to be protected. Finally, in our last conference call, I was asked about whether I wanted to adjust our long-term sales target to align with the industry. My response was that I was still comfortable with the 3%-5% CAGR.
As you know, Aflac has a career agency force that drives almost 70% of Aflac U.S. new annualized premium sales. Although broker sales have more than doubled since 2009, the broker channel still represents only 30% of total U.S. sales. This dynamic is very unique in the market, as many of our competitors have an inverse relationship between brokers and career agents, some having more than 70% of their sales through broker relationships. While our broker sales are keeping pace with the market, our career agent sales are slightly above market. However, our distribution mix has a greater impact on our long-term CAGR of 3%-5%. Again, I am optimistic based on what I'm seeing today with our indicators, but I'd like to see a lot more consistent performance before declaring any new trends.
We continue to enjoy stable persistency. We're seeing results that are in line with our expectations as we continue to drive toward that long-term CAGR of 3%-5% sales growth. I've already received a couple of questions also about the impact of the recent hurricanes on our U.S. business. Before heading into Q&A, I'd like to address this topic. We have policyholders, agents, brokers, and employees in the affected states and U.S. territories. We focused on what we could do to help support them during this time, including changes that we've made to our normal processes. We've extended the grace period for premium remittance for accounts and policyholders in the impacted areas. We estimate that this will result in lapsed AP in the range of about $15 million-$20 million.
We believe that the impact of a hurricane will be more short-term in nature, not really affect our long-term sales CAGR of 3%-5%. Early analysis suggests that the storms may impact our 2017 sales forecast by approximately 1%, recognizing that we'll continue to monitor any developments. We may change that estimate. Keep in mind we're not property casualty. We would not expect to see a meaningful spike in our claims process or our claims due to the hurricane. We do not expect to have a material impact on our benefit ratio. We do not expect the hurricanes to have a material impact on earnings as the deferred acquisition costs would be offset by the benefit release. I said earlier, I believe that Aflac has the right strategy in place.
At the end of the day, as our policyholder said in her letter, we intend to continue doing what we say we're going to do, that's deliver on the promises to our policyholders. We'll do this with a focus on profitable growth, operational efficiency, and excellent customer experience. Thank you.
Thank you, Teresa. We will now have a Q&A panel for the Aflac U.S. Again, I will repeat the rules for our session. First, please wait for the microphone before asking your question. Second, please tell us your name and firm. Third, please limit yourself to one question. We'll begin with Erik.
Thank you. Erik Bass from Autonomous Research. First, Teresa, how much investment is needed, do you think, to broaden the distribution to reach the self-employed and the companies that are not sort of Aflac customers today? Then, I guess you sort of addressed this at the end of your comments, but given the size of the opportunity, why shouldn't Aflac be able to grow faster than the market in the broker and group channel?
The first question was in reference to direct to consumer?
No, just in general, how much investment to broaden your distribution to tap the sort of the channels that where Aflac's underrepresented today or the segments of the market.
Well, I think I'll answer that by saying, as far as investment, what we're really looking at is sizing the market opportunity in areas where we know that we already have distribution. The distribution that we have, I know you've heard me say, that we're looking at enhancing producer productivity. All of the things that we're doing right now are really to ensure that we're enhancing our producer productivity, like Everwell, the participation in accounts. You saw the slide where of the 49 million employees in accounts where we already offer, there's still opportunity there. What we're really doing is we're going back and we're really doing the fundamentals, the investment's already there. It's really just driving the sales through those current channels.
Now, you heard me also talk about alternative distribution, and really the play there is we're going to study that a little bit more. We are already selling direct to consumer in a very small way. Really, we're studying there to really look at how we can take advantage of this new genre of entrepreneur. These are people who we cannot reach in the work site. The goal is to continue to focus on the work site, but also look at opportunities to reach that new entrepreneur that is really outside of the work site, or really does not have an employer-employee relationship.
The second, or why not grow faster than given that you're starting from
Erik, will you repeat that into the microphone?
Yeah.
Sorry, and then just the second question was, you sort of mentioned that you're growing sort of in line with the market in the group or broker area.
Given that you're starting from a smaller base and you have more sort of untapped opportunity, why wouldn't you think that Aflac would grow faster than the market?
Aflac's broker, I think in 2015 is when we really pulled together our broker strategy, we are already a force to be reckoned with in the broker market. We are, if not number 2, we've come up very quickly in the broker market. I'll have to get the numbers. We're selling really well to that market today. I say that we're already moving in that direction to be the force in that market.
I will say that we won't be satisfied until we have moved up, our objective here is to give you what we think right now. Is it our long-term objective? Of course, is to be at that pace you're talking about. I do want to say, Teresa has done an outstanding job of what has been a very difficult situation in terms of, you saw it with our corporate agency structure in Japan, where that was the foundation of the company, how we gradually brought in Japan Post and Dai-ichi Life, then we just had the corporate agency structure, we built the individual agents. We're changing over from this other. We really are, and she said this in her speech. We really are the only one left that really has a big field force. Almost everybody else is broker driven.
From that standpoint, we're a little behind the curve. When they're doing more than two-thirds of our business, we can't let it drop off, it is a large portion. This other area, broker area, is growing nicely, keeping this other happy. What we're really trying to do, and you've heard her say this, is keep our field force under 100. Right? In accounts with 100 or less. Our big brokers are kind of set, the ones over 1,000 or over 5,000 are doing very well. All the fighting that is occurring or the whatever nice words you want to call it.
Conflict
competitive-
Channel conflict
spirits, whatever, is all taking place between the hundred and the thousands. We need referees to some degree because of that overlap. Is it worth it? Absolutely.
Yeah.
It's a full-time job her refereeing these and working out. With time, it will work out.
We're starting to see that. We're starting to see a lot more traction in that area. At the end of the day, you can't turn the light switch on and tell everybody this is what you're going to do. You do have to work through that.
I will say I'm definitely seeing progress. I'm very excited of some of the things we're seeing this year.
I'm excited that Rich is now on board as well.
Feel the pressure, Rich? I feel it right there.
Yeah.
Humphrey Lee from Dowling & Partners. Teresa, you just mentioned direct to consumers. In your view, kind of where can that become a bigger piece of Aflac going forward. Especially with the latest ads, you seem to be more educating the consumers what Aflac's products truly are covering seems to be helping to bring that value proposition to consumers. Do you see direct to consumers to be a bigger part of the distribution in the near future?
We believe that today there's a new generation of worker that is not going to be in the work site. We are following that trend. Again, as I said, our goal is not to really go and we say direct to consumer. Internally, we've called it direct to worker. Really, it's to ensure that we are targeting the specific people that we want to target. We already have a great business with our career sales force in the work site, and we have a great business with our broker channels and our broker partners that we're building with them in the work site. Now this piece, we're going to be phasing it. As I said, I think we have about 17 million that we sell right now through a direct channel. It is a passive direct channel.
What our plan is to really do some of the research that we need to do so that we can change our product set. The product has to be more simplified if it's going through that channel. We have to make sure we have the right product. The pricing needs to be where we want it to be in that channel. We still have some work to do there. That's primarily why I brought Rich on, because as we start looking at other opportunities for an alternative channel, we've got to make sure that we don't take our eye off of the two major channels that we have today. This is going to be a big part of what we're doing.
Teresa, talk about the low penetration in our accounts and the potential there.
Yeah.
That, to me, where an enormous potential is.
Today, as I said earlier, we have 30% of the accounts that we're offering to, but we're only 15% penetrated in those accounts. There's a vast opportunity to go in and actually continue to increase participation. I'm hoping that you got out of my presentation that a lot of the initiatives that we've put out or that we've executed on are initiatives that are driving increased access, increased penetration, employee participation. These are all driving to the same place. Some of them are driving in a small business segment, but some of them are driving in that mid-market and large market segment, like the partner products. We want to be at the table when a large employer is asking for benefits.
What we found is we weren't at the table sometimes because they were talking about what they call true group products, and that's not something that we've traditionally offered. How do we get to the table? We start looking at ways to offer true group product. That's how we're evolving from a product set standpoint to ensure that, again, we're in there when we need to be, and we are competitive as well.
For these kind of group partner products, just want to clarify, these are all white label products that you are selling third-party products through your channel, or are you taking any actual underwriting risk as well?
On the universal life product, that is purely a distribution agreement, yes, we are white labeling that product, and don't take on any risk. Our goal there is to get lift of our core product, and we're starting to see that. We're getting a lift there. On the term life product, we have, I believe, 20% risk, and correct me if I'm wrong, Todd. On the whole life product, we have a 50% risk that we take.
Thank you.
Greg Peters with Raymond James. Thank you for taking our questions. Contrary to its original intent, it seems like the ACA has destabilized the non-group and small group marketplaces. Consequently, I'm beginning to sense that there's maybe more demand for comprehensive coverages versus supplemental health coverages. Just stepping back from a big picture perspective, from Aflac, do you think there's more demand for comprehensive solutions today and for the next couple of years, or do you think the supplemental market will continue to be a relevant player here?
Well, we continue to believe that the Aflac products will be in demand even in that market. As we have gone into the small case market, the impetus of the Everwell solution is to solve for the problems for small businesses. That platform has not only the Aflac product, but it has a major medical product. It also has some dental. It has a number of different features on it to include, and you saw the investment that we made in Wellthy. That is a decision support tool, and it's designed specifically for small business to help them to understand when they should be offering major medical, when they shouldn't, how to integrate all of their product sets together.
Our goal is to provide a solution for the small business so that they can make those decisions that you just talked about with regard to whether they should have major medical, whether they should not offer major medical, et cetera.
Let me be clear, they should have major medical before they have our insurance. We are not trying to tell people buy ours instead of major medical.
Right.
There will be gaps in coverage, and we need to help fill those gaps, but they still need some form of health insurance within their system somehow or another, either by through the program that the government will offer or.
Yeah
shape, form, or fashion.
Everwell also allows them to do that. We allow them to go through GoHealth, through an exchange of some sort. Really the tool that we're building is to provide that small business owner with the support they need to make those decisions.
Yeah. Thanks, David. Suneet Kamath from Citi. You had mentioned that the mix of your sales is 70% individual, 30% broker, and that's sort of the flip of what some of your competitors are experiencing. Is the idea there that maybe you can't grow at the market rate until you see more of a balance between individual and broker? I just want to get a sense of what you were meaning by that.
Really what I was trying to convey is, our sales force, we sold about $950 million last year through our career agency force. The law of large numbers says that it's going to take me a little bit to be able to overcome the large numbers. To an extent, we're a victim of our own success. However, I think the other part of that is the broker side of the business is a newer side of the business. They're enjoying the same market increases that you see with our competitors as well. Yes, the issue is how do we overcome the success of our career agency force? I believe that we have the right strategies in place to do that.
I believe that we are increasing their productivity, increasing the penetration in those accounts, and I believe some of the tool sets that we put out there and the products will help us to do that.
Yeah. Let me say one thing, Sunny. I kind of compare this to the doctors. You remember how a few years ago, all the new doctors were fine, but all the old doctors were complaining how all the new rules and regulations, and they didn't like it, and they didn't want to fool with this, that, and the other. Time takes care of it. What's happening here is that we've got a group of people, veteran agents, been around a long time, that thought they could write anything in the world they ever wrote in. Now, they never did, but they thought they could, but they did write the 100 to the 1,000. The new people that are coming on, they don't know the difference.
We've told them that the 100 is big enough and has potential, they're used to it, just like the new doctors that come in are used to it. It's taken time to get this adjustment. I think you're going to see broker playing a larger role, broker probably opening the account, and still our existing field force helping grow the business by working together, but in a different manner. I think we're kind of over the hump and heading in the direction we want. This year, we've got to wait and finish it out, but I'm encouraged about this year and what we're seeing because it's what she's put in the last couple of years that is making the difference. You've got the pain of doing it, and then you hope to see the results, and I'm hoping that this will continue.
That's certainly what we're betting on, we'll just have to wait and see.
Just from a timing perspective, we've been talking about this channel conflict now for probably a couple of years. Is it you really get a sense that we'll start to see that impact more significantly in 2018, or do you think it's going to take even longer than that?
I think it's too early to tell at this point, but what I think is, we've been doing it now for several years, just hiring all these new people, they don't know the difference. It's a matter of the shift in time of the new people coming on and the older ones retiring or whatever it might be and the shift that's taking place.
Do understand, though, that there will never be a time where there's zero channel conflict.
True.
There will never be that time. We could talk about channel conflict in 2018, but if your question is really more around do we see traction and do we see improvement? Absolutely.
The final statement I want to make about it is, it seems like that when you talk about this group that we've got, it's negative. It's negative in that it's a little bit harder for growth going forward, but it's very positive and no one's got it. We own it.
Yeah.
We've got it. We don't want to lose it. We want to build upon it. As she said, it's riding close to $1 billion in new sales.
Yeah
a golden goose that is well worth it for us, and it makes a difference in our business model, and people aren't really going after the under 100. We want to keep that market.
Right. I do believe our broker side of the business, we're just touching on, we're on the edge of doing some really great things there. I think that we're starting to see a lot more RFPs and bids. We are talking to a lot more people. All of our indicators are very, very positive. I feel very good that we will see some execution. Our leaders have got to just make sure that we properly execute.
Thomas Gallagher, Evercore ISI. I guess just a strategic question for you, Dan. Since Teresa mentioned True Group and that, I guess white labeling products, is one solution because that's been an impediment up to date. Why wouldn't you make a bigger push into True Group life disability, whether that's organically or through M&A? Is that something you'd consider?
It doesn't make much money, True Group Life. I don't want to lose focus on what we're doing. Next, acquiring anything right now, nothing looks attractive. It's not our area of expertise, and we'd rather buy our stock back or increase the dividend as a general rule than to do one of those two things. This is not a perfect solution, but it solves our problem and it doesn't leave us exposed. One thing Fred's been very good about is, and working with Teresa, is cutting costs. We've got a program right now internally about finding ways to slash costs because of the technology and the things that we're doing to make us stronger. I'd rather keep our focus on these things. If you said, as a CEO, "What's your strength?" One of my strengths is just staying on something and wearing it out.
I want to stay on doing these things that we're doing and wear those out first, then later on, we can look. We've got this solution. I want to go right back to trying to find ways because I believe the low-cost operator ultimately is the winner.
Yeah.
We've got to keep those expenses in. She's got a lot of experience in IT and understands what's going on. Remember, she came from AT&T Universal Card. She understood that many years ago. She's got that expertise that is helping us and will make a difference.
Todd, did you want to comment?
Yeah, I was just going to say on the True Group, part of that term life product that we've recently developed is the True employer-paid group product that's intended to get us in with more brokers. Next year, we're going to have the short-term and long-term disability products that go along with that in the True Group environment. Just to let you know that's coming.
Jimmy Bhullar from JPMorgan. I had a couple of questions. First, on the elevated expenses in the U.S., are these long-term investments that'll go on for a while, given the nature of them, or are they more discrete expenses that you're talking about that'll be maybe one, two, three years or so?
The range I think we've given you is 33%-35%, we're going to hover to the high side of that range for about two to three years. Our goal is to then by 2022, because then we'll be able to start retiring systems, we'll be able to power down off of some of our processes. I think by that time, I think we'll be at the low end of that range.
On the introduction of some of the True Group products to your platform, what's been the initial reception of that, and is that something that'll help your sales this year at all, or is it more next year or the year after? How meaningful do you think that'll be?
I will say that initially I thought that it would be more help next year. We're seeing a double-digit volume increases in quotes. It is, as Todd said, attractive to a number of brokers. We're starting to see it come in the pipeline a lot earlier this year, which has been a positive for us. We do believe that it'll be some impact this year, but probably the majority of the impact, well, certainly the majority of the impact will be next year.
Just lastly on the hurricane impact to your sales, should we expect most of that in the third quarter, or is some of your expectation baking in a headwind in the fourth quarter as well?
From a sales perspective is what you're saying?
Yeah. Sales.
I would say yes, the third and fourth quarter. The fourth quarter, I'm really looking at Puerto Rico, Virgin Islands, quite frankly. The Houston areas have started, Texas areas have started to get back in, and we're seeing some really good numbers there. The Florida areas, you still have some that are a little depressed, but we're not seeing. We've done a good job with the sales force really getting out and trying to cover for and help some of the areas that aren't selling today. They've delayed some of their enrollments, that meant that there was still intention, and this is employers who have done that. I do feel that we'll see some impact in the fourth quarter, but I think the major impact we've already seen.
Thank you.
Thank you. I'd like to conclude the Q&A at this time and thank our panelists. If you do have any additional questions, we'll have Q&A at the end as well for you to ask those questions. Thank you. Next, we will hear from Eric Kirsch. Eric joined Aflac in 2011 as First Senior Vice President and Chief Investment Officer. He was promoted to Executive Vice President in 2012. Today, Eric will cover Aflac's global investment strategy.
Thank you, David, good morning, everybody. Let me begin with a review of the key drivers of our investment approach, which is grounded in a robust strategic asset allocation process that is recalibrated every three years and updated annually. We seek to refine our investment portfolio based on disciplined asset and liability management, Aflac's capital management objectives, and capital markets assumptions. The main objective is to create a diversified investment portfolio to optimize long-term returns while minimizing risk. As you will recall, we initiated the SAA process for the Japan portfolio in 2012, and the portfolio has been significantly reshaped. For ALM purposes, we target the majority of our assets to be yen-denominated, such as JGBs and private placements, while having dollar-based assets for diversification. We size the unhedged portion of Aflac Japan's U.S. dollar portfolio relative to a stressed economic view of equity surplus in Aflac Japan.
Today, our portfolio is highly diversified by asset class, sector, and region with strict risk limits in place. The portfolio is actively managed and monitored by the global investment teams in New York and Tokyo. Given the limited yen fixed income markets, its very low yields, we believe our diversified investment portfolio, backed by a disciplined SAA process, protects our policyholders while enhancing value for our shareholders. As you know, the macro environment has created significant headwinds of low yields around the world, particularly in Japan, our largest market. In addition to the macro headwinds, there are portfolio-specific challenges such as a limited yen fixed income market, lower reinvestment yields when faced with maturities, calls, and redemptions, as well as rising hedge costs. To manage the headwinds, the global investments team has found and continues to search for new investment opportunities.
Based on the need for JPY-denominated assets and to further diversify, we reopened the investment-grade private placement program last year. These privates earn a significant spread relative to JGBs while minimizing impact on the volatility of our SMR ratio through the use of Japanese GAAP PRM or policy reserve matching accounting designation. As a reminder, PRM designated assets are not included in the available-for-sale category. It is the available-for-sale category that impacts SMR as they are marked to market. We have expanded our USD program by making a significant allocation to the private credit markets through middle market loans and transitional real estate. These floating rate assets with strong credit underwriting provide attractive credit spreads and yields that correlate and exceed hedge costs.
We will also continue to pursue switch trades to swap into higher yielding risk-adjusted assets, such as those we have successfully executed over the past few years. Finally, we continue to refine our hedge ratio to align with our stressed economic view of Aflac Incorporated's equity surplus in Aflac Japan, which we prefer to invest in USD assets. As Aflac Incorporated's equity has been evaluated with a risk-adjusted economic lens, it has been growing, allowing us to unhedge a greater proportion of the portfolio and save on hedge costs. While difficult to fully offset all of the headwinds, we expect our strategies to begin to stabilize NII over the next few years, assuming similar market conditions. For Aflac Japan, we believe diversification is critical considering low yields in Japan and the lack of a robust fixed income market beyond JGBs. Let me highlight a few themes.
First, we have a diverse JPY investment portfolio with around 75% in purely JPY-denominated assets. The majority of these, or 68% of total assets, are designated as either HTM, loans, or PRM, making for a well-managed asset and liability strategy which minimizes impacts to our SMR. The investments are also well diversified with the growth of our USD program, providing multiple relative value opportunities among USD assets, combined with a dynamic hedging program. In total, we carefully manage interest rate, credit, and currency risk with a balanced approach to diversify risk through market cycles. Also worthy of note is that 32% of our assets are designated as available-for-sale, and that these assets impact the solvency margin ratio. We tailor our AFS investments mindful of the potential market value sensitivity, which has been reduced with the switch trade of late last year.
You'll recall that the objective was to reduce long duration investment-grade corporates by $2.5 billion and swap into three months duration floating rate assets. This will reduce AFS sensitivity, and we will continue to pursue other strategies to do so. I also want to address performance and specifically the benefit of our approach. I appreciate the tendency to focus on hedge costs in a vacuum, but understand the portfolio's new money yield is impacted by both prevailing market yields in Japan, which are very low, and by higher yielding USD assets, which need to be hedged to a degree to manage SMR volatility. We always perform an economic relative value analysis between the two options, forecasting long-term hedge costs and potential variability. As you can see, we initiated the USD program in 2012 at the lowest point in the hedge cost cycle.
The strategy has added over $1 billion of additional income since its inception. While hedge costs have risen as expected, the strategy continues to be profitable. With the changes to the Dollar Program last year on the asset and hedging side, we expect continued value to be added with reduced volatility to hedge costs, which I will review in a few minutes. Here, we want to share our best estimate of cash flows through 2019. As you can see, we will still have substantial headwinds as we look to reinvest proceeds from the call and maturities of higher yielding assets. We can't predict future reinvestment yields, but at this point, expect them to be a challenge. This slide also provides insight as to how we will invest those dollars over the next few years.
Let me remind you that these are preliminary estimates that are subject to change, but you will note the high allocation to floating rate assets in 2017 and 2018 as a result of the switch trade that we initiated late last year. In 2019, the yen allocation increases as we expect to approach our current limits for the Dollar Program, though we review the sizing annually in our investment planning and SAA work. You will recall that we restarted purchases of yen private placements last year. Let me emphasize a few things. First, we are leveraging our world-class credit team to find excellent companies to invest in while obtaining exposure in yen. This allows us to earn a competitive credit spread. In addition, we primarily designate new private placements in PRM, thus supporting capital stability. Finally, we have a 35% long-term limit for the asset class.
We have ample opportunity to add exposure, but we also recognize that we have high volumes of calls and redemptions still offsetting new purchases. Importantly, we like the relative value of leveraging our credit capability and earning JGB yields plus a credit spread while locking in our yen currency exposure. Outsourced assets are a growing part of our investment program. We continually dialogue with money managers and investment banks in the search of appropriate assets that fit our investment program. Some assets, such as commercial mortgage loans, infrastructure debt, and bank loans, are traditional. Other asset classes, such as private debt, are more specialized and a particular core focus for us. We believe transitional real estate and middle market loans offer good relative value.
While most credit assets are richly priced currently, we like the relative value of underwriting good middle market loans to small companies and transitional real estate loans with negotiated senior secured covenants that pay us an adequate spread of return for the risk. These assets are also particularly attractive for the hedged Dollar Program, given the floating rate characteristics and positive correlation to hedge costs. In July, we initiated the alternatives portion of our growth asset program with the addition of two private equity managers. We expect our alternative asset portfolio to eventually have about $2.3 billion of committed capital, primarily across private equity and real estate equity. This will take five-plus years to invest as we seek diversification and exposure to multiple vintages over business cycles.
This portfolio is expected to generate strong returns over time, adding to our net investment income in a measured way, while still being mindful of the low initial returns due to the J-curve and potential drag on earnings in the earlier years as these investments ramp up. To date, we have entered into relationships with a dozen leading money managers across fixed income and growth asset classes, and regularly tap into their intellectual capital to share best practices and investment ideas. Let me turn to Aflac Japan's dollar program and highlight the continued diversification of the asset base and the growing floating rate portfolio that is now at 9%. Also, note that currently about 51% or $11.5 billion of the program is unhedged. You can see our hedge ratio has declined, and we expect that trend to continue.
We aim to have unhedged dollars in the amount of Aflac Incorporated's adjusted stressed economic surplus in Aflac Japan, but we are constrained by SMR risk charges and sensitivities. As of June 30th, the hedged portion of the portfolio currently stands at $10.9 billion and has an average asset duration of 7.2 years, with a portfolio of forward hedges that have a duration of 1.8 years. The average book yield of the hedged assets was 3.63%, and annualized hedge costs were 190 basis points for the first half of the year. Let me highlight further enhancements to the investment and hedging strategy that we will be implementing later this year designed to better align returns and hedge costs to reduce earnings volatility and bring income stability. On the asset side, you can see our overall dollar program will target a larger floating rate allocation.
Importantly, all of the floaters will be entirely hedged and will make up about two-thirds of the hedged portfolio, as you can see on the right. The floaters make up the first bucket of the three-bucket strategy we are transitioning to for the hedged portfolio. These three-month duration assets will primarily be matched with three-month forwards. While this bucket will incur variable hedge costs with frequent rolls, the floating rate coupons, pegged primarily off of LIBOR, have a high historical correlation with hedge costs. This essentially means that the net income of this bucket will maintain a more stable margin after hedge costs and outperform JGBs over most time periods. In other words, even if hedge costs go up or down, the floating coupons will move in tandem and provide us with a net credit spread and stable income stream.
The second bucket represents primarily more traditional intermediate duration fixed income and may also include growth assets. Our hedging strategy is to buy three to five-year forwards that match 30%-70% of the asset duration. With this approach, we lock in a high proportion of longer-term hedge costs and importantly, have a highly predictable range of hedge costs for this bucket in each calendar year. This allows us to accurately forecast each year's NII from this bucket and mitigate sharp increases in hedge costs while earning a good spread to JGBs over the long term. Let me discuss the third bucket of unhedged assets. The amount of this bucket is reviewed continually and based on a stressed economic view of Aflac Incorporated's equity surplus in Aflac Japan. Naturally, we want this bucket invested in dollars, and it has no need to be hedged back to JPY.
Setting aside alignment with economic surplus, a lower hedge ratio requires additional capital to support associated SMR volatility. Fred will comment on how the strategy of lowering our hedge ratio plays into our capital management plans. In summary, this three-bucket approach will smooth out our net investment income from the dollar portfolio, mitigate the impact of rising hedge costs, and better align unhedged assets to our equity in Aflac Japan. Let me conclude by highlighting that our investment program is carefully designed around our policyholders and the interests of our shareholders, calibrating key corporate financial objectives. Leveraging a thoughtful investment process with our investment team's expertise, we have managed a well-diversified portfolio that has added substantial income while balancing investment risks. We expect markets to be an ongoing challenge, but we equally expect to continue to find excellent investment opportunities to defend net investment income. Thank you.
Thank you, Eric. We will now hear from Fred Crawford. Fred joined Aflac in June 2015 as Executive Vice President and Chief Financial Officer. Before joining Aflac, he most recently served as Executive Vice President and Chief Financial Officer of CNO Financial Group. Fred also spent more than a decade at Lincoln Financial Group in roles of progressive responsibility, including as Executive Vice President and Chief Financial Officer. He will now give an update on Aflac Incorporated's financial outlook and capital management. Fred?
Thanks, David. First, I want to welcome all of you and thank you for joining us today. I also want to thank those of you who are investors and have been investors for a while. I want to thank you for your investment in the company and your trust in us. I was smiling when Dan was talking about one of his core competencies is when something is working, he sticks with it until he wears it out. He takes that same approach to the executives that work for him, as he's got us all running hard and running smart, I hope. Let me kind of cap things off with some financial discussion. Eric and I really share this presentation because you can't really separate the investment strategy from the capital and financial strategy of the company. They're intertwined, particularly in Japan, as you all know.
He and I really attempted to coordinate the best we can, and ultimately we'll come back up here on a panel and take your questions together with Todd and others. Thank you, Eric for that presentation. I'll focus my time on really three interconnected financial strategies that we expect to drive meaningful value as we settle into our new corporate structure. Eric covered our investment strategy and efforts surrounding the management of our U.S. dollar investment portfolio in Japan. I'll focus my comments on connecting our investment strategy to Aflac's overall capital management framework. The branch conversion influences our go-forward capital management strategy as it creates a more transparent view of our capital and allows us to optimize. The most important takeaway is to recognize that all three of these strategies work together, and they are underpinned by our risk management framework at the company.
Before diving into capital, let's briefly discuss our outlook for core insurance margins, starting with our business in Japan. As anticipated, we've entered into a peak period for limited pay products, mainly 5 pay WAYS product reaching their paid-up status. As such, we expect earned premium in 2017 to be negatively impacted by approximately 2%-3%, or roughly JPY 55 billion-JPY 60 billion. That will, however, taper as we move into 2018 and 2019. Profitability is not materially impacted due to the amortization of a deferred profit liability, together with other reserving dynamics and invested asset returns related to the policies in force. With the pullback in sales of first sector savings products and WAYS reaching paid-up status, the distribution of our earned premium shifts towards third sector with a lower benefit ratio relative to first sector products.
This shift in earned premium is expected to lower our reported benefit ratios by approximately 100-150 basis points over the next few years. We expect benefit ratios in our core lines of cancer and medical to remain strong, with claims trends continuing to benefit from fundamental changes in Japan's healthcare system, which include natural incentives to reduce total days in hospitalization. We have lowered our expected benefit ratio range by 100 basis points, lowered actually from the outlook call comments we made here this past December. We continue to invest in IT and administration with near-term efficiencies gained from process improvements reinvested back into our platform in Japan. In addition, we have an active product development pipeline, including investment in digital solutions. We expect overall expense ratios to be elevated, and we have increased our projected range.
Overall profit margins are expected to perform at the favorable end of our forecasted range and generally consistent with recent performance. Turning to the U.S., 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. 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 a higher benefit ratio, and assuming the business performs according to our expectations, we would expect some natural upward pressure on ratios from new business over the long run.
The expense ratio in the U.S. has been elevated recently as we've been actively investing in our U.S. platforms, both the group and the individual business models. I'll discuss our capital management plans in the U.S. in a few minutes, realize that as you pull excess capital out of the U.S., you modestly reduce net investment income and the impact to the segment's revenue and expense ratios over time. Overall profit margins in the U.S. are expected to continue at or near their historical highs, we believe it's prudent for us to reinvest some of those profits back into our business to both defend and build market share. Before moving on to capital, this is somewhat to address Jimmy's question earlier, you can see from Koide-san and Teresa's comments today, we are dedicated to investing in long-term growth.
We face certain revenue realities that are important to recognize. While growing the top line remains our goal, we need to continue to focus on our long-term expense structure. We have dedicated project plans in Japan and in the U.S. that will elevate our near-term expense ratios, but are designed to drive towards the midpoint of the 18%-20% range in Japan, and the low end of the 33%-35% range in the U.S. over the next five years, both assuming our best estimate of revenue growth rates. I'd like to provide you a quick refresher on the capital mechanics of our branch conversion. Currently, Aflac has a stacked structure for moving cash flow to the holding company. We first work with the FSA to ensure their comfort that our branch has strong capital position to support repatriation.
We must satisfy the Nebraska Department of Insurance conditions for dividends to the holding company. Our conversion to a Japan subsidiary simplifies or unstacks our legal structure, allowing for one layer of regulatory review before transferring capital to Aflac Incorporated. As a Japanese subsidiary, dividends to the parent company are governed by Japanese corporate law and is somewhat aligned with managing the solvency margin ratio or SMR ratio. Aflac U.S. is governed by Nebraska Department of Insurance statutory dividend rules, where dividend capacity is defined as the greater of statutory net gain from operations or 10% of policyholder surplus. Aflac Japan and our U.S. insurance entities will continue to pay management fees directly to Aflac Incorporated, and like our U.S. entity, we have installed a tax-sharing agreement between the Japan subsidiary and the parent company.
These agreements collectively provide roughly JPY 20 billion-JPY 25 billion of steady and uninterrupted annual cash flow from Japan. It's important to note that we are maintaining excess levels of capital and liquidity throughout the transition. Given the size and complexity of the branch conversion, that's prudent to do. There are a number of cash inflows and outflows, along with geographic movement of funds to better align our capital as we settle into the new construct. We have reviewed our capital management plans with the rating agencies. The agencies view the conversion as net positive to our overall ratings profile and have affirmed our ratings at their current levels. A key takeaway from this slide is that the process is staged over the three-year horizon of 2017-2019. First, plan and execute on the conversion and unstacking without disruption to our core business.
Second, allocate the capital in accordance with our view of risk and return opportunities at the insurance company level. Finally, once settled into the new structure, we look to further optimize our capital structure to both defend our low cost of capital and improve overall shareholder returns. We maintain a strong SMR, in part to absorb market volatility resulting from unrealized gains and losses on our investment portfolio. We estimate unrealized gains account for approximately 175 points of SMR as of June 30th. The driver of SMR volatility is unrealized gains and loss position in our AFS holdings, which are naturally subject to interest rate, credit spreads, and foreign exchange movement. Of course, assets in AFS are generally higher yielding than the majority of yen assets classified mostly as PRM and HTM and less volatile.
We try to balance the income and diversification benefits of AFS with the additional capital required. We continue to work to mitigate SMR volatility through actions that include building out our floating rate loan portfolio. In addition, we have established contingent capital facilities, an example being our reinsurance line of credit, and hold excess capital for the express purpose of SMR recovery. Upon branch conversion, we transfer our retained earnings account to capital reserves. As a result, we lose a tax gross-up factor on retained earnings that benefits our SMR by approximately 100 points. Importantly, this is an accounting-driven adjustment to SMR. There is no economic impact to capital. Retained earnings is also important in creating a buffer to ensure stability in dividend flows out of Japan under the Japan dividend law.
Dividend capacity is governed by retained earnings plus other capital reserves, less net unrealized after-tax loss position on your AFS holdings. We have worked with the FSA and will be allowed to pay dividends out of the capital reserves, thus restoring retained earnings and the associated benefit to SMR and a cushion to pay steady dividends. Our dividend capacity and our minimum SMR policies are aligned. Our approach to SMR remains consistent, targeting a minimum SMR of 500%-600%, and recognizing we need to maintain appropriate margin due to the risk of AFS volatility. Last September in Tokyo, we commented on the FSA's progress in field testing a new economic capital ratio referred to as the economic solvency ratio or ESR. The ratio is similar to solvency measures used in Europe, which is sensitive to the current interest rate environment and an ultimate forward rate assumption.
Because the ratio is in field testing, the precise method of calculation, timing, and process of implementation are still uncertain. We tend to fare better than a traditional life or asset-levered business models in Japan. We estimate our ratios in excess of 200% when internally modeling an ultimate forward rate, which contributes roughly 60 points to the ratio, or said otherwise, approximately a 170%-190% ESR ratio without a UFR. This is consistent with current field testing standards. We are in a very strong position, but we need to monitor the ESR as we continue to work with the FSA on potential future adoption. We maintain strong insurance company gross premium valuation margins in Japan that average in excess of 15% on a GAAP basis and 25% on an FSA basis. We maintain a level of excess capital in Japan embedded in conservative reserving requirements.
While no reinsurance is currently contemplated, we have the proven ability to unlock capital if needed, both for opportunity and in deploying or defending our capital position. Aflac is a supporter of economic solvency framework as managing under SMR drives short-term volatility that is often inconsistent with the economic strength of our underlying business. Let me now walk you through how we plan to utilize excess capital housed in our U.S. business post-conversion. Our RBC will be a U.S.-only calculation and will not be impacted by either foreign exchange fluctuations or capital charges applied to our concentration in JGBs. Post-conversion, we plan to run our U.S. business closer to 500% risk-based capital, unlocking approximately $1.75 billion of excess capital. We are targeting an increase in true U.S. deployable capital of approximately $1 billion.
Tied to Eric's comments on our U.S. dollar portfolio optimization, we will build contingency capital in Japan, allowing us to lower our hedge ratio towards the 40% range while maintaining appropriate SMR cushion as SMR will be marginally more sensitive to market volatility. As shown on this slide, we accomplish this by effectively repositioning excess capital from the U.S. to Japan, designed to lower and stabilize hedge costs, thus increasing U.S. dollar net investment income. We will provide more details on how this impacts our 2018 earnings on our December outlook call here in a few months. This slide provides more specifics on the timing and tactical execution surrounding our drawdown of the U.S. RBC. Our plan is to pull the projected $1.75 billion out of Aflac U.S. over three years, starting this year with establishing the SMR capital margin in Japan.
We will begin with an initial down payment of $750 million in 2017 and prior to conversion. This slide shows the approximate pre- and post-dividend RBC ratios and how they trend throughout the drawdown period to roughly 500% in 2019. There are two important points to emphasize here. First, recognize that this slide focused on an amount of excess capital movement. Our annual dividend out of the U.S. will include both excess along with free cash flow generated from statutory earnings. We estimate our run rate statutory dividends out of the U.S.-only legal entities to be around $500 million annually. Second, both 2018 and 2019 require extraordinary dividend approval from the Nebraska Department of Insurance. We have reviewed our U.S. capital management plan with the department, and provided capital conditions remain stable, we expect the appropriate regulatory approvals will proceed without disruption.
Please realize that there are significant moving parts to this forecast, we will refine and update as we move through the three-year period. While there may be opportunity to lower our RBC threshold in the future, we want to defend our strong ratings and think it is prudent to maintain a level of excess capital while we settle into our new legal entity structure. Now let me discuss our corporate capital structure going forward. Our approach to lowering our cost of capital includes the following three variables. Recognizing the strength of our coverage at over 15 times and the stability of cash flow generation in recent years, we are comfortable managing to the midpoint of our 20%-25% leverage range. We are adopting a holding company minimum contingent liquidity position of $1 billion.
While representing an increase in our current $500 million liquidity policy, realize that we have consistently held upwards of $1.5 billion of contingency capital. We are simply codifying our approach consistent with our stress testing work. Finally, we will look at opportunities to rebalance the mix of yen/dollar debt issuance to better align with cash flow generation and to lower our cost of debt. We have set our core capital policies consistent with double A rating standards at the insurance company level and A-rated senior debt levels. We generated $6 billion in deployable capital in the three-year period ending 2016. Importantly, recall that this was a period that included reinsurance benefiting FSA earnings in Japan and higher overall repatriation. We estimate this contributed over $1 billion to that period's capital deployment. 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 natural free cash flow generation and the drawdown of excess capital in the U.S. We would break that down as annual free cash flow of roughly $1.6 billion-$1.8 billion a year, along with U.S. excess deployable capital of $1 billion. We define free cash flow and deployable capital in a similar way, capital available after reinvesting in our core insurance businesses and after covering debt service and holding company expenses. Our free cash flow and deployable capital forecast conservatively assume 80% of FSA earnings repatriated and a practical assumption for net realized losses and impairments. It's worth noting that we have stepped up our investment in the core business platforms as both Koide-san and Teresa outlined. As Eric highlighted, we are appropriately building out growth asset portfolios and optimizing our Japan U.S. dollar program.
These strategies are supported by attractive returns, but naturally require higher levels of capital to support, thus reducing deployable capital moved up to Aflac Inc. With the exception of supporting our core business growth, share repurchase continues to be the standard against which all other alternatives compete for our deployable capital. You will see us providing an annual range for repurchase guidance. We want to pay attention to trading levels relative to intrinsic value and act prudently in our use of capital. As Dan noted, we are committed to maintaining our 34-year track record of cash dividend increases. Our dividend policy is guided by growth in operating earnings per share, taken together with free cash flow generation and capital quality. We've allotted an opportunistic portion in our capital deployment plans.
We will look for opportunities to enhance our business through corporate development activity with a focus on alternative distribution, technology, and new business innovation. We launched a $100 million corporate venture fund earlier this year and have made five investments to date, both in Japan and the U.S., totaling approximately $20 million. These are some of the names that you saw, both in Koide-san's presentation as well as Teresa's. Investments are characterized by digital opportunities and innovation platforms where we either have in place or can see strong commercial opportunity for Aflac. Importantly, the opportunistic portion of our capital deployment may also be used for repurchase or retained in support of our insurance company capital position and ratings if market risk dictates. Our allocations illustrated here are not designed to be precise estimates, but directionally how we would show our capital deployment priorities and approach.
As is the case each year, we will give more precise guidance on our December outlook call. Our financial playbook for creating value is straightforward, and we are confident there is opportunity to drive additional value. We see opportunity in the following areas. We've stepped up our investment in technology and innovation to improve service and efficiency, digitizing our platform, and exploring alternative distribution. We will continue to work hard in defending attractive margins in our core insurance businesses through pricing discipline and expense management. We have also allocated our capital towards higher returning businesses with the pullback from first sector savings products in Japan. Eric and his team in global investments continue to refine our investment strategy in Japan and the U.S., optimizing investment income governed by our strategic asset allocation and associated risk tolerances.
We will execute on our branch conversion, unlocking excess capital for allocation and reinvestment at higher rates of return or returning to shareholders. After a transition year in 2018, we have further opportunity to optimize our capital structure and cash flows as we settle into the post-conversion structure. Operating ROE is forecasted in the 15% range on a currency-neutral basis for 2017. Meanwhile, our weighted average cost of capital is approximately 8% and among the lowest in the industry. We now include ROE in our long-term incentive comp metrics, recognizing we have recalibrated to account for revised definition in 2017. There is a significant amount of value tied up in optimizing the interaction of the investment strategy, post-conversion capital structure, and balancing investing excess capital to drive growth while returning capital to our shareholders. Thank you. With that, I'll turn the program back to David.
Thanks. Okay, great. Thank you, Fred. We are going to move into our next Q&A session, and this will be the Q&A for Aflac Financial. If the panelists will please come up. As before, please wait for the mic, introduce yourself, and one question as well. We are working the mics into the room right now. Mr. Krueger.
Thanks. Ryan Krueger with KBW. I guess start with a question for Fred. The $750 million capital margin for Japan, is that something that you would permanently expect to hold, or do you see a potential opportunity over time to dip into that?
Yeah, it's a good question. First, a few things. Realize that that is not an incremental set aside of capital, meaning it has been in our system, but it's been housed in this large entity called Aflac Columbus, which includes the branch and the U.S. operation. By dividing out or separating out or unstacking the company, we can more appropriately identify that capital and move it in a position where we can generate good returns on it. As you pointed out, what we're doing effectively is repositioning that really early in 2018 to Japan. It'll actually be approximately JPY 60 billion in Japan, or roughly $550 million, and we would expect it to contribute the return on that capital would be effectively bringing your hedge ratio down from 50%-40%, and that represents a good risk-adjusted return on that capital.
Your question about optimizing is a very appropriate one, and that is over time, particularly as we make progress on managing AFS volatility, as we start to make progress on that front, we may have opportunity to dial that in differently, either releasing some of that capital or getting further progress on hedge costs. Something I want to make a comment on that's not precisely your question, but it's related to it that's important to note. Eric mentioned a couple of times, quote unquote, "a stressed economic position." Understand what we're doing here. It's really quite straightforward, and that is if you take a look at the economic surplus you have, if you will, in Japan, and very importantly, you stress it, because of course, that surplus or that economic capital you have may be necessary under stress conditions, so you stress test that.
That resulting level of capital, in theory, the call on that capital is our U.S. shareholders, meaning that's a capital that is owned by our shareholders. It's a capital that comes back to you in the form of repatriation and dividend throughout the years, but it stands to reason it could be held in dollars economically over the long run. Meaning what we always want to hold in yen are obviously monies backing reserves and yen backing the capital necessary over and above reserves to support our promises made to policyholders in Japan. After that, there's a level that really can be traded and viewed in dollars. That's really what we mean, in terms of strategy-wise, around sizing the unhedged portion. The science behind it, of course, is economic surplus and economic value calculations and stress testing.
Thanks. Then on the free cash flow of $1.6 billion-$1.8 billion.
I guess it sounds like you expect some drag from some of the investment changes that you're making.
Is it your expectation that would remain steady within that range throughout the next few years, but then following that, we should start to see growth kind of consistent-
with your earnings growth?
Yeah, a good way to think about it is in Japan, I would tell you what we call the technology roadmap or IT roadmap, in other words, investments we're making, plus even digital investments and product development investments, are a relatively modest drag, if you will, to our cash flow and capital generation. They do weigh on, it is real money, but largely what we've been doing in Japan and will continue to do is take the savings from what we have been able to achieve thus far and recycle those savings back into those investments, so that from a cash flow perspective and bottom line perspective, you don't see a lot of impact. Differently, however, is the U.S. The U.S.
is on a more of an accelerated path because, of course, we see opportunity there, but also an accelerated path to really improve the whole technology stack and technology platform, both in group and individual. We are running and expect to run at approximately 50 to 100 basis points of expense ratio, elevated expense ratio to capture that investment over the next, as Teresa mentioned, three years or so. We will be able to calm down coming off the other side of those investments back down to the lower side of our 33%-35% expense ratio. You can do the math, if you will, on what that level of investment is. One very important thing in the sizing of the $1.6 billion-$1.8 billion remember a couple things. One is I have an impairment assumption in those numbers because that's prudent to do.
We will run around a $200 million pre-tax impairment assumption each year. That we think is just a prudent level of impairment to assume, and we may do better. In fact, the previous three years, we really had nothing in the way of impairments and realized losses on a net basis. The second thing to realize is that cash flow is predicated on repatriating 80% of our FSA earnings. We think that's also a very appropriate policy to have in place, realize that's also somewhat conservative if market conditions are stable and practical and cash flows and capital conditions remain very good. Okay. That's what's embedded in that number. Real simple way to think about it, JPY 130 billion-JPY 140 billion a year out of Japan in the way of repatriation, $500 million a year out of the U.S.
platform in the way of dividends or cash flow, as I mentioned in my prepared remarks. That gets you to the midpoint of that cash flow. Everything else is handled through intercompany agreements, debt service, holding company expenses, tax payments, or net tax payments. That's the way we think about it. Okay.
Thanks very much. I had two questions. The first one's for Eric. You have the slide in there on the Aflac Japan new money allocation and yield, the total cash flow in JPY terms looks like it's declining pretty dramatically through 2019. I'm just trying to square that slide with the prior comment that Japan net investment income should stabilize over the next few years in JPY terms. Could you help us with that?
Sure. As we've gone through a number of years of lots of calls and maturities, 5% assets, 4%, now they're typically 3%-4%. Remember, those are older private placements. New money yields have come down, your average book yield starts to come down, therefore, that's impacting your net investment income.
At some point, assuming, and that's why I said assuming similar market conditions, assuming yields don't continue to go down, at some point, it begins to stabilize because that differential between the calls and maturities and where I'm investing becomes narrower, if you will, and closer to the natural book yield of the portfolio. In our modeling over the next few years, that starts to occur. I say similar market conditions. As an example, when we model out the next few years, just like for hedge costs, we use forward curves, even though we know forward curves won't necessarily be right. We need a neutral starting point. We do the same for new money yields. A good example is when we did our modeling a year ago, the forward curves for new money yields suggested they were going to rise in 2017. They have not.
We probably might be a little bit ahead of where we are today, but we're not because that was a particular factor that didn't work. Jay, if I add all of that together, that's what I mean by we should begin to stabilize. In other words, we don't see larger dips, but rather we're starting to get to even and keeping that NII about the same. There's a number of variables that could change that, obviously.
All right. That's helpful. For my follow-up for Fred, I just want to make sure I understand this correctly in terms of the capital deployment pie chart you showed, with capital deployment under stable conditions, 2014 to 2016, $6 billion. If I take the rough midpoint of the 2017 to 2019 period, also around $6 billion, it looks like share buybacks would be slightly more than half of that allocation going forward as opposed to two-thirds previously. Does that imply less share buybacks in 2018-2019 than the $1.4 billion you're expecting this year?
Yeah, let me just make a few comments about it. We will be presenting a range of buyback. What I've colored in, if you will, on that pie chart looking forward is the low end of the range. Why? Because I want the range itself to be opportunistic, as I mentioned. That may go up if that's the highest and best use of the money, or it may not. I think something to sort of get some perspective around is just look at the two pie charts together. Look back three years, look forward three years. If you look at the color coding and you take to your point, the midpoint of the range for our forecast, you're talking about a repurchase level that is at or above $7 billion of repurchase over a six-year timeframe, and we're a $33 billion market cap company.
It's sort of a bit difficult to step back from that and say, "Geez, your repurchase is coming down. What's behind that?" Really, it's not about that. It's been an exceedingly great investment when looking at the past three years, as you all recognize. That $3.9 billion, which is that color part of that chart, was an extremely good return on capital. As we trade up towards intrinsic value, I would expect you, as investors, would want us to be gradually more careful about what the return expectations are on repurchase. It's our favorite company to buy. As Dan mentioned, we'd far rather acquire our own company and our own returns and our own business model than pay a premium and a multiple to venture into other activities. Okay.
We'll continue to buy back a meaningful portion of our stock, but we want more range because we need to be exploring ways in which we can drive more return. You can't come to the company and say, "We want to see more dynamic growth out of your franchise, and at the same time, we want to strip every last excess dollar out of you and have it go to stock buyback." You've got to find balance over time. That's just prudent business decision making. That's an easier decision to make as we trade towards intrinsic value. The last three years, buying back our stock in the 50s and high 40s and low 60s, that was a great investment, and we pushed the accelerator.
The other thing I would point out is don't lose sight of my earlier comments when talking about the midpoint of that range and the prospects for going high. Remember, that last three years had reinsurance proceeds in there, so let's call that a trade. Reinsurance proceeds the last three years, excess capital in the U.S. the next three years. But very importantly, in those last three years, we were repatriating, on average, over 90% of our FSA earnings. We also experienced on a net basis, net of gains, losses, impairments, essentially zero, if not arguably a bit of gain position. When you look forward at that forward three years, I've got an 80% of FSA earnings assumption in there, and I've got technically $450 billion pre-tax of impairments and realized losses in that number. Why 450? Because I'm partway through 2017, and it's looking good. Okay.
Don't lose sight of that. I'm being, I think, prudent in what we're assuming, but it's a forecast, and we want to be careful about what we're forecasting with reasonable assumptions.
Thank you.
Nigel.
Thanks. Nigel Dally, Morgan Stanley. Fred, you mentioned you're in favor of the economic solvency ratio, I just wondered if you could give an update as to where we stand with regards to potential implementation. Assuming it does get implemented, does that impact your view of excess capital or free cash flow generation?
It's a little early to tell, Nigel, but my shorter answer is it absolutely does. Okay. Let me just be very clear. I think most of you in the audience would look at our business model, you'd say a few things about us that are very reasonable. One, with your business model, Fred, I would think you could run up a little higher on leverage. Two, with your business model, Fred, I would think, to Dan's comment, you could push the accelerator a little more on your dividend payout. The number one gatekeeper that takes an otherwise extremely stable, steady, predictable margin and cash flow business to less stable is the SMR ratio in Japan, it's 70% of our cash flow.
When you have a capital ratio that moves around with unrealized gains and losses on AFS, that causes you to need to be careful. If I move to an economic ratio, where literally you can see some correlation between an economic solvency ratio and our GPV or cash flow testing margins, you start getting to a more predictable, more reliable, less volatile, basically, capital ratio. To me, the SMR ratio runs the risk of telling you you're too healthy at times, telling you don't have enough capital when in fact you have a tremendous amount of capital. We're trying to find that right balance. There's an optimization model in there, we're working hard on that's part of what we see as potential opportunity going down the road. The answer is very simple.
Yes, we are promoters of economic solvency ratios because we look really good when looking at us economically.
Eric?
Thank you. Erik Bass with Autonomous. Wanted to get your perspective on overall EPS growth, and just kind of looking at what you've laid out for the margin trends and NII trends and other things. Should we expect sort of in the near term to run with similar growth rate as kind of what you've expected for 2017? Looking out kind of 2020 and beyond, it sounds like there's some opportunities for acceleration around the expense ratio improvement, investment income coming in. Is that sort of the right way to think about it?
I don't want to front run our outlook call, which is where we'll give more obviously range-bound preciseness around how this all plays into EPS. I don't want to get in front of that, Erik, but I would acknowledge the following. Certainly in the short term, what I call the planning period, which is essentially our three-year period we show here on these slides, and that is if you are proactively investing in your platform, both in Japan and the U.S., those are investments that take time to pay off in the way of distribution expansion and productivity improvements. They end up being a near-term weighing down, if you will, on GAAP measures like EPS.
If you're in Japan and you're pulling out of first sector savings, which means you by definition are bringing less flows in for Eric to invest, you're bringing your premium levels down. You know you are benefiting on the economic side, namely FSA earnings and cash flow because you're allocating less capital to those businesses. That also takes time to turn the corner. It tends to hit your GAAP results immediately and then takes time to build the cash flow that could be put to work at higher returns. If I end by saying, "Hey, I need to be careful and I want to be more practical and opportunistic about at least a portion of my excess capital over time." In other words, I'm not just going to buy back stock to buy back stock at any price.
I'm going to have a calculation as to whether this is good for our shareholders or not over the long run. Those statements are all weighing down on near-term GAAP measurements, they are very positive to economics. My view is those two converge over time. To your point, yes, over time, we would expect to see, again, some strength behind GAAP measures like EPS. Right now, we're making some economic investments that we think are important for the long run of the company.
Thanks. Sean Dargan at Wells Fargo. Fred, just looking at the UBS, I'm sorry, the U.S. RBC drawdown slide. I realize when you're asking for extraordinary dividends in 2018 and 2019, you can't bring it down too much, but 500% seems high for your business mix and asset leverage. What do you think the right RBC for Aflac U.S. is?
Just in the spirit of full disclosure, I have both shareholders here and I have rating agencies here. I have one answer.
The one answer is this. I challenge you to find a lower risk profile business model in the U.S. than Aflac's business model. You can't see it at the moment because buried in it is literally the world's largest financial service branch. Okay? Is buried in this thing called Aflac Columbus. From a pure risk-based capital perspective, you can't see it quite as clearly. Our U.S. model, I've been in business models that are less than stable at times. This is a very stable model. You no doubt can arguably run this similar to oftentimes you'll hear Torchmark's name thrown out, even frankly Unum, which has a big runoff block that can be volatile, down at or below 400% RBC. We have to be careful about it. Right?
The reason we have to be careful is one, we're going through a period of transition, also we have among the highest ratings in the insurance industry. You tend not to focus on those ratings because we're not considered a rating sensitive business model. As you move into the brokerage business and as you explore ways in which to expand, and by the way, when you're forming alliances in Japan with entities like a Japan Post, okay? Your ratings and the strength of your company as expressed through those ratings are enormously important. We're going to be careful. The answer to your question is, there's no question the stability of our business model, the low asset risk. We do $6 billion a year of revenue in our U.S. company and have a $13 billion general account.
You and I both know that asset risk and interest rate risk is what drives RBCs up. We do not have that type of leverage, there's opportunity. We're going to be gradual. I want to see and print statutory earnings, want to see cash flow come through the statutory statements as stable as I believe they are, then we'll work as to whether there's optimization opportunity there. The extraordinary dividend issue, we've spent quality time with the Nebraska Department of Insurance. We're not going to just leave that to be extraordinary. We need to get the approvals. You have to go get the orders. Yes, if conditions are unstable for some reason, then we've got more work to do. Fundamentally, we've stepped through the entire three-year process with both regulators, both the FSA as well as the Nebraska Department of Insurance.
They agree it's a strong RBC.
Thomas Gallagher, Evercore ISI. Eric, a question for you. I just wasn't entirely clear where the unhedged versus the hedged portion of the USD portfolio is going. I know you said you're going to hedge less going forward. Can you just elaborate more on that? I guess specifically, how should we think about where this switch trade is going to? How big will that get?
Sure. Let me cover the second question first. The switch trade, I assume you're referring to the one from last year, the $2.5 billion. It's not going to get any bigger. It's $2.5 billion, but as you recollect, we sold the $2.5 billion, moved the money to JGBs with the intent of floating rate assets getting accumulated, so in essence, bringing the $2.5 billion back. With the floating rate assets, the transitional real estate, the middle market loans, those are not public securities. We are dependent, and we have money managers doing it for us, strong underwriting standards on when they can raise that capital. In other words, when they can find the loans. That's going very well right now. Maybe a little behind plan in our transitional real estate bucket, but it's going relatively well.
By the end of this year, that should get to just under $2 billion. Maybe there's another $500 million from that original switch trade into next year. That's it on that switch trade. That should be completed sometime next year. On your first question, recollect where we are today, 51% of the portfolio is unhedged. If you look at the charts, our intent is probably to move it down to 40%. That's alignment with the stress view of Aflac's economic surplus as Fred described. That's where we're heading to. We are in the process of how we're going to implement that and when, which will be next year, but that's part of the three-bucket approach.
Once we move that ratio down to 40% being hedged, 60% unhedged, that's when you see as you continue to build the floaters, as the majority of that hedged portfolio, and as the majority, when we all think about the concern of rising hedge costs, well, they go up. They're still going to go up even for our floaters. Our floaters are going up in their income stream. You're left with this nice stable margin. All of us should be less sensitive to just looking at hedge costs in a vacuum. You now need to look at that package. Given that's the majority, up to two-thirds in a couple of years of the hedged portfolio, that really reduces that risk we all worry about, just rising hedge costs and above themselves. I should comment on bucket number 2, because that's important as well.
That's where you have the more traditional intermediate duration corporate bonds, commercial mortgage loans, which are five to seven, eight years in duration. There, we've lengthened the duration of our hedges. I'll just contrast that to when we started this whole program a few years ago, we primarily focused just three-month hedges for everything. Now we've said we have the ability to buy longer hedges for those longer assets. It's difficult to get it exactly matched. We can't do that, but we can get it 30%-70% matched. Why that is attractive to us is we are locking in longer term hedge cost. The benefit to that is, as I work with Fred to plan on EPS and my contribution to that, in our NII forecasting, we know with pretty high certainty what next year's hedge cost will be.
Just as we knew in 2017, early in the year or late last year, we were 70%-80% locked in. We're currently at 90% locked in. Fred doesn't have to call me and say, "Eric, are we going to have a miss on net investment income?" "No, it's highly predictable, Fred. It's going to be there." Even bucket two, while has some potential risk there, obviously, if hedge costs go up, with three to five-year hedges, I've got no worries in the next two to three years. It's sort of later on when I have to worry, and hopefully I can adapt to that as well.
I guess, Fred, follow-up question to that. With those changes, is your JPY sensitivity in terms of just EPS translation back into USD, is that going to go up or down?
Um-
Have you thought that through yet?
Yeah. If it does go up or down, I don't know that it would be a material dynamic in that respect, Tom. I'm not as focused on that. I'm more focused really at the moment on the economics of it. Mainly because as a matter of practice, we think first and foremost on our currency neutral drivers of earnings and performance. What I would say is I actually like the fact that we've got a balanced level of NII in both USD and in JPY in Japan because what I like about it is when we do stress, for example, FSA earnings on relative exchange rate movement, and I view FSA earnings as my proxy for cash flow, I see less volatility in that dynamic by having a nice balance between the USD and the JPY investment income. That would be just a comment.
And then just one-
Can I just add?
Yeah, please.
to that? Holding more on the hedged dollars, it will give quite good return on capital. Even though we're going to hold more capital in Japan for it, we get very good returns on that additional capital we hold. It will ultimately, holding more assets in U.S. dollars will lower the yen exposure to the end U.S. dollar shareholder.
Got you. Just one final question on this whole topic. If you're hedging less now than you were Partially offset by floating rate with the assumption that there's going to be correlation between currency and interest rates. That's hedged in a different way, I guess you could say. Are you introducing more risk here? Is there some level of basis risk here, more so than you previously had when you think about just overall enterprise risk management? Because the one thing I do wonder about is if you're starting to use floating rate as sort of a proxy for hedging and doing the same thing a currency hedge should have, it's still a different risk. It's not exactly the same. There's probably macro scenarios where that is not going to be correlated. Have you thought through that angle?
I would say, of course we have. We continually, both on the investment side and the risk management side, model our portfolios and asset allocation. That's not only part of SAA, but it's importantly part of the risk management team modeling SMR stresses. All of those correlations of the risk factors are incorporated. We do ESG modeling for all of those kind of outcomes. You should always consider dollar risk, FX risk, credit spread risk, yen interest rate risk. Why do I say that? Just as some examples, we're going to have some environment where there's some credit events in the market. We've just been in a benign market. We've been all fortunate, and we know in our SMR stress testing when that environment hits, that's not a good one for SMR. When you have a credit market that is really tough, guess what? Rates are rallying.
There's an offset because people are going to safe assets when credit assets are blowing out. Well, that's a good guy for SMR. Similarly, when we look at floaters, yes, there's more credit risk. There's double B risk as opposed to investment grade risk, but they're senior secured loans. All of these risk factors come together through our modeling and our SMR stress testing as we've reshaped the portfolio is always the governor for us. To your point about are you taking more basis risk? No. As I've pointed out, our SMR testing, particularly when we reshaped the portfolio last year as a result of all the negative rates in Japan and all the macro things that were going on, demonstrated we reduced SMR sensitivity.
I don't think we're taking on more, but clearly you might have a different credit risk bucket versus an FX risk bucket. That's our job to manage all of that and get it into models to make sure we haven't changed for the organization the risk that it wants to take.
Thank you. I think that will be the last question for this portion. I want to thank our panelists and also let our audience know that you will have one more opportunity here in a moment to ask any final questions that you have. Thank you all for being on our panel.
Thank you.
At this time, I'd like to ask Dan Amos to make some concluding remarks before we move into that final Q&A. Dan?
Well, I hope you've all gotten a lot out of today's presentation, not only in terms of Aflac's results, but also in terms of our philosophy and our short-term and long-term objectives that we've set forth. At Aflac, we manage our business for the long term while remaining laser focused on meeting our near-term financial objectives. Earlier today, I mentioned the fundamentals we believe are necessary to produce long-term shareholder value. It was generating profitable growth, investing in our business, advancing a legacy of innovation, and ensuring sound financial management. You have heard today many activities that we are undertaking to accomplish these fundamentals. This includes our strategic advantage in Japan and in the U.S., that we will continue to issue and to move toward growth and drive shareholder value.
Our industry leading market share and the scale in both the U.S. and in Japan drive our administrative efficiencies, this allows us to offer affordable and valued coverage to the customers, the competitive compensation to the distribution channels. At the same time, we want to drive value for our shareholders, building on our leading position in both countries that will help position us for growth moving forward. As a product innovator, we've experienced success leveraging Aflac's powerful brand to drive sales. Today, 9 out of 10 people in both countries recognize our brand. I'd like to insure 9 out of 10, by the way. We are proud to be the leader in voluntary insurance at the worksite in the U.S. and insure 1 out of 4 households in Japan.
Having a diverse and productive distribution channel is definitely a strategic advantage and is a vital component of our growth strategy in Japan and in the U.S. As such, this is one area where we will continue to focus a great deal of our efforts as we move forward. Our goal is to have a presence in all outlets where consumers in both countries want to buy their insurance products. We offer innovative products and high-quality customized service to provide businesses and their employees with affordable solutions to protect their financial well-being. We've established a strong cash flow position and stable earnings and strong cash flows. Our capital ratios demonstrate our commitment to maintaining robust capital levels and flexibility on behalf of the policyholders, the bondholders, and the shareholders. We also regularly assess our capital adequacy to ensure we remain strong even under extreme economic circumstances.
Finally, it's our people that is our greatest asset. We place a high priority on ensuring that we have the right people in the right roles, I want you to know that we have a tremendous management team currently in place, you've had a chance to hear from them today. One thing I'll encourage you to do is, I ask Max this question. He's been with us a little over six months, I ask him the question all the time is, "What can we do to be more transparent?" Because he had been on the other side for many years, not telling any secrets by looking at the proxy, they were our largest shareholder. I wanted to know what we can do to be better to where we communicate everything we possibly can to you. You might ask him that question.
Now I'd like to ask the other people, Teresa, Fred, and Koide-san, to come forward for any final questions that you might have. Koide-san? Okay, Teresa. Any final questions? Yes.
Thanks, Dan. In one of the prepared remarks, there was a comment about ROE, I think at 15% or something like that was being folded into management comp. Can you give us a sense of what the targets are and where you see ROE progressing over the next couple of years?
Fred, I'm going to let you take that.
My recollection is the target range is, first of all, where we have ROE is we've put it in our long-term incentive program. This would be the 3-year, stock-based compensation for executives as opposed to the annual compensation package, and that makes sense. Importantly, alongside that ROE target is also an SMR, a combined SMR and risk-based capital target as well, and then the remainder being total shareholder return. Those are the component parts of our long-term incentive program. ROE has a range. Off the top of my head, I want to recall the range as being in the neighborhood of, I think, down as much as Actually, you know what? I'd rather not quote unless I get it exactly. It's down a couple hundred basis points, up a couple hundred basis points.
It's about a 400 basis point range is what I recall, around the center target. Over time, what you'll find is naturally, we are distributing more capital than we're accumulating. Distributing less capital than we're accumulating. In other words, dividends and repurchase are running naturally below in combination than our GAAP earnings. We continue to build capital, and that gives rise to us having to think about capital structure moves as time goes on to preserve the ROE. For a period of time, we'll have a little bit lower earnings weighing down on ROE, as I mentioned earlier, meaning weighing down on the growth rate of ROE. Eventually, we'll start to build again.
Any other questions? Yes, or either way.
Hi. Humphrey Lee from Dowling. Just another question related to Aflac Japan. You talked about kind of expanding your third sector products, and a lot of your peers are looking into senior care products. Can you talk about your appetite in that product category?
Koide-san. I'll briefly touch on it, then if Koide-san has any other comments. Our actuarial departments, specifically Todd in risk, we've been looking at the potential for new products because of the aging population. We look for that as a potential area for growth for us, but not at this particular moment. We're working on other products and want to see the MIT product or the income support product, as we call it, to be the first area. It is something we're looking at and studying right now. Of course, we're very limited in what we can say because of the FSA at this particular time.
Got it.
Okay. Yes.
A question for Fred. I remember on the second quarter earnings call, you talked about the accounting dynamic for the paid-up status of the WAYS product, the benefit ratio about 100 basis points. We could see another potential impact like this when the 10-pay WAYS come up. Can you remind us what is the size of the five-pay WAYS in force versus the 10-pay WAYS in force?
I don't know if Todd might have some of that information. Not really handy, not the sheer size of it. What I can tell you is this. You might have noticed in my comments, I mentioned that it was tapering. The five-pay WAYS would taper in 2018 and 2019. Something like $55 billion-$60 billion this year weighing down on the paid-up policies. That moves to about JPY 25 billion in 2018, and down to JPY 15 billion in 2019. That's more specifically the tapering that takes place in the amount of paid-up. You're absolutely right. We sold five-pay and 10-pay. I think the majority of what we sold was more five-pay than 10-pay, but we do run into another period like this down the road.
At the end of the day, this is all part of first sector savings, which we are proactively pulling back on as a proportion of our business. The paid-up dynamic does not have implications for our earnings for the most part, but it does weigh down on revenue. As I mentioned, as revenue starts to get weighed down by first sector savings pulling back, unless we see third sector really grow to really keep pace with that, which is obviously our goal, we have to be conscious of expenses. We've got to manage our expenses down in line with any form of business that is in somewhat quasi runoff, if you will. That's what we're focused on. Yes.
John Barnidge, Sandler O'Neill. Just a quick question on the hurricane. What % of your sales last year were in the impacted territories or states?
Well, I'd have to get you that number as far as percentage. I know that the one that I'm really looking at is Puerto Rico and Virgin Islands, as I said, and I believe our sales there were about $17 million in that area. That's the one that I really have been focused on. The other ones, as I said before, we're starting to see a lot of things pick up in those areas a lot quicker than planned, I can get you the number.
The one comment is I don't have the breakdown of the area, as you can imagine, Texas and Florida are in the top five for us in terms of production.
Yeah
Overall, it's significant, the good news is they found a way to counter it. I'm very happy with what they've achieved there. All right. I think that pretty well wraps it up. Before I turn it back over to him, I never ask for applause for something, I want to ask for something on this. First of all, Fred is great. If I had known what I knew early on, I just could've never believed how great he's been in this short period of time. The person I want to give recognition to is Kriss Cloninger. Although he's going to be a consultant next year, he will be retiring at the end of this year.
For any of you that have had any stock in this company, one of the reasons the stock has gone up over the years is because of Kriss Cloninger. Kriss, I want you to come forward, and I just want to give you a round of applause and thank you for everything you've done. I'll turn the podium over to Dave. We are in October putting his portrait in our building as being a key person that built this company. I have enjoyed my partnership with him over the years, and I just couldn't have asked for anybody better. They have brought somebody into my life with Fred who will be different, but is just as good in his own rights, and I'm excited about that with Fred. With that, I'm going to turn to David, is there anything else? Okay.
Just a couple of housekeeping notes. Thank you all for coming here today. A quick thanks to everyone who made a lot of effort and put in a lot of hard work for this event. I'd also like to remind you that our upcoming third quarter earnings release will be on October 25th, and the conference call will be the following morning. In addition, we will host our outlook call for 2018 on December 1st, and we will provide more details in the coming weeks. We also expect to have our annual financial analyst briefing book with today's presentations within the next two weeks, so be looking for that. Upon completion, we will post it to investors.aflac.com. Finally, I hope that you will join us for lunch in the adjacent ballroom.
Please continue your conversations with our management there, I thank you all for attending this year's meeting and tuning into our webcast. We hope you'll keep in touch, and we look forward to speaking with you again soon. Thank you.