Good morning. Welcome to day three of the Raymond James Institutional Investors Conference. It's an honor for me to introduce our next company that will be participating in the conference, Aflac. It's hard really to say a lot about the company, considering its broad brand name recognition and appeal, but it is serving a valuable function both in Japan and the U.S., being at the crossroads of the changing healthcare environment and being one of the leading providers of supplemental health insurance to both Japanese and Americans. I'm very honored to have these guys here today. From management, we have David and Robin, who help in the IR function, and then Fred Crawford, who serves as the Chief Financial Officer. Let me turn it over to Fred.
Thanks. Thanks very much. Thank you for joining us this morning. First, before I get started, I want to just remind you that some of the statements in the presentation are forward-looking within the meaning of the federal securities law. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Please look at our annual report in Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss today. Our fourth quarter 2016 earnings release is available on the investor 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 on the non-GAAP and forward-looking information. Let me just get started.
Aflac operates in two of the largest insurance markets in the world, Japan and the U.S. 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. First, let me remind you that our core products are supplemental and voluntary in nature. The benefit payments are not structured to build wealth. Rather, Aflac products 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 may have. Because the benefits are fixed rather than open-ended, they are not subject to inflation. Aflac's operations in Japan accounts for about three-quarters of our pre-tax insurance earnings.
Today, we insure one in four Japanese households and are a leading provider of medical and cancer insurance in Japan. 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 include supplemental health products like cancer and medical insurance that pay fixed benefits upon the occurrence of a specific health event. 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 two new products and revised our non-standard medical product. One of the new products is cancer insurance for cancer survivors, which is directed towards those who have been previously diagnosed with cancer. Our traditional agencies, which include individual agencies, independent corporate agencies, and affiliated corporate agencies, began selling this product last March.
Japan Post, through its 20,000-plus postal outlets, began selling this product this past October. While we anticipate that sales will only be slightly additive to our overall sales results, more importantly, this product underscores our reputation and our commitment to being there for Japanese consumers when they need us the most. The other new product we launched last year is 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. This product was developed to supplement the disability coverage within Japan's Social Security system. It targets young to middle-aged consumers ranging in age from their 20s through their 40s, a segment of the population in which we believe we are under-penetrated.
By focusing our efforts on this demographic, we believe we are building relationships that lay the groundwork for the sale of cancer and medical insurance later in life. We believe this product has the potential to gradually develop into a new Aflac pillar product over the long term. We also offer select first sector products, which includes ordinary life insurance through a limited part of our distribution system, especially our exclusive agencies that only sell Aflac products. We categorize 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. Products such as cancer, medical, and term life insurance, however, 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 Japan. In 1974, when Aflac Japan was established, virtually all of our sales came from affiliated corporate agencies, as Japan's 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 expand our reach to consumers. During the 1990s, many Japanese citizens preferred to purchase insurance outside of their workplace, and we 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've established additional strategic alliances with banks, Japan Post, and Daido Life, further enabling us to be where our customers want to purchase insurance in Japan.
Aflac has established a powerful and trusted brand in Japan. In 2003, Aflac Japan began using the Aflac Duck, and its popularity continues to connect with consumers today. We've also utilized variations of the Aflac Duck since then to promote our products. In 2016, we launched a commercial that promotes our new Income Support Insurance by pairing a male actor and a female comedian who are both very popular with consumers in their 20s and their 30s in Japan. By leveraging the popularity of the Aflac Duck through different characters over the years, about nine out of 10 Japanese citizens now recognize the Aflac brand. Let me now update you on Aflac Japan's performance. Our sales target is aligned with our focus on Aflac Japan's third sector products, which include cancer and medical insurance, and most recently, Income Support Insurance.
We're very happy with Aflac Japan's strong third sector increase of 4.1% for the year, which was at the high end of our 2016 expectation of flat to up 5%. This also came off a very strong 2015. We're extremely encouraged with the significant progress we've made in limiting the sale of our first sector savings type products, namely WAYS and child endowment. With the current low interest rate environment, as planned, our actions prompted a 57% decrease in the sale of first sector products in the second half of 2016, which included a 72% decrease of WAYS and child endowment. We've been aggressive in pulling product from select channels and conservatively repricing our WAYS and child endowment products for the reality of an ongoing low rate environment. We anticipate that our sales of first sector savings type products in 2017 will also continue to decline significantly.
At the same time, we will continue to offer protection type products as an option mainly for our exclusive agencies to provide their customers. With both third sector products and first sector protection type products, we believe Aflac Japan will maximize the potential of our distribution channels to achieve growth. As we focus on third sector products going forward, we continue to view Aflac Japan's long-term compounded annual growth rate in sales for the third sector products to be in the range of 4%-6%. Aflac Japan margins were solid when adjusting for the reserve strengthening we made in the fourth quarter. Benefit ratios, expense ratios, and pre-tax margins were all in line with expectations that we provided on our outlook call. I would note that going forward, our ratios and margins in Japan will reflect hedge costs on an amortized basis related to Japan's dollar investment portfolio.
As you're aware, Japan's population is covered by the National Healthcare system in Japan, 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 increased financial strain, and consumers have been required to pay more out-of-pocket healthcare expenses. This increase in medical expenses is projected to significantly outpace GDP growth in Japan. Because of the rapid aging population and higher co-pays for medical expenses, the market for the third sector products that we sell has been steadily growing, a trend we expect to continue. Now let me turn to Aflac U.S. operations.
Aflac is the number one provider of voluntary insurance at the worksite in the United States, where about 98% of our products are sold on a payroll deduction basis. I'll cover more of these products shortly, but first, I'd like to share some information with you that help gives you some context for the current U.S. healthcare environment. While the Affordable Care Act did much to expand access to health services for Americans, the ability to control the increase in health costs continues to be a challenge for employers. According to Kaiser Health News, employers are expecting health costs to rise by about 6% in 2017, a moderate increase compared to the historical trends that far outpaced growth in the economy. Employers have continued to shift the cost to workers in the form of higher premiums, deductibles, and cost sharing.
This trend has led to high deductible health plans becoming one of the most popular health plan offerings by employers. In addition to actions taken by employers, it's important to understand Americans' challenge to meet the increasing burden of healthcare costs. In 2016, the Kaiser Family Foundation found that health insurance premiums and the cost of health services continue to rise at a pace that exceeds that of workers' wages. Additionally, according to the Aflac WorkForces Report published in 2016, 65% of the 5,000 employees we surveyed responded that they have less than $1,000 to pay out-of-pocket expenses associated with an unexpected serious illness or accident if it occurred today. It's within this landscape that we believe consumers and employers will increasingly see the need for the financial protection Aflac 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 plan, is designed to cover all out-of-pocket expenses, and Aflac's products are there to partner with consumers and employers. Small businesses have been Aflac's bread and butter for more than 60 years and represents the focus of our career sales agents. The majority of these sales come through smaller employers with fewer than 100 employees, a market which traditionally has been underserved by insurers. To ensure we are equipped to tap into the sales opportunities among medium and large employers, we are building out and managing relationships with brokers. As we look to 2017, we are focusing on providing support for our career agents in the small case market, which continues to be underserved, and positioning our broker support team to focus on the large case market. Like in Japan, the Aflac brand is an important aspect of our strategy.
About nine out of 10 people in the U.S. recognize the Aflac brand, very similar to Japan's recognition. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts. You may have seen our newest commercial called "Surgery," which debuted before the Super Bowl. "Surgery" uses a satirical example of how one unexpected incident or medical event can negatively impact your lifestyle, demonstrating the need for Aflac's products. Additionally, our groundbreaking initiative, One Day Pay, further enhances our brand, as does recognition by J.D. Power for providing an outstanding customer service experience. 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 submitting using One Day Pay were paid within one day, and 95% of our policyholders that use One Day Pay say 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 metrics. Sales in the U.S. were disappointing in 2016 and were essentially flat when compared to the prior year. However, as we look at 2017 and beyond, we continue to anticipate that 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. performed well in 2016. Both net premium and operating revenues were up in 2016 compared with 2015.
Revenues grew by 2.1%, with premiums benefiting from strong sales in 2015. In 2016, U.S. benefit ratios continued to trend favorably for the fourth quarter and for the full year, and our expense ratio was in line with our guidance. Overall, our U.S. pre-tax profit margins exceeded our annual guidance range for the year, coming in at 19.6% due to the favorable benefit ratio and improved policy persistency. 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 and appreciation of 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, and 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'll spend the last portion of my discussion updating you on our consolidated financial performance and our capital management initiatives. Aflac Incorporated has a long history of delivering strong financial performance in the face of fluctuating yen. Due to the significant contribution of Aflac Japan's operations to overall earnings, a stronger yen magnifies Aflac's results as reported in dollars. However, Aflac's currency exposure is primarily translation related as opposed to transaction and currency related.
As such, we still believe that viewing our results, excluding the impact from foreign currency, is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. While the yen to dollar exchange rate weakened from 2013 to 2015, it strengthened in 2016. Our continued focus on capital ratios demonstrates our commitment to maintaining financial strength and flexibility on behalf of our policyholders, shareholders, and bondholders. Earnings have positively impacted our capital levels, shown by significant improvement in our capital ratios. Our risk-based capital or RBC ratio at the end of 2016 remained high at 894%. Additionally, our capital and liquidity position in Japan remains strong. While not finalized, we estimate that the solvency margin ratio or SMR was in the mid-900% range at the end of 2016.
We believe that analysis of operating earnings, a non-GAAP measure, is important in understanding Aflac's underlying profitability drivers. Aflac defines operating earnings as the profits derived from operations, including cash flows associated with notes payable, but before realized investment gains and losses from securities transactions, impairments, and derivatives and hedging activities, as well as other non-recurring items. On an operating basis, we have a long history of producing solid earnings growth. As this chart shows, growth in operating earnings per diluted share benefited from the strengthening of the yen in 2016. Excluding that impact, growth in earnings per share was in line with our earnings guidance for the full year, driven by solid overall margins in both the U.S. and in Japan. Of note, beginning in 2017, we'll include hedging costs in our Japan/U.S. dollar investment portfolio in our definition of operating earnings.
In addition, we will exclude from our definition costs associated with our announced Japan branch to subsidiary conversion project, expected to conclude mid-2018. Let me now turn to a topic that I know is important to our shareholders, that's capital management. While policyholders are always top of mind, we also strive to enhance shareholder value through capital deployment. As we've consistently communicated, when it comes to deploying our excess capital, the most attractive avenues include investing in our growth, in our core franchise in Japan and the U.S., maintaining our strong dividend 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 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, we anticipate increasing the dividend again in 2017. We remain committed to maintaining strong capital ratios on behalf of our policyholders. As we mentioned on our outlook call, we 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, with approximately $800 million-$1 billion of that repurchase in the first half of the year. This assumed 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 our record of earnings growth.
For 2017, our objective is to produce operating earnings per diluted share of $6.40-$6.65, assuming roughly a 109 JPY to the USD exchange rate, which was the full year average annual exchange rate in 2016. This slide shows how our 2017 operating EPS might look at various currency scenarios. I would note that our final currency neutral exchange rate came in at the roughly 109 JPY to the USD. Our objective in 2017 is to maintain our strong capital position while producing stable earnings and strong cash flows. We believe that our market leading position, powerful brand recognition, and strong distribution in Japan and the U.S. will provide support towards this objective. As we look towards our objectives and goals, we have confidence in our business model, the fundamental need of our products, and most importantly, the future success of Aflac.
Thanks for your time and attention. With that, I'll go to any questions you have. Sure. Let me repeat the question, just so that you can hear it both here and also on the webcast. The question is, we have announced a conversion of our Japan branch to a subsidiary. That conversion is going to take roughly 18 months to complete. We would expect to complete it in mid-2018. The question was, an update on that conversion, but also more specifically, is there anything about tax reform that has implications for that conversion or that we need to be mindful of? First on the conversion itself, we're very excited about this conversion. It is largely a regulatory and operational exercise, meaning it's not causing any distraction in our core businesses in the U.S. and Japan. That I would say for starters.
It remains on budget and on time. We don't see any impediments as we sit here today to making that conversion. We were able to move forward on that conversion because we were able to uncrack the code on finding a tax solution to avoid any tax friction upon conversion. That had previously been an impediment to moving forward on this type of a move. You should note that moving to a subsidiary structure in Japan is really moving to the norm in the marketplace. We were in fact, unusual in our branch status. It is the preferred regulatory structure internationally, not simply in Japan, to have a subsidiary structure. We think over the long run, strategically for the company, you always want to be traveling with the norm, if you will, from a regulatory structure perspective. This puts us in that camp. It's good strategically.
It also does quite a bit in really creating some greater flexibility on our capital management. We noted in our announcement on the conversion that it will go a long way towards essentially codifying the amount of excess capital we have in the U.S. We estimate being able to deploy upwards of $1 billion of additional excess capital coming out of our U.S. operations once we separate out from that U.S. operation, the Japan subsidiary. Everything is going very well, and we're quite pleased with executing on this strategy. We'll continue to update you on our progress, but all is smooth sailing. Specific to the tax question and tax reform, tax reform in of itself is not really related or impacting of the conversion itself. The thing to remember about Aflac's tax position is we are a U.S. taxpayer, okay?
We're a U.S. taxpayer today, and we remain a U.S. taxpayer even upon converting our branch to a subsidiary. We pay currently a 35% corporate tax rate. Because roughly 75% of our earnings come out of Japan, and Japan's corporate tax rate is approximately 29%, if there were to be a corporate tax rate reduction, let's use for an example to 20%, we would not bring our effective tax rate all the way down to 20%. It would be stopped, if you will, by the amount of corporate tax rate we pay in Japan. Think of it this way, if there were to be a lowering of the U.S. corporate tax rate to 20%, our effective tax rate would settle in closer to 26%, because we continue to be a 29% taxpayer in Japan.
That's currently how we have, quote, "modeled" any sort of speculation around corporate tax reform. What we haven't tried to do is any sort of tax planning assumptions or fine print related assumptions related to tax reform, because quite honestly, all of us in this room know it's way too early to understand what might actually happen. It's important to know those mechanics as it relates to our tax status. Okay. Please. Mm-hmm. Mm-hmm. Right. Mm-hmm. Yeah, there are slightly different dynamics in Japan and the U.S. I'll repeat the question. The question is, we've seen favorable benefit ratio trends in both the U.S. and Japan. What's behind those trends, and do we expect them to continue? The answer to the question is, it does differ a little bit. The story does differ a bit between Japan and the U.S., but there are similarities.
The similarities are things like the hospitalization rates, the move towards outpatient treatment. These have all reduced the days stay, if you will, in a hospital. Many of our products, both in Japan and the U.S., pay out relative to your days in the hospital. You've seen that trend in lower hospitalization rates. You've also seen a lot of advancements in the treatment and rehabilitation of patients when they come down with illnesses. Those advancements or pre-screens or really getting ahead of any illnesses have also worked to reduce some of the incidence rates that we're seeing in both Japan and the U.S. The question as to whether we would see these trends continue, they may have some modest continuation, but we do feel both in Japan and the U.S. that it's starting to stabilize as we look at our actuarial data.
It's hard to say whether we may see some continued trends, but in recent years, we've seen some of those trends start to gradually slow, which you would expect. Remember, they're slowing at a rate that is still a very favorable benefit ratio and supports strong margin performance both in Japan and the U.S. The question is what's hindered your U.S. growth in recent times, particularly I think you're referencing 2016 sales growth rates. The question about the relative U.S. and Japan businesses, and is there any advantage to, I guess, spinning or breaking apart. In terms of the first question, the U.S. growth rate, what we believe is behind it is really relatively straightforward based on the data we've reviewed in our performance in 2016, and it really falls into the following buckets.
One is a very big driver of our sales in the U.S., is what we would call our veteran career agents. We saw some of their production or productivity levels fall off this year, and we have identified it as having built out incentive programs that really skewed them towards focusing on recruiting and new account generation. That, unfortunately, moved their concentration away from working existing accounts. Remember at Aflac, we really grow in two ways. One is we bring on an actual new business, a new account, okay, a new small business, for example. But the second way we grow that's very important to understand is on average, we'll only penetrate 20%-30% of the employees in a given business.
The nature of our products being supplemental and sometimes referred to as being on the second page of your enrollment sheet, by the time you get there, you may, A, be out of money or, B, be out of interest. What's a very big challenge for us is making sure we promote the importance and the value proposition of supplemental insurance to you as you are enrolling. A big part of the growth story or production story is veteran agents who have a track record of producing product and bringing on new accounts, going back into those accounts during enrollment period and further penetrating the employee base. We saw that fall off in 2016. We've addressed that through, again, incentive programs and making sure we dial in that incentive to go back into your accounts and work them.
We think that's mechanically a way we can be confident about the production. The second area that we saw weakness in is the good news is that our broker strategy has in fact yielded growth, but it's yielded growth largely in larger brokers serving larger companies, larger companies being defined as over 1,000 employees. What we're finding is that we had weak results between 100 employees, where 100 employees and less is that core small business career agent focus, and 1,000 and up employees, which is more the large broker. That middle section, which is a large opportunity, as you can imagine, in the U.S., that was underserved. What we've done very straightforwardly is we simply have brought more bodies in.
We are on pace to hire roughly 24 to 26 new broker sales consultants, specifically with experience to come on in and go after regional brokers who cater to that middle size company. Those are the two pockets of primary weakness that we saw in 2016, and we're taking steps to address that. It's one part incentive redesign and one part just actual investment, bringing in new bodies. On the topic of U.S. and Japan, what you can, I think, tell from our presentation is that the valuation of Aflac Inc. has everything to do with the synergies and the working relationships between Japan and the U.S. That working relationship is really a key to driving valuation in the company.
In fact, I don't think it's a surprise that you've seen recently Japanese insurance companies purchasing U.S. platforms to leverage their low cost of capital in Japan to expand and grow in the U.S. You're seeing that through transactions, and here we sit, Aflac, blessed with a 60-year history in the U.S. and 40-year in Japan building up our market share. Interestingly, you'll also note that the strategy in the U.S. and in Japan from a product design, marketing, value proposition, is very similar, okay? A lot of the intellectual capital and strategic design, risk management, governance, go-to market, innovation, all of that is a real shared level of work between the two parties. We really like our model.
I think the last thing I would say is, it's unusual to be a $30 billion market cap financial service company with the scale and strength of having 50 million policyholders, and yet not be so large and complex that you bring on unwanted regulatory scrutiny like SIFI and some of these higher designations, and you maintain a simple business model. While we are large, we are very simple, and I think a lot of times where large multinational companies get asked questions about, does it make sense to be large and multinational, it's because they're complicated, they may be in too many countries facing too many regulatory hurdles, and you, as an investor, are simply finding it hard to understand how you generate sales to earnings to value. In the case of Aflac, we're simple in Japan, simple in U.S., That's by design.