Paul Amos, President of Aflac. For those of you who are familiar with the Aflac story, you'll know that the only thing as consistent as the Aflac Duck is the Amos name, so we're thrilled to have Paul here. In his current role as President, Paul has reporting responsibilities for Aflac Japan and Aflac's Global Investment Division. In addition to his current responsibilities, Paul has previously held a wide range of roles across the company, including Chief Operating Officer of Aflac U.S. He's really seen the whole range at Aflac. With that, I'm going to turn it over to Paul to deliver his presentation.
Thank you. Good morning. It's a pleasure to join you here at the Bank of America Merrill Lynch 2017 Insurance Conference. Before we begin, let me remind you of some of the statements in this presentation are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they 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 today. Our fourth quarter 2016 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 on our non-GAAP and forward-looking information.
Aflac operates in the two largest insurance markets in the world, Japan and the United States. Our policies cover more than 50 million people. Our strategy in Japan and the United States 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 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 that they may 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 the pre-tax insurance earnings.
Today, we insure one in four Japanese households and are the leading provider of medical and cancer insurance. As many of you may know, I had the opportunity to spend a significant amount of time in Japan working closely with our executive management team on matters related to long-term strategy in a challenging environment. 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 specified health events. Our products are designed to help our policyholders with out-of-pocket expenses that are not covered by Japan's national healthcare system. More recently, we introduced a new category within our third sector, income support insurance, which I'll cover in a moment.
In 2016, we introduced two new products and revised our non-standard medical plan. One of the new products is cancer insurance for cancer survivors, which is directed toward those who have been previously diagnosed with cancer. Our traditional agencies, which include individual agencies, individual corporate agencies, and corporate affiliated agencies, began selling this product last March. Japan Post, through its 20,000-plus postal outlets, began selling this product this past year in October. While we anticipate the sales only will be slightly additive to our overall sales result, more importantly, this product underscores our reputation and commitment to being there for Japanese consumers when they need us 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 ages from their 20s through their 40s, a segment of the population in which we believe is well underrepresented. By focusing on efforts of this demographic, we believe we are building relationships that lay the groundwork for the sale of our cancer and medical insurance later in life. While it's still early, we are very happy with the reception our income support insurance has received. We believe this product has the potential to gradually develop into a new pillar for Aflac over the long term. I'd now like to briefly discuss Japan's first sector, which includes ordinary life insurance products and annuities.
We offer a small amount of select first sector products through a limited portion 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 child endowment are products that primarily offer income benefit and cash surrender values or CSVs. Products such as cancer, medical, and term life insurance, however, provide a layer of protection rather than an income benefit or CSV. We will continue to refine our existing product portfolio and introduce innovative new products to maintain our market leadership and expand our appeal to Japanese consumers. In addition to maintaining a solid product portfolio, our business strategy also strives to be where people want to purchase our products.
In 1974, when Aflac Japan was established, 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 expand our reach to consumers. During the 1990s, many Japanese citizens preferred to purchase insurance outside of the 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. This has enhanced and expanded our distribution network to support our goal of being everywhere customers want to purchase our insurance products.
Also supporting our presence in Japan, Aflac has established a powerful, trusted brand in Japan, and we continually seek opportunities to leverage our strong brand and highly regarded reputation through innovative advertising campaigns in our efforts to drive sales. Our advertising is unique and is in an incredibly crowded and competitive marketplace. 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 related to the Aflac duck to market specific products and help drive sales. In 2013, we launched the Black Swan, the arch enemy of the Aflac duck, to promote our EVER medical product. Our most recent commercial featuring the Black Swan just released this week to support our newly revised EVER plan.
In this commercial, two characters, the Hiyoko swans, are the children of the Black Swan, following him around to convince him that Aflac's enhanced medical insurance is effective to help provide financial protection related to hospitalization and outpatient treatment. In 2014, which was Aflac's 40th year of operations in Japan, we introduced an advertising campaign featuring a new character, our Hajimete 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 2015, we built on the popularity of the Hajimete duck in a commercial that also featured characters representing Aflac's founders and their quest to create products to help provide financial protection following a serious medical event.
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. An icon of the female comedian holding the Aflac duck is shown on this slide. By leveraging the popularity of the Aflac duck through characters over the years, about nine out of 10 Japanese citizens now recognize the Aflac brand. We will continue to connect with customers through innovative marketing campaigns for our product line as new opportunities arise. Let me update you on Japan's performance. Our sales target is aligned with our focus on Japan's third sector products, which include cancer and medical, and most recently, income support insurance.
We're happy with Aflac Japan's strong third sector sales increase of 4.1% for the year, which was at the high end of our 2016 expectation of flat to up 5%. These results are impressive considering the fact that we upwardly revised our sales targets twice in 2016. We're extremely encouraged with the significant progress we've made in limiting the sale of our first sector savings products. Within 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. We've been aggressive in pulling product from select channels and conservatively repricing our WAYS and child endowment products for the reality of the ongoing low rate environment. We anticipate that our sales of first sector savings products in 2017 will decline significantly.
At the same time, we will continue to offer protection products with an option mainly for exclusive agencies to provide to their customers. With both third sector products and first sector protection type products, we believe Aflac Japan will maximize the potential of our distribution to achieve growth. As we focus on third sector products going forward. We continue to view Aflac Japan's long-term compound annual sales growth rate for the third sector as being in the range of 4%-6%. We believe that the continued revision and expansion of third sector product line will aid in achieving this objective. From a financial perspective, Aflac Japan performed well in 2016. Due to our strong in-force business, our net premium and operating revenue all remain strong. Aflac Japan's margins were solid when adjusting for the reserve strength we made in the fourth quarter.
Benefit ratios, expense ratios, and pre-tax margins were all in line with our expectations and our outlook call guidance. 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. Let me now briefly discuss our opportunities in Japan. As you're aware, Japan's population is covered by national healthcare system. Citizens still have a significant amount of out-of-pocket costs associated with healthcare. As such, we believe the need for Aflac products will only continue to grow. We also see the introduction of our new income support insurance as an opportunity to further grow the third sector. Over the last four decades, Japanese consumers have seen healthcare costs increase amid an aging population and declining birthrate.
This has put the national healthcare system under increasing financial strain, and consumers have been required to pay more out-of-pocket healthcare expenses. For example, in 1984, a 10% copay was introduced for salaried workers under the age of 70. In 1997, it was raised to 20%. In April 2003, co-payments grew to 30% for the cost of medical treatments covered by the national healthcare system. This increase in medical expenses is projected to significantly outpace GDP growth in Japan. Because of the rapidly aging population, higher co-payments for medical expenses, the market for third sector products has been steadily growing and a trend we expect to continue, which will allow us to expand our leading position. 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. I'd first like to share some information that helps give context to 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 healthcare costs to rise about 6% in 2017, a moderate increase compared with historical trends that far outpace growth in the economy. Employers have continued to shift the cost to workers in a form of higher premiums, deductibles, and cost-sharing.
Employer-sponsored health plans in the form of high-deductible health plans are one of the most popular healthcare saving offerings. Even with the related savings account options, the 84% of employers offering high-deductible health plans in 2017 is essentially unchanged from 2016, according to the National Business Group on Health report cited Kaiser Health News. Similarly, the percentage of companies offering high-deductible health plans as the only choice for workers and families was 35% in 2016 and remains at that percentage this year. Keep in mind, patients with high-deductible coverage pay thousands of dollars in medical costs before their major medical even kicks in. 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 the 5,000 employees surveyed responded that they have less than $1,000 to pay out-of-pocket expenses associated with unexpected serious illness or accident if it occurred today. It is within that landscape that we believe consumers and employers will increasingly see the need for the financial protection Aflac's products offer for out-of-pocket expenses as they rise. Aflac was founded in 1955. After identifying the need to lift the financial burden of cancer patients and their families, we pioneered the introduction of a cancer insurance policy.
While the Aflac U.S. product portfolio includes a variety of voluntary insurance products that pay cash directly to the policyholder, our accident, disability, and cancer plans all are top sellers for many years. Our portfolio of individual and group voluntary supplemental products provides consumers with outstanding value. At the same time, we offer businesses of all size the opportunity to provide their employees with a more valuable and comprehensive selection of benefit solutions. Despite changes in the healthcare environment over the last several years, one constant has been and continues to be the need for our products. No major medical plan, not even the best, is designed to cover all out-of-pocket expenses. Aflac products are there to partner with consumers and employers. 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 sales come through smaller employers with fewer than 100 employees. The reason for our focus on the small business market is straightforward. These are the businesses that are the most underserved by insurers, which gives our career agents a significant opportunity to sell insurance to employees in these businesses. There are vast opportunities to sell our products through medium and larger employers. To ensure we are equipped to tap into these opportunities, we are building out and managing relationships with large national brokers. You will recall, in 2016, we focused on deepening our relationships with brokers and recruiting career agents. As we look to 2017, we're focused on providing support for our career agents in a 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, and about nine out of 10 people in the U.S. recognize Aflac. The Aflac brand is a combination of many elements, with the most visible being the Aflac duck. It is also made up of the trust that we build through relationships with businesses, policyholders, and consumers. This is especially important because businesses and consumers want to turn to a brand they know and trust when making insurance decisions. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts to be receptive to the learning of how Aflac products can help them.
As you may have seen with our newest commercial, called "Surgery," which debuted a couple of weeks ago at the Super Bowl, along with a supporting role by the Aflac duck, "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. 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 policyholders that used One Day Pay said they are likely to refer people to Aflac. We continue to receive phenomenal feedback from our policyholders telling us that our commitment to pay claims fast through One Day Pay underscores Aflac's integrity and commitment to keep our promises.
Even further differentiating Aflac, we are proud that Aflac's contact centers have been recognized by J.D. Power for providing an outstanding customer service experience. This recognition is based on successful completion of an audit and exceeding customer satisfaction benchmarks. These kind of initiatives and feedback demonstrate our commitment to delivering on our promise to our policyholders. Now I'll turn to 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, we remain committed to the fundamental strategies designed to balance growth and preserve our margins. As we look to 2017 and beyond, we continue to anticipate the long-term compound annual growth rate in Aflac U.S. will range in 3%-5%. From a financial perspective, Aflac U.S. has performed well in 2016. Both net premium and operating revenues were up in 2016 compared to 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 year, and our expense ratio was in line with our guidance. This reflects progress we've made on certain strategic initiatives and increased promotional spend. Overall, our U.S. pre-tax profit margins exceeded our annual guidance range for the year, coming in at 19.6% due to favorable benefit ratios and slightly improved policy persistence. Despite the discussion of changes to the healthcare legislation recently, we believe that 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 toward uniform coverage will initiate a better understanding and appreciation for Aflac's products.
We believe that the U.S. small and large businesses alike represent a vast opportunity for growth, and we are building our business and enhancing our distribution system with that potential in mind. 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 positioned to serve this segment. We 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 a consolidated financial performance and our capital management activities. Aflac Incorporated has a long history of delivering strong financial performance in the face of a fluctuating yen.
Due to the significant contribution of Aflac Japan's operations to the overall earnings, a stronger yen magnifies Aflac Incorporated's results as reported in dollars. However, Aflac's currency exposure is primarily translation-related as opposed to transaction or currency-related. As such, we believe that viewing our results, excluding the impact of foreign currency, is the most meaningful way to assess our financial performance, whether the yen has helped or hurt us. While the yen to dollar exchange rate weakened from 2013-2015, 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 ratio, or RBC, at the end of 2015 remained high at 933%.
Additionally, our capital and liquidity position in Japan remained strong, ending 2015 with a solvency margin ratio, or SMR, of 828%. We are still waiting for the final year-end statutory and FSA estimates of our RBC and SMR. However, despite market volatility in the fourth quarter, we ended the year with strong capital ratios, with SMR and RBC estimated in the mid-900 range and mid-800 range, respectively. We believe that an analysis of our 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 securities transactions, impairment, and derivative 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 the 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 United States and Japan. Now let me turn to the topic that I know is important to all of our shareholders, capital deployment. 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 are very pleased that 2016 marked the 34th consecutive year of increasing our cash dividend. We are proud of that achievement, and we anticipate increasing the dividend again in 2017.
As we have communicated, when looking at ways to deploy capital, we have primarily considered enhancing organic growth, paying dividends, and repurchasing shares. Based on our assessment of the company's capital strength, we repatriated approximately JPY 139 billion in 2016, which was consistent with our expectations. 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 repurchase in the first half of the year. As is always the case, this assumes that our share repurchase remains the optimal use of excess deployable capital in driving long-term shareholder value.
While the scales have always been tipped toward dividends and share repurchase, we continue to explore other options for deploying capital to grow our business. As we evaluate alternative uses of capital, share repurchase will continue to be the base against which all other opportunities will be measured. Our focus remains on maintaining the strong fundamentals in our core business and building on our track record of earnings growth. For 2017, our objective is to produce operating earnings per diluted share of $6.40-$6.65, assuming a JPY 108.7 to the dollar, 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 roughly JPY 109 to the dollar rather than 110, which we used in our outlook call.
Similar to last year, we did not adjust the range for the few pennies of additional annual earnings. To be clear, our annual planned earnings are essentially unchanged, and it's safe to assume that we've added a few pennies to our actual forecast accordingly. In addition, our sensitivities to a given change in the JPY were updated as we refined our modeling of foreign currency exchange impact on locked-in hedge costs in preparation for installing our reported operating earnings. Our objective in 2017 is to maintain our strong capital position while producing stable earnings and strong cash flows. We believe that our market-leading position, powerful brand recognition, and strong distribution in Japan and the U.S. will provide support toward this objective. We believe that our efforts will continue our prudent strategies for capital deployment as well as our ongoing commitment to customer service, product innovation, and distribution enhancement.
We remain focused on being the number one provider of voluntary insurance at the work site in the U.S. and the number one provider of supplemental insurance in Japan. 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. Thank you, and now I'll take your questions.
Paul, thanks so much. We have about two to three minutes for questions. I just want to kick off with one, then I'll open it up to the audience. How has the low interest rate environment in Japan impacted competition, specifically for the third sector?
Your expectation might be that the traditional first sector large life insurers in Japan would naturally gravitate from their traditional first sector business over to selling more third sector. That's honestly what we anticipated from a strategic perspective. However, counter to our expectations, we have not seen that. Many of the first sector companies in Japan have continued to focus on the large first sector products, shifting somewhat from yen-denominated policies toward foreign currency-denominated policies. At the same time, there's been no significant increase in the activity of selling third sector. We have, over the years, seen second sector companies continue their focus in selling third sector products and have become somewhat successful. Overall, we have not seen any significant or material change in competition.
I will say that competition in the medical market continues to be high, but Aflac's brand within cancer insurance as well as income support continues to provide opportunities for us to sell and cross-sell all of our products, despite the fact that we held back first sector in such a significant way in the second half of 2016.
All right.
What's the typical age of the buyer of your products in Japan, and how are you affected by sort of demographics? Because overall population is falling about 0.5% a year in Japan, but there are certain categories of population, people approaching late middle age or old age are actually expanding that group.
Reality is that we have, because of our cancer domination in the market, honestly been able to attract older customers. We actually ran a commercial a few years ago where we featured a 30-year-old comedian in Japan who'd had stomach cancer, trying to make sure we demonstrated to the Japanese population that cancer is not a disease of age despite people's thought process. What you've seen us do to overcome that is continue to offer new products as well as go into different distribution channels to move earlier in the life cycle of acquiring customers. Specifically, as I mentioned earlier, our income support insurance is specifically designed to capture customers in their demographic age of 20s to 40s and help us get people earlier so that we can cross-sell them over a lifetime.
I believe that Aflac's distribution channels, their traditional distribution channels, have continued to skew to older ages. It's one of the reasons that we believe that selling through banks and our strategic alliances, as well as large non-exclusive agencies, have allowed us to procure younger customers. We feel we're moving in that direction, and it's a constant focus for our marketing and sales team.
I think we're gonna end it there on time. Paul, thank you so much.
Thank you.