Good morning, and welcome to the virtualinvestorconferences.com June 2017 event. Probably we're well into our seventh year of introducing issuers and investors online. My name is Bradley Smith, Director of Marketing at PR Newswire and Cision. On behalf of PR Newswire and Cision, as well as our co-host, BetterInvesting, we're very pleased you have joined us for our next live presentation. As we run the agenda, we have a fine day of senior executives sharing their company's vision, as well as we have an extremely helpful education session first thing in the morning. Before I introduce the next presentation, a few quick points. Please ask questions in the questions box next to the slides. Getting questions in real time from you is essential. It lets our presenters know what's important to you. Also, ask your question when it comes to your mind.
Otherwise, if you're like me and you wait till the end, you may forget. Questions will be answered as time allows at the end of the following presentation. Once the session has ended, don't log out. You'll be automatically transferred into the company's virtual trade booth, where you can continue to ask questions via chat. You'll also find a library of materials, as well as links to the company's website and other key information. Lastly, all presentations are recorded and are available for 24/7 replay at your convenience. Now, at this point, I'm very pleased to welcome back our next speaker, Aflac's Senior Manager of Investor Relations, Daniel Bellware. Daniel?
Thank you, Brad. It's a pleasure to join you for this Virtual Investor Conferences. Today, I'd like to tell you about Aflac's strategy, operations, recent performance, and how we plan to return capital to shareholders. Before we begin, let me remind you that some statements in this presentation are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Please look at our annual report on Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss here today. Our first quarter 2017 earnings release is available on the investors page of aflac.com and also includes reconciliations of certain non-GAAP measures.
We also encourage you to look at the appendix at the end of this presentation for more information on our non-GAAP and forward-looking information. Aflac operates in the two largest insurance markets in the world, Japan and the U.S., and our policies cover more than 50 million people. Our strategy in Japan and the U.S. has remained straightforward and consistent for many years. Aflac develops relevant voluntary insurance products and sells them through expanded distribution channels, which yields new accounts and customers. Aflac's core products are supplemental and voluntary in nature. The benefit payments are not structured to build wealth. Rather, they provide a layer of financial protection against loss of income and assets based on qualifying health events. Benefits are paid directly to the insured, regardless of any other insurance they might have. Because the benefits are fixed rather than open-ended, they are not subject to inflation.
Aflac's operation in Japan accounts for about three-quarters of our pre-tax insurance earnings. Today, we insure one in four Japanese households and are the leading provider of medical and cancer insurance in that country. Aflac has been operating in Japan for more than four decades. Since inception, the foundation of our product portfolio has been and continues to be third sector products, which primarily include supplemental health products like cancer and medical insurance. Our products are designed to help our policyholders with out-of-pocket expenses that are not covered by Japan's national healthcare system. In 2016, we introduced a brand new category of third sector product for Aflac, income support. It provides a fixed benefit in the event the policyholder becomes unable to work due to significant illness or injury.
It targets young to middle-aged consumers ranging in age from their 20s to their 40s, a segment of the population that we believe we are underrepresented in. By focusing our efforts on this demographic, we believe we are building relationships that lay the groundwork for the sale of our cancer and medical insurance later in life. We believe this product has the potential to gradually develop into a new pillar product over the long term. Additionally, in February of this year, we introduced a revised version of EVER, our popular medical product. This updated version of EVER was very well received by consumers and our distribution outlets, further affirming our status as the leading seller of medical insurance in Japan. We also offer select first sector products, which includes ordinary life insurance. We group our first sector products into two different categories, savings type products and protection type products.
Savings type products such as WAYS and child endowment are products that primarily offer income benefits and cash surrender values. Protection type products like term life are more similar to third sector products such as cancer and medical insurance and focus on providing a layer of protection rather than an income benefit. In addition to maintaining a solid product portfolio, we strive to be where people prefer to buy our products. In 1974, when Aflac Japan was established, virtually all of our sales came from affiliated corporate agencies as Japanese citizens predominantly purchased insurance at the work site. Since that time, our distribution system has steadily evolved to include more sales outlets that have allowed us to broaden our reach to consumers. We've also expanded our ability to provide face-to-face sales by building a large network of independent corporate and individual agencies.
In late 2000, we entered into our first strategic marketing alliance with Dai-ichi Life. More recently, we have established additional strategic alliances with banks, Japan Post and Kampo, with their 20,000 postal outlets and 76 sales offices, and Daido Life. These important strategic alliances further enable us to be where customers want to purchase insurance throughout Japan. To support our presence in Japan, Aflac has established a powerful, trusted brand, and we continually seek opportunities to leverage that strong brand and highly regarded reputation through innovative advertising campaigns in our efforts to drive sales. Our advertising is unique in an increasingly crowded and competitive market. In 2003, Aflac Japan began using the Aflac Duck, and its popularity continues to connect with consumers today.
On an ongoing basis, Aflac Japan has seized opportunities to create separate and unique offshoot characters that interact with the Aflac Duck to market specific products and help drive sales. In 2013, we introduced Black Swan, the archenemy of the Aflac Duck, to promote our EVER medical product. In 2014, which was Aflac's 40th year of operation in Japan, we introduced an advertising campaign featuring a new character called Hajimate, or Pioneer Duck, to promote our New Cancer DAYS product. This character was developed to remind customers that Aflac was the pioneer of cancer insurance in Japan. In 2016, we launched a commercial that promotes our new income support insurance by pairing two Japanese celebrities, a male actor and a female comedian, that are both very popular with consumers in their 20s and 30s.
The character portrayed by the female comedian holding the Aflac Duck is shown at the bottom of this slide. By leveraging the popularity of the Aflac Duck and different characters over the years, about 9 out of 10 Japanese citizens now recognize the Aflac brand. Let me update you on Aflac Japan's performance. Our sales target is aligned with our focus on Aflac Japan's third sector products. We're very happy with the strong third sector sales increase of 7.6% in the first quarter. Sales in the first quarter of this year benefited from the February introduction of our revised EVER product. As we look ahead, Aflac Japan's focus will remain on selling third sector products, along with first sector protection products, both of which are less interest sensitive and have strong and stable margins.
We continue to view Aflac Japan's long-term compound annual sales growth rate for third sector products as being in a range of 4%-6%. The decline in operating revenue was due to decreases in both premiums and net investment income. Aflac Japan's premium income decreased in the first quarter, with growth in third sector premium offset by reduced first sector premium. The decline in net investment income reflected the stronger yen dollar exchange rate on dollar-denominated investment income. In line with our guidance for the first quarter, the benefit ratio remained essentially flat, while the expense ratio was slightly elevated and the profit margin decreased slightly. As you may be aware, Japan's population is covered by a national healthcare system, but citizens still have significant out-of-pocket costs associated with healthcare. As such, we believe this provides a natural catalyst for future growth.
Over the last four decades, Japanese consumers have seen healthcare costs increase amid an aging population and declining birth rate. This has put the national healthcare system under increasing financial strain, and consumers have been required to pay more out-of-pocket healthcare expenses. The increase in medical expenses is projected to significantly outpace GDP growth in Japan. Because of the rapidly aging population and higher co-payments for medical expenses, the market for third sector products has been steadily growing, a trend we expect to continue. Let me turn to Aflac's U.S. operations. Aflac is the number one provider of voluntary insurance at the work site in the United States, where about 98% of our products are sold on a payroll deduction basis. Our portfolio of individual and group voluntary products provides consumers with an outstanding value.
We offer businesses of all sizes the opportunity to provide employees a more valuable and comprehensive selection of benefit solutions. According to KFF Health News, employers are expecting health costs to rise by about 6% in 2017, a moderate increase compared with historical trends that far outpaces growth in the economy. Employers have continued to shift the cost to workers in the form of higher premiums, deductibles, and cost-sharing. In addition to actions taken by employers, it's important to understand Americans' challenge to meet the increasing burden of healthcare costs. In 2016, the Kaiser Family Foundation found that health insurance premiums and the cost of health services continue to rise at a pace that exceeds that of workers' wages.
According to the Aflac WorkForces Report published in 2016, 65% of those surveyed responded that they have less than $1,000 to pay out-of-pocket expenses associated with an unexpected serious illness or accident if it occurred today. It is within this landscape that we believe consumers and employers will increasingly see the need for the financial protection Aflac's products offer. Despite changes in the healthcare environment, one constant continues to be the need for our products. No major medical plan, not even the best, is designed to cover all out-of-pocket expenses. Small businesses have been Aflac's bread and butter for more than 60 years and represent the focus of our career sales agents. The majority of those sales come through smaller employers with fewer than 100 employees, a market which traditionally has been underserved by insurers.
To ensure that we are equipped to tap into sales opportunities among medium and larger employers, we are building out and managing relationships with brokers. As we look to the future, we remain focused on providing support for our career agents in the small case market, which continues to be underserved, while positioning our broker support team to focus on the larger case market. As in Japan, the Aflac brand is an important aspect of our strategy, and about nine out of 10 people in the U.S. recognize it. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts. You may have seen our most recent commercials called "Surgery" and "Dad's Choice," both of which use satirical examples of how one unexpected incident or medical event can negatively impact your lifestyle, demonstrating the need for Aflac's products.
Our groundbreaking initiative, One Day Pay, further enhances our brand. Through One Day Pay, we process, approve, and pay eligible claims in just one day. In 2016, 100% of the nearly 1.8 million claims submitted using One Day Pay were paid within one day, and 95% of our policyholders that use One Day Pay said they are likely to refer other people to Aflac. These efforts reinforce the strength of our brand and demonstrate our commitment to delivering on our promise to our policyholders. Now I'll turn to an update on Aflac U.S. performance. Total new annualized premium sales increased 1.7% in the first quarter of 2017. As we look ahead, we continue to anticipate the long-term compound annual growth rate for Aflac U.S. will be in the range of 3%-5%. From a financial perspective, Aflac U.S. continued to perform well in the first quarter.
As you can see, both net premium and operating revenues were up in the first quarter compared with last year. The benefit ratio was in line with expectations. Additionally, as we anticipated, our expense ratio was elevated, reflecting our investment back into the business. Also of note, persistency hit a record level in the first quarter. Despite the discussion of changes in healthcare legislation recently, we believe Aflac U.S. has the opportunity to emerge better positioned from the ever-evolving healthcare environment. Like national healthcare in Japan, we believe that the trend towards more uniform coverage will initiate a better understanding of and appreciation for Aflac's products. According to the U.S. Census Bureau, the United States has more than 5.7 million businesses with fewer than 100 workers. These small businesses employ more than 40 million people.
Our traditional focus has been on payroll accounts with fewer than 100 employees, and our career agents are best positioned to serve this segment. We also believe our strategy for working with local, regional, and national brokers will better position Aflac in businesses with more than 100 employees. I will spend the last portion of my discussion updating you on our consolidated financial performance and our capital management activities. Aflac Incorporated has a long history of delivering strong financial performance in the face of a fluctuating yen. Due to the significant contribution of Aflac Japan's overall earnings, a stronger yen magnifies Aflac Incorporated's results as reported in dollars. Aflac's currency exposure is primarily translation related as opposed to transaction and currency related.
As such, we still believe that viewing our results excluding the impact from foreign currency is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. While the yen to the dollar exchange rate weakened from 2013 to 2015, it strengthened in 2016 and continued with slight strengthening this year. Our continued focus on capital ratios demonstrates our commitment to maintaining financial strength and flexibility on behalf of our policyholders, shareholders, and bondholders. Presented here are two capital adequacy ratios required by our regulators, RBC in the U.S. and SMR in Japan. Our risk-based capital or RBC ratio at the end of 2016 remained high at 894%. Additionally, our capital and liquidity position in Japan remained strong. The solvency margin ratio or SMR was 945% at the end of 2016.
We believe that an analysis of operating earnings, a non-GAAP financial measure is important to understanding Aflac's underlying profitability drivers. Aflac defines operating earnings as the profits derived from operations, including cash flows associated with notes payable, but before realized investment gains and losses from security transactions, impairments, derivative and foreign currency activities, as well as other non-recurring items. In addition, we will exclude from our definition costs associated with our announced Japan branch to subsidiary conversion project expected to conclude in mid 2018. On an operating basis, we have a long history of producing strong earnings growth. Excluding the impact of those items, earnings per share was in line with our expectations, driven by solid overall margins in both the U.S. and Japan. Let me provide some details about our capital deployment.
As we've consistently communicated, when it comes to deploying excess capital, the most attractive avenues include investing in the growth of our core business in Japan and the U.S., maintaining our strong dividend and track record of dividend growth, and absent other compelling uses of capital, repurchasing our shares. Including dividends and share repurchase, we returned approximately $2.1 billion to our shareholders in 2016. The board of directors' action to increase the quarterly dividend by 4.9% demonstrates our commitment to rewarding our shareholders. We were very pleased that 2016 marked the 34th consecutive year of increasing our cash dividend, and we anticipate increasing the dividend again this year. As we mentioned in our first quarter conference call, we still expect to deploy capital in the range of $2 billion-$2.2 billion to shareholders in 2017.
This includes $1.3 billion-$1.5 billion of share repurchase front-loaded in the first half of the year. Of course, this assumes share repurchase remains the optimal use of excess deployable capital in driving long-term shareholder value. Our focus remains on maintaining the solid fundamentals in our core business and building on our record of earnings growth. For 2017, our objective is to produce operating earnings per diluted share of $6.40-$6.65, assuming the same average yen-dollar exchange rate as 2016. This slide shows how our 2017 operating earnings per share might look at various currency scenarios. We estimate that a one yen move in the average annual exchange rate will have an impact of approximately $0.035 per share on earnings.
Our objective in 2017 is to maintain our strong capital position. I should be on the next slide right now. Okay. Our objective for 2017 is to maintain our strong capital position while producing stable earnings and strong cash flows. We believe that our market-leading position, powerful brand recognition, and strong distribution in Japan and the U.S. will provide support towards this objective. As we work toward our objectives and goals, we have confidence in our business model, the fundamental need for our products, and most importantly, the future success of Aflac. I'll be glad to answer some of your questions. I think we've had some questions come in. The first one, can a U.S. individual purchase coverage directly from Aflac or an association if their employer does not offer Aflac via payroll deduction? Yes, they can.
I believe if you go out to our webpage, you'll find an 800 number that you can call. I think you can purchase the insurance directly from the company. Okay. Let's see. Okay, here's one. With Aflac trading at an all-time high, does that impact the level of capital committed to share buybacks in 2017? Yeah, actually, we're very close to an all-time high. I think we hit $76.88 back at the beginning of May. We're trading a little bit below that, but certainly, we do keep that in mind. We certainly don't want to overpay for the shares we repurchase. So we definitely keep an eye on that and try to make smart decisions when we go to repurchase our shares. Okay. All right, so here's someone. How much of your top-line revenues are impacted by unfavorable yen-to-USD exchange rates?
As I mentioned, that's basically just a translation issue. The premiums that we collect in Japan are all JPY-denominated. We pay the benefits there in JPY, we pay commissions and expenses in JPY, and the only thing we have to worry about translating is the profit when we go to repatriate our profits two or three times a year, but we do hedge that transaction. That's one of the few times we actually translate JPY into USD. It's more of a reporting issue when you look at our top-line as opposed to an economic issue. As I said, we do repatriate about 80% of our profits, and it's a very predictable cash flow stream. We start hedging that well in advance, so that when the time comes to do the repatriation, there's really no surprise. Let's see. If I had any other questions here.
Let's see. Do we anticipate a stock split? Okay. Per our Chairman and CEO, our stock price would have to be above $75 for a period of about six months before the board would consider a stock split. I know that we've hit 75 in recent days. I think we had dropped down from 76 down into the 74s. He's definitely saying that before they would consider it would have to be trading at 75 or above, I think, for a period of six months for them to consider that. Let's see. Oh, I had a question come in: Would Aflac benefit from tax laws lowering tax rate on repatriated profits? To a small extent. Our Japan branch is actually a U.S. taxpayer, it's not really the repatriated profits that are an issue. We pay approximately 35% on everything in Japan and the U.S.
If we were to drop to a much lower tax rate, say lower than, I think, Japan's rate, we would have some small benefit from that. It's not that we're holding funds offshore or anything like that, waiting to bring them back when the tax law changes. We generally repatriate every year about 80% of the Japan profits. A lower tax rate would be helpful somewhat, but again, not to the extent that some other companies that are holding a lot of money offshore because we don't actually do that. Let's see. Can you explain again why you feel it is appropriate to evaluate company performance denominated in USD without separating out the impact of exchange rates? Yeah, actually, that's the opposite of what we do. I think somebody may have misunderstood. We do like to separate out the impact of exchange rates.
Generally, when you look at our numbers that we report for Japan in our statistical supplement, you'll see that we report them all in JPY in there so that you can get a better idea of how the business is doing without having foreign exchange sort of muddy the waters for you. Again, when we tell you how our financial performance has been for the year, we do like to show you before the impact of the JPY so that you can get an idea operationally how the company is performing versus what the market is doing with exchange rates. Let's see. I think I had any other questions here. Somebody wanted to know what the status of our branch conversion is. The project is currently on budget and on track. We're still targeting a mid-2018 time period.
Of course, that would all be subject to regulatory approval. For the time being, the branch conversion is still on budget and on track. Okay. Tell you what, I'd be more than happy to visit with some of you folks in the virtual booth. So I'll go ahead and sign off here and I'll try to meet up with some of you if you have any more questions in that booth. All right. Thank you very much.