Good morning, everyone, and konnichiwa. Ohayou gozaimasu. I'm Robin Wilkey, Senior Vice President, Investor and Rating Agency Relations, and I want to welcome each and every one of you here today, and we appreciate your participation and support in being here. I hope all of your travels have been smooth. I want to wish that you all find the information today useful in your evaluation of Aflac. Please let us know if at any time you have any issues or you need something. We have a table set up right outside the door, so any type of emergency situations, please see us outside. With that, I'm going to turn over today's podium to our emcee, Masato Kuroda-san, who is Head of Corporate Communications for Aflac Japan, and he will be our host today. Kuroda-san?
Thank you. Thank you, Robin. Good morning and ohayou gozaimasu. We are pleased that so many of you can join us for our 2016 Tokyo Financial Analysts Briefing today. Before we start our presentations, I would like to cover a couple of items. If you need assistance, please let any of the Aflac staff members know. We are providing translation services all day today. Please use the earpiece in front of you and tune in to channel 1 for Japanese and channel 2 for English. Also, Wi-Fi service is available in this room and on the 27th floor where you have lunch. To get a connection, once you've clicked on the icon for wireless network connection, select Hyatt, and for the security key, use Hyatt2016.
You'll find copies of the slides at your seat in front of you so that you can follow along with the presentations and make notes on them. Today, there will be 2 main Q&A sessions for Aflac speakers. 1 following the morning presentations, mainly geared to the morning speakers, and another Q&A session following the afternoon presentations. I'm sure you will probably have a lot of questions, but please hold them for the respective Q&A sessions. If you're not able to get your question in after the morning session, you will have an opportunity to ask again during the afternoon session. As you can see on today's agenda, during the morning session, we are focusing primarily on strategic highlights, as well as an overview of Aflac Japan, international public policy and regulatory developments, and Aflac Japan's marketing and sales.
Also in the morning session, as I mentioned, we are very glad to have 2 external guest speakers, Mr. Masahiko Nishizawa, President of N-iCo Limited, who will give us a presentation on the activities on an independent Aflac sales agency, and Mr. Toshiyuki Yazaki, Japan Post Executive Officer and Director of the Kinki Regional Office, who will provide us an overview of Aflac cancer insurance sales at post offices. Following the morning session, we will move to the 27th floor to have lunch. In the afternoon session, we will cover Aflac Japan investments and financials, including Aflac Japan's financial outlook and capital management. Additionally, we will share with you Aflac Japan's future Vision 2024 plan, followed by our final Q&A sessions. Before we begin today's program, let me remind you that some statements you will hear 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. Our actual results could differ materially from those we discuss today. Please look at our latest 10-Q filing for some of the various risk factors that could materially impact our results. Please remember that this presentation is being webcast. Please turn all cell phones and other electronic devices off or place them on silent mode. Now, we will begin this morning's program with opening remarks from Paul Amos, President of Aflac. Paul moved from the Aflac U.S. sales force to Aflac headquarters in 2005. He assumed additional responsibilities as Chief Operating Officer of Aflac U.S. in 2006 and was promoted to President of Aflac in 2007.
In 2013, he assumed reporting responsibilities for Aflac Japan. He lived in Tokyo for two years to oversee the operation locally before returning to the worldwide headquarters in Columbus late last year. Now, I will hand over to you, Paul.
Good morning. Thank you for joining us for Aflac's 2016 Tokyo Financial Analysts Briefing. Today's business environment is dramatically different from when Aflac Japan was founded over 40 years ago. Economic, political, and regulatory changes have challenged us to focus on what we do best, creating value by leveraging our unique resources and expertise to ensure policyholder protection. Our leadership in this area has enabled us to pursue greater profitability and to deliver long-term growth for our shareholders. While much has changed over the years, we have remained steadfast in our focus and commitment to work hard every day to remain good stewards of the trust that our Japanese policyholders have placed in us. That focus and commitment has allowed us to grow and become the leading provider of medical and cancer insurance in Japan.
Today, we are proud to provide insurance protection to one in four households in Japan. Japan faces the unprecedented challenge of keeping its economy growing while the country's population shrinks. The growing proportion of Japan's elderly means a smaller workforce and a greater strain on the social safety net. These factors constrain Japan's public social security system and encourage customers to seek products to supplement the support they receive from public institutions. An aging population also means greater health-related expenditures. Japan's per capita spending on healthcare continues to grow, creating a need for financial protection and peace of mind. In short, this means the demand for insurance products remains strong.
Aflac Japan is determined to maintain and expand its position as the leading insurance company in the third sector by meeting consumer needs and quickly adapting to changes in the marketplace, even as competition from other life insurers continues to intensify. Aflac built its position as the leading provider of cancer and medical by offering consumers relevant products through expanded and effective distribution channels to yield new accounts and new customers. We believe our growth strategy and initiatives for 2016 serve to position Aflac for sustained growth for the long term, so we can deliver on our brand promise to be there for our policyholders in their time of need. Ultimately, living up to this promise to our customers will create value for all of our stakeholders, including our shareholders. The presentations of this financial analyst briefing cover those opportunities today.
The foundation of our product portfolio has been and continues to be supplemental health products. For years now, Aflac Japan's operations have intensified their focus on third sector products, which are less interest rate sensitive and more profitable than first sector products. In keeping with our pioneer spirit, Aflac launched its latest third sector offering on July 19th of this year. The new product, called Income Support Insurance, is designed for those unable to work due to illness or injury. It works by paying policyholders a fixed amount of monthly benefits to cover lost income when the insured is continuously out of work for 60 days. To promote this product, we've launched a marketing campaign that features a popular comedian. You'll hear more about the campaign today, and we will show you one of these commercials.
The launch of Income Support Insurance follows the successful start earlier this year of another addition to our third sector product portfolio, a new cancer insurance product designed specifically for cancer survivors. In early 2016, we also made refinements to our non-standard portion of our EVER Medical product in order to keep it aligned with evolving customer needs. Later today, Ariyoshi-san will provide further details on income support as well as other products. The success of this new initiative and the financial results we'll be discussing in today's briefing are possible because of the close, collaborative relationship that Aflac has between the U.S. and Japan. Aflac Incorporated promotes synergy that a robust communication and governance structure. As you will hear later today, Aflac Incorporated has established a global governance committee structure that provides a framework for executive management to discuss important strategic management issues for the U.S. and Japan operations.
The framework ensures a high level of accountability, oversight, and it's the backdrop for our two sides of our operations share best practices throughout the value chain. Aflac Japan's operations, for example, have delivered results through sales channel diversification and product development. Aflac U.S.'s operations have continued the fundamental brand and enabled Aflac Japan operations to deliver on new innovations to the Japan market. Aflac is committed to fostering such synergy, and the marketing and sales summits are a great example of Aflac's investment in communication throughout the organization. Another example is the creation of our global information security subcommittee, which combines expertise from teams in the United States and Japan to ensure information security issues are considered in a variety of perspectives, global practices are incorporated, and the company's ability to protect consumers' most sensitive data is further enhanced.
As you can see from today's agenda, the Aflac team is here to provide you with an in-depth discussion on our operations in Japan, along with capital management strategies and outlook. Aflac Japan President Hiroshi Yamauchi will begin by telling you a little bit about Aflac Japan's history, which will be followed by a discussion on the economic and regulatory environment by Chairman Charles Lake. Following the regulatory overview, Koji Ariyoshi will provide us overview of sales and marketing strategies for this year. After the break, we will hear from Masahiko Nishizawa, who runs an independent sales agency. Having beaten cancer twice, Nishizawa-san knows firsthand how Aflac products help mitigate care costs and enable policyholders to focus on the energy of what matters most, recovery. We will then hear from a special guest, Toshiyuki Yazaki, Executive Director and Officer of the Japan Post Kinki Regional Office.
Yazaki-san will provide an update on our strategic alliance with Japan Post, and particularly on Japan Post's sales approach. in the afternoon, you'll hear from Hideto Yamamoto and Yutaka Otsuka from our investment and financial teams in Japan. As well as Chief Financial Officer Fred Crawford, who will present Aflac Incorporated's financial outlook and capital management. Finally, Masatoshi Koide, Deputy President of Aflac Japan, will provide an overview of Aflac Japan's mid to long-term strategic vision and plan. Let me conclude by reiterating how proud I am of the accomplishments of our management team and employees, and sales distribution in Japan, as they've worked hard to deliver on our brand promise to accelerate the company's growth.
As we assess our past accomplishments and we make plans for our future, competitive strengths that Aflac is the leading provider of cancer and medical insurance are exactly the qualities that will enable Aflac to be tomorrow's leader in insurance for daily living. To realize this vision, we are building on a culture of dynamic innovation and risk management to grow our core. We're focused on the key pillars of activity, including driving innovation in our business and operational areas, further growing and maintaining our low-cost operations, and enhancing our capital flexibility. As you've come to expect from Aflac over the years, our innovative products and product enhancements, combined with a consumer-focused portfolio strategy, will continue to benefit our customers and in turn, deliver value for our shareholders for decades to come. We look forward to the road ahead, and we're grateful for your time and attention today.
Our next speaker is Hiroshi Yamauchi, President and Chief Operating Officer of Aflac Japan. Yamauchi-san joined Aflac in 1976 in the actuarial department where he served as a section manager and assistant general manager. Over the last 40 years, he has been promoted to various positions of increasing responsibilities. Following his promotion to executive vice president in 2012, he was promoted to the current position in January 2015. Today, Yamauchi-san will provide us with an historic overview of Aflac Japan.
Good morning, thank you very much for coming all the way to Japan to attend today's meeting. 40 years ago, I joined Aflac Japan, only a year and a half after the company was founded. My 4 decades with Aflac have witnessed great strides in the company's growth. I have also seen the company navigate ongoing challenges and changes in the economy, social demographics, and the competitive landscape of the Japan insurance industry. Today, I'd like to discuss Aflac Japan's history and journey of growth as seen through my eyes. Aflac Japan began its operation on November 15th, 1974, by selling only one product, its pioneering cancer insurance. Since then, the upward growth of our policies in force has been continual.
41 years later, we are the leader of the third sector, which includes cancer and medical insurance, and we are currently responsible for more than 23 million policies in force. In fact, we are proud to insure one of four Japanese households today. During the 1970s and 1980s, a number of non-Japanese insurance companies entered Japan's life insurance market. Aflac is the only non-Japanese insurer with more than 10 million policies in force that has stayed in Japan and steadily grown. JPY 8 trillion is a very large and impressive number. That enormous sum illustrates the total amount of benefits and claims payments that Aflac Japan has paid out to policyholders over the course of our 40-plus years of operation. The first benefit payment was paid in May 1975 in the amount of JPY 750,000, or $2,500 at an assumed exchange rate of JPY 300 to the dollar.
40 years since our first payment, we are currently benefiting many customers, as evidenced by that large and impressive number of that JPY 8 trillion. As these numbers clearly demonstrate, Aflac's presence today in Japan's insurance market has broadened to become quite significant, and our policies help provide financial protection to millions. While Aflac is an insurance company that now has one of Japan's highest number of policies in force, the past 41 years has not always been smooth. When Aflac first entered Japan, Japanese insurers primarily sold first-sector products, which include life and savings-type products. By offering a new type of product, cancer insurance, we turned a challenging competitive environment into a profitable business opportunity. When Aflac Japan began its operation, cancer was feared as an untreatable disease, and the social climate then prompted people to avoid talking about cancer.
Many Japanese insurers viewed cancer insurance as something that would never be socially acceptable in Japan due to the stigma associated with cancer. Under those difficult circumstances, we leveraged our creativity by paying close attention to a number of details within the culture to help Japanese citizens become more at ease with cancer insurance. This entailed demonstrating the unique advantages and benefits of our cancer insurance policies, with an emphasis on efforts that relate to benefit payments. In our early years in Japan, it was quite rare for a person who was diagnosed with cancer to be informed of their condition. Rather, family members of cancer patients were told of a person's cancer, and doctors took good care not to inform the actual patient about their diagnosis. Therefore, Aflac used two different envelopes to send documents to policyholders.
The envelope on top of this slide was used for regular business, and Aflac's name and logo was printed on it. The other envelope, however, was blank. Blank envelopes that usually contained insurance claims-related documents omitted the company name logo and intentionally so that one would not be able to tell that it was from Aflac. The idea that even if a letter with Aflac's name and logo was addressed to a family member, the cancer patient could associate the letter with cancer and inadvertently find out about their illness as a result. Because of this, we showed our consideration to the patient and family members by using envelopes without a company name, and at times, we even hand-wrote a sender's name with the same gender as the addressee. This is just one example of how we communicated with family members about claims matter for those with cancer.
Close attention was paid to all details, no matter how small. By remaining in tune with Japan's customers and social climate, we've been able to spread the word about cancer insurance throughout the entire industry. Sustaining growth is no easy task, and our endeavors have been met with challenges over the decades. Perhaps our greatest challenge came in 2001. That is when major domestic life and non-life insurers entered the third-sector market. We refer to this as deregulation or market liberalization. Looking ahead to this, we began offering first-sector products in 1996, five years prior to third-sector deregulation. Our goal was to solidify relationships with existing cancer policyholders prior to deregulation by offering first-sector products, including whole life, term life, and endowment insurance products. With deregulation, insurers with more than 10 times our total assets entered the third-sector market.
The amounts on the slide represent the total assets of those insurers. There were those who thought third-sector deregulation would be devastating to Aflac. Some even said things like, "Aflac's domination of the cancer insurance market is over." The greatest challenge that we faced, however, is now an example of how we turned change to an opportunity for Aflac. In 2000, prior to deregulation, in order to build a new distribution channel, we developed a strategic distribution alliance with Daiichi Life, which is an industry first among life insurers. Through this affiliation, Daiichi Life had the opportunity to sell cancer insurance without having to develop a product from scratch. As a result, we gained access to their distribution network of 50,000 sales representatives for cancer insurance. We released EVER in February 2002. At the time, most medical products covered hospitalizations that were long-term.
The coverage offered by EVER, however, was pioneering in that it fit with the external trend of average hospitalization terms becoming shorter. By making the coverage simple and easy to understand, we were able to achieve sales that dominated our competitors in the medical insurance field. Third-sector deregulation drove us to strengthen our medical product. Not only did we maintain our number 1 position in cancer insurance sales, but we emerged in 2003 as the number 1 medical insurer. We also strengthened our proportional strategy by using the Aflac Duck beginning in 2003, and Aflac's level of recognition in Japan considerably improved. The Aflac Duck has grown to become the popular character that it is now.
Despite the challenge of third sector deregulation, our highest obstacle ever, we were able to turn such a situation into an opportunity to solidify our position as the leading company of the third sector through such efforts. I now want to show you a commercial about a general cancer product that illustrates how the social climate in Japan is changing in regard to cancer. The woman in this commercial is not a celebrity. Her name is Yamashita-san, and she's a cancer survivor. Through this commercial, we are conveying her story to the public, demonstrating the message that it is possible to live a normal life even after undergoing a treatment and surviving cancer, while also underscoring the importance of cancer insurance. Considering how cancer was once a topic that was avoided due to its stigma, this represents quite a change in terms of social climate.
There are statistics that illustrate how the number of cancer diagnoses and survival rates are on the rise. Japan's National Cancer Center reported in July 2016 that Japan's number of those diagnosed with cancer is expected to exceed 1 million people for the first time this year. During the same month, the National Cancer Center has reported that the five-year survival rate for those with cancer from 2006-2008 was 62.1%. This is quite an improvement considering that the same rate was 54.3% from 1997-1999. All of our products, including our cancer insurance, have been revised on a number of occasions to better suit the evolving needs of customers, medical advancements, as well as the changing social climate in Japan. Continuing with this tradition, this year we released an important new product, Days supporting you, cancer insurance for daily living.
This product is cancer insurance for cancer survivors. Of all people, cancer survivors best understand just how important cancer insurance is. Now, with the introduction of our cancer insurance for cancer survivors, they are able to purchase our cancer policy. Our new product for cancer survivors exemplifies our commitment to offering cancer coverage that meets the varying needs of our clients and the ever-changing society. In delivering on our promise to our customers, our mission goes beyond simply providing cancer insurance. We are also determined to very enthusiastically spread cancer awareness to as many people as possible so we can increase early detection and treatment. A recent event that illustrates one of our efforts was when a Japanese celebrity diagnosed with breast cancer talked on television about why she decided to get checked.
According to her, she found a breast cancer educational display at a bank and noticed a cancerous lump on the Aflac display felt similar to a lump beneath her breast. The experience compelled her to seek more in-depth testing, which led to relatively early detection and treatment for her breast cancer. This is one example of the importance of the cancer awareness displays that Aflac places in banks and post offices throughout Japan. The celebrity's experience reaffirms the importance of spreading awareness about cancer as well as early detection. While we have made progress with cancer awareness for cancer as well as creating dialogue, there is still much room for improvement in this area. The actual educational display located outside this room today is used at awareness events hosted by Aflac across Japan. Aflac has partnered with local governments to launch programs in support of cancer prevention and education.
These programs have contributed to an increase in cancer screening rates. Aflac is the only insurer that has formed partnerships with all 47 prefectures in Japan. As of the end of June 2016, we have also formed partnerships with 112 local governments, including ordinance-designated cities and other municipalities. With the desire to share the knowledge we have gained through the sales of cancer insurance, we partner with local governments and together with associates, we are providing information on many topics related to cancer, including cancer education awareness, prevention and diagnosis, and treatment options. We believe that encouraging screening will increase early detection, early treatment, and an increase in those living life the way they want to live.
This kind of dialogue and educational initiatives demonstrate how Japanese culture has changed in terms of taking a topic that was once a taboo and making it a part of an everyday conversation that helps save lives through early cancer detection. We are privileged to be a part of this initiative. Aflac has taken part in activities to help customers understand what kind of an illness cancer is, as well as the importance of early detection. Through our coverage, we have also worked to provide peace of mind to the customers should they ever be diagnosed with cancer by lessening their financial burden through our cancer insurance. We have a scholarship fund set up for children of cancer victims as well as pediatric cancer patients.
The Aflac Scholarship Fund for Childhood Cancer Survivors and Children of Cancer Victims was established to help in providing financial grants that do not need to be returned to high school students who have survived childhood cancer or have lost parents to cancer. This is an effort to help reduce the financial burden associated with the cost of attending high school. To date, Aflac Japan is proud to have awarded this valuable scholarship to more than 2,300 students. Aflac Japan has also established the Aflac Parents' House, which offers three locations, two in Tokyo and one in Osaka. Together with Children's Cancer Association of Japan, the oldest foundation in Japan established for pediatric cancer patients and their families, highly specialized services are provided in collaboration with medical experts and relating organizations.
This cheerful and spacious facility provides a home away from home for pediatric patients and their families, where they can stay together while they bravely fight cancer or other serious diseases. These activities have been supported through generous donations from those that feel strongly about helping children with cancer and other serious diseases, such as employees, agencies, and us, and Aflac Parents' House has helped a total of 12,000 people, including those from overseas. Looking ahead, the 50th anniversary of the founding of Aflac Japan will be in 2024. In order for us to grow further, we have created VISION 2024, which will serve as a target for where we would like to see the company as we head toward our 50th anniversary. Koide-san, Mr. Koide, will provide more detail on our vision in the afternoon session.
We plan to forge ahead with multiple initiatives to support our vision for Aflac Japan as we move forward. The first such products to come from these initiatives is our Income Support Insurance. Pillar products such as cancer and medical insurance supplement expenditures, such as the cost associated with treatment for illness. This new product, however, is from a new insurance area that helps to protect consumers from financial challenges, such as income loss that arise when they are unable to work due to treatment. Ariyoshi will go into the product details further, but we position this as an important strategic product that will serve as the third pillar behind cancer and medical insurance as we continue working to address and accommodate the evolving needs of Japanese consumers. I'd like to thank you for your attention. I hope you will find the presentations throughout today informative. Thank you again.
Our third speaker is Charles Lake, President of Aflac International and Chairman of Aflac Japan. Charles joined Aflac Japan in 1999, and from 2003 to 2005, he was the President of Aflac Japan. Since 2008, he's Chairman of Aflac Japan and also assumed the position of President of Aflac International in 2014. He will be covering international public policy and regulatory developments to include the Japan macro environment.
Good morning. Welcome to Japan. The purpose of this presentation is to provide an overview and an update on key issues regarding the global public policy and regulatory environment affecting the insurance sector in Japan and the U.S., and Japan's macroeconomic, political, and public policy developments, including Aflac's strategic response in each of these areas. An explanation of high-level themes and concepts can be found in the Financial Analysts Briefing materials provided in May. With respect to global regulatory developments. Under the direction of the G20, work continues at the Financial Stability Board, or FSB, and International Association of Insurance Supervisors, or IAIS, to formulate international financial standards for the insurance industry. The IAIS continues work specifically to develop measures to apply to 2 categories of insurance companies.
The first being designated Global Systemically Important Insurers, or G-SIIs, and the other being ComFrame, or Common Framework for the Supervision of Internationally Active Insurance Groups, or IAIG, including a Global Insurance Capital Standard, or ICS. In the development of ICS, IAIS has conducted a series of field testing exercises, impact studies aimed at testing whether the design of ICS will have the intended outcomes of promoting effective IAIG supervision in a manner that does not impose excessive cost to the IAIGs. Key objectives include assessing results to identify necessary changes during the drafting stages of ComFrame and ICS. The field testing is designed to test all components of ICS. The most recent field testing exercise launched in May 2016.
The IAIS intends to finalize ICS 1.0 this year, following a public consultation to solicit feedback from industry and other stakeholders, after which IAIS member supervisors will begin requesting confidential reporting of ICS data by IAIGs starting in May or June 2017. Aflac is not an IAIG, as it does not meet the criteria. At the same time, we continue to closely monitor developments in this area. On June 16, the IAIS released its updated methodology for assessing insurers for potential designation as G-SIIs. The new methodology adjusts and simplifies the process by which insurers are designated by, but the fundamental approach remains the same. A notable change from the 2013 initial methodology is the replacement of the term nontraditional and non-insurance activities, or NTNI, with systemic risk from insurance product features.
Previously, involvement in activities that the IAIS defined as NTNI was heavily weighted in the assessment of systemic risk. This had led to criticism from industry stakeholders that the criteria were confusing and required clarification. Under the new assessment criteria, Aflac supplemental accident and health and other products will not pose systemic risk. As was the case under the 2013 criteria, Aflac does not meet the G-SII requirements and therefore has not been designated as such. A number of recent developments are suggesting that global policymakers are beginning to shift their approach to assessing systemic risk from the current firm-specific focus to a macroprudential one that is more centered on activities. In April 2016, the International Monetary Fund, or IMF, released a report that urged regulators to take a more macroprudential approach to systemic risk in insurance.
IAIS officials have expressed support for the IMF's recommendation, in June, the IAIS Executive Committee voted in favor of exploring the activities-based approach. In the U.S., the Federal Reserve Board, or the Fed, has taken on a growing role in insurance supervision. In particular, because the Dodd-Frank financial reform law provides the Fed with the authority to supervise certain insurance companies that have been designated as systemically important financial institutions by the Financial Stability Oversight Council or that own a federally insured bank or thrift. Because Aflac does not own a federally insured bank or thrift and has not been designated as systemically important by the U.S. Financial Stability Oversight Council, it is not subject to Fed supervision. At the same time, we pay close attention to regulatory developments overall for potential implications for the company.
In a May 2016 speech, Federal Reserve Board Governor Dan Tarullo outlined the Fed's approach to developing capital standards for insurance. The speech was generally well-received by the industry for sufficiently addressing the differences between bank and insurance business models. In the speech, Governor Tarullo stated that he had a strong reluctance to rely on internal modeling, which is the approach adopted by the European Union's Solvency II regime. Instead, the Fed's approach is a predominantly standardized risk-based capital requirement to enable comparisons across firms. Further, the Fed will rely heavily on stress testing for its capital requirements, similar to its approach in the bank sector. The Japanese government, in particular Financial Services Agency, or FSA, as the comprehensive regulator of the financial services industry, is paying close attention to discussions around development of global financial regulatory standards, including insurance standards.
In recent years, Japanese insurance companies have expanded their global reach through acquisitions and other means. The FSA's policy document entitled Strategic Directions and Priorities 2015 to 2016, the FSA explained its plans to actively communicate views and contribute in international forums to promote development of optimum financial regulations on an overall basis that strikes a balance between economic growth and financial stability, and also give consideration to the adverse consequences brought about by the overlapping effects of regulation. Under current leadership, the FSA is placing emphasis on principles-based financial regulation, including the promotion of best practices rather than strict adherence to specific rules in a manner that simultaneously promotes financial stability and economic growth. In this context, the FSA has advocated that global financial standard setters take a cautious approach to avoid unintended consequences of reform.
One example of the FSA's active approach to international engagement is the NAIC-FSA Insurance Regulatory Dialogue. First established in 2014, this dialogue with the U.S. National Association of Insurance Commissioners is held twice a year to discuss insurance-specific regulatory approaches, as well as regulatory best practices that attain common objectives while respecting the diversity of jurisdictional regulatory structures. Among other topics, the dialogues reaffirm the two authorities' active engagement in the development of ICS. Over a number of years, the FSA has been discussing and studying the potential for adopting an economic value-based solvency regime for Japan. Such a move would align Japan's insurance solvency regulation under principles similar in nature to the Solvency II regime in Europe and the ICS under development at IAIS, both of which are economic value based. FSA is taking a cautious approach and continues to thoroughly study the issue.
In July, it launched its latest round of field testing. The FSA is likely to continue engaging closely and constructively with the insurance industry as it moves forward with these discussions. Fred will address this topic in more detail in his presentation later. In the context of global regulatory developments, the corporate governance framework is a key focus. In this regard, Aflac Incorporated's corporate governance framework ensures a high level of accountability and oversight holding company-wide, system-wide of the conduct of business operations consistent with market discipline and the laws and regulation of the United States and Japan. As Chris explained during the May financial analyst briefing, in the Aflac Incorporated holding company system, the company formed the Global Executive Management Committee, or GEMC, to work with and evaluate the activities of our three core governance committees. Global Risk, Global Investment, and Global Capital.
This committee structure is designed to ensure the accountability of all key members of executive management to perform and execute Aflac's business strategy. Aflac Japan has in its place robust governance mechanisms to provide appropriate control while ensuring as much local management autonomy as possible to ensure agility and effective management in Japan. Aflac Incorporated created the Aflac Japan Management Guide as part of its management control and guidance to Aflac Japan to ensure robust corporate governance framework pursuant to the management agreement. Under the Aflac Japan Management Guide, Aflac Incorporated and Aflac Nebraska give as much autonomy as possible to protect and satisfy customers in Japan on the premise that Aflac Japan formulates and executes its management policy and annual budget to protect and satisfy customers in Japan and establishes an internal control framework.
To coordinate the company's response to global regulatory developments, including relevant domestic developments in Japan and the U.S. at the federal and state levels. In 2013, the company established an internal Aflac Global Regulation Committee or AGRC. By gathering together in a global multidisciplinary manner, subject area experts in various fields, including actuarial, accounting, risk management, legal, and government affairs, Aflac is able to effectively coordinate policies and actions in light of international regulatory developments in Japan and the U.S. The AGRC now serves as the core mechanism to coordinate engagement with regard to developing international regulatory standards and global best practices. Although Aflac is not a G-SII or IAIG, the company engages regulators, including the Nebraska Department of Insurance and FSA, to ensure that they fully understand or are comfortable with Aflac global governance. The annual Aflac Supervisory College is a key mechanism in that regard.
It anchors Aflac's regular interaction with Japan and U.S. regulators and provides a means for mutual communication to enhance understanding of the Aflac Incorporated holding company system. Company executives from the highest levels participate from the Aflac Incorporated CEO and down. The next supervisory college will take place in November of this year. Next, I will turn to the Japan political, macroeconomic, and public policy context. Since taking office in late 2012, in a coalition between his Liberal Democratic Party or LDP and Komeito, Prime Minister Shinzo Abe has been implementing a well-known economic reform program known as Abenomics, consisting of bold monetary policy, flexible fiscal policy, and structural reform. Focus on economic reform and steady and disciplined policy implementation has been a key source of support for the Abe administration since the LDP returned to power.
At this point, Prime Minister Abe is the fifth longest serving prime minister in post-World War II history. Elections for the upper house of Japan's parliament, the Diet, resulted in a landslide for the LDP-led coalition, extending the ruling party's majority in the upper house. In light of an increasingly uncertain global economic outlook, the economy has been a priority for the Japanese public. In opinion polls before the election, voters identified the economy and jobs as their top priority, and a majority said that they had a positive view of Abenomics. Although the ruling coalition won a majority of seats up for re-election, this was not an unqualified win, suggesting that the ruling coalition will have to continue to work hard to maintain public support.
The election results, in theory, placed a constitutional amendment within reach as pro-amendment parties now occupy two-thirds supermajorities in both the lower and upper house of the Diet. The Prime Minister has indicated that he will take a measured approach. Proposed amendments to Japan's constitution must trigger a national referendum, and if the proposed amendment is approved by the majority of votes cast, the constitution is amended as proposed. Although polls show that a majority of the Japanese public supports discussion of constitutional revision, opinion is divided on which parts of the constitution should be amended. At the same time, because the Abe administration's success to date has significantly dependent on voters who support his economic reform agenda, he faces increasing pressure to steadily implement economic reform.
Historically, the cabinet support has suffered when the government is seen as focusing too much on national security or other non-economic issues. As I explained in the main financial analyst briefing book, the Abenomics reform program has produced tangible results. To give just a few brief examples, unemployment of 3.2% is a multi-decade low. A comprehensive set of corporate governance reform is sharpening corporate Japan's focus on enhancing corporate value. The female labor participation ratio for women aged 15 to 64 has climbed four points to 64.6% since 2012. Even so, Japan has not experienced a sustained improvement in macroeconomic results. Inflation remains persistently low. As a result, the Abe administration continues to face pressure to continue implementing economic reforms. On August 3rd, Prime Minister Abe reshuffled the top LDP leadership and the cabinet, replacing all but eight members.
Several officials have been central to the Prime Minister's policy effectiveness retain their positions, including Deputy Prime Minister and Minister for Finance, Taro Aso, and Chief Cabinet Secretary, Yoshihide Suga. This suggests that the Abe administration is seeking to maintain its continuity as it looks to put forward its agenda in the extraordinary Diet session this month. A key element of this fall's legislative agenda is a JPY 28 trillion economic stimulus package aimed at shoring up the economy at a time of heightened uncertainty. Another major part of the legislative agenda will be to approve the Trans-Pacific Partnership trade agreement along with related legislation. The Abe administration has positioned TPP as a major part of its structural reform strategy. For Japan, TPP is a part of its competitive liberalization strategy.
In other words, Japan is pursuing a series of regional and bilateral trade deals at once, including the Regional Comprehensive Economic Partnership, or RCEP, among 16 countries including China, South Korea, Indonesia, and Vietnam, in competition with other major economies, with the intention of spurring global trade growth and sowing the seeds for progress in further trade liberalization at the World Trade Organization, or WTO. In addition, the TPP requirements are being leveraged by the administration as a catalyst to enact domestic reform. For these reasons, the Japanese Diet is likely to pass the TPP treaty regardless of the developments in the U.S. With respect to financial regulation under the Abe government, the FSA has been actively adopting an approach to regulation that seeks to appropriately maintain financial stability while also supporting economic growth to end deflation.
This approach has had strong political backing, supported by the continued appointment of Mr. Taro Aso, a former Prime Minister and LDP political heavyweight, as Minister of State for Financial Services. Given that Prime Minister Abe has kept Mr. Aso in the position since returning to power in 2012, we expect that the administration will continue to strongly back FSA's current approach to regulation going forward. As we outlined in the May financial analyst briefing presentation, the Abe administration continues to implement policies to reform the tax code along with Social Security programs in an effort to ensure the sustainability of these programs as Japan's society ages and the population declines. On June 1st, Prime Minister Abe held a press conference to announce its decision to postpone a planned consumption tax increase from 8% to 10%.
Instead of coming into effect on April 1, 2017, as previously planned, the hike will, pending passage of new legislation, now take effect on October 1, 2019. Prime Minister Abe stated that although there are many indications that the Japanese economy is strong, weakness in emerging markets such as China has made the economic growth outlook more challenging. In that context, now is the time to take decisive action to shore up the economy, he said. The new implementation date of October 2019 will coincide with the run-up to the Tokyo 2020. Olympic preparations are expected to generate significant demand, which would help to offset the negative impact on demand that would result from increasing the consumption tax. The government will maintain its target of achieving a primary balance, that is a fiscal surplus excluding debt resurfacing costs, by 2020 by accelerating Abenomics structural reform.
Discussions are continuing to move forward with a series of reforms designed to preserve Japan's public pension system by controlling benefits while bringing in more revenue. One such measure is a legislative fix to a macroeconomic slide mechanism designed to more accurately adjust benefit levels to match inflationary or deflationary trends. Legislation to address this issue was submitted to the 2016 ordinary Diet session but was left unpassed. It will likely be introduced during the extraordinary Diet session beginning this month. Given the nation's rising healthcare costs, constraining government spending on healthcare is an important objective to preserve the sustainability of Japan's universal healthcare system. On July 14, an advisory body to the Ministry of Health, Labour, and Welfare began discussions on issues including maximum monthly out-of-pocket expenses for the elderly, as well as possible reforms to a health insurance program aimed at seniors aged 75 or older.
Aflac continually monitor public policy developments to analyze changes and developments in the business environment. For example, with the enactment of the Postal Services Privatization Act in 2005, the Japanese government officially decided to start a process of privatization of Japan Post, a postal service which also engages in large-scale banking and insurance operations. As the legislation was being developed, Aflac formulated a comprehensive strategy to address possible opportunities and risk. In 2007, the subsidiary that operates the post office network selected Aflac Japan as its provider of cancer insurance to be sold through its post offices. Sales through this channel began in 2008. In July 2013, Aflac Japan entered into a new agreement with Japan Post Holdings to further expand its partnership that began in 2007. Currently, Aflac cancer insurance is sold at more than 20,000 post offices across Japan.
The postal privatization process marked a key milestone in 2015 when three Japan Post Group companies, Japan Post Holdings, Japan Post Bank, and Japan Post Insurance, staged initial public offerings on the Tokyo Stock Exchange. As privatizing entities, the Japan Post Group companies are increasingly being subject to market discipline and expectation for growth with investors. Alliance partnership, including the Aflac Japan Post Alliance, are consistent with Japan Post Group efforts to enhance corporate value and expand revenue. Aflac and Japan Post Group have developed a strong and positive working relationship. To just give you one example, I was recently given the honor and privilege to serve as the first non-Japanese outside director on the board of Japan Post Holdings.
In closing, I would just say that as I have explained today, Aflac is well positioned to take advantage of opportunities based on strategic analysis and proactive engagement with all of our stakeholders in the public policy context. Thank you very much.
Our next speaker is Koji Ariyoshi, Executive Vice President and Director of Sales and Marketing, Aflac Japan. Ariyoshi-san joined Aflac Japan in 2008 after working for AXA and ALICO Japan. He's going to give an overview of Aflac Japan's marketing and sales strategy.
Good morning. I'm going to go over Aflac Japan's sales and marketing strategy. We are very pleased with the growth in the third sector sale during the first half of 2016, which has greatly surpassed our initial projections. For the second quarter, the third sector sales grew 11.2%. Both our cancer and medical insurance products were solid performance, generating a double-digit sales increase in the second quarter of 2016. For the first half of the year, the third sector sales grew 6.4%. This is especially impressive given that the G sales results are on top of the 23.3% increase in the first half of 2015. Sales of our cancer insurance product increased 5.2% for the first half of the year.
One driver of growth was the support structure for the tier-by-tier approach being enhanced under the Japan Post Group's new sales strategy that started in April, which is the start of their new fiscal year. The new product effect from the March introduction of the new cancer insurance product designed exclusively for cancer survivors also contribute to this growth. We believe this element will contribute to sales of our cancer insurance product. In terms of performance of our medical products, medical sales grew 8.3% during the first half of the year. The launch of our revised non-standard medical insurance in March made a significant impact on our sales, especially through the traditional channel. At Aflac, along with innovative products, we believe that our competitive advantage is brought along through our diverse distribution channel.
We have expanded and enhanced our distribution channel so that many customers can consult about or apply for insurance at numerous locations that are in demand. I continue to believe that the strength of our company will remain our distribution network, which start with the traditional channel that has sustained Aflac Japan's growth until now. The insurance shop, which our product of assimilating to changes to customer demands and our alliance channels such as Japan Post Group. We are going to continue making investment into each channel to achieve a stable growth in the future. Next, I'm going to talk about the Income Support Insurance that was introduced in mid-July. As we mentioned at the Financial Analysts Briefing in May, this is a new type of third sector product for Aflac.
Income Support Insurance provide predetermined benefit amount in the event that the person is unable to work due to illness or injury. These benefits complement coverage within the Social Security system, including the disability pension provided by the Japanese government. It can be used to cover income loss and other financial challenges. This product targets young and middle-aged consumers in their 20s, 30s, and 40s. By setting the targeted demographic as those in their young to middle-age years, a demographic which where we'd like to improve the number of policies in force, we will be able to increase the opportunity to offer other products such as our cancer and medical insurance to them. Currently, approximately 80% of those purchasing this product are in their 20s to 40s, leading us to believe that we are reaching the targeted age demographic.
Though this product is still in the early stage of its product life cycle, we'd like to take our time and develop Income Support Insurance into a new Aflac pillar product over the long term. Though sales trends for this new product become visible will happen at a later time, we are pleased with the initial result of the Income Support Insurance. Our associates have also reacted positively to Income Support, and they're actively promoting the product. This leads us to believe that stable sales can be expected in the future as well. I'd like to take a few moments to discuss the difference between our Income Support Insurance and the long-term disability product in the U.S., because there is a big difference. When we developed this product, we built in several risk mitigation factors.
First, Income Support Insurance is available as an insurance product that supplements the Social Security system and is not something that covers all risk associated with not being able to work. Specifically, the payment condition is not simply being unable to work and limited to the standard used by the government to satisfy those that are eligible to receive public coverage. If consumer becomes unable to work over long term, they become eligible to receive disability pension. Claims and benefit payments are paid to policyholders of Income Support Insurance should they satisfy the eligibility requirements under the Social Security system. Additionally, the Income Support Insurance product does not offer mental health benefits, which are difficult to determine, and whether payment condition have been met. Coverage is limited to illness and injury in which the determination of whether payment condition is met is clear-cut.
Background investigation conducted on claims where any type of fraud is suspected. This includes cases where claims are being made over long-term despite a slight injury or illness. Concerns related to fraud were top of mind as we developed a product and its benefit structure. When one becomes unable to work and their income decreases, Income Support Insurance provides a predetermined amount of benefit payment through its coverage. This can be used to cover a portion of the decreased income that could not be supplemented by the Social Security system. However, even for highly specialized occupation insured by National Health Insurance, such as private practitioners, the monthly coverage limit is at JPY 200,000, also making primary selection subject to phase II, we minimize the risk of anti-selection.
As you can see, we approach the development of this product with a considerable amount of time and effort allocated to embedding risk mitigation factors, while at the same time maintaining the profitability level similar to that of our medical and cancer insurance. I'd now like to talk about the potential of that market that Income Support Insurance is in. As a result of the market research conducted by Cross Marketing Inc. in February 2016, we know that the consumer recognition of an income protection type insurance is lower compared to the medical insurance. That said, according to market research conducted by Macromill, Inc. in April 2016, if the surveyed consumers have an understanding of what an income protection type insurance is, they demonstrate the same level of interest in purchasing a disability product as they do a medical product.
Because of this, we firmly believe that as the level of recognition for Income Support Insurance improves, those that will consider purchasing such a product will increase and expand the market of Income Support Insurance. In order to improve the level of recognition for Income Support Insurance, we are sending out messages to the public throughout the various initiatives, and this new commercial draws attention through the surprising coupling of a popular male actor and a female comedian. This is popular among those in their 20s and 30s as husband and wife. I also expect the necessity of Income Support Insurance and awareness of when such a product might be necessary to viewers.
Specifically, we are trying to have consumers realize that there are risks associated with not being able to work long-term, such as not being able to afford mortgage payments, securing educational fees for their children, which may go beyond the coverage amount of medical insurance. Market research conducted on consumers shows that this television commercial marked the historical highs for all testing characteristics such as favorableness. In addition to the commercial I referred to, in order to highlight the introduction of our new product, we also created a new commercial that features the very famous female comedian in Japan. I'd like to show the commercial now to you.
Go mean, Naomi.
Good. Now let me turn to my discussion to cancer insurance. Over the last 41 years, our cancer insurance products have evolved to respond to consumer needs and to provide peace of mind to our policyholders. In Japan, cancer has been the number 1 cause of death since 1981, and we expect this to continue as Japan's society continues to age. In fact, according to a July 2016 study conducted by National Cancer Center, the total number of people diagnosed with cancer within one year is expected for the first time to surpass 1 million in the year 2016. As Yamamoto-san mentioned, we introduced a cancer insurance product called Cancer Days Supporting You that is specifically designed for individuals who have survived their fight against cancer. A product with these characteristics is not currently offered by our top competitors in Japan.
Thanks to our 41-year experience with cancer insurance, we were able to develop such a product. Following my presentation, Mr. Masahiko Nishizawa, a longtime Aflac independent sales agent, will talk about his experiences selling our cancer insurance product. Being shown are the results of research conducted by Macromill, Inc., which indicated that providing a cancer product for cancer survivors significantly enhances consumer impression of Aflac when considering the purchase of a cancer product. Through this research, we determined that for consumers considering the purchase of a cancer insurance product, the favorableness and the level of impact associated with providing cancer insurance for cancer survivors, the first item, such as paying large amounts of claims and benefit payments on a daily basis, being the pioneer of cancer insurance that released Japan's first cancer product, and having the most cancer insurance policies in force.
This leads us to believe that by disseminating information to consumers about Aflac carrying a cancer insurance for cancer survivors product will improve our reliability and also set us apart from our competitors. Japan Post and Japan Post Insurance, both within Japan Post Group, are both going to be offering Cancer Days Supporting You, our cancer insurance for cancer survivors product. This will advance our efforts to deliver our cancer product to cancer survivors across Japan. We believe that this product will be a solid contributor to cancer sales in the future. In order for us to provide support for a large organization like Japan Post, we have a support structure in place that is designed to accommodate at various levels within the business structure.
The objective of this tier by tier approach is to allow Aflac to provide better support to Japan Post in accordance with the characteristics of each tier. Starting in April of this year, Japan Post has enhanced their promotional efforts through the introduction of the field sales coordinator, which is to serve as a new tier within that tiered support structure between regional office and large-scale post office. The role of the field sales coordinator is to provide instruction and training to large-scale post offices based on the sales strategy and sales policies. The Aflac branch manager in charge of building relations with the field sales coordinator while serving as their counterparts provide detailed support for initiative development and implementation. This is in addition to the existing relationship between our branch manager and Japan Post area managers that supervise small-scale post offices, where sales activities are supported through regular interaction.
This year, we also increased the number of Aflac sales office sales representatives who are exclusively in charge of Japan Post. We have strengthened the support structure in this way. Going forward, the company-wide effort will be made to maintain the solid relationship we have with Japan Post throughout all business layers. Later today, we have Mr. Toshiyuki Yazaki from Japan Post and the Executive Officer and Director of the Kinki Regional Office to discuss these various efforts. Now, I'd like to update you on our efforts to restrict the sales of First Sector products.
As we communicated at our May financial analyst briefing, we have implemented various initiatives from all angles in accordance with the product and channel type, including lowering the discounted advanced premium rate from 0.8% to 0.05%, placing caps on sales of WAYS and endowment products, suspending the sales of WAYS product and child endowment with staff in the bank channel, and lowering the commission for WAYS. These initiatives were applied to the various product and channel effectively resulting in a decline of 24.7% in the First Sector product sales during the second quarter of 2016. Additionally, in August, at all distribution channels, we temporarily discontinued the sales of our WAYS product, which made up a large percentage of First Sector sales.
I would note that in order to secure the product lineup. Maintain the loyalty for exclusive agencies and agencies that contribute a high amount of Aflac Third Sector product sales. The sales of WAYS will resume in November with price for the current low interest rate environment and be limited for sales within the traditional channel. As we reiterated during the FAB, we are expecting sales of the First Sector product to decline by at least 50% in the second half compared to the same period last year. The 2016 full year comparison of the First Sector product sales is expected to decline by at least 20%. For the final item of my presentation, I'd like to update you on our outlook for 2016 Third Sector sales.
Given our results thus far this year and our continued success in enhancing the sales of Third Sector products, we are revising our projected range upward to an increase of flat to 5%. I would reiterate that we believe our long-term compound annual growth rate for the Third Sector products will remain in the 4%-6% range we have previously provided. We are driven each day to remain good steward of the trust that our Japanese policyholders have placed in us over more than four decades. This has allowed us to grow and become the leading provider of medical and cancer insurance in Japan today, and we are proud to provide insurance protection to one in four Japanese households. Thank you for your attention.
We would like to take a short break about 10 minutes at this time. We'll begin the morning Q&A session promptly at 10:35 A.M. following the break. Thank you.
We're about to start in a few minutes. Please take your seats.
Thank you, everyone. Now that we've had a brief break, we have our panel of speakers from this morning. We'd like to begin Q&A. What I would do is ask that you please raise your hand. We have microphones that will come and be delivered to you. Please state your name and your company. Then have your question. If you want a follow-up to that specific question, you can certainly do that. I would ask you to hold your question to one question until we go around. Then there may be time for additional questions. Okay. We're about to start. Tom Gallagher, right up here on the third.
Thanks, Robin. Tom Gallagher, Evercore ISI. First question is just on the income replacement product. Can you comment on whether any other companies are selling some form of this product, or something related to it, or is this a brand-new product type in the market?
Okay, let me take this question. There are similar products that are offered by three companies. As rider, there are about eight companies that have this product as a rider, this similar product. Basically, this is totally different from the disability offered in the U.S., totally different, and I think that has been covered in my presentation.
When you compare your offering relative to the eight other companies that offer it in the form of a rider, how do you believe or how are you expecting this product to give you an advantage, versus the other products that are in the market?
Thank you for the question. The benefit details are very easy to understand, and the coverage is more enriched compared with other companies. Therefore, we have very high competitive advantage compared with other products.
Ryan?
Thanks. Ryan Krueger with KBW, for Charles Lake. You mentioned the FSA slowly working on the development of a more economic-based framework. Do you have any expectation at this point for potential timing on that?
The schedule that they initially developed calls for some sort of an adoption, 2019, I believe. That was prior to all the discussion that took place, as a result of Federal Reserve speech, as a result of the discussion at IAIS, and as a result of the impact on Japanese insurance companies of negative interest rate policy. I think the FSA is going to take a bit longer than I think they originally planned. They haven't really formally announced that, but I believe that the sense on the street and those who follow this closely is that they are not going to be able to implement it in a short period of time. The senior officials from FSA clearly have said that they're going to take their time.
In the language that we speak, that means it's not going to be implemented on schedule, is how people are interpreting it.
Erik Bass.
Thank you. Erik Bass with Autonomous Research. I was hoping you could provide an update on the penetration of cancer insurance, then where you see that going over time. I guess, what are the areas of the market that you still see as under-penetrated? Thank you.
As I explained in the fact that penetration is less than 40%, that is the current penetration rate as of now. We are conducting a survey to customers what kind of insurance they would like to purchase. The number one is the cancer, and the second is medical, and the third is life, and then the fourth is the annuity. I think that cancer is the most interested product for customers, therefore, we are going to promote. Also we expect that the penetration of cancer will further expand it.
Particular segments, whether age groups or areas of the population geographically that are more or less penetrated?
Well, cancer is considered as a disease by old people. I mean those in their 50s, 60s or 70s. For younger people, however, they are not considered that is something they will develop. Therefore, those in their 30s, we are seeing that low penetration in those in their 30s. I think we need to approach the necessity of cancer to the age group in their 30s. By region, so we have alliance and also the several agencies and depending on that. Actually we have reached nationwide the market, however, through the JP Alliance. Still, we have the area that we have not reached yet. However, on the other hand, JP has the 20,000 post offices, so they reach the corner of Japan.
Even they cover the area that we do not have our agencies. We like to reach to that area using the relationship with JP. Actually, we are seeing an increase in the policyholders of cancers. We cannot say the particular area that are weak. However, still we are seeking for any opportunity to expand our cancer sales.
Eric Berg.
Thank you. Eric Berg from RBC Capital Markets. You presented a slide showing what would seem, I don't know, but it would seem to be an alarming rate of increase in cancer over the last 10 years. That the number of people diagnosed, I think the slide indicates, has doubled. I have two related questions. Really several questions. How does that compare to other countries? Most importantly, if you were to adjust for the aging of the population, is that a big number that we're looking at, this doubling of cancer, or is it sort of in line with what you would expect given the aging of the population? And what is the Cancer Institute saying is its best sense of the major causes of these increases, this seemingly sharp increase in cancer rates? Thank you.
Well, cancer is a disease of aged. That is how it's been said. From that perspective, by Japanese population aging, the number of people suffering from cancer will increase. However, looking at insurance, by age, we have different incidents by age. Looking at the incident or morbidity, there is no sharp increase. As I mentioned in my presentation, a five-year survival rate. In the past, it has increased significantly in the past. With medical technology advancement, compared with before, cancer is a much more treatable disease compared with the past. As a result, there are more awareness of people wanting to treat their disease, especially when they suffer from cancer. Cancer insurance benefit, it has always been good, but I think our benefits and coverage has been more valuable than in the past.
Dr. Utsude, is there anything you'd like to comment? As Mr. Yamauchi has just mentioned, the incidence of cancer is becoming large, and the biggest reason is because of the aging population. I'd like Tsuda-san to add if there's anything else. However, the cancer incidence by age, after an adjustment, there really has not been a significant increase. It's more of the aging population that's contributing to the increase.
As explained, I totally agree with that. Cancer incidence is we are looking at extra careful, and the incidence by age is extremely stable in our trend. Most of the number of cancer patients increasing is mostly old people, and there really has been no impact to our profitability for cancer. That's it.
I'll just add quickly. There's a lot of public data that is captured by the Government of Japan that's available on the website, and you can see trends in incidence rates over time.
When you hold a population constant for a given year and look at the trends, all these statements are absolutely true. Total incidence has gone up, but it's totally due to the aging of the population.
Jimmy Bhullar.
Jimmy Bhullar, the firm's J.P. Morgan. I had a more broad-based question just on what you're seeing in terms of competitor behavior. There's a view that with rates in Japan declining further, many of the first sector companies would try to become more active in the third sector. Are you seeing any of that? Also what you're seeing in terms of competitor behavior on pricing of products and marketing.
When it comes to competitors' behaviors, when it comes to first sector, especially when it comes to foreign currency denominated products, they are switching to that trend. Especially in Japan, it's low interest rates and yen-denominated interest rate is very low. That is the reason why they go for foreign currency denominated products. Therefore, because of this low interest rate, they are not really shifting to the third sector. However, competitors are focusing on those products that I just mentioned. That's the direction they are shifting, I believe. For overall industry, toward next April, in this low interest rate, standard interest rate will be revised in April next year. Because of this low interest rate, new pricing is likely to be held by many competitors around that timing.
[Shun], on your income protection product, how many of the customers— I realize it's early, but how many of the customers that are buying the policy are new to Aflac versus people who might have bought other products in the past?
For this one, we haven't done really a lot of analysis for the Income Support Insurance because it's been only two months since it's been sold. We haven't done the thorough analysis yet. Did I answer your question?
Yeah, I guess.
Let me chime in.
The main question was, is helping you expand your market or is this a new market segment you're going into? I guess you don't know yet.
We obviously had projections based on what our expectation was. You also have to think about the channel through which these products are being sold. Right now, our associates channel is very heavy in the adoption of MIT or income support. As a result, we're actually seeing them doing a good bit of cross-selling to the existing customers. At the same time, as Ariyoshi-san has said, it's a little bit early for us to give you any kind of trend. I'd hate to look at data that we know is going to be skewed just because of how a channel has come off. We're seeing the bank channel now begin to rapidly adapt this product, and everyone else. When we roll out an existing product upgrade, we tend to be able to roll that out across channels very quickly.
When we roll out a brand-new product line like this one, it takes a little more time. The sales process is more adaptive. We're doing a lot, obviously, through the commercials and otherwise to raise the awareness that Aflac is now in this market. It's just not going to have the same curve across the channels that you would see in a normal product launch that Aflac might do in a cancer or medical. I think that it's really going to be too early for us to give you any data. Perhaps, by the end of the year or beginning FAB next year, we'll be able to give you some depth that'll really show you what that's like.
Yaron.
Thank you. Yaron Kinar with Deutsche Bank. Paul, you actually answered one of my questions just now. Another question I had was, with regards to the distribution of products, let's say three, five years down the road, how do you see the third sector developing with these new products? Maybe could you give us some idea of what the percentage you would envision would come from the new income protection product or maybe the cancer survivor product?
Could you restate the question or maybe repeat the interpretation?
Sure. I was asking, if you look three or five years down the road, how you would envision or foresee the development of the third sector product sales or even premiums, especially with regards to the two new products that you had just mentioned.
Let me say about the overall third sector prospect. As of now, the national health care system, the medical cost went up, the government is suffering from the tightness of financial issue. The cancer treatment becomes very expensive because there are new medical treatment and also the drug for the cancer or anti-cancer drug becomes expensive.
Therefore, the need for those new technology will be expanded into the future. When it comes to the cancer, as I said, because of the aging, the number of the cancer patients are increasing. The people need to protect their life by themselves. I think that the market will grow in a stable manner.
Let me just follow up one point.
Oh.
He was asking about income support and the percentage that it's going to hold. Reality is we don't know yet. We do believe that unlike many of our products, this has the potential to be larger than, say, a non-standard medical or a cancer for cancer survivors. Remember, cancer for cancer survivors, although despite the trend that we talked about during Erik Bass's question, really is a very minimal portion of the population. It's exceeded our expectations thus far. However, they're just not a huge population to go after. On the income support side, however, we see two very important things. One is it's underserved in the population, two, as we've mentioned, the ongoing financial pressures that the Japanese government's going to have to deal with on both the pension and the healthcare systems.
We believe this product is well timed and perhaps even ahead of its time, we really need to see how the sales go to be able to give you a full projection on what that's going to look like.
Michael Kovac.
Thanks. Michael Kovac, Goldman Sachs. It sounds like third sector sales have been progressing better than expected throughout the year versus what you might have expected at the beginning of the year. I'm wondering if you could expand a little bit upon the different elements that are leading to that, in part, as you think about first sector cross-sell and potentially the adjustments that you're making there. Can you divide for us the negative impact that that's having versus the positive impact you're seeing in other parts?
Let me start from the outlook. This time, we have launched two new products. One is Gentle EVER and the other is Cancer for Cancer Survivors. From that, traditional sales have been very stable, and it's very welcomed by the agencies. In addition, Japan Post business is going very well, and that's a positive factor, and we are likely to see that that will continue. On the other hand, from negative impact, because of the low interest rate, mega banks businesses being impacted by negative interest rate. Mega banks have a large number of customers that have deposits. What these banks are doing is to lead or shift these customers to single premium type of products or investment trusts.
Because a third sector amount is very small and banks trying to shift a large amount of customers' deposits to another bank, banks or mega banks are not focusing on the third sector sales of our products. That's a decline in our sales. However, even among banks, shinkins, smaller types of banks that are more regional or local based banks, rather than selling first sector products or investment trust, these smaller banks are trying to sell more of our third sector products to really have a breakthrough in the low interest rate. Mega banks negative and shinkins positive. That's been offset. In total, third sector new product introduction and Japan Post business and traditional stable operation, I think that has become positive to the entire business.
Hey, thanks. Michael Levy with UBS Asset Management. Apologies if you've already answered this, but who else competes with Aflac in the Income Support Insurance cancer insurance market? How does your product differ from competitors? If there's other people that compete. Why did it take until now for Aflac to start offering this product?
On the mother-
Regarding the income protection type insurance, as I said, when we developing a new product, we try to find out because there is a need for young to middle-age categories. That is the reason why we came up with that. Therefore, because our payment condition is much clearer compared to competitors, also our benefit is more enhanced compared to competitors, that's why our product is much good. Then non-exclusive agency actually sell other companies' products. However, though, they are saying that our product is much easier to sell. Those are the reputation we are getting. For this income protection type insurance for the needs, there is a huge need. However, though, when it comes to competitors, there are companies who are already selling this product.
However, though, for this product, difficulty is just the benefit, how to pay benefits, about the definition of the benefit payment. Because of that, for us, that one, we actually did a lot of research in that area. For customers, we made sure that's easy to understand for customers and when the customers can eligible for the income by using this protection type insurance.
For the agencies who are considered as non-exclusive agencies, we did some research with them. Then for the agencies, what kind of explanations would it be good to sell this product? Comprehensively, we thought about all that. Then for customers and agencies, we wanted to give the best product possible for the agencies. That is the reason why we launched this product.
In terms of your question about why we didn't launch this product earlier, we're very careful about when we go to market with something new. We like to have a high level of expertise and data, that's one reason when we launched the cancer for cancer survivors, our dominant market share in that product, our experience, over the years with that product has allowed us to take it first to the marketplace. We, however, have not always been first to the marketplace. Medical insurance is a classic example. There were many competitors in the medical market before we launched our EVER plan in the early 2000s. We immediately went to overnight, became number 1 in the market. We don't expect necessarily to have that same trajectory when it comes to income support.
We want to be very mindful when we launch a product to have seen the experience in the marketplace to understand what's going on. As I mentioned earlier, we believe the timing is now right. With the pressures you're seeing with the third pillar of Abenomics being structural reform, we believe that the time to launch an income support product is now.
Thanks. Just one follow-up, if I could. Are there other areas of the cancer insurance market where Aflac competitors are selling a product that Aflac doesn't currently?
Yes, but they're very minor. There are group cancer plans and some other cancer plans that exist in the marketplace that we do not currently offer. It's really a different product altogether. We can have that conversation offline, and I really view it as something that's distinctly different than what Aflac does.
This would round out effectively all areas of cancer coverage for the company, right?
Can you repeat the question?
The major areas.
Yes, exactly. Yes. For us, about 70% of the cancer market, we actually dominate.
Okay, we've got about one more minute. Next question.
Humphrey Lee from Dowling & Partners. There's some discussion about the government is planning to cap certain payments for certain kind of more advanced drugs or expensive drugs. I was just wondering if you have any color that you can share on this kind of development.
The government is looking at a number of options to ensure that they can contain cost, and while looking at ways to increase revenue. It is a philosophical as well as political debate that's continuing. I've talked about some of that. They're increasing, for example, to co-payments, for example, for those who are aged seniors but have income that they can really count on. The co-payment may go up to 30% and have gone up to 30% and so on. There are a number of measures that they're looking at, including shortening the hospital stays, including treatment strategies, and so on.
Although the universal healthcare system is going to continue, that's exactly what's going to be the direction, and that's exactly the reason, as Paul and Ariyoshi and Yamauchi-san has talked about, the need for our products in supplemental health cancer medical will continue to grow, we believe. I don't know if that answers. There's so many things going on in the government's policy council, you're right that there are many things that are being looked at. Does that answer your question? Okay.
Okay. One more question. Mike.
Great, thanks for taking the question. For Charles, I wanted to follow up on some of the economic capital considerations that you outlined there, kind of a two-part component to it. One, what sort of potential differences do you see in terms of capital needs as you think about that framework versus an SMR framework that you're under today? Two, any sort of preparations that you're making to prepare, understand it's a few years out, but how you're thinking about that.
Great questions that I think will be better answered after you have a chance to hear Fred's presentation and when I join his panel, not just because we're about to go to break. The important point I will just make is the fact that FSA is looking at this in a very practical and realistic way. Exactly the kind of question that you pose are the questions that they're looking at and being a very reasonable regulator in that regard. How that will have implications, potentially scenarios and so on, we will talk to you about it later on after Fred's presentation, if that's okay.
Okay. One more quick question.
Thanks, Robin. Tom Gallagher, Evercore ISI. The comment was made earlier that the cost of cancer treatment has gone up significantly, and that's going to be one of the key drivers for your future sales growth. Can you give us some statistics about the annual change in treatment? Like what %, what has that delta been on average, just so we can get a better sense for what we're talking about here. Have you also seen, has that been a big driver for you in terms of cancer growth? Are customers buying more coverage per unit or more coverage per customer?
Regarding the data, Utsude-san, do you have any kind of data available with you? The medical expense, or just like Ariyoshi said earlier, particle treatment or proton-type treatment. Those kind of treatments, once you get treated, it costs like JPY 1 million or more. That kind of treatment, machines are very expensive. A couple of years ago, medical institutions that have that kind of equipment are very limited. Lately, the number of institutions have been increasing with that kind of equipment, and there has been advanced technologies. In the past, the cancer treatments using that kind of equipment was limited before. The usage has been increasing. The treatment gets better with those kind of equipment. If it's JPY 3 million treatment fee, you're not going to purchase your life with the money.
If you have this kind of money, if the benefit covers this, then you can actually have a choice to have this kind of treatment. When it comes to expensive medical treatment has been increasing. Anti-drug cancer treatment is very expensive as well, too. There are people who are not insured but still pay out of pocket. If you have insurance, you can have that kind of treatment covered by the insurance, then that would be good for your life. That is the reason why the medical treatment fee has been actually increasing.
Thank you very much. Now the panel will be excused. Please know that if you have an additional question, the panelists are also going to join us this afternoon for Q&A, you'll have plenty of time for additional Q&A once we end the rest of the presentations. Now I'm going to turn the program back over to my colleague, Kuroda-san. Thank you.
Next we will move on to our guest speakers. Before that, we have to rearrange the seat, please wait for a moment. Next, I would like to introduce our first guest speaker, Mr. Masahiko Nishizawa, President of N-iCo Limited. He became an agent at an Aflac sales agency when he was 24 years old and has been an exclusive Aflac sales agent for 32 years now. For today's meeting, Nishizawa-san will discuss the activities of an independent Aflac sales agency.
Good morning, everyone. Thank you for this opportunity. Today, I would like to show you the sales activities of an exclusive sales agency of Aflac, which is deeply rooted in its regional community. I would really like for the analysts to know about this. I really hope my short talk will be of help in providing insight into an Aflac exclusive agency in Japan. My name is Masahiko Nishizawa, 56 years old. I became a sales agent at an Aflac agency when I was 24 years old, became an individual agency afterwards, and established an independent corporate agency thereafter. I have been exclusively engaged in business with Aflac for 32 years. It feels like I'm just starting out. I am a passionate automotive enthusiast, and my first job was car-related, but I coincidentally encountered the insurance business, which dramatically changed my life.
Since then, I have devoted my career to the insurance business and Aflac only. Through my experience of having cancer twice in my life, which I will share more about with you later, I strongly believe it is my mission to introduce the benefits of cancer insurance to as many people as I can. That is how I see my business. Personally, I am a huge fan of Harley-Davidson and the American style this embodies. I just love them. When I was asked to be featured in Aflac's 2015 year in review, the company originally expressed strong interest in a photo with my Harley-Davidson on the left, as you can see there. However, Aflac ultimately chose the family photo shown on the right that features my wife and father standing beside me. It surely is a great memory for my family.
Even though I secretly hoped that my photo with my Harley would be printed and published in the year in review. I would like to briefly introduce my home place and market for business, the Nagano Prefecture. As you can see on the map in this slide, Nagano is located in the center of the island of Japan. It takes an hour and 20 minutes on the bullet train to travel to my home from Tokyo Station. While Nagano is famous for many resort places such as Karuizawa and the Japanese Alps, it's been referred to as the Switzerland of Japan, as it has also been known for its precision machinery industry. Nagano is the birthplace of the world-famous watch brand Seiko and printer manufacturer Epson. You may recall that in 1998, the Winter Olympic Games were held in this prefecture.
In addition, Nagano is the longest average lifespan nationwide for both genders. The level of medical expenses among the elderly is one of the lowest. Some say Nagano is an advanced region for health-related matters. N-iCo, the independent corporate agency I run, has a corporate philosophy of extending cancer insurance to as many people as we can in order to best serve citizens in the region. We have been endeavoring to achieve this goal for nearly three decades. Our market lies in the cities of Nagano and Ueda, which together have a population of 500,000. We have 19,000 policies in force and JPY 1 billion of annual premiums in force. Though we run one service shop in Nagano and one in Ueda, our business is mostly conducted at the work site and homes of customers. Therefore, we have chosen the location close to the interchange of highways.
All of the 12 members of N-iCo are faithfully working very hard every day to support the corporate philosophy of extending cancer insurance to as many people as we can. I would like to talk about the business results of my company. On product, cancer sales dominate approximately half of our business, and combined with medical, third sector sales represent about 80%. As you can see in the chart, cancer sales have shown notable growth recently. As for customer segmentation, individuals account for more than half. However, this figure includes those who retired from respective companies where they initially bought our policies and incremental sales after their retirements. In this regard, our customer base virtually consists of clients with whom we initiated a relationship through work site solicitation.
By leveraging our longstanding relationship with local companies and Hojinkai or small business associations, we have been able to hold orientation meetings and seminars on health-related matters. Through these opportunities, awareness about the importance of cancer and medical insurance has increased the sales opportunities among executives and employees of local companies. We also closely and cordially respond to the needs of customers for services such as claim payments and other administrative needs by visiting their homes personally. We regard and respect these dealings as important business opportunities to secure new sales and preserve our relationship with our clients. Excuse me for a moment. Let me take a moment to talk about my personal experience, slightly away from my business. The man on this slide is my friend who passed away from cancer. He was my best friend since we met in class during junior high school.
In July 2009, on the very morning of his daughter's wedding ceremony, he suddenly experienced extreme pain and was taken away by ambulance to the hospital, where he was diagnosed with colon cancer. An advanced one. This was a harsh reality for him to face at any time. It was especially devastating because it happened during what was supposed to be such a time of joy. After fighting cancer for nearly two years, regrettably, he died very young in May 2011 at the age of 50. He ran a tiny factory all by himself as a skilled craftsman. When he was diagnosed with cancer, he faced not only serious problems fighting against the disease, but also economic challenges in responding to the income loss due to his illness. These challenges included feeding and supporting his family and repaying loans for the factory and his house.
Unlike those who are well protected under the umbrella of a big corporation, he instantly faced a loss of daily income when he became unable to work. Eventually, he spent 305 days in total at the hospital during his 39 times of hospitalization. When he was released from the hospital, he needed to take morphine to continue working at his job throughout the night. Excuse me again. The photo on the right-hand side was taken when he was at work. The items shown inside the red circle are morphine. Fortunately, he was a policy holder of Aflac's cancer insurance, so his economic problems were greatly alleviated. He expressed his appreciation for this insurance. However, I still cannot forget what he said quietly. He said he truly wished to have been insured by another product which pays benefits when he became unable to work.
I recalled his words with this poignant feeling when I saw the launch of Aflac's new Income Support Insurance five years after his death. I have a special feeling towards this product. My first customer of the Income Support Insurance product is also a self-employed president. Anyway, even during his hard times he faced, he continued to smile, and on some occasions, we went out for a drink, as the picture on the left shows. Despite his hardship, he was such a nice person to tell me that cancer can be overcome with early detection and diagnosis. You must get cancer checkups. After this conversation, I immediately had a checkup and found that I too had early-stage stomach cancer in 2010. I did take to heart his words and about recovery, and concentrate on my treatments. After this incident, I also experienced another cancer diagnosis.
However, early diagnosis again allowed me to recover, and thus, I'm doing quite well now. My best friend is really a lifesaver to me, thanks to his advice about cancer checkups and early detection. By witnessing his death, economic problems, and hardship for his family, I was scared when I imagined what might have happened to him if he did not have a cancer policy. It reminded me of our corporate philosophy of extending cancer insurance to as many people as we can. In doing so, I believe I can honor my best friend who saved my life. There's an overwhelming amount of information on cancer available, and people are often wondering what to pay attention to. As Mr. Yamauchi mentioned in his speech, media reports on a woman who is a popular celebrity diagnosed with cancer at an early stage prompted women to contact insurance companies.
Even in my shops, I witnessed such a phenomenon through my own business. Under such circumstances, I myself can show and prove how cancer checkups and early detection are important through my personal experience. I believe that it is in consumers' best interest to focus on the importance of early detection. As shown on this slide, the ratio of those who had cancer checkup in a year was 38.7% on a national average, and in the case of Nagano, it was 45.3%. Both ratios are below the target of 50% set by government. I always carry this chart with me and explain to whomever I meet that there are a lot of lives to be additionally saved if the checkup ratio goes up. Those who listen to this story carefully will naturally understand that cancer is a treatable disease, and anyone can face this disease without having fears.
Careful preparation is needed to counter the economic burdens waiting thereafter. This may be partly because I'm a cancer survivor, but it is mostly because they themselves must be serious about proactively planning for the future. For a regional community-rooted sales agency like us, contribution to the region and receiving appreciation there is the most important role. We have been contributing to the region by providing our valid products and services such as cancer and medical insurance, which have truly helped people in our region. I really appreciate the value and the meaning of Cancer Days Supporting You for cancer survivors and launch this year, both from a business perspective and also from a cancer survivor standpoint.
I believe the launch of Income Support Insurance shall strongly help those who are struggling in the difficult circumstances, just like my friend who experienced without having such product before his death. We are continually providing local companies and Hojinkai with seminars on health and medical-related issues to achieve our role in society to promote activities beyond the framework of insurance sales. This regional community-oriented business promotion shall continue to be an important part of the strengthening of our business franchise. Aflac has gained significant trust for many corporate customers through its longstanding relationships with them, I believe it is the strength of Aflac's relationship with the customers that sets it apart from other companies. The increasing number of individual transactions, including those retired from our corporate clients, requires us to respond to the varied needs specific to each individual and household.
We call our service shop a little Aflac, we are professionally and personally responding to a wide range of customer needs. It is our belief that a service shop is not simply a sales shop. We appreciate if a customer buys our policy at our shop, we believe our mission is to meet with our customers wherever and whenever they wish to do business. This steady work has resulted in success with building customers' confidence and comfort that they can rely on us for a consultation about anything related to insurance. This is particularly the case with claims payments. Smooth payments are greatly appreciated by our policyholders and their families, this great experience provides excellent opportunities for new sales as well. This is true not only for our existing customers, we can also leverage such opportunities for those who moved from outside of our prefectures.
The recent expansion of new sales channel by Aflac essentially embodies our corporate philosophy of extending cancer insurance to as many people as we can. Aflac becoming strong as a whole through a wider permeation of cancer insurance is something we are truly thanking for. Opportunities to capture customer needs will increase because of Aflac's widening network. I believe it would be also beneficial for my company because we will be able to help customers through claims and other services in the future, regardless of where the transactions were originated. In concluding my speech, I will touch upon the historic results of activities as an exclusive agency for nearly 30 years. This slide shows the cumulative amount and number of claims paid since our establishment. We have paid approximately JPY 4.5 billion or 4,000 policies.
We are merely a small sales agency with 12 members, when we recall each of the payments we have served, we are so proud of our activities and have a feeling of great accomplishment. We are committed to be of service to our region and contribute to Aflac. Thank you very much for your kind attention.
Thank you very much, Nishizawa-san. Kinki Regional Office, who will provide us an overview of Aflac cancer insurance sales at post offices. The Kinki Regional Office, which he leads, is the front runner of cancer insurance sales among 13 regional offices. For today's meeting, Yazaki-san will discuss how and why sale of cancer insurance is essential to their business from sales standpoint.
Please come to the stage. Good morning. Allow me to introduce myself. My name is Toshiyuki Yazaki, I'm an executive officer for Japanese Post Company and Director of the Kinki Regional Office. In 1984, I graduated from university and joined what was the Ministry of Posts and Telecommunications at that time. Since then, my career has been centered mostly at the Postal Savings Bureau . Afterwards, during the preparation phase for postal privatization, I took on a role that launched Alliance Financial Services, which allowed post office to sell products from outside of the Japan Post Group, including cancer insurance sales. Following postal privatization, I took on position at the Japan Post network that mostly were related to sales promotion of the aforementioned products.
In April 2015, I became the director of the Kanto Regional Office, starting this past February, assumed my current position as Director of Kinki Regional Office. I'm honored to be presented with an opportunity to talk about our daily efforts at today's Aflac Financial Analyst Briefing. Thank you very much. As I mentioned, I'm in charge of an area called the Kinki region. The area that the Kinki Regional Office covers is referred to as the Kansai area, a metropolitan area second only to Tokyo. There are six prefectures, and the regional population is approximately 20 million. The number of direct operated post offices based in this area is over 3,200. This figure outnumbers the 2,900 elementary schools in the area. In terms of the number of post offices a regional office is in charge of, the Kinki Regional Office oversees the largest number of post offices in Japan.
My speech today will cover three key items. First, I will provide a business overview of Japan's post offices. Second, I will discuss why cancer insurance sales started at post offices and give an example of how we sell such products. Third, I will cover the cooperative with Aflac. I briefly outlined the area that the regional office I'm directing is in charge of. Now I'd like to talk about the comprehensive scale of Japan's post offices and describe their business operations. Throughout Japan, there are approximately 1,300 large scale post offices and 19,800 small scale post offices. There are approximately 20,000 post offices locations directly operated by Japan Post Company. There are also approximately 36,000 contract post offices offering externally commissioned over-the-counter services. Briefly going over the history of Japan's postage service, this year marks the 145th year since we were founded.
Postal saving was introduced 141 years ago, and postal insurance celebrated its 100 years anniversary this year. Our organization is certainly one with a long history. For many years, we have provided three services, postal services, savings, and insurance at our post offices, which exceeded 20,000 locations across Japan. Post offices are the largest regional financial institution in Japan. I first want to introduce Japan's post offices. The business of Japan's post offices can be separated into two parts. The first is the postal and distribution operations that collect and distribute mail and parcels. The second is the financial and over-the-counter operations, which covers accepting postal items and parcels and over-the-counter sales of postage stamps and postcards, along with financial items like savings and insurance. One characteristic this is different from the United States Postal Service is that we offer financial services like savings and insurance.
Japan Post Group's basic principle is to aim toward becoming a company that comprehensively supports the everyday lives of customers by serving customers from all angles of life. Our financial and over-the-counter operation handles various products and services to meet the needs of all customers. The direct operated post offices can be categorized into those that are large scale and small scale. Large scale post offices offer both of the aforementioned operations. The small scale post offices do not take on distribution operations, only offer financial and over-the-counter services such as postal service, savings services, and insurance sales. Another characteristic of Japan's post offices is that they are required by law to provide services like savings services, which include remittance or settlement, as well as insurance services. Such services are shown in red in slide.
We refer to this as the universal service obligation. By law, we are required to provide savings services at Japan Post Bank, provide insurance products at Japan Post Insurance, or Kampo for short, and conduct sales activities at Japan Post Company. In addition to the three universal services operation, Japan Post Company is allowed to conduct various operations through the post offices. This is a result of regulations that post offices were subject to being partially eased as a result of privatization, resulting in the widened scopes of services possible at the post office. Part of this widened scope is the Alliance Financial Services, which allow us to take now commissioned services from companies outside of Japan Post Group, including Aflac's cancer insurance. I'd now like to talk about why post offices handle cancer insurance and the sales methods that we actually use.
We first started offering cancer insurance at post offices in October 2008, a year after the privatization took place. Offering cancer insurance at our post offices was something that we considered when we were preparing to privatize. I'm about to touch on the reasons behind this. The major premises behind this is that Japan Post Group, its basic principle is to aim toward becoming a company that comprehensively support the everyday lives of customers by serving customers from all angles of life. We believe that expanding the variety of products being offered at post offices will lead to the improvement of customer satisfaction, and the value of the postal network, which in turn will elevate the enterprise value of Japan Post Group. Cancer insurance is one that consumers are deeply familiar with and one that mutually complements Kampo products.
This, we believe, mean that cancer insurance was a product that post office employees who were accustomed to selling Campo products would easily understand and be able to sell. Upon deciding on what products to actually sell, we believe that expanding our business scope would be accelerated if we accepted commissioned sales from outside of Japan Post Group, as Campo does not have a cancer product. Based on that policy, Japan Post Network opened up to the public to collect proposals from companies that offered cancer insurance. As a result, Aflac was chosen as our partner because of their product's excellence quality and their rich sales support structure. Afterwards, in 2013, comprehensive business alliance agreement was completed between Japan Post Group and Aflac.
The number of post offices handling Aflac products was gradually increased, and now, in principle, all directly operated post offices, which exceeded 20,000 locations, offer cancer insurance. In the Kinki region, I'm in charge of over 3,200 post offices handled Aflac products. I want to talk about how cancer insurance is sold at our post office locations. In any organization, in order to start something new, it is important to share a company-wide common understanding. Success would not be attained unless our employees first understood the importance and significance of selling cancer insurance. As the director of a regional office, I have talked repeatedly to all employees under my supervision about how Alliance Financial Services, which include cancer insurance, are strategic products that are vital to improve both customer satisfaction and the value of the Postal Network.
Because I personally lost both parents and my sister to cancer, I've seen firsthand how important cancer insurance is. When I talk about the importance of cancer insurance, I firmly believe that. The basic sales policy that we use is to cross-sell with Kampo products. Allow me to introduce an example of just how we actually offer cancer product. Last year, when I was the director of Kanto Regional Office, the Alliance Financial Services team developed a sales pitch for cancer insurance that was simple yet innovative. We call this by-the-way sales pitch. This method is to ask customers, "By the way, you already have cancer insurance, right?" Regardless of a proposal for a Kampo product being successful or not. If the answer is yes, we check on details like when they purchased their policy.
If they have an out-of-date policy, we explain to them how treatment for cancer has evolved over time and make proposal to them to either revise or add to their coverage to be in line with the current available treatments for cancer. If their answer is no, we talk about why being a cancer insurance policy holder is important and have them consider such a product. This allows us propose cancer insurance to them regardless of the insurance products we had originally tried to sell. Many of our employees have adopted this tactic and have put into practice one after another cases of customers purchasing cancer insurance with a full understanding of what they signed up for occurred, and this was unrelated to whether they purchased a Campo product or not. At that time, cancer sales at the Kanto Regional Office dramatically improved.
When I was assigned to the Kinki Regional Office, I first helped them understand what it means to sell cancer insurance, and following the sales pitch being employed, the impact was immediate. This by-the-way sales pitch is one that is currently employed across Japan, and company-wide cancer insurance sales have progressed at a very favorable pace. As you can see, the sales pitch is simple, but in addition to having a solid understanding of the current cancer product, our staff members in charge of sales must also be knowledgeable about what kind of illness cancer is. The employees that sell cancer insurance at post offices are over-the-counter representatives and field sales representatives that handle financial products. Because these employees handle numerous financial products, they put in a considerable amount of effort to learn the product details and sales method for all products.
Through various training sessions, workplace study groups, and voluntary after-hours study groups, many of our employees are working hard to improve themselves as professionals. The picture in this slide is an example of a voluntary study group. In addition to our sales representatives, our postmasters who are in our management class are also participants. For study sessions such as that pictured in this slide, we at times ask Aflac to send us an instructor. On a regular basis, Aflac employees make frequent rounds to post offices to provide their support, and through such efforts, they make considerable contribution to cancer insurance sales at post offices. In addition to sales operations, Aflac and the post offices have a close cooperative relationship in terms of activities to spread awareness.
As Mr. Yamauchi, the President of Aflac Japan, just mentioned, Aflac has let us use their breast cancer educational display, and we are circulating them to post office locations across Japan one by one. The educational display has been instrumental for customers to take interest in cancer insurance while heightening awareness about what kind of illness cancer is and getting screened for cancer. Today, our post office employees have a sufficient understanding of how important selling cancer insurance is, and Japan Post Company and Aflac are working together to prepare the business environment necessary to make such activities possible. If the day comes when we are able to serve many more customers as a result of our post offices and Aflac working hand in hand, that would be our greatest joy.
From post offices, we believe that cancer insurance is a product that is vital to achieve improvement of both customer satisfaction and the value of the postal network. In terms of our business environment, the demand for cancer insurance is rising as a result of heightened interest from a report about a famous celebrity being diagnosed with breast cancer and reports of another celebrity diagnosed being widely reported. From here on as well, we are confidently going to continue offering cancer insurance to our customers. Thank you very much for your attention.
We'll now break for lunch. Lunch will be served upstairs on the 27th floor. We also have a restroom there, so you can use that. Following lunch, we will resume our business meeting back in this room downstairs, beginning with a discussion of Aflac Japan investment at 1:00. Please be informed that this room will not be closed. There are people inside and our staff inside, but please keep your valuables to yourself. Thank you. We'll meet you at 1:00 P.M. We are starting our afternoon session in a few minutes. Please have your seat. Before starting the afternoon session, please let me remind you to turn your cell phones and other devices off, or place them on silent mode, please. Thank you. Let's start our afternoon session.
The first speaker of our afternoon session is Hideto Yamamoto, Senior Vice President and Chief Investment Officer, Aflac Japan. He joined Aflac in 2015. He is responsible for leading Aflac Japan's investment team, including oversight for execution of globally approved investment strategy of the Aflac Japan portfolio.
Good afternoon. Thank you for joining us today. In April last year, I was privileged to have the opportunity to become the CIO of Aflac Japan. I was very pleased that Eric and Yamauchi-san asked me to be a member of the team of Aflac Japan. Thus far, my experience at Aflac has been wonderful. As you know, markets have been very volatile, especially following the announcement of the negative interest rate policy implemented by the Bank of Japan in late January. Against this macro backdrop, we face a number of challenges. As you know, yields for 10-year JGB are negative and only slightly positive for 20- and 30-year maturities, and yields are at all-time lows globally. The first challenge we face is about $5 billion of interest, calls, and redemptions each year for the next few years that must be reinvested at these much lower yields.
Another challenge we face is the Japan fixed income market, which provides little in the way of other assets beyond JGBs, thus limiting our investment universe. While we have an effective hedged dollar investment program, it will also be challenged as we may experience diverging central bank policies with rising U.S. short-term rates and lower Japan short-term rates, thus placing further pressure on hedge costs. While we have diversification from our overall asset strategy, we continue to seek ways to invest globally while reducing volatility in our key capital ratios. Like all insurance companies, we recognize that we have challenges ahead of us. I'm confident that we will continue to manage through these difficult markets. Let me discuss our investment goals and strategies for the investment portfolio of Aflac Japan. Our first and primary objective is to protect the assets backing our yen-based policyholder liabilities.
In managing the portfolio, we seek to earn a competitive rate of income while considering core objectives such as capital, risk limit, and asset and liability management. Our ALM policy is to manage the interest rate and liability characteristics while also ensuring we can return our policyholder funds in Japanese yen. To create a sound investment plan, we carefully develop a strategic asset allocation every three years that calibrates to these investment objectives. This results in a diversified asset pool of fixed income choices, primarily in Japanese yen and dollar-based, while allowing for a small portion of gross assets. Given the stable nature and long duration of the majority of our liabilities, our strategy allows our global investment teams to seek out investment choices for long-term return and stability, and in multiple currencies.
While yen assets are critical to our ability to match the interest rate characteristics of our yen liabilities, the Japan fixed income market is primarily a JGB market, the risk-free asset here in Japan. In the interest of diversification, we use U.S. dollar assets, primarily hedged back to yen, to round out our investment opportunities. We also keep a core unhedged dollar portfolio to hedge the equity of Aflac Incorporated in Aflac Japan. As you know, Aflac Global Investments was created about five years ago to be a world-class investment group and bring best practices to both our investment and investment risk strategies. As you can see from this chart, the distinct progress we have made in diversifying the overall portfolio, appropriately reducing risk while diversifying the portfolio in many asset classes, considering interest rate, credit, and foreign exchange risk.
For example, our private placement portfolio has been reduced from 56%-27%. Though not shown here, our European holdings have been reduced from 31%-15%, and our financial exposure from 27%-11%, including a sharp reduction in our hybrid and lower capital securities. In fact, over the past three years, our credit impairments and losses have been small, as you can see on this chart. Today, Aflac Japan has a globally diversified portfolio, including investment-grade assets, high-yield assets, commercial mortgage loans, bank loans, J-REITs, and U.S. and Japan equities. Later this year, and into early next year, we expect to add middle market loans, infrastructure debt, private equity, and real estate exposure. In total, 75% of our portfolio is in Japanese yen interest rate assets, 18% is in dollar assets hedged to yen, and 7% in unhedged dollar assets.
Finally, let me point out that our investment portfolio incorporates best investment practices that our peers practice in the Japan market. As an example, our peers typically have about 37% in JGBs and a 22% allocation to foreign assets, including dollar bonds with hedges, whose hedge ratio fluctuates based on the market conditions and is currently around 71%. Our JGB allocation is currently higher than the peer group, mostly reflecting the longer nature of our liabilities and need for longer duration JGBs. In fact, with the advent of negative rates, it is well reported in the press that our Japan peers have been large buyers of dollar corporate bonds, a strategy we instituted back in 2012. Based on public announcements of nine major Japanese life insurance companies, the majority will be decreasing domestic bonds, increasing their foreign bonds allocation, and increasing equity.
For Aflac Japan and Aflac, this is an important local comparison by which local regulators, policyholders, and other stakeholders would compare us. It is important to recognize that any peer comparisons need to be balanced against our respective liability framework. For example, many of our peers have currency products, and these naturally have higher allocation to currency assets and lower hedge ratios. However, the underlying trends are consistent with the direction we have taken in the last three to five years. I would now like to turn to the challenges and opportunities we foresee with future net investment income, particularly as it relates to reinvestment risk in a low-rate environment. We have steady cash flows to invest every year, and since 2015, those have been primarily generated from the investment portfolio, including interest income, redemptions, and calls.
In the chart, you can see the decline in cash from operations in 2016 compared to recent years, which is consistent with our corporate strategy of reducing first sector sales. In 2016, our average run-off yield is 4.09%, and average expected new money yield is 1.96%, highlighting our challenge. Obviously, our net investment income will decline whether we use Japanese yen or U.S. dollar assets based on today's available market yields. Given this very low yield environment and our moratorium on buying additional JGBs at these historically low yields, we have intensified our efforts to identify new investment opportunities. For example, we plan to add capacity to our Japanese yen private placement portfolio. As you may recall, leading up to the financial crisis at the end of 2007, we had a very large private placement portfolio.
However, the risks were not in the instruments themselves, but the concentration within geographies, sectors, subordination, and individual issuers. Since then, we have carried out a significant de-risking program to reduce the size of the private placement portfolio and related concentrations, as I highlighted earlier. Importantly, we have also established a more robust risk framework to mitigate the risk of concentrations going forward. Additionally, our credit teams in New York and Tokyo evaluate new private placements to ensure that they meet our strict credit criteria. As such, we are now in the process of resuming our investment in private placement bonds with an initial modest allocation of JPY 50 billion, with potential additions in the future. We are also exploring local Japanese yen-based public credit bonds as well as municipal and other local bonds. However, the size and liquidity of these investment opportunities are very limited compared to the U.S. bond market.
Finally, we have been adding Japanese yen residential mortgage-backed securities. These are somewhat shorter in duration, but in Japan, they exhibit greater stability than those in the U.S. market. They are also triple A-rated and have yields of about 40 basis points today. For our U.S. dollar program, we are exploring opportunities in the private credit space, including middle market loans, transitional real estate, and other credit assets. We particularly like this U.S. dollar asset because we are confident we can underwrite the credit risk with our built-out external manager platform. The floating rate assets are a good fit for our hedging program, given their relatively short duration and spreads to LIBOR. In aggregate, these investment opportunities will allow us to continue to focus on sound ALM management and defend declining net investment income as compared to concentrating on low-yielding JGBs.
For 2016, you can see on this slide that we have approximately $6.1 billion of total cash flow to invest. For the year, we now estimate that 49% of our allocation will be to JPY fixed income, 40% to USD fixed income, and 11% to growth assets, primarily U.S. and Japan equities. I would highlight the amount of diversification in our asset allocation between various asset classes and also our use of bank and middle market loans for their positive characteristics that match the duration and yield profile of the hedging program. I would also note the addition of commercial mortgage loans, a very predictable and solid fixed income asset class. Our allocation to JPY fixed income includes about $1.1 billion that we consider assets temporarily in JPY, awaiting reallocation to USD assets such as infrastructure, commercial mortgage loans, and growth assets.
These asset classes take time for managers to source. We will reallocate these assets as the investment become available. I would now like to turn the discussion to our hedging program. The USD program, as of June 30th, had a book value of $23.2 billion, of which approximately $17.6 billion is hedged as of today. As has been the case for many years, the majority of the unhedged portion of the U.S. dollar portfolio is used as a natural hedge to a portion of our equity in Aflac Japan. The pie chart shows that the program now has multiple asset classes within fixed income and growth assets. I would like to address our active strategies around asset allocation, efficiently managing hedge costs, and managing currency exposure and its impact to capital. Hedge costs have been rising given the divergence of central bank policies between the U.S. and Japan.
In past analyst meetings, Eric explained the effectiveness of the program and how we manage its performance against buying JGBs. This is a sound and well-practiced part of an overall well-diversified portfolio practiced by us and other Japan insurance companies. It balances risk along with the opportunity to create a diversified investment income profile. While there is a tendency to look at hedge costs as an expense line item, in our view, that is only half of the story. The program should be reviewed in the context of net investment income, that is, the gross yield of any USD assets, less associated management fees, if any, and hedge costs. It is compared for relative value against other alternatives on a short and long-term basis. We typically use a 20-year JGB, which is a risk-free asset and main fixed income investment in Japan as our main alternative.
This is no different than buying long-term credit or investing in growth assets that generate variable investment income. While today's relative value is challenged by increasing hedge costs, we still find opportunities that we expect will outperform low-yielding JGBs. Keep in mind, the rise in hedge costs have been similar in magnitude to the dramatic decline in JGB yields, leaving the net spread fairly wide. Tactical asset allocation within the program is an important active strategy. We have made several tactical asset allocation decisions to diversify and maximize long-term returns. Let me highlight two examples. In 2015, we executed a $1 billion switch trade of investment grade assets into BB high yield, which added approximately $90 million of investment income per annum, somewhat mitigating rising hedge costs.
Because income from bank loans floats with short-term rates, and therefore will maintain a better duration match to the forwards and yield advantage over hedge costs, we moved bank loans into the hedged program. This also captured capital benefits of about 30 points in SMR. Over time, we will seek to increase allocations to asset classes that we believe will outperform hedge costs, while still maintaining a diversified portfolio that takes into consideration risk, capital, tax, and gains and losses. As mentioned earlier, we are exploring middle market loans, transitional real estate, and other private credit assets as very good alternatives for the dollar program. We would expect to lower the investment grade credit portion of the program in favor of these alternative asset classes. We manage the hedge program predominantly through forward contracts.
They are the most liquid and efficient means by which to hedge dollar assets back to yen, and we get full capital benefits in SMR as they are treated as yen assets. We proactively manage the maturity profile of our forwards to take advantage of forward pricing, which is dependent on central bank policy and the cross-currency basis swap curve. We typically focus on an average duration of between three months and a year, with maturities as short as one month out to two years. We also utilize options in the form of zero cost collars to reduce cost and maintain favorable capital treatment. Collars are most effective when we wish to manage our unhedged exposure, as the collar maintains the unhedged risk while getting favorable SMR benefits. The final component of our strategy is managing currency exposure as measured by the FX hedge ratio.
Our neutral hedge ratio is primarily based on having enough dollar assets to hedge Aflac Incorporated equity in Aflac Japan. Our current risk guidelines allow us to adjust the ratio up to approximately another $2.8 billion of dollar exposure. This is examined regularly by our management and adjusted based on a number of variables around currency related unrealized gains and losses and impacts on GAAP equity. Our decision to take more dollar risk, and therefore adjust the hedge ratio, will incorporate our market views on currencies as well as the impact on asset rotation opportunities, hedging costs, and overall return forecasts. Our proprietary tools allow us to model various market scenarios and consider the potential model portfolio's trade-offs between currency exposure, asset allocation, and performance of the program against a JGB portfolio, including potential impacts to capital, taxes, and gains and losses.
Under the current SAA framework, we target no more than 30% of the portfolio in the dollar program as a good overall risk limit. As a final tactical strategy, we could lower the allocation to the program if we believe increasing hedge costs will pressure the net earnings of the program to where yen assets may look more attractive. As central bank policies diverge between the U.S. and Japan, this is a strategy we will explore closely. I will now focus on costs of the currency hedging program. As Fred and Eric reviewed during our last earnings call, we have made some additions to the program this year, and I would like to update you on their impact to the current 2016 forecast of hedge costs. We have implemented tactical strategies designed to further improve the risk return profile and proactively manage the hedge costs.
Changes include our enabling of hedging bank loans and other new asset classes, which adds $3.8 billion in hedged notional. In addition, we are rebalancing the existing portfolio of hedges and are subject to increased market levels of hedge costs. Finally, given the flat hedge cost curve, we are tactically lengthening the average duration of our hedges from six to nine months. Collectively, these changes amount to total estimated hedge costs for the year of $280 million-$300 million. I also want to draw your attention to the graph showing the history of hedge costs. We started the program when hedge costs were historically low and got even lower due to accommodative central bank policy in the U.S. and Japan. We earned significant income from investing in the dollar program during this time. We always knew as an economic cycle progressed, hedge costs would rise to their historical averages.
This year's increase in the actual hedge cost is primarily driven by market increases. The duration extension is a tactical strategy change. Our current accounting recognizes the full $60 million immediately in the months of execution as opposed to amortizing. This, too, would eventually smooth out, though, given the flatness of the hedge cost curve, the extension will save us some costs, assuming they continue to rise in the future since we have locked in today's level. In closing, let me highlight our areas of focus going into 2017. We will continue to build out our new money asset allocation plans for next year. We intend to add to our growing list of new asset classes while searching for additional opportunities for yen-based assets.
We will continue to focus on efficient execution and hedge cost management, understanding the dollar program remains valuable in an environment of negative to low JGB yields, while also considering the benefits of further diversification. Finally, we will balance the needs of defending net investment income, considering corporate objectives of capital and risk management. We expect markets to remain volatile and challenging, and we will continue to be proactive in managing through this challenging environment. We look forward to providing further updates on our plans on the outlook call later this year. Thank you very much.
Next, we'll hear from Yutaka Otsuka, Vice President, Financial Management and Accounting, Aflac Japan. Otsuka-san will discuss Aflac Japan's earnings driver and repatriation.
Good afternoon. At our financial briefing in May, the thread covered our financial outlook and capital management initiatives in great detail. Today, I will update you on Aflac Japan's earnings drivers and repatriation affecting our capital management plans. You will note throughout the presentation that some of the information is presented on a Japan FSA accounting basis, while others are on a U.S. GAAP basis. The accounting basis is noted on each applicable slide. As most of you know, the fiscal year for FSA-based accounting is April 1st through March 31st, while GAAP accounting uses a calendar year, January 1st through December 31st. The FSA fiscal year 2016 ends on March 31st, 2017. Let me begin with a review of our earned premium trends. The compounded annual growth rate was CAGR for earned premium from 2012 to 2016 is a +1.7% for the aggregate of all of our product lines.
This comes from suitable, stable growth of in-force policies with high persistency, as well as the contribution from new sales. The increase of 9.5% for the ordinary life portion looks notable and strongly reflects the sales of our life and child endowment products. However, it should be noted that the anticipated decline in premium income growth for 2016 compared with 2015 is primarily due to two factors. The first to deal with the negative interest rate policy implemented by the Bank of Japan in the first quarter of this year. We cut the rate for discounted advanced premium from 0.8% to 0.05%, and at the same time, we implemented other measures directed at curtailing the sales of the first sector products beginning in the second quarter. Those actions will slowly impact the first sector and premium growth rate as the cumulative impact of reduced new business takes hold.
Therefore, the numbers shown in the slide do not fully reflect the impacts of these actions. The second, the decline in premium income growth in first sector products is primarily due to limited pay products reaching paid up status. During the premium paying period, accounting standards require us to accrue a deferred profit liability or DPL. Upon becoming paid up, the policies of this type do not contribute any further to premium income. However, the DPL is released into the profits that emerge fairly evenly throughout the life of the policy. Regarding the core health and other category, we estimate a decline earned premium of 0.9% for 2016 as compared to 2012. However, you may recall that we executed some reinsurance transactions during 2013, 2014, and 2015 on our EVA block of medical business and Rider Max block for the purpose of capital management.
Rider Max, now a closed block of business, was a medical rider that was available as an add-on to our cancer insurance product. Without the impact of reinsurance transactions, the CAGR would have come in at a positive of 0.5% for the core health and other lines, supported by sales persistency, as well as growth in new business. Without the reinsurance impact, an overall increase of premium income would have been 2.8% for all product lines. This slide shows trends in the benefit ratios. Looking at this slide, we can see the benefit ratio has declined between 2012 and 2015. The decline is primarily due to decreases seen in our large core health and other business segments. These results reflect changes in the Japanese healthcare system, as well as the advanced medical techniques. I will touch more on those points later.
The introduction of products with no cash surrender value, or CSV, in cancer and medical lines in 2000 and 2002 respectively, have helped to lower the benefit ratio as the in-force portion of those blocks have added to the growth of in-force premium. These products with no CSV release reserves upon the policy surrender and enhanced earnings. On the other hand, the benefit ratio for ordinary life products is rising due to the fact that ordinary life includes a growing proportion of WAYS and child endowment products. As I mentioned earlier, the earned premium growth for ordinary life products is somewhat constrained due to a large portion of WAYS becoming paid up in 2016, the majority of which will come in the fourth quarter. Let me now provide you with further detail on the factors driving our favorable benefit trends in the core health and other product lines.
The first, the average length of stay in the hospital has declined over time due to the actions taken by the Japanese government to reduce the medical costs. Additionally, we have seen other factors affect the favorable trends, including advances in early detection techniques, increased use of pathological diagnosis rather than clinical exams, and follow-up radiation and chemotherapy treatments on an outpatient basis. We continue to see relative stability at our favorable trends levels. Expense ratio have remained generally consistent in recent years, and this stability is expected to continue. Process improvements have been made in administration and IT, with the resulting cost savings being reinvested back into the business for initiatives such as new product development. A recent example of one such process improvement to our business operation is the new claim process for our medical products.
This enhancement allows a claim request to be submitted and processed entirely through our website. We expect that the current expense ratio level to remain stable going forward. This slide shows how our FSA income is influenced by foreign exchange rates and hedge costs. We have communicated that as our dollar-based assets have grown, so has our dollar-denominated investment income. This contributed to our investment income growing in JPY terms from fiscal year 2012 to fiscal year 2015, along with weakening of the JPY against the USD. It's important to note that we don't hedge cash flows from USD income. The change in the foreign exchange rate directly impacts the investment income in terms of JPY. Our dollar-denominated investment income is particularly important given the historically low interest rate environment in Japan.
For fiscal year 2016 planning purposes, we used the 2015 calendar year average exchange rate of JPY 120.99 to the USD. The JPY has since strengthened, consequently reducing estimated FSA-based investment income for 2016. We have various hedging strategies for those growing dollar-based assets. We anticipate that our hedge cost in fiscal year 2016 will further increase. There are three major factors influencing this increase. First, the widening interest rates differential between the U.S. and Japan. Second, an increase in the notional amount within this program. Third, a lengthening of the tenure of our hedges. Despite the increase in hedge cost, the dollar-denominated investment income contributes significantly to investment income. This slide shows our FSA investment income sensitivity to changes in exchange rate and new money rates.
As you can see from the bar chart on the left, we estimate that our U.S. dollar-denominated investment income is expected to be $1.3 billion or JPY 154 billion for fiscal year 2016, assuming an exchange rate of 120.99. However, if we were to assume an annual average exchange rate of JPY 110 to the dollar, which we believe reflects a more realistic exchange rate, our annualized FSA investment income would decrease by approximately JPY 14 billion. The bar chart on the right shows our estimate for FSA investment income sensitivities to new money rates in fiscal year 2016. We estimated new money for investment for the fiscal year 2016 would be approximately JPY 640 billion. Out of the JPY 640 billion, roughly 40% will be invested in yen-denominated assets and earn JPY 0.5 billion of investment income.
About 60% will be invested in dollar-denominated assets and earn JPY 4.4 billion of investment income. With that, the 50 basis points decline for new money rates would make investment income from dollar and yen assets lowered by JPY 0.3 billion and JPY 0.01 billion respectively for fiscal year 2016. This slide shows our history and an estimate for current fiscal year FSA net earnings and repatriation. First, let me comment on a change in FSA earnings year-over-year. The blue bar shows FSA earnings for each year on an FSA fiscal year basis. During fiscal year 2012, the larger sale of rates and child endowment products led to elevated premium reserves for the first policy year in accordance with FSA reserving guideline. Higher new sales suppress earnings in the year business is written to a greater extent.
As a result, FSA net earnings were constrained to be JPY 96 billion in fiscal year 2012. You will note that during fiscal years 2013 and 2014, FSA earnings were enhanced by executing the reinsurance transactions for capital management purposes. The reinsurance transactions enabled us to reduce policy reserves to earnings, resulting in a lift to the SMR and enhanced earnings and repatriation. Excluding the impact of reinsurance, FSA net earnings would be approximately JPY 131 billion and JPY 166 billion for fiscal year 2013 and 2014, respectively. FSA net earnings for fiscal year 2015 returned to a more normal level as a result of lower first-sector sales and absence of new reinsurance contracts. The estimate of earnings for fiscal year 2016 assumes a similar result to that of 2015.
It should be noted that, as I mentioned on the previous slide, investment income is sensitive to foreign exchange rates and FSA earnings shown here for 2016 are based upon the assumption of JPY 120.99 to the dollar. With the yen actually strengthening this year, net earnings will be reduced. While yen appreciation has a negative impact on FSA earnings, repatriation in U.S. dollar terms is positively impacted. The red bar represents our policy for the repatriation of FSA earnings for each fiscal year. We have a policy of repatriating 80%-100% of FSA earnings depending on overall capital conditions. Once making the policy decision, we will pull the repatriation amount out of capital for purpose of calculating our reserving margin or SMR. The green bar represents the actual repatriation on a cash basis that we have made for each fiscal year ended March 31st.
Actual cash repatriation timing can vary according to capital needs and the deployment plans at the parent. The difference is not normally expected to be material, but has been more pronounced in periods of reinsurance driven FSA profits and repatriation. We look ahead, our objective remains to enhance shareholder value through growing the cash dividend and repurchasing our shares, which is supported by repatriation from Japan. Keep in mind that to achieve this, we need an appropriate SMR level to help maintain our financial flexibility and gives us greater confidence in our ability to repatriate a significant portion of FSA earnings. Fred is going to cover our capital management strategies shortly, including how we manage the SMR level. My goal here today was to provide insight into the key drivers and objectives for the financial management team in Japan.
Has always been the case, we closely monitor earned premium and look for ways to enhance this important revenue driver. Earned premium tends to be constrained due to increase in paid up limited pay products. We expect the benefit ratio will continue to see favorable trends in our cancer and medical insurance books of business. In addition, we believe the expense ratio to remain stable at around 18% as we continue to control spending. FSA investment income sensitivity to new money rates is not very significant, as our levels of new money coming in are relatively small compared to the total investment portfolio. We will continue to be laser focused on the risks associated with our hedge program as U.S. dollar investment assets expand to include rising costs. This involves ensuring that we have appropriate measures in place to mitigate these risks.
Finally, you can expect to see our repatriation capacity supported by steady FSA net earnings. I hope my presentation has given you a better understanding of our earnings drivers and repatriation in Japan. I'll turn the program back over to Koda-san. Thank you very much.
Thank you, Otsuka-san. Our next speaker today is Fred Crawford, Executive Vice President and Chief Financial Officer of Aflac Incorporated. Fred joined Aflac Incorporated in 2015, bringing more than 20 years of financial leadership and experience to Aflac. Most recently serving as Chief Financial Officer of CNO Financial Group since 2012. Fred will be covering Aflac Japan's financial outlook and capital management.
Welcome to Tokyo, and thank you all. Those of you who traveled a long way to get here, we really appreciate it on behalf of executive management, Paul, Chris, and the others who are here in attendance. We really appreciate the time and energy you take to come here. I asked the team to put my presentation in the afternoon to safely ensure that jet lag has set in time to do some of my comments. With that, I'll try to keep my comments interesting and hopefully pointed. Yamamoto-san and Otsuka-san spent time with you on our investment and earnings trends. I'd like to briefly pull the financial investment story together and discuss how it relates to capital management in Japan.
Early in 2016, we witnessed a material decline in interest rates with the somewhat surprising actions from the BOJ. Then another move down post-Brexit. This also drove volatility in rates and foreign exchange and influenced hedge costs to some degree. Internally, we have a global cross-functional project team developing strategies to navigate through this unusual capital markets environment. We have divided the work of this team into two primary work streams. They include additional actions to be taken on first sector savings products and taking a fresh look at our strategic asset allocation, including hedging strategies and associated capital management. Both work streams are supported by, very importantly, our actuarial and risk management department. Some of what you've heard today is actually a direct result of that team's work.
The ultimate goal is to solve for a comprehensive strategy that supports our franchise, and more specifically, to establish a basis for building out our sales, earnings, and capital plan for the 2017 through 2019 period. Elements of this plan will be discussed on our December outlook call, together with any impact on our guidance. I'd like to spend a little time discussing our approach to product pricing and actuarial testing in this environment. The most critical assumptions from the standpoint of both product pricing and reserve testing on our first sector savings products are long-term new money rate assumptions and associated portfolio yields. We work with our global investment team to understand investment allocations and third-party data to support our view of new money yield curve. Our assumptions also include an estimate of hedge costs.
In both pricing and reserve testing, we include provisions for adverse deviation or pads. We have historically held new money rates at their current low rates forever. In periods of unusual market conditions, such as a negative rate environment, best estimates would typically call for some modest recovery in rates over a very long horizon and average historical hedge costs. In addition to conservative long-term estimates of new money rates, we have priced in a very low regulatory standard discount rate of 25 basis points for the purpose of building reserves. This is down from 1%, and this revision to 25 basis points will be the required rate in April of 2017. We have also removed incentives on accelerated premium features, or what we call DAP, which has contributed to a dramatic decline in deposit-oriented premium flows in the last few years.
We are looking to drive longer pay products, not only for the potential investment yield recovery, but also to ensure that our products are being purchased for protection benefits and not as a savings product. In terms of actuarial testing, while we expect to see a decrease in some of our gross premium and cash flow testing margins in our first sector in force, our margins remain positive and will not require any near-term reserve strengthening. However, we recognize the need to be cautious in monitoring conditions, and we believe it is prudent to maintain our current excess capital position in Japan. There are a few smaller legacy blocks of intersensitive third sector business that may require strengthening this year, as these blocks have been susceptible to strengthening in the past. Yamamoto-san covered in great detail our strategic asset allocation and hedge program work.
We focus first on supporting our policyholder liabilities, then on maximizing risk-adjusted returns while managing volatility and capital quality. This is no different than any other life and health insurance company. In order to do this, we have to navigate in a market with low and even negative interest rates and very limited yen-denominated investment options. Once settled on a tactical investment strategy, we then have to run it through several lenses, including Japan and U.S. GAAP, U.S. statutory and Japan FSA treatment, Japan regulatory capital metrics, and as a branch, U.S. regulatory capital standards. By the way, as you may know, some of these are evolving. While complex, the issues are clear, and we are confident that we can drive a workable solution. We have one of the best and most experienced teams in the business, from my perspective, on managing through this Rubik's Cube of considerations.
As we move forward, our outlook call in December, I expect to see the following. A shift to broaden the portfolio of yen fixed income asset classes while further reducing future allocations to JGBs. A calculated re-entry into yen-denominated private placements, recognizing that the runoff of maturing and redeemed private placements will hold our total allocation in check. We may consider additional currencies beyond U.S. dollars to invest for diversification and hedge cost benefits as we are exposed to relative Federal Reserve and BOJ actions. While we are all aware that hedge costs are on the rise, keep in mind that we are investing capital to extend the duration, locking in a portion of the cost, and providing flexibility should costs rise sharply. We are also covering more asset classes, like bank loans, that deliver an attractive net yield and positive capital or SMR benefits.
I think it's fair to say that hedge costs are a key risk to manage as we move forward. We're actively engaged in exploring strategies to reduce the risk. The fact that many of our peers in Japan who also face low rates and limited asset classes have adopted many of the same strategies that we have employed over the last several years is reassuring. I believe we are well-positioned in this current economic environment. Let me touch on hedging activities as it's related to profit repatriation. As you will recall, a few years ago, we began a hedging program for profit repatriation from Japan to better insulate our repatriated amounts from extreme volatility and changes in the yen-dollar exchange rate. As we have discussed for the last 20 years, it is not our policy to hedge foreign currency translation for financial reporting purposes.
We do give serious consideration to hedging economic transactions such as profit repatriation. We adopted a strategy of placing hedges on a rolling 18-month basis. As you can see from this slide, as of June 30th, we are more than 80% hedged for estimated profit repatriation for 2016 and more than 50% for 2017's estimated repatriation. You will note that in years when we have scheduled yen debt maturities, we leave repatriated yen cash flows unhedged to fund the maturities, this portion shown here in yellow. Turning to Aflac Japan's approach to managing capital, Itsuka-san did a nice job of walking you through the earnings drivers and specifically FSA earnings trends and sensitivities. FSA earnings are the source of repatriation and cash flows to the U.S. and up to the holding company. Let me now focus on the pure capital ratios in Japan and other capital management considerations.
You're familiar with the SMR diagram on this slide. We maintain a very strong SMR ratio to account for market volatility, in large part resulting from unrealized gains and losses. As a result, during a period of unrealized gains, the ratio is optically high. For example, we estimate that unrealized gains account for approximately 138 points of SMR as of June 30th. In addition, our actions to hedge new asset classes mentioned earlier are expected to boost the SMR. The added SMR is somewhat necessary to absorb the volatility that comes with AFS holdings subject to interest rate, credit, and FX risk, and exposed to rising hedge costs. We continue to work to mitigate SMR volatility through actions that include classifying investments as PRM and putting in place contingent capital facilities for the express purpose of SMR recovery.
As Charles noted in his comments and in the panel discussion, the FSA is field testing a new economic capital ratio similar to solvency measures used in Europe, which are sensitive to the current rate environment and ultimate forward rates. Because the ratio is in field testing, the precise method of calculation, timing, and process of implementation, and the relationship to SMR are still uncertain. As I noted on our second quarter earnings call, we tend to fare better than traditional life or asset-leveraged businesses in Japan. We have a considerable amount of long-duration liabilities where there is an unavoidable ALM mismatch that serves to drive down our solvency margin or solvency ratio under low rate assumptions. With a reasonable ultimate forward rate assumption, we estimate our ratio is in the 140%-160% range. This is considered very strong and would not be capital constraining.
We will need to monitor as we continue to work with the FSA on potential future adoption. Early in the year, I formed a market volatility group to meet at least biweekly, and more often when needed. That group is made up of the chairs of the Global Capital Committee, Global Risk Committee, and Global Investment Committee. We review a comprehensive dashboard of investment, capital, and liquidity metrics. The quick cycle time of reporting on our financial sensitivities is necessary, with the primary purpose of ensuring that our global policies and standards make sense in the face of market volatility and to uncover any defensive or opportunistic tactical actions we may consider. Here are a few of my observations. Market volatility impacts the collateral we receive or post with respect to repatriation hedges and swaps on debt.
This tends to be manageable and does not disrupt holding company capital management. With excess liquidity, conservative leverage, and industry-leading coverage ratios, market volatility, in general, tends not to cause holding company issues. Our U.S. operations are by definition not impacted by market volatility given very low U.S.-only asset leverage and stable morbidity-based liabilities. The only concern we have is that Japan is a branch of our primary U.S. legal entity, and therefore, foreign exchange impacts our U.S.-reported RBC. In fact, year to date, we've seen strengthening of the yen negatively impact our RBC by roughly 81 points. Most of the market volatility boils down to managing Japan capital and FSA earnings conditions. Rising rates, widening spreads, strengthening yen, and rising hedge costs all place stress on JPY-based cash flow and capital ratios.
From a pure cash flow perspective, however, we make up for this headwind with the conversion of repatriated yen into dollars, which tends to neutralize the impact on global capital generation and importantly, deployment plans. These items are not necessarily correlated, so we tend to see rates and spreads move in ways that neutralize the impact on our capital ratios. Hedge costs are really independent and more central bank driven, and foreign exchange balances out upon repatriation and conversion to dollars. Overall, we have a firm handle on market volatility. We have naturally offsetting variables that act as stabilizers. We monitor core capital metrics, stress test, and adjust our strategies based on our daily assessment of the markets. Finally, we have contingency plans in place in periods of extreme volatility. In closing, we are navigating the current rate and volatile market environment successfully.
We have taken decisive action on first sector savings products and related premium flows to reduce the stress on new money investment options. We are tactically adjusting our SAA and related hedge strategy to properly balance net yield with capital preservation and actuarial testing margins. While market volatility and reduced NII can pressure our results in JPY terms, we expect stable range-bound FSA earnings and no material disruption to repatriation and our capital deployment plans. Finally, we maintain healthy excess capital in Japan, but we see our excess capital as necessary to ensure we do not run the risk of taking any sharp turns in our capital deployment strategy, including protecting and growing our common stock dividend. Thank you, and with that, I'll turn the program back to our moderator.
Thank you, sir. Our final speaker today will be Masatoshi Koide, Deputy President of Aflac Japan. Koide-san joined Aflac Japan in 1998. In January 2015, he was promoted to Executive Vice President, and this past July, he was promoted to his current role as Deputy President. Koide-san will discuss Aflac Japan's future and VISION 2024 plan. Following this last presentation, we will have our afternoon Q&A session. Thank you.
I hope the presentations earlier today have given you all a better understanding that Aflac Japan's history is an accumulation of accomplishments that we are proud of. As the final speaker of the day, I will focus on Aflac Japan's future. From a mid- to long-term perspective, we are moving forward with a number of significant changes. First, the continuing low birthrate and aging population are changes to the business environment. As a result, the working population will decrease, and those in the senior age group will increase. This will strain the financial condition of the public social security system, and consumers will have concerns regarding uncertainty on the public social security system. Consumers will also become more health conscious due to medical advances and longevity.
With these reasons, we believe that in order to prepare for illness and long-term care, consumers will put more effort in preparing oneself through use of private insurance. In addition, information and communication technology such as the Internet of Things or IoT, artificial intelligence, and smart robots will evolve. With businesses utilizing technology more, how businesses approach consumers will change. The insurance industry is no exception to this. As such, the business environment that surrounds Aflac Japan is projected to undergo drastic and complex changes in the future. This is nothing to be pessimistic about. Just like how Aflac achieved success in the past, we are interpreting this change as an opportunity for future growth and are preparing ourselves to detect the various changes.
To achieve sustainable growth under such circumstantial changes, Aflac Japan needs to not only establish a robust business base but also allocate management resources under a mid- to long-term strategy. We think it is important to make clear the direction in which the company should go. For those reasons, at the end of last year, Aflac Japan formulated VISION 2024 as the mid- to long-term direction in which the company should go toward by the year 2024. 2024 will mark Aflac Japan's 50th anniversary since being founded. VISION 2024 indicates what company Aflac Japan wants to become by the end of our 50th anniversary. Aflac Japan formulated VISION 2024 based on The Aflac Way, the corporate philosophy of Aflac Japan, and our core values. To achieve sustainable growth under the changing circumstances, the company should change some aspects and should preserve other ways of doing business.
Aflac Japan will hold fast the corporate philosophy and core values, which we have regarded as important since our founding in Japan. In order to realize this VISION 2024, Aflac Japan developed the basic strategy for VISION 2024. Based on this basic strategy for VISION 2024, we are now developing the mid-term management plan for three years starting next year. I will briefly introduce major themes for this mid-term management plan later. VISION 2024 consists of three components: vision, mission, and passion. Vision is what Aflac Japan wants to become in 2024. Aflac Japan wants to become the leading company creating living in your own way. Since 2005, creating living in your own way has been adopted as a brand promise for Aflac Japan, which is a brief, memorable statement of the purpose of Aflac Japan as the leading company in the third sector insurance for living.
Mission is what Aflac will do in order to realize Vision 2024. Aflac Japan will contribute to the realization of a society where everyone can live secure and healthy lives in their own way. Aflac Japan has made efforts to do this by delivering insurance for living. With Vision 2024, Aflac Japan will continue to do this, not only by delivering insurance for living as our core business, but also by creating new value through expansion of business frontier. Passion is required to realize Vision 2024. We believe that our current success is a result of the pioneer spirit passed on since the days of our foundation. It is important to continue to cherish this pioneer spirit, which encourages each of our employees to take on the challenge of innovation. Aflac Japan established a basic strategy for Vision 2024. This basic strategy consists of three pillars.
The first pillar is to further strengthen our third sector insurance business. We will hold fast to our position as the leading company in insurance for living. Aflac Japan has steadily grown by focusing on third sector business. Third sector insurance will continue to be the main driver for our sustainable growth going forward. This year, we launched Income Support Insurance as the new product, which is intended to develop a new market in third sector insurance. As Yamashita-san mentioned, this is really a part of the basic strategy for Vision 2024, strengthening our third sector insurance business. The second pillar is to explore new business opportunities to respond to the customers' diverse needs under the evolving environment.
Aflac Japan would like to explore new business opportunities, not only in the insurance area, but also in other areas, if such new business is consistent with our basic policy, creating living in your own way. Aflac Japan has earned strong confidence from customers as the leading company in insurance for living. Customers expect that Aflac Japan would further respond to their needs to live secure and healthy lives in their own way, not only in the insurance area, but also in other areas. By creating new value in the society, Aflac Japan could enhance its corporate value at the same time. This is Aflac Japan's corporate philosophy. The third pillar is to build an organizational and human resource base that makes it possible to respond to customers' diversified needs under the changing circumstances in a timely and appropriate manner.
This organizational and human resource base should encourage an efficient and productive way of working, and inclusion of diverse perspectives. It is also necessary to foster the innovative corporate culture to explore new business opportunities. Based on Vision 2024, we are now formulating Aflac Japan's midterm management plan for three years starting next year. Today, I will introduce the major themes for the midterm management plan that is to be finalized later this year. First of all, we will further strengthen our third sector insurance. As I mentioned before, the third sector insurance is a main driver for Aflac Japan's sustainable growth. We will seek further growth in cancer insurance and medical insurance by introducing new products which respond to the customer's needs in a timely manner, and by strengthening sales capabilities in sales channel.
We will grow Income Support Insurance, which we launched this year, into the third pillar in the third sector insurance after cancer insurance and medical insurance. We will also strategically continue sales of first sector insurance products on a limited basis to further strengthen third sector insurance. One of our main sales channels, exclusive agents, conduct their business centering on third sector insurance. They need certain first sector insurance for the purpose of comprehensive consulting sales to their customers. With this midterm management plan, we believe our long-term compound annual growth rate for third sector products will continue to be achieved the plus 4%-6% range.
Secondly, as I mentioned before, to realize VISION 2024 over the next three years, we will look for opportunities that tie into future growth by exploring new business opportunities in the insurance area, which includes third sector products, and other areas as well. Thirdly, 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 aim toward improving customer satisfaction while also heightening cost efficiency. Cost savings resulting from improved operational efficiency will be reinvested back into the business for future growth. Fourthly, while navigating unprecedented market conditions in the near term, we will seek investment choices to drive long-term economic returns and relative stability. Fifthly, we will maintain our strong financial profile and commitment to risk management, safeguarding our strong ratings and low cost capital. Finally, we will foster vigorous corporate culture.
As I mentioned at the beginning of my presentation, from a mid to long-term perspective, the business environment that surrounds us is undergoing significant changes. In order to attain sustainable growth, while adapting to the changes to the business environment, corporate environment and structure that can maximize the abilities of employees with diverse values is vital. As such, we will spread more efficient and productive way of working among our employees and continue to support success of women in workplace as part of our efforts to incorporate diverse perspectives. I hope the information I presented today will be useful for your understanding of Aflac Japan's future. Thank you very much for your time.
In a moment, we would like to start our final Q&A session. We're going to make the stage, I'll hand it to Robin.
We're asking the speakers from this morning and this afternoon to please step forward and take a seat on the stage. While they're doing that, I want to introduce several other people that may have made comments this morning or may make comments this afternoon that are supporting our speakers. When I call your name, if you would just please stand up so that you can be recognized. Todd Daniels, Global Chief Risk Officer and Chief Actuary. Dr. Tomoya Tsuda, Chief Administrative Officer for Aflac Japan. Masatoshi Sarumaru, Advertising. Kazumi Atsuta, Corporate Actuarial, Aflac Japan. Andy Conrad, General Counsel, Aflac Japan. Eric Kirsch, Global Chief Investment Officer. John Morfield, Chief Transformation Officer, Aflac Japan. Okay, I think everybody is settled in on the stage now. We look forward to beginning Q&A.
As I mentioned this morning, please state your name, company, limit your question to one and one follow-up, and we'll begin now. Tom?
Thanks. Tom Gallagher, Evercore ISI. Fred, just one for you first. I think your comment that you're not planning, I think, for 2017 purposes to draw down excess from Japan, should we assume that means your total capital management plan would largely be a function of free cash flow, or are there other sources of excess elsewhere in the organization you'd consider deploying?
Yeah. Thanks, Tom. Back at FAB in May, we talked to the range of deployable capital over the next, 2016 and the following two years, as being in a range of $5.8 billion-$7 billion. At that time, what I pointed to in terms of what makes the difference between $5.8 billion and $7 billion is the low end being sort of true free cash flow generation on a consistent basis, a little bit supplemented in the early years from continued drawdown of reinsurance proceeds. Moving up on the scale would be a matter of looking at excess capital position in Japan, excess capital position in the U.S., and over time, some debt capacity as you naturally retain more capital and draw down your leverage. Those are effectively the sources of how to move in the range.
Really what I am saying, and have been saying actually for a while now, is that as we look at the Japan excess capital position, which I have defined as roughly JPY 300 billion of excess reserves, if you will, that could be subject to reinsurance if you will. That excess capital should really for a period of time be dedicated to ensure the safety and soundness of the balance sheet in protecting ourselves in this unusual capital markets condition. With negative rates and increased volatility, I would choose to hold the line there. What could move us up in the scale in deployable capital is really revolving around if capital conditions remain very good, we could continue to move additional excess capital out of the U.S., and as we draw down leverage, we would naturally look for opportunities to whether we have got room in the leverage calculation.
Those would be areas of flexibility, otherwise free cash flow.
Got it. Then just my follow-up. The comment that the, I guess from a risk management standpoint, the limit would be 30% in terms of U.S. dollar-denominated securities backing the Japanese portfolio. I think you are at 25% today, you said. That means you can go up another 5%. If those numbers are right, my question is, are we just a couple of years away from hitting that limit? What happens beyond that if all of that is right?
I will let Yamamoto-san comment, and if necessary, Eric and I can add some commentary.
The 30% limit is including hedged portion, by the way. We're talking about 30% U.S. dollar exposure, maybe fully hedged or non-hedged. That depends on our views on the currency or underlying market conditions, risk budget, and all these factors. That depends. We have a SAA now, which have a kind of three-year plan we established late 2014. According to the SAA at this moment, 30% is a kind of limit we can have for the U.S. dollar assets. That's why I said 30% is for the time being, it's a limit. Again, Fred mentioned maybe we go into some other currencies. In that case, maybe we reduce U.S. dollar and increase something different like euro or Aussie dollar. Aussie dollar is not under discussion, but euro is certainly now we're discussing. That could be the case.
At this moment, in total, 30% is our limit.
The working group that I mentioned during my comments is focused on a number of questions, this is one of the essential questions. As Yamamoto-san said in his comments, you might have caught in the tail end of his comments, is that while these are limits that have been set, they are limits that are derived from stress-testing our portfolio against our capital ratios and stress-testing the possible drag, if you will, on cash flow and earnings from hedge costs rising unexpectedly. Even though we have those limits set, we're going to maneuver within those limits based on those conditions. For example, if hedge costs were to rise dramatically, that may cause us to think differently about how much or what our threshold for U.S. dollar or currency investing may be.
We may choose to go into yen-based assets that, while lower yielding, have certain capital-friendly benefits, have stabilizing factors associated with it. We'll make that decision as the market plays out.
Eric Berg.
Thanks. Eric Berg from RBC. I just wanted to sort of cement in my own mind exactly how you calculate the hedge cost. Is that essentially equal to the difference between today's rate, the spot rate, and the forward rate?
The hedge costs are essentially driven by the relative short-term rate environment in the U.S. and in Japan.
Right.
Said differently in my comments, watching relative Fed actions versus Bank of Japan actions.
Right.
In some cases, the hedge costs are a derivative of the actual rate levels. What we've also seen over short periods of time is those hedge costs could move around based on just the outlook for what Yellen and the Federal Reserve may do or the Bank of Japan may do. We have to be tactical as we move in and out of hedging. Part of the reason we're extending the duration is there could be short-term periods of spike, if you will, in hedge costs where we want to maybe sit out a little bit while we watch these dynamics unfold.
My second question is related to the first one, and it is if you're expressing your hedge costs in basis point terms, how many basis points it cost you to hedge a dollar principle, $1 dollar principle. You don't hedge the investment. As I understand, you don't hedge the coupon income. You're hedging the fair value of your dollar investments. If I have it right that the hedges are expressed in basis point terms, why would increasing the size of the portfolio, hedging $2 versus $1, hedging $3 versus $2, why would that increase hedge costs in basis point terms, or would it not? Do you follow? Is the question clear?
I do. I think the answer is hedge costs, the way we would define hedge costs, would be defined against the notional amount that's being covered.
The dollar amount of hedge costs. Do you understand my question?
Yeah.
Maybe you can add later. Thanks.
For example, when you look at our average basis points now, remember, we put more dollars into the hedge program at different times through the year. The basis points we show is sort of normalized, if you will.
If you simply just created new hedges today, it would reflect the current hedge cost. It's sort of an averaging in. Right, it's like an averaging in based on when we actually made new additions, and made tactical changes to the program. Thank you.
Erik Bass.
Thank you. Erik Bass with Autonomous Research. You commented on how you've seen recent favorable trends in the third sector and how it's benefited your benefits ratio. I guess, thinking forward, how much of that recent or current experience is factored into either your guidance for the benefits ratio, or your reserves? I guess asked another way, if you continue to see current experience, should we expect more favorable development?
Certainly, if we anticipate future improvements in hospitalization rates, you'll realize that as we see it. I wouldn't say we're necessarily conservative. We're looking at best estimate when it comes to a GAAP basis for reserving, and our best estimate is what we've observed so far.
Peter. Sorry, we're moving across the room here, folks.
Thanks so much. Peter Deutsch, Fidelity Investments. You mentioned a preliminary Economic Solvency Ratio of 140%-160%. Maybe you can talk a little bit about the ultimate forward rate used, both in the U.S. and Japan, and at what point you pivot to that rate.
The ultimate forward rate, which is really a Japan dynamic, has industry-wide been established, if you will, at 3.5%. My recollection, but Todd, you can please jump in and correct me, but we currently in our models, remember, the nuance of an ESR model is it's fundamentally your model that you are calculating similar to solvency, is grading in over 30 years, if I recall right. The ultimate forward rate would be something that you would start to price in or use as a discount rate when observable market rates stop. You would grade up to it at the end of year 40 in Japan. The ratio that we talked about today is only Japan. It does not include U.S. business. Sensitivity to the ultimate forward rate, which may be a natural question.
It will vary, of course, over time as the ratio varies and we calculate and recalculating it. Every 100 basis points of change in the ultimate forward rate is approximately 15 points of ESR ratio, to give you an idea, is how our current sensitivity plays out.
You're saying that at the 40 year JGB hit 0%, you're saying that if the 3.5% went to 0%, that would be roughly 45 or 50 SMR. You would basically have 100% solvency.
I'd be careful on what may be the convexity of the metric. It's not going to be as linear, just gives you a sense of what the sensitivity of that ultimate forward rate is. Currently, the industry's using 3.5%.
I just wanted to quickly comment. You asked a question at the end about when do we plan to pivot. The FSA regulatory standard today, and still will be in the coming years, will be solvency margin ratio. ESR is being field tested, so all companies are experimental, doing things with it obviously. Some companies have decided to announce it. Exactly these are the kinds of things that FSA questions like the ones you asked, FSA are looking at, interested, and are talking to us about. It goes back to the original question in the morning, whether ICS is formulated according to plan, what happens to international standards, they're going to watch that as well. This is not yet to be a required standard to do all things and replacement to SMR. That's something to keep in mind as we have this conversation.
Maybe you're aware of it, but just wanted to make sure.
Thanks so much.
Noda-san.
Taichi Noda from Goldman Sachs. My question is quite related to what Peter asked. Basically, on page 10 of the second slide, 140%-160%. Question number one is basically what numerical number of the numerator and denominator, roughly? That 140%-160% range is a target? Basically, you think it's adequate or short of somewhat? Relative to the other peers, there are four listed life insurers in Japan, most of those are running at like 80%-120%, so it looks higher for you. Does that mean you are excess or you are in short? Thank you.
Yeah, I think I'm going to ask my colleagues to jump in with a little bit of color in terms of, say, the preciseness of the numerator and denominator and so forth. You're right that we are running, as I mentioned in my comments, higher than other peers, it appears on the surface from what we see. I think that's primarily related to our mix of business and having much more in the way of morbidity-based insurance in our structure, much less asset-levered or interest-sensitive product in general as a ratio of our liabilities. I think that's it. In terms of target, we have currently various risk management thresholds that we have deployed for ourselves as to when we would take a monitoring role internally, and when we would assess taking any forms of action to support or shore up the ratio.
However, while embedded in our risk management practices where we watch and monitor it, we have to be very careful about making fundamental economic decisions around this ratio. It is being field tested. It is evolving. It's uncertain when and how it will be actually introduced. As I mentioned, the relationship between SMR and ESR is unclear because a given decision by management could be good for ESR and bad for SMR. As a regulator, which ratio are you most interested in me following? What I do like about the ratio is it is largely economic-driven. That is, in fact, how we base our risk management practices in Japan. In terms of any other technical color, I yield to the team.
Yeah. I'll comment quickly on the numerator and kind of let you back into the denominator. If you think of the numerator as being pure economic capital in the company in Japan, you're looking at a range in dollar terms between $25 billion and $30 billion. Obviously, it depends on rates, depends on lots of other things. You can do the math and back into the risk amount that would be supporting that. Take the 30, say, and divide it by 1.5, you get 20. That's one number. If you consider it a range right now because we are still studying and testing and depending on assumptions, you get varying answers of the numerator. $25 billion-$30 billion is a good starting point.
Ryan Krueger.
Thanks. Ryan Krueger with KBW. Just one more follow-up on this. The period in which you grade up to the UFR, is that just simply for JGB rates or is there any other assumptions in there?
Trying to involve those that surround the calculation as best we can.
I think David needs a workout. For the grading up, I think the grading period starts 10 years before, so it doesn't necessarily follow the forward rate between 30 and 40. I think we start at 40, but I could be wrong. That's one way to think about it is grading up to this ultimate forward rate over a period of time. Definitely using that over where the markets stop. There is no market beyond 40 years, so you would have that, but you'd likely grade into it over, I think a 10-year period is what we've said.
Thanks. Separately, I think you disclose every 10 basis points of new money rates is 100 to 130 basis points on ROE or margins in the first sector product. Is there a rule of thumb to follow for third sector as well? I know third sector is far above zero, just thinking for sensitivities.
Yeah, I'll take that one, too. We did some sensitivity testing anticipating this question would come up. If you think of a 50-basis-point change on new money rates for third sector would impact your internal rate of return by about 100 basis points. Far less sensitive.
Okay.
This is Natsumi Tejima, JPMorgan, Tokyo. I have three questions, one is very quickie. ESR, you said 140 to 160, but as of when? This is March end or June end or today? The second one is the potential reversal of DAC. How many years if the current interest rates continue you really need to be serious about reversing DAC related to the contracts that you are using past 60? The third one is, I'm not really much familiar with the new U.S. GAAP under consideration incorporating economic method. If you have any color, the potential impact, that would be great.
I'll start this, Fred, you may want to add some color around it. The ESR that was quoted today in Fred's presentation was an estimation as of the end of August. It was a very recent update based on how we true up the ratio throughout the quarter. Second question on DAC. Interest rates would have to fall considerably from where they are today or we would have to shift our investment strategy in order for us to do a DAC reversal. Obviously, we do this testing every year with our gross premium valuation. Starting with the DAC, we would reduce the DAC. Then we would begin to increase reserves. It varies by line of business and how we break out the portfolio.
We're currently undergoing an evaluation with the working group that Fred has started in investigating the best way to go about allocating the portfolio to different lines of business. Regarding your third question, I'm not familiar with any economic-based U.S. GAAP that's currently being proposed.
The long-duration.
If we're talking about the old IFRS-type testing, this is something we've investigated in the past, and I don't believe is anything that's we're looking for happening anytime soon.
I think you've covered it. We have very strong actuarial testing margins on a gross premium valuation basis, a statutory cash flow testing basis under the so-called New York seven scenarios. Because our FSA reserves are naturally carried at a high level, there tends to be very little risk, even under strained interest rate and rising hedge cost environment. From a pure capital and cash flow dynamic, we feel very comfortable. You would first see challenges on the GAAP side, which is normally the case because you're carrying a lower reserve level on the GAAP side. Even there, our testing suggests us to be in a positive margin, even under zero JGBs forever and hedge costs of 200 basis points forever. That's even being conservative on certain elements of other assumptions embedding in the testing.
The caution light needs to be on any interest-sensitive products in Japan for sure, but we maintain good margins, and that's under conservative assumptions.
Thank you.
Okay, do we have any other questions out there? I don't see any hands. Anybody else? No? All right, wonderful. Thank you so much again for joining us today. I want to say a great appreciation for everyone that contributed to all of this. I can tell you it was hours and hours of work by many people here and in the U.S. Thank you so much for joining us. Please follow up with us with any questions that may arise after you go home and think about these things. Thank you.