Morning, everyone. Thank you for joining us at the 2016 Aflac Annual Analyst Briefing. I'm Robin Wilkey, Senior Vice President of Investor and Rating Agency Relations. Shortly you will hear from our speakers. In the meantime, I'd like to introduce you to some other special people we have with us today. First of all, our board members here today are Doug Johnson, Chuck Knapp, and Joey Moskowitz. If you'd please stand as I call your name. Doug Johnson is a retired audit partner with Ernst & Young. He is the financial expert of the audit committee and also serves on the executive committee as well as the compensation committee, and he joined the board in 2003. Dr. Knapp is President Emeritus of the University of Georgia, my alma mater, and also served as U.S.
Deputy Assistant Secretary of Labor in the Carter administration, and Executive Vice President and Chief Financial Officer of Tulane University. He was elected to the board in 1990. Mr. Moskowitz is a retired Executive Vice President from Primerica, Inc. He provides insight into the analysis and evaluation of various actuarial and financial models, which form the basis of various aspects of corporate planning, financial reporting, and financial assessment. He was elected to the board in 2015. Before we begin with our speakers, I'd also like to introduce to you today Aflac's officers that are joining us and put a lot of their effort into making these presentations so great. First of all, Todd Daniels, Executive Vice President, Global Chief Risk Officer, and Chief Actuary. Thank you, Todd. Ken Janke, Executive Vice President, Treasurer, Head of Corporate Development and Finance. Eric Kirsch, Executive Vice President, Global Chief Investment Officer.
Audrey Tillman, Executive Vice President and General Counsel. Kathryn Blades, Senior Vice President, Corporate Communications. Julia Davis, Senior Vice President and Chief Information Officer for the U.S. Gail Galuppo, Senior Vice President and Chief Marketing Officer for U.S. Andy Glaub, Senior Vice President and Director of Aflac U.S. Sales. Thank you, Andy. June Howard, Senior Vice President, Financial Services, and Chief Accounting Officer. Let me introduce the officers joining us from Japan. Charles Lake, President of Aflac International and Chairman of Aflac Japan. Thank you. Koji Ariyoshi, Executive Vice President, Director of Sales and Marketing. Masatoshi Koide. Koide-san is Executive Vice President of Planning and Research, Risk Management, Investment Compliance, and General Affairs. Thank you. Before we begin today, let me remind you that some of the statements you'll hear are forward-looking within the meaning of federal securities guidelines.
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-K for some of the various risk factors that could materially impact our results. You'll find copies of the slides at your seat today so that you can follow along and make notes. As I mentioned, we will have three Q&A sessions throughout the meeting, so there should be ample time to ask questions. Please make sure you hold your questions till then. We're going to begin with the Japanese speakers first, then we'll have Q&A, then we'll have the U.S. speakers and have Q&A for the U.S. Finally, as always, we end with the financial speakers and we will have Q&A then.
Remember this presentation is being webcast. As a courtesy to everyone in here, please turn off your cell phone and other electronic devices. I appreciate that. Now I'd like to introduce our first speaker. Dan Amos has been with the company on a full-time basis since 1973. In 1990, he became CEO of Aflac and Aflac Incorporated, in 2001 he was also named chairman. Dan will now give us a strategic overview of Aflac and Aflac Incorporated.
Good morning, everyone, and thank you for joining us. Since our last Financial Analysts Briefing 12 months ago, many changes have occurred in Japan and in the U.S., not only in the political landscape, but also across the insurance industry. Let me begin with the U.S. The last year has been dominated by mergers and acquisitions within the health care industry, notably brokers and hospitals. Additionally, with the presidential election looming, many candidates have articulated various options and opinions ranging from minor changes to the current Affordable Care Act, or the ACA, to an outright elimination of the ACA. Without a doubt, in the U.S., there remains confusion with brokers, agents, employers, and employees alike on the specifics of the ACA and how it affects each constituent. For most insurance companies particularly, this represents a challenge, but to us, we feel like it represents an opportunity.
I'll talk about that in a moment. In Japan, we've seen Abenomics, the goal of which is to eliminate deflation and to create an inflation of 2%. On January the 29th of 2016, the Bank of Japan announced negative interest rate policies as a tool to fight deflation, in addition to the ongoing quantitative and qualitative easing program. The traditional expected outcome of the weaker yen also went the other way, with the yen strengthening to the 107 level to the dollar, and today it's about 110. Additionally, the negative interest rate environment has exacerbated problems in the insurance companies faced in Japan, especially finding yen-denominated assets to match against the longer duration liabilities. Some Japanese insurance companies responded with steps such as the withdrawal of interest rate sensitive products.
Given Japan's historically low interest rate environment, we've also seen domestic insurers looking for opportunities outside of Japan, resulting in the purchase of U.S. or other foreign companies to help diversify their business. What remains in question is whether the changes in the monetary policy in Japan will have the ability to eliminate the negative interest rate and raise it to the targeted inflation rate of 2%. While the environment has been challenging in both the U.S. and Japan, it's important to note that we've remained focused on doing what we do best, providing protection-type products to help consumers when they need it most. That's clearer today than ever before. What's been true for more than six decades is what separates Aflac from the other competitors. It is the relentless focus on affordable supplemental products in both the U.S. and in Japan. That also generates solid profit margins.
This disciplined approach has been a major contributor to the success for many decades, and I believe it will continue to propel our leading position in both countries in the future. Our business is dedicated to what we see as the most attractive segment of the two largest insurance markets in the world today, and the opportunities we see in Japan and the United States are vast. You'll hear more about these opportunities today. Although Japan and the United States are half a world apart, there are many similarities that our products ideally suit for both countries. In particular, the aging population puts the financial pressure on the healthcare system in both U.S. and in Japan. In both countries, rising healthcare costs are being shifted to consumers in the form of greater out-of-pocket expenses and healthcare co-pays and deductibles.
In Japan, consumers have been actively looking for solutions to help bear their cost. In the United States, the Affordable Care Act is prompting similar dynamics as consumers come to grips with the reality of the healthcare cost that they must bear. In both countries, we are leveraging Aflac's innovative products, our extensive distribution system, and trusted brand to extend our success to the solution of choice for millions of people. I am convinced that we have the right approach to provide solutions that benefit consumers in both countries, and in doing so, produce attractive long-term growth for our shareholders. Let me provide you with an overview of the fundamentals we believe are necessary to produce long-term shareholder value, generating profitable growth, investing in our business, and ensuring sound financial management. First, let me talk about our efforts to generate profitable growth.
Aflac Japan, our largest earnings contributor, has gathered more than four decades of experience with supplemental products, and we are leveraging that experience and expertise that we've gained for the success in our current environment. For several years now, Japan's operations has intensified its focus toward third sector products, which are less interest rate sensitive and more profitable than the first sector products. In fact, given the ongoing negative interest rate environment in Japan, we're going to aggressively reprice our WAYS product this year and other first sector products in April of 2017. As a result of these actions, we expect overall sales of the first sector products to decline dramatically, which will contribute to lower premium income and revenues in that category. We will continue to develop new third sector products specifically designed to maintain our strong market share, and you'll hear more about it from Yamauchi-san this morning.
With respect to profitability in the United States, we have more than 60 years experience with supplemental products. We continually evaluate the market environment and develop essential products and services for our primary contributors and constituents. The sales agents and the brokers who sell our products, the businesses who offer our products, and the consumers who need and purchase our products, because the sales process doesn't involve selling just to consumers. It involves gaining buy-in from all three constituents. Our success in emphasizing Aflac as a total solution for each will ultimately increase the penetration of our profitable product offerings that we have today. Another fundamental in producing long-term shareholder value lies within the strategic business investments we make in enhancing operation efficiencies and leverage our brand and our distribution opportunities.
In both the U.S. and in Japan operations, we continue to invest in technology and innovations to improve productivity, enhance customer service, aid the distribution networks and enrollments, and build strong market share. The third fundamental in our building long-term shareholder value entails sound financial management of the company. I know how important capital deployment is to you, our shareholders. Deploying capital prudently is a top priority. Historically, as we have considered capital deployment options, we primarily contemplated projects for enhancing organic growth, dividends, and share repurchase. We have been and will continue to be very disciplined when evaluating capital deployment. Absent more compelling alternatives, we see these as our primary avenues for capital deployment. We will also concentrate on maintaining a low-risk profile and a transparent business model as we do this.
Aflac has come to be known as the industry-leading ROE. We have among the lowest cost of capital in the insurance industry today. We will continue to work hard to preserve and leverage our unique competitive position in the insurance industry today. We certainly won't alter our conservative posture for our balance sheet. By staying disciplined and focused on doing what we do best, I believe we will continue to generate results that build long-term value for our shareholders. With these fundamentals of long-term shareholder value firmly in place, let me now expand on two of our most important assets, our brand and our people. Our brand serves as a door opener for future opportunities. It is our people who open those doors and make those strategies a reality. While we have a phenomenal brand, it's important to differentiate our company from the competitors.
We continue to be innovative in creating different ways to leverage the brand into tangible results. An example of this in the U.S. is the One Day Pay, the initiative we launched in 2015 that allows us to process, approve, and pay a claim in just one day. You'll hear more about this from Teresa. There is no doubt that American consumers need cash quickly. Paying claims fast and fairly helps set us apart from the competition. It's important to understand that One Day Pay isn't a marketing gimmick. It's a driver of shareholder value. We've seen One Day Pay enhance the customer experience, increase the brand trust and loyalty, and most importantly, it drives account penetration and enrollment periods. In Japan, Aflac's brand has also served us well for many years.
Not only is Aflac Japan the pioneer and leading provider of cancer insurance business, we're also the number one seller of medical business in Japan. As a product innovator, a trusted brand, we have experienced tremendous amount of success leveraging the strength of our brand to ultimately drive sales. Our remarkable results underscores the importance that Japanese consumers place on selecting the brand they trusted and know. We believe our growth strategy and our initiatives serve as a position to Aflac to sustain growth for the long term. We can deliver on a brand promise which will ultimately benefit not only the consumer, but other stakeholders, including our shareholders. At the end of the day, it's a long time to build a brand, but it takes a very short time to tarnish or destroy a brand.
I believe that protecting the brand is one of the most important responsibilities I have as a CEO. Another critical aspect of my job is leadership development and succession planning. We have a tremendous management team currently in place, but no matter how strong our team is, we are continually striving to strengthen our bench. That's because leadership development and succession planning is not an end into itself. It is an ongoing process that infuses the knowledge and skill sets already inside the organization with the expertise and the fresh ideas of new people who join our business. Many of them are here today, and I encourage you to talk to them as I'm sure you'll be impressed with their knowledge and their expertise. Ultimately, creating and nurturing the culture of an organization is a very important part of leadership.
Two weeks ago, Paul and I returned from Japan where we surveyed the earthquake damage and met with the people and numerous policyholders down in southern Japan. Last week, I went to seven states in the U.S. as part of a nationwide effort to help Teresa continue to push the advantages of One Day Pay and the Everwell enrollment platform. One of these messages that I'm pushing as a CEO is that even though I've been with the company now for 42 years, we are laser focused on the future. I'm letting everyone know that change is an important part of the business environment at Aflac, and that change and that innovation are what continue to propel our long-term growth and our success.
I am convinced now more than ever before that with change comes opportunity, and I am excited today more than I've ever been about the future of Aflac. We have maintained our focus on controlling the things that we have the power to control. We can and will control our efforts to build our business and to take care of our customers, our employees, and our distribution network. By doing this, I believe we will continue to enhance shareholder value. I will conclude by reiterating how proud I am of the accomplishments of our management team and employees, our sales distribution networks in both Japan and the United States, as they've worked hard to generate these results. To prove that, I'm going into my 26th year as CEO, and in each of those years, our management team has achieved our operating earnings per share, including currency.
Most importantly, we expect to achieve the 2016 objectives as well. Thank you very much, and with that, I'll turn it back over to Robin. Robin?
Thank you, Dan. We'll now turn our attention to Aflac Japan with the first presentation by Paul Amos. Paul moved from our U.S. sales force to the headquarters in 2005. In 2007, he was promoted to President of Aflac. He recently returned home to the U.S. after residing in Tokyo for two years to oversee the Japanese operations. Frequently, he is continuing to travel back and forth between the U.S. and Japan as he continues to lead Aflac Japan. Today, Paul will discuss Japan's macro environment and the market overview there. Paul?
Since Aflac Japan was founded more than 40 years ago, Japan has undergone significant social, economic, regulatory, and governmental change. At Aflac, we have always believed that with change comes opportunity. Aflac Japan has consistently leveraged its unique resources and expertise to create social benefit by ensuring policyholder protection while pursuing profitability and long-term growth for our shareholders. Aflac built its position as the leading provider of cancer and medical insurance through a focused product line, diversified distribution system, and effective partnerships. This approach allowed Aflac Japan to fulfill its promise to our policyholders. Creating value by providing insurance for daily living continues to be our focus into the future. I will begin my presentation today with an update on Japan's macroeconomic environment. I will then address Aflac Japan's standing in the market and our strategy in Japan moving forward.
Japan faces unprecedented challenges of keeping its economy running against the backdrop of an aging and declining population, which is contributing to a shrinking workforce and placing Japan's government under increasing financial strain. Therefore, the government has to support a growing number of retirees without allowing its public debt to balloon. As you'll recall, Prime Minister Abe first announced the Three Arrows Abenomics strategy in 2012 to address these challenges. The strategy is aimed at exiting deflation, shoring up Japan's economy, and reining in public debt, which is currently the highest among developed economies. Last year, the Prime Minister declared stage 2 of his Abenomics program, which has been referred to in the media as Abenomics 2.0.
The goal of stage 2 is to increase GDP to JPY 600 trillion by 2020, raise the birth rate from 1.4 to 1.8 per woman, and reduce to 0 the number of people forced to leave their jobs to care for elderly or a sick relative. The government is scheduled to announce a comprehensive plan to achieve JPY 600 trillion GDP target later this month. Since we met last year, there's been a headwind to the economic recovery in Japan, due in part to global economic uncertainty. In 2005, Japan's annualized GDP growth moved in and out of negative territory. In the fourth quarter, GDP declined 1.1% due to weak exports and consumption. Consumer prices, excluding fresh food, were flat in January 2016, continuing to fall short of the Bank of Japan, or BOJ's, 2% inflation target. Falling oil prices have weighed on inflation expectations.
Companies' consumer inflation projections one year ahead fell 0.6% from 1.4% in June 2015 to 0.8% in March 2016, according to the BOJ's quarterly Tankan survey and its quarterly survey of corporate sentiment. On May 19th, 2016, the Nikkei stock average had fallen approximately 19% since the end of May 2015. The market is up 60% since Prime Minister Abe took office in 2012. Over the past year, the government has actively tried to promote an environment conducive to sustained economic growth. On January 29th, the Bank of Japan surprised markets with a negative interest rate policy in an attempt to spur investment and to boost inflation. Under the new policy, commercial banks continue to earn 0.1% interest in the most existing reserves held at the central bank. The rate fell to minus 0.1% for new reserves effective February 16th of this year.
Bank of Japan Governor Haruhiko Kuroda explained in a press conference that the policy is intended to show people that the BOJ is strongly committed to achieve 2% inflation, and that the central bank was prepared to reduce the interest rate further into negative territory if it was warranted. The BOJ kept rates unchanged following their April 28th monetary policy meeting. This is an area we are monitoring closely and which I will touch upon later in my remarks. In November 2014, Prime Minister Abe announced plans to raise the consumption tax from 8% to 10%, effective April 2017. Recently, however, the Prime Minister has stated that a sharp contraction in the global economy would warrant postponing the tax hike. There is an increasing speculation that the Prime Minister may be preparing to make the case for delaying the increase of the consumption tax.
In any event, Prime Minister Abe has already begun putting in place measures aimed at fiscal consolidation, including those to control Japan's Social Security expenditures. Although it remains uncertain how effective Abenomics will be, we are seeing change on the ground, particularly from economic reform measures. Reforms that have been particularly well received include the implementation of the corporate governance and stewardship codes, enactment of the 2016 Tax Reform Act on March 29th, which lowers the corporate tax rate to below 30%, and the passage of the Womenomics law in August of 2015, requiring firms over 300 employees to develop, announce, and submit voluntary action plans to expand opportunities for women in the workplace.
Taken in its entirety, in the mid to long term, the strategies pursued by the Abe administration have the potential to deliver meaningful reform to Japan's economy and change the way businesses operate in Japan, including Aflac. Please let me explain. Womenomics, or the increased participation of women in the workforce, has been highlighted in Japan as a primary way to address the challenge of a shrinking workforce. Diversity management has always been central part of Aflac's philosophy for decades, and in Japan, we are promoting diversity through our women's empowerment program. Among a range of measures in November 2015, we brought together for the first time the women of Aflac Japan and the female members of our senior and executive ranks within Aflac U.S. to discuss the changing tide of women in Japan and the importance of diversity in the workplace.
As we advance toward the next decade, it's critical that Aflac Japan harness the unique skills and perspectives of our female colleagues and bring them into the management ranks. Empowering women in the workplace is not just the right thing to do, it is good for business. I'm proud to say that the women currently hold 20% of Aflac Japan's leadership position. We are committed to achieving 30% by 2020. I'm also pleased to announce that on March 4th of this year, Aflac Japan was recognized for its diversity efforts and successful implementation of diversity and inclusion, or D&I strategies, by Japan Women's Innovative Network, or J-Win, in their Diversity Award. While we hope to make progress in the future, bolstering the role of women in Aflac Japan will continue to be a key focus moving forward.
In February 2016, Japan's official census figures showed Japan's population shrank by nearly 1 million people for the first time over the last five years. In 2015, Japan's population stood at 127.1 million, representing a 0.7% decline since the last census in 2010. This marked the first time since Japan began collecting census data in 1920 that the nationwide count recorded a decline in population. Japan's birth rate has long been significantly below the 2.1 per woman needed to sustain growth and currently stands at 1.4 per woman. Today, one in four Japanese citizens over the age of 65, and by 2050, nearly 40% of Japan's population will be over the age of 65. The senior citizens hold approximately 60% of Japan's household assets, and this percentage is expected to increase over time.
With a shrinking workforce and rapidly aging population, Japan's publicly funded social insurance programs will continue to be under increasing financial pressure. The Ministry of Health, Labour and Welfare estimates that the medical insurance benefits will reach as high as JPY 54 trillion in 2025. Accordingly, the Government of Japan has moved forward with a comprehensive and integrated overhaul of the Social Security system, along with healthcare and tax reform. Japan's immigration policy has remained largely unchanged for years, and although minor adjustments are being implemented, they will not be enough to meaningfully impact Japan's demographic challenges. Against that backdrop, raising Japan's consumption tax is seen as one of the primary funding mechanisms for Japan's Social Security costs. Part of the need for Aflac's products arises because many expenses are not covered by Japan's healthcare system.
Patients must bear these expenses, which include extra charges for private or semi-private rooms, special treatments or medicines not covered by the national healthcare system, transportation costs for family members traveling to the hospital, and daily necessities of life in the hospital. According to the most recent survey by the Japan Institute of Life Insurance, the daily out-of-pocket expense incurred by a patient or family during hospitalization is up 30% from 2010 to 2013, and roughly one-third of patients incurred more than JPY 20,000 of daily out-of-pocket expenses during 2013. Rising healthcare costs have driven the majority of Japanese consumers to seek private insurance to help cover the out-of-pocket expenses. Aflac's trusted brand and relevant products provide options for the millions who continue to seek as they struggle to bear the financial burden of higher medical expenses. Let me share with you some data to underscore my point.
As you can see, Japan's life insurance market is expanding, with particular growth in third sector products, including cancer and medical insurance. The total number of policies in force at the end of December 2015 was 158.1 million, of which 61.1 million came from third sector products. Aflac remains disciplined when it comes to profit margins and risk appetite, particularly in this low interest rate environment. As we discussed in our first quarter call, and I'll address later, we are actively managing our first sector business to ensure we control production in this low interest rate and negative interest rate environment. This slide illustrates market penetration rates for various insurance products in Japan. In 2010, 79.2% of Japanese citizens were covered by some form of life insurance. What is remarkable is that between 2010 and 2013, the market penetration for cancer insurance has increased more than four percentage points.
Keep in mind that because of the data of 2013 does not reflect the impact of Aflac's alliance with Japan Post. As such, we believe the penetration rate of cancer insurance is considerably higher today. With cancer being the leading cause of death, combined with the fact that cancer is a disease of age, Japan's population is aging. Excuse me. Japan's population is aging, and the need for cancer insurance will intensify. Additionally, we believe that recent efforts by the government at both the national and local level to promote cancer awareness will further drive consumer demand for cancer insurance. Meanwhile, the medical insurance penetration stands at 74%. Although this number is much higher than cancer, we continue to see an opportunity for growth.
The demographic factors mentioned below present an opportunity as health related expenditures continue to grow, so we do not need additional financial protection and peace of mind. With our strategy of offering consumers relevant products through expanding and effective distribution, Aflac will continue to create shareholder value by providing protection for the whole family by offering insurance for daily living. Yamauchi's speech will go into greater detail about Aflac Japan's growth strategy. Let me take a moment to provide you with an overview of where we are and what we have planned for the remainder of 2016. As you can see from this slide, the graph on the left shows that the number of policies in force for standalone cancer in the life insurance industry is growing at a rate of 3.9%, and reached 22.9 million policies as of December 2015.
As you can see from the graph on the right, our leadership position remains unchanged. Based on December 2015 data, Aflac Japan has a 65% market share of the standalone cancer market. While our percentage has declined slightly, the percentage increase in the penetration of the standalone cancer market has increased significantly, as you saw in the previous slide. We've also had our overall penetration boosted by partnerships with Japan Post, Dai-ichi Life, and Daido. This slide illustrates Aflac Japan's market share and the overall market growth for standalone medical insurance in terms of policies in force. As shown at the graph to the left, the number of policies in force for standalone type medical products in Japan has grown every year. As of December 2015, there were 33.3 million policies in force, representing a 4% increase when compared to the end of March 2015.
Aflac Japan's total market share in terms of policies in force was 17.3% as of the end of December 2015. While Aflac Japan was late in terms of entering the medical insurance market, we quickly rose to become the market leader as a result of the 2002 launch of our medical insurance product, EVER. I'm pleased to say that we have retained the number one position ever since. As of March 2016, Japan had 35 competitors selling standalone medical products and 26 competitors selling standalone cancer products, including both life and non-life companies. These levels have been fairly stable over the last several years, especially considering the number of mergers and acquisitions. The market is expected to continue growing as consumer demand increases for third sector products that supplement the public social security system. Many companies see growth opportunities in this market, the landscape remains competitive.
Aflac Japan is determined to maintain and further expand our position as the leading insurance company in Japan's third sector market. This slide compares our key indicators with that of MetLife and four domestic life insurers, namely Nippon Life, Dai-ichi Life, Meiji Yasuda Life, and Sumitomo Life. Given that the majority of Aflac Japan's total assets and premium income are generated by third sector products with low unit prices, the gap remains wide between Aflac and the four major domestic insurers in terms of total assets and premium income. That said, Aflac remains at the top with Nippon Life in terms of the total number of policies in force. Accordingly, Aflac Japan maintains a top tier position within the industry. The foundation of our product portfolio has been, and continues to be supplemental health products.
As discussed in our first quarter conference call in March 2016, Aflac Japan launched new cancer insurance product designed specifically for cancer survivors. While this product is expected to be minor in terms of sales, it is important that we continue to be innovative and responsive to the changes in consumer wants and needs. Among our life insurance competitors, Aflac is the only competitor to offer this product with this type in Japan. We also made refinements to our EVER medical product to ensure that we stay in step with the wants and needs of Japanese consumers. In keeping with our pioneer spirit, in July, we anticipate launching a completely new product in a new segment of the third sector to further enhance Aflac's growth potential. Yamauchi-san will provide detail on this product in his comments.
That said, in today's negative interest rate environment, we have taken steps to limit first sector product sales, including implementing production caps, reduced commission, product repricing, and in certain cases, product discontinuance. We are repricing the entire suite of WAYS products this year, and we plan to change the assumed interest rate for child endowment products in April 2017. In addition, effective May 2nd of this year, we suspended sales of WAYS and certain child endowment products in the bank channel. Similarly, we placed caps on WAYS and child endowment products for large non-exclusive agencies. Starting on June the 2nd, we will be lowering commission rates for sales of first sector products through our traditional channels, including our exclusive agencies.
As we have said in the past, when exclusive agencies sign a contract to sell only Aflac products, they do so with the belief that we will provide them a full product portfolio, including third sector and first sector products. Overall, we believe these decisive steps will put our first sector product portfolio on a more sustainable path. Yamauchi-san will cover more on distribution initiatives, but let me say that our traditional channels, which include individual agencies, individual corporate agencies, and corporate affiliated agencies, have been and remain a key to our success. Strategic alliances with our partners like Dai-ichi Life, banks, and Japan Post continue to strengthen and evolve. We believe our growth strategy and initiative for 2016 serve to position Aflac Japan for sustained growth over the long term so that we can continue to deliver on our brand promise.
We are committed to being a part of Japan's culture and part of the solution to aid consumers and their healthcare needs now and in the future. In closing, let me say that as we assess our past accomplishments and make plans for our future, the competitive strengths that Aflac, the leading provider of medical and cancer today, are exactly the qualities that will enable us as tomorrow's leader in insurance for daily living. To realize that vision, we are building on our culture of dynamic innovation and risk management to grow our core. You will hear more about this at our Mini FAB in Tokyo in September, but we are focused on key pillars of activity, including driving innovation in business and operational areas, further growing and maintaining our low-cost operations, and enhancing our capital flexibility.
As you have come to expect from Aflac over the years, our innovative products, strategies, and enhancements to offer our current benefits will ultimately benefit customers for now and in the future. We look forward to decades to come. Thank you.
Thank you, Paul. Our next speaker is Hiroshi Yamauchi. Yamauchi-san joined Aflac in 1976. Upon joining Aflac, he served in the actuarial department as section manager and held many positions of increasing responsibility. He assumed his current role as President and Chief Operating Officer of Aflac Japan in January 2015. Today, he will provide an overview of Aflac Japan. Yamauchi-san?
Good morning. As Paul mentioned, Japan has gone through significant changes in the past 41 years. These changes and the challenges are front and center today as we continue to enhance our strategy for creating value in this environment. The most recent significant challenge to insurers in Japan, and especially those focused on selling first sector product, has been the negative interest rate environment that took effect in early February. When I discuss first sector product, I am going to focus my comments on WAYS and the child endowment, recognizing these product dominate our first sector sales. At Aflac, we categorize our first sector product into 2 different categories, savings type product and protection type product. Savings type product, such as child endowment, are product with a primary purpose to obtain income benefits and cash surrender values or CSVs.
Products such as cancer, medical, and term insurance with the main purpose to obtain benefit from diseases, injuries, and death are protection type product and are low in terms of savings type benefits such as CSVs. For WAYS product categorized as savings type, they are sold through either discounted advanced premium or DAP type, or have a short premium payment period, usually 10 years or less. On the other hand, protection type product have level premium payment and also a longer premium payment period. Steps have been taken to control sales of first sector product due to negative interest rates. We cut the rate for DAP from 0.8% to 0.05% on May 2nd for all channels and all products.
In addition, we are repricing the entire suite of WAYS product this year, and we plan to change the assumed interest rate used for pricing child endowment and other first sector product in April 2017. We have planned to place further control on sales of savings type product such as DAP type WAYS and the child endowment, and will also take actions to reduce sales of protection type product such as level pay WAYS until they are repriced. Let me now cover some of these sales control measures that we plan on applying to savings type product. For large non-exclusive agencies channel, as of May 2nd, we placed production caps on the sale of WAYS and child endowment product, including level payment type product. We felt this prudent as this channel has historically generated a large volume of WAYS sales.
We also plan on reducing commission for the sale of WAYS product within the traditional channel starting June 2nd. As Paul mentioned, the traditional channel includes individual agencies, independent corporate agencies, and affiliated corporate agencies. In the bank channel, we had put measures in place to control the sales volume of WAYS and the child endowment product prior to the BOJ announcement. As we recognize the challenges posed to profitability from the low interest rate environment. Additionally, we suspended the sales of WAYS and DAP type child endowment product in the bank channel on May 2nd, with very few exceptions. As many of you know, modifying the availability of a product for sale through our distribution system does not happen overnight. Prior to implementing sales control measures to the agency channel, we have to be sensitive to the relationship between our agencies and their customers.
We feel it necessary to give them some time between informing them of control measures and actually implementing the measures. We feel we took the shortest road possible to implement a combination of a number of effective actions. While we have not set a sales target for first sector sales in 2016, we do expect sales of these products will decline as a result of the action we began taking beginning in May. As such, we anticipate seeing at least a 50% decline in sales of first sector products, namely WAYS and child endowment, during the second half of 2016 on a year-over-year basis, and at least a 20% decline is expected for the full year. While it is premature to estimate, we would expect further decline in 2017 as a result of our repricing actions.
Our execution plan is multifaceted with the simple goal of reducing Aflac capital committed to first sector savings type product, while preserving relationships with our various distribution networks. At the same time, we are defending and building upon our highly profitable suite of third sector products. For the last several years, we have refocused our effort on selling third sector products, cancer and medical insurance, which are less interest rate sensitive than first sector products. In 2015, we greatly exceeded our sales growth target for third sector products, generating a new annualized premium sales increase of 13.4%, which marks our highest annual third sector growth rate in the past 10 years. In addition, the fact that third sector sales grew successfully for three consecutive years at an average growth rate of 7.8% is particularly remarkable and considerably exceeded our anticipated midterm growth rate of 4%-6%.
For the full year of 2015, cancer insurance sales grew by 40.6%. Significantly contributing to this growth was the introduction of New Cancer DAYS in the third quarter of 2014. It's important to note that this increase was also enhanced by a cancer product exclusively sold through Japan Post. Following this product launch, the number of new contracts surged through all distribution outlets, further solidifying Aflac Japan's position as the leading provider of cancer insurance in 2015. Additionally, sales benefited considerably from our initiative that expanded the number of Japan Post locations offering our cancer insurance product to 20,000 locations in July 2015. Following the launch of a new medical product in August 2013, medical insurance policy sales benefited. However, with the introduction of our New Cancer DAYS policies in 2014, the focus of our sales force turned to sales of cancer insurance.
In June 2015, we introduced a new medical rider that enhanced our medical product, which has been additive to our medical sales. Aflac Japan has a history of developing innovative products to help relieve financial burdens related to changes in the national healthcare coverage and remain in step with consumer wants and needs. In order to do this while also sustaining our growth, we will continue to introduce new and revised products into the third sector insurance market. Some of the changes may be minor and directed toward a specific targeted consumer group, while other revisions will be extensive and directed towards a large segment of the population. A new cancer insurance product that we released on March 22nd is directed toward a specifically targeted consumer group, those who have previously been diagnosed with cancer.
This is a product cancer survivors can purchase if five years have passed since their final treatment for cancer. Our main competitor do not have a product with this benefit. We are able to develop this product due to our extensive experience with cancer insurance over the last 41 years, more experience than any other company in Japan. We believe that we are upholding our commitment to social responsibility as the pioneer of cancer insurance, while also broadening our customer base. While this product is specifically targeted to a small segment of the population, the sales so far have surpassed our original projections, and we are strengthening our effort to have all distribution channels offer this product. In addition, we revised the new non-standard medical insurance product, also launched on March 22nd, to enhance our competitive position.
This product covers serious diseases that are common causes of death in Japan, including cancer, heart attack, and stroke. The competitiveness of the product was further enhanced through a lower premium. We are pleased with the initial market reception of this product, and we believe it will serve as a catalyst to benefit the overall sales of medical insurance in 2016. Additionally, we are very pleased that we will begin offering a new category of third sector product in July. This insurance product, which has recently been approved by Japan Financial Services Agency, or FSA, covers a portion of the insured's income and provide a fixed amount of benefit payment in the event that they become unable to work as a result of a serious disease or injury. It is important to note that this product supplements benefit provided by the Japanese government.
Furthermore, payment terminate at either age 60 or 65, which are typical retirement ages in Japan. In addition, this product has the same level of profitability as medical and cancer insurance policies. In similar fashion to the concerns that Japanese consumers have pertaining to their ability to pay for medical fees resulting from disease and injuries, Japanese consumers are also concerned about their income decreasing as a result of not being able to work. By introducing such product, we anticipate that we will carve out a new market and capture new customers, thereby leading to further growth in the future. In addition, this income protection insurance can enhance commission for Aflac agencies. This is especially important because many of these agencies have been affected by a reduction in the sales of savings-type products.
We believe that along with our innovative product, we have achieved a competitive edge through our access to various distribution channels. We have enhanced and expanded our sales network to provide customers with multiple locations where consultative discussion and the purchase of insurance products can take place. Having secured access to various distribution networks and prioritized investment into these various channels with high potential, we believe we can achieve sustainable growth in the future. The traditional channel is the primary key to our success as this channel contributed significantly to 2015 sales. Last year, we focused on agency with high growth potential and strengthening our support to each of them by offering our services that match the individual needs of each. Providing financial assistance to hire sales agents or develop a sales force structure was one way we provide value to our traditional channels.
We also conducted sales agent training and offered assistance directed toward the individual needs of each respective agency. By continuing this effort, we believe we can further growth sales through these channels in 2016. Additionally, we have ramped up our effort to support insurance shops, which allow consumers to walk in and receive consulted service related to their specific insurance needs. The number of these shops, particularly in the urban areas, has been increasing for some time. A number of these shops are run by large non-exclusive agencies. We have dedicated a segment of our employees to support their sales operation. Alliances have been an important addition to our distribution system over the past 15 years. We just celebrated our 15th anniversary with Dai-ichi Life as an alliance partner and have maintained strong ties while also improving sales.
In 2016, we will continue our company-wide effort to further strengthen our relationship. Additionally, in December 2007, bank channel deregulation occurred, permitting the sales of third-sector insurance products to their customers. We leveraged the long-standing relationships we established with banks to help us reach more consumers, and that is exactly what we've been able to do. As I look to Japan Post, which is the largest distribution outlet in Japan, the number of post offices carrying Aflac product was expanded in July 2015 from 10,000 to 20,000. We have strengthened our support, particularly in training sales operation personnel at the newer postal outlets that offer our product. In 2016, we will build on this effort by providing promotional support in order to improve the productivity of these post office locations. We will continue to further build on the great relationship with Japan Post.
It is very important to note that the vast majority of customers buying Aflac products through new distribution channels are new to Aflac. This means we are gaining access to new customers we might otherwise never have been able to reach if we hadn't expanded our distribution outreach. As we work with new alliance partners and our traditional agencies, we feel it is important that there is very little overlap between their respective customer bases. We will continue to provide training and support that not only ensures the success of our alliances, but also the best experience for customers throughout Japan. Our actions have been centered around improving both our corporate brand power and relevant product through innovative advertising campaigns. Last year, we took a two-pronged approach for both cancer and medical insurance by simultaneously running advertising campaigns that promoted product and another campaign that promoted the company brand.
The objective of the product-oriented advertisement is to heighten product recognition while also highlighting the advantage of our products. Our corporate brand advertisements are aimed to further enhance our company image as the top life insurer for medical and cancer insurance. According to an independent research conducted by Aflac, our consumer recognition as the number 1 cancer insurer improved, as well as the image of Aflac as a trusted company has improved. When we aligned the timing of the new two-pronged promotional strategy with the new cancer and medical product introductions, consumer intent to consider our product improved. Because of this, we will continue this two-pronged approach. Now, I'm going to show both the product-oriented TV commercial for cancer insurance for cancer survivors, which was released in March, and the TV commercial that promotes our corporate brand as the number 1 cancer insurer. Enjoy.
Aflac.
がん保険に入っておけばよかった。がんを経験した方のそんな気持ちに応えたくて、Aflacはがんになった後でも入れるがん保険を作りました。日本で初めてがん保険を作ったAflacに、また1つ新しいがん保険が加わりました。生きるをつくる。
Aflac.
The graph illustrates the growth of Aflac Japan's total number of policies in force and the number of policyholders. The trend for Aflac Japan's total number of policies in force and policyholders has been increasing since 2009. As of 2015, the number of policies in force is approximately 23.7 million, and the number of policyholders is 15.3 million. As a preeminent domestic insurer accountable for many policyholders, we take our social responsibility very seriously. As such, we feel it is important to take further steps to strengthen our reach to customers. We feel sustainable growth will come as a result of maintaining high customer satisfaction levels through appropriate communication and accurate payment of claims and benefits. A number of initiatives will be taken by Aflac Japan to strengthen our relationship with customers. For example, Japan Post change of address notification service will be implemented for all policyholders.
This service helps ensure various policy-related postal items will be delivered to our policyholders after they've moved to a different location. Through implementation of this service, we believe we'll be able to contact our policyholders with better accuracy. Another example of an initiative we are implementing related to helping senior citizens in Japan. Japan's aging society is expected to accelerate in the future, considerable effort to connect with senior citizens will be in demand more than ever, making further improvement necessary. This entails ensuring our procedures easier to understand and more convenient to use. As part of our senior related effort, we are working on launching a status check service for senior customers in the second half of 2016 as a cooperative between Aflac and the Japan Post that leverages Japan Post delivery network, which includes all households in Japan.
In June 2016, we are going to launch our digital claim filing service, which enable online claims for some of our product to further improve customer convenience. We believe we have been able to strengthen the trust relationship with our customers through initiatives that will lead to claims being paid promptly and accurately. As a company that is accountable for 23.7 million policies in force, being attentive to our customer base is extremely important. By moving forward with effort to strengthen relationship with customers, we will seek ways to coordinate our effort and relationships to cross-sell various products. In Japan, in order to build a solid trust relationship with customers, making accurate claims and benefits payment is vital. The graph on the left shows the amount and number of policies related to benefit payments for our cancer and medical product from 2008 through 2015.
In 2015, we made more than 1 million claims payments with JPY 319 billion paid in claims for cancer and JPY 124 billion paid for medical. By delivering on our promise to policyholders, we believe we'll be able to continue to maintain a strong company brand and trust of our customers through the millions of claims payments we've made over the past 41 years. As you are aware, in February 2007, the FSA instructed all life insurance companies to thoroughly re-examine the status of benefit and the claims payment. Since then, strengthening the claims payment framework has been an ongoing focus for Aflac. As a result, we have continued to reduce the number of errors. In fiscal 2014, our error rate dropped to 0.002%, which is lower than any of the four major domestic insurers. Making both accurate and prompt payments is fundamental to our successful business model.
At Aflac, we will continue making improvements to our payment structure to solidify the trust relationship with our customers even further. As my final topic, I am going to talk about our 2016 sales outlook. Last year, Aflac generated strong sales of our cancer insurance, surpassing our expectations. At the same time, we produced solid sales of our medical insurance with the enhancement of new medical riders. Additionally, the number of post offices carrying Aflac products increased, and as a result of all of these factors, Aflac grew sustainably. Our third sector production for the first quarter of 2016 grew by 1.0%, which exceeded our expectations, especially given difficult comparisons.
During the December outlook call, you will remember Paul talked about how the strong sales results from third sector products in 2015 would create difficult comparisons for 2016, resulting in expected range of third sector sales being down mid-single digits for the year. However, in the first quarter of 2016, third sector production actually grew by 1.0%, which exceeded our expectations. As we shift our focus away even more from first sector sales and towards third sector products, those third sector sales have benefited. Taking all of this into account, we now anticipate third sector sales for 2016 will be in the range of down 3% to up 2%. I would reiterate that long term, we continue to believe the compound annual growth rate for third sector product will be in the range of 4% and 6%. We believe Aflac product will continue to provide valuable insurance options for Japanese consumers.
Our innovative product development strategies, broad distribution outlet, and enhanced customer outreach will support our future growth as we deliver on our promises just as we have for the past 41 years. Thank you.
Thank you, Yamauchi-san. Now we are going to have the Aflac Japan Q&A panel. I am going to ask Dan, Paul, Charles, Yamauchi-san, Ariyoshi-san to join me up here for the panel. I also want to ask you to focus your questions on the operations or sales or the environment or the government type things, because if you will remember at the end of the day, we will have financial presentations that will talk more about the profitability, benefit ratios, things like that. So if you could remember to do that, I would appreciate it very much. As always, I do not think I have to say it, but I will anyway. Please wait for a microphone before you ask your question. Tell us your name and the firm you are with. Also, we would like to limit everyone to one question and one follow-up. Okay. Jay?
Thank you. Jay Gelb from Barclays. My first question is on the sales decline outlook in 2017 for first sector products. I believe you mentioned you expect a further decline in sales next year. On what order of magnitude do you think that could be?
Jay, this is Paul. I think it's premature for us to give you that expectation because we're taking additional measures in the second half of 2016, and we honestly don't know how much sales are going to be down. I think the image we're trying to portray to you is that we are further projecting a downward trend in first sector as we focus our importance on third sector products. With the launch of our third product line in third sector, we really believe we can begin to shift people's expectations over from first sector and focus them on third sector.
Does that mean overall new sales could be an increase in 2017 if you add up all the first and third sector products?
It's still too early to tell.
Okay.
We focused on Third Sector. That'll continue to be the metric that we go after. In terms of how much First Sector is going to be down, we're saying 50% or more, and we really need to see that number before we can give you a percentage for the following year.
My second question is on the slide that says customer service strategy. Clearly policies in force of around 24
million is well above number of policyholders of 15 million. Clearly that means you have an average customer buying more than one policy. Can you give us some insight on those trends, what you see happening there going forward?
Well, my simple answer to your question is that the trend and also the proportion probably will not change that much going forward. However, since we are planning to launch a new category product in July, whether this new product will be purchased by a brand new customer or existing customer, depending on that proportion, this trend that you're mentioning about could change. However, as I mentioned, there should not be a significant change. Randy?
Thanks for having me. Randy Binner, FBR Capital Markets. I just wanted to learn a little bit more about the income protection product. I'm not aware personally that that's a big product in Japan. Is this something that other insurers have been writing? Is this something where Aflac's the pioneer? Has something changed in the way that the government helps folks who are out of work due to illness? Just trying to understand where this product line is in that country and what your opportunity is.
As Yamauchi-san and Paul mentioned in their speeches earlier, the current needs of younger consumers in Japan are not only to be covering the treatment cost for their diseases or injuries, but they're also worried about their cost of living or the living cost. Well, what we actually have done in researching the launch of a new product is to search for the nursing care type of product. However, as we have gone through our research phase to these younger customers, what we found out was that these younger customers are more worried about their future or their income rather than the nursing care type of things. Also there are some public social coverage being provided by the government. The product that we are planning to launch will complement the government offer. This product will offer coverage to hospitalization or people staying at home for their treatment.
This offering or the payment of the coverage will end at age 60 or 65. It is about time that these kind of products are starting to being offered in Japan. What I mean by that is that there are a few companies that have started selling this type of product. However, these other products that are currently in the market are rider types, or the coverage is not as rich as ours. I think our product will offer a better coverage. I do believe that this type of product or the product that we plan to launch this time will become the third pillar after cancer and medical in our product portfolio.
That's great. Thank you.
Let me say one thing about this new product. It's probably the most exciting new product we've had in a long time because everything else has been a variation of the other. As they said, it's the third pillar. They developed it. I'm very excited about it. It's still too early to tell. We don't know how it'll take hold, but if it takes hold, it can be big. We just got to wait and see.
I do want to add one comment on trajectory, though. I think the expectation, because in the past you've seen sales just spike immediately. The Japanese mentality here when it comes to a brand-new product line is going to be one of beginning apprehension, where they're going to want to learn it, learn the sales process, and how to sell it well before they really take it out strongly to their customers. We're going to launch it in the beginning of the third quarter. We don't believe it's going to have gigantic sales in the latter part of this year. The reason for the uptick that you've actually seen in our sales is actually due to the core products that we already have performing better than we expected, not necessarily an uptick in this product.
We're remaining cautious and conservative about the sales in the second half of this year for this product.
It's just like any new product. Not a revised product, but a new product. People have got to see it, use it, and then the word spread.
Eric?
Thanks, Robin. Eric Berg from RBC. I too have a question about what would seem to be disability, what in the U.S. we would call disability income. My question starts out with sort of the following thought, which is that in the U.S., of course, disability insurance is much more than medical insurance, or it responds in the case of much more than illness. It responds in the case of injury, traditional injury, and it responds in the case of diagnoses that are harder to make, such as, say, clinical depression or substance abuse. My question is, what specific perils are you going to be responding to for this product, and how will the medical underwriting work?
If we could ask Todd Daniels to start and make comments on this from an actuarial perspective, that'd be great.
Thank you. There's a few things to note with this product. Number 1 is the definition. How do you qualify for benefits? The first is you have to be hospitalized or under home care for more than 60 days. By definition, you are not working. Second, there's specific conditions that the government system outlines as part of its coverage, and we've basically piggybacked off those specific conditions as well. It is not based on your ability to work. It is defined by you having these conditions, but you have to be hospitalized or in home care for more than 60 days. The underwriting is similar to other products. It's simplified underwriting. But again, we're looking at your job. It's based on your income as to what benefits you qualify for.
I do want to comment on two additional factors that make this a very different product from the U.S. and any similarities you may be drawing. Number 1 is the absence of fraud in Japan. We just aren't going to face the same level of fraud that other U.S. insurers face in this category, and therefore, we are very happy to be able to think about profitability in a much stronger sense. The second, for those of you who have not lived in Japan, you cannot imagine the immense social pressure to get back to work. In fact, part of the long hospital stays that occur in Japan are actually related to the fact that when people are sent home, they feel compelled to go back to work. They keep them in the hospital longer at times to make sure that they don't actually have to return.
I firmly believe that we're not going to see the same level of concerns with people being willing for a percentage of income, or loss of income to stay at home. Both of those factors are strongly weighed into our overall profit that we've declared, which we believe is going to be in the same range as cancer and medical. Remember, the benefits terminate at 60 or 65, and we've capped the level. Everywhere you go, we've been conservative in every different direction of what could be ultimately high claims, and we're making sure that's not the case.
Suneet?
Thanks, Robin. Suneet Kamath with UBS. A question about the competitive environment in Japan. I guess there's recently been some discussion about a tie-up between Dai-ichi and Japan Post. Curious how you're viewing that and how it might affect your relationships with both companies since you currently distribute through both.
Charles or Koji, whoever.
Let me touch upon the business tie-up between Dai-ichi Life and Japan Post Insurance or Kampo. As you know, we have business alliances with both companies, and according to the information that I have obtained so far, there seems to be no specific things that have been determined between the two companies about how they are going to tie up in their business. Now the relationship between Aflac and Dai-ichi Life and Aflac and Kampo, with the both companies, we have very good relationship, and at the same time, the performance with the two companies have been very well.
Okay. Just a quick follow-up. I know there's not a lot of clarity, but just to be clear, to the extent we can, does this tie-up, based on your understanding, is it in Japan or is it in countries outside of Japan? Because I've read mixed things in press reports.
There are elements of this basic agreement, conceptual framework agreement that explores the possibility of, for example, Japan Post and Dai-ichi working in Vietnam. There may be some, but it is, as Ariyoshi-san has laid out, as we understand it, a conceptual framework to begin a discussion on possibilities moving forward. Very detailed, comprehensive strategic alliance agreement that we have in force with Dai-ichi and Japan both separately, and there's nothing about this arrangement between them that in any way challenges our relationship independently with them. It's wonderful in some ways that our two strategic partners have also decided to get together to have positive discussions about working together. We see this as a positive development and not in any way bad for us.
More to what he just said.
Okay.
You go.
All right. Thanks. Sean Dargan from Macquarie. I think I heard private nursing care insurance mentioned before, and it sounds like you've decided to pass on that as your next third sector product offering. I believe that some of the domestics have been offering this. It sounds kind of like long-term care to me. I am just wondering if you can describe what that product is and why you've decided to not have that be your next product launch.
As I mentioned earlier, we have considered launching a nursing care type of product. Aflac's current strategy is to expand the customers in their younger ages, meaning from those in the ages of 20 to perhaps 49. The nursing care needs among this age group customers is very low at the moment. One thing is that these customers are very interested in cancer insurance, medical insurance, and income protection. However, older customers or elderly customers are very interested in the nursing care type of product. However, when you calculate the incident rate of the nursing care or the occurrence rate of the nursing care as well as the current interest environment, when we calculate these numbers, the premiums tend to become very high. As a result, we have switched our direction from pursuing nursing care to income protection.
As I mentioned earlier, because the needs in the younger or the middle-aged customers towards this income protection type is very high, and this product goes very well with cancer and medical, so it will be easier for us to sell them together.
Steven Schwartz.
Hi. Steven Schwartz, Raymond James. A little bit more on the income protection product. Just so I understand this, you have to be in the hospital. You have to be under home health care, I think you said for 60 days, Todd? Is that right?
Yes.
Okay. Then what happens afterwards? Do you provide rehabilitation? Is there any return to work programs or things like that? Does that exist in Japan?
Go ahead. Go ahead, Todd. Oh.
Well, first of all, yes, as was mentioned earlier, 60 days of hospitalization or staying at home for treatment would be needed in order for one to receive the benefit payments. It not only requires to be in a state of not working, but it also requires some objective indices or objective facts such as hospitalization or home stay. As long as that status continues, that payment will continue. Another important factor is that there's always a diagnosis of a doctor required for this payment to be made. The actual amount of payment at the maximum amount will be JPY 400,000 for a regular employee and JPY 200,000 per month for a self-employed person. A monthly benefit amount a medical doctor could receive will be JPY 200,000 because a medical doctor is a self-employed person.
Okay, just one more follow-up just so I understood that. To continue to get payments, you actually have to be under a doctor's care. Okay, thank you.
Correct.
Yes.
Eric?
Thank you. Erik Bass from Citigroup. Had a broader question about competition, because I'm assuming with the changes in interest rates, you're seeing competitors take similar actions in the first sector. Are you seeing more competition as a result in third sector products?
Well, it is not as simple as that. Well, the third sector has been an area of focus from a while ago among all competitors. Basically, many of our competitors have first sector as their core products. The commissions are based on the sales, and the sales of the actual AP of the first sector product is large, so the commission being paid for the first sector is large. What I mean by that is because a third sector product's premium is smaller, which means a person selling that product will only receive small amount of commission. Our understanding is that those people who have been selling first sector products will tend to sell first sector. I believe our competitors are focusing more on the foreign currency denominated products because that is part of the first sector product.
In overall, my understanding is that the third sector product competitiveness will not enhance any more than it currently is because of the current situation.
The first sector market is already extremely competitive, and we believe that they're not going to take their eye off the ball despite the conditions of that market. Also notably, a lot of those companies are spending a tremendous amount of capital and resources going overseas. We believe they've already kind of made their way into third sector. We're currently competing against them, we don't expect any substantial change to the competitive environment as a result of the first sector product changes.
Hi, thank you. Seth Weiss, BofA Merrill Lynch. I wanted to ask about maybe discussions you've had, feedback you've had from your distribution partners in terms of how it might impact their third sector sales, considering the cutbacks in first sector offerings.
They don't like it. They'll go into more detail.
Ariyoshi-san is a skilled negotiator. In terms of our distribution channel. As I mentioned, we plan to launch income protection type of product in July. We've also launched two new products in March, and they are non-standard medical and cancer product for cancer patients, and they are selling very well. On top of these two products, we will be introducing the income protection in July. I think the focus of our distribution channel, the partners, will be in these areas.
Thanks.
I really want to just say they have really worked hard with this because it's a delicate balance between keeping them happy and not having them go somewhere else where someone would try to entice them through saying, "Okay, we'll let you sell it." Balancing that and keeping all these people. It's really all these people on this panel, I give them the credit for that because we have been able to pull that off. Would we like to have done it a little faster? Yes. Could it have been a lot worse and we could have lost them? It could have been much worse, so I'm very pleased with what they've done.
Humphrey Lee, Dowling & Partners. Based on Yamauchi-san's remark earlier about increasing market share in the insurance shops in Japan, I think there's a discussion by the FSA talking about bringing in some greater scrutiny over those kind of channels. Can you talk about the regulatory environment for the insurance shops in Japan and how you think about how that would affect Aflac Japan?
今回の規制は2つありまして、1つは顧客に対して正しい情報を与えるということですね。それは。どうぞ。
There are two parts to the regulations that have been introduced, one is to provide accurate and right information to customers.
顧客が移行情報、入るという意思を持っているかどうか、そしてまた顧客に対して十分な情報を与えたかどうかということ。
What is important is that the customer truly has the intention to purchase that particular policy, and that accurate information is conveyed about the product to the customer.
それからもう1つのパートとして、代理店自身も保険体制をきちんと取らなければいけない。それに対する調査が金融庁から入るという状況に変わった。今まで保険会社だけだったんですが。
That was one part. The other part is that the agencies that are selling insurance products have to have the right organization and governance. Up until then, the FSA had not inspected these kind of agencies. They have always inspected insurers only.
これ自体が我々のビジネスに影響を与えるということはなかったのですが、これらの情報を的確に代理店に提供して、その対策まで含めてサポートしたということが評価されています。
This itself does not have direct impact to our own business. However, it is important for us to provide accurate information to the agencies on what they need to do, and support them so that they can continue their business. Our agencies have evaluated highly of us because we have supported them in this manner.
アフラックとしては、商品とかそういうものだけでなく、こういった業法が変わった時に代理店に対してきちんとサポートをする。こういうこともアフラックの付加価値として、代理店がアフラックの商品を選ぶということにつながっています。
Our agency or agencies are choosing Aflac as the business partner they would like to work with, and our products as well. Aflac have been able to add values to their businesses by providing them the right information, how to deal with these kind of regulations, and not only just providing new products to them.
Humphrey, if you'll pass that down to Ian for our last question this morning.
Thank you, Robin. Ian Gutterman with BAM. Paul, I just want to clarify something you said earlier. There was a slide you showed about a 30% increase in outpatient costs related to hospitalizations. I assume that's for people who don't have insurance. If there are people like that who have insurance, they might have an Aflac policy. Does that suggest pressure on your cost? If so, how does that affect profitability?
Traditionally, the Japanese government has been very public in the increases in the co-pays that they have gone through from zero to 10 to 20 to 30. Unfortunately, going to 40 is probably some level of political suicide for the party. One of the things that they're doing behind the scenes is we're seeing benefits that the government is offering continue to be slowly increased to the individual, but doing so in ways that are less public in nature. There is a continued effort to raise the expenses that an individual is forced to take on, but not doing it solely through co-pay. No, we don't have concern over it.
In fact, we see opportunity within it that as the co-pays or the overall % of the expenditure that an individual is expected to take on goes up, it offers us an increased opportunity to sell larger policies. We're optimistic about it.
Makes sense. Thank you.
Okay. Thank you very much. We're going to take about a 10 to 15-minute break. Outside we have snacks, if you'll be back in here in 15 minutes, please, we'll start the U.S. review. Would everybody please take their seats and ensure everybody in the hallway is coming in? Okay, welcome back, everybody. Now we're going to turn our attention to Aflac U.S. Next, we will hear from Teresa White. Teresa joined Aflac in 1998, and in 2014, she was promoted to President to Aflac U.S. This morning, she will give an overview of Aflac U.S. Teresa?
Good morning. Today, I'd like to update you on our strategy to grow our U.S. business. First, however, I'd like to provide a backdrop of the overall insurance market and the outlook for voluntary in the United States. On March 23rd, 2010, the Patient Protection and Affordable Care Act, or ACA, was signed into law. With it came many ambitious goals to expand overall access to healthcare coverage. Implementation of the law has occurred in several stages, with the introduction of the individual mandate in 2014 and the employer mandate a year later. Meanwhile, the Cadillac tax, which is scheduled to take effect in 2020, still remains under intense deliberation. Regardless of the deliberation and debate surrounding ACA, appeals and delays have already been encountered.
It's clear that the impact of ACA has transformed health coverage in the United States, not only for the last couple of years, but will continue to impact all constituents, including hospitals, service providers, insurers, employers, and individuals in the healthcare industry into the future. Let me put into context the magnitude of the financial burden felt by consumers. Since 2020, deductibles for all workers have increased nearly three times faster than wages and seven times faster than inflation. Additionally, the results of a PricewaterhouseCoopers survey in June 2015 show that while ACA has not greatly influenced health spending, its impending Cadillac tax has already had businesses scaling back their benefits, resulting in a trend of shifting more costs to the consumers.
More than 1,000 employers across 36 industries surveyed by PricewaterhouseCoopers said that 44% had indicated that they had already started implementing cost-shifting plans through plan design changes and increased employee contributions. Additionally, 42% responded that they're considering this option. In addition to the actions taken by employers, it's important to understand Americans' ability to meet the increasing burden of healthcare costs. In its 2015 employer health benefits survey, the Kaiser Family Foundation found that the health insurance premiums are outpacing premium inflation and workers' wages. Additionally, according to Aflac's WorkForces Report published in February of this year, 65% of the 5,000 employees surveyed responded that they have less than $1,000 to pay out-of-pocket expenses associated with unexpected serious illness or accident if it occurred today. It is within this landscape that we believe Aflac has an excellent opportunity for future growth.
Voluntary products allow employers to provide their employees with adding little to no increase in cost for the employer. This is an appealing solution to employers who are trying to retain talent and keep their employees healthy in the workplace. As employees continue to bear more of the cost of healthcare coverage, and as they increase the awareness of the need for voluntary insurance policies, we believe that the demand for our policies will increase. Additionally, the affordability of product offerings is essential for our consumers in understanding that supplemental coverage is at a small price, and they can have that for their healthcare. It is much easier for an employee to accept a weekly payroll deduction of $10 than it is for them to come up with $1,000 in cash.
As you can see on this graph, the voluntary market is expected to grow at a compounded annual growth rate of about 6% over the next four years. Sales through brokers are expected to grow at a faster pace of 8%-9%. With the strong growth expected through our brokers, it's no surprise that last year, Aflac spent a tremendous amount of time and effort building out our broker sales channel. While we expect competitors will continue to enter this attractive market, especially since margins are squeezed with major medical, we're focused on deepening our relationship with our broker partners and making investments in technology to support growth in 2016 and beyond. Given this growth opportunity, I want to place the U.S. payroll market into perspective with a chart that we've often used and referenced in the past.
Based on the most recent U.S. census data, there are approximately 5.7 million firms with fewer than 100 employees in the United States employing more than 40 million people. This has been the market segment that our career agents have dominated, and it's the foundation of Aflac's U.S.'s business. Approximately 91% of all Aflac accounts in the U.S. are currently in the less than 100 employee segment. The mid-size market is made up of 95,000 businesses employing approximately 23 million workers. About 7% of Aflac accounts fall into this segment. We've been servicing this segment with our agents and brokers for many years. While the large case market includes a relatively small number of firms, that segment accounts for almost 47% of employees in total, offering us the potential access to 55 million workers.
As we've said in the past, each of these markets has unique needs, but they all face the same evolving benefits landscape. As employers and employees navigate this post-ACA healthcare environment and search for options, we must ensure that our career agents and broker support teams are equipped with holistic solutions in the form of products, value-added services, and tools needed to succeed in servicing their client base. As employees find themselves strapped with increasing medical expenses due to high deductibles, limited provider networks, and restrictions on covered prescriptions and procedures, we must ensure that we provide options for the protection and financial relief that they need. You'll recall that in 2015, we focused on building out our two-channel distribution model to leverage the strengths of each channel.
As we look into our strategic playbook for 2016, we're focusing on career agents in the small case market, which continues to be underserved, and our brokers support teams are focusing on our large case market. To accomplish this, we're concentrating not only on expanding our distribution through recruiting but also enhancing training and productivity within the sales organization. Additionally, in 2016, we're focusing on promotion of Everwell, which is Aflac's new platform designed to address the needs of the small business. We'll continue to work on deepening relationships with brokers. As part of these efforts, our agents are providing value-added services to brokers who dominate the large case market. Another aspect of our 2016 strategic playbook is maintaining stable account and premium persistency through differentiating our brand and offering businesses and their employees innovative solutions in the challenging healthcare environment.
Finally, we're targeting short-term and long-term operational initiatives aimed at driving efficiencies in our insurance processes and systems. Let me expand further on the focus of our 2016 strategic playbook. Recruiting is an obvious means for expanding distribution, recruiting alone does not drive a successful and sustainable sales organization. As I stated last December in the outlook call, we must focus on enhancing productivity of our sales distribution. As you can see, recruiting has been on a downward trend for the past year. I believe this reflects our efforts to establish a national framework that standardizes recruiting, training, and onboarding processes across all of our markets for the career agent channel. While I'm not thrilled with the recruiting trend, it doesn't tell the whole story. Our incentive compensation to our field rewards field management only when the recruit produces sales at specific levels.
While average weekly producers stayed relatively flat, I'm pleased by the average increase of 3.1% in productivity per producer over the last year. As you'll recall, we published the productivity metric in the Financial Analysts Briefing supplement beginning first quarter of 2016. This productivity metric represents new annualized premium per average weekly producer. I believe this improvement in productivity is a result of the efforts to transform recruits into productive agents and brokers sooner through successful onboarding, training, and incentive programs. We know that a productive recruit is more likely to have a long, successful career with Aflac if the recruit reaches a certain level of production within the first 52 weeks, and ultimately, Aflac benefits from a more productive distribution.
While recruiting will continue to be important, I don't expect to see a straight line growth rate each quarter, rather ebbs and flows as we start to increase the production of recruits. In the long term, striking an optimal balance should also improve sales force retention and premium persistency, since productive agents are more likely to stay with Aflac. Another important aspect of increasing productivity among recruits is providing the right tools to enhance benefits education and the enrollment experience. One important tool that supports increased productivity for our career agents is our enrollment platform called Everwell. While employers with less than 50 employees may not directly be impacted by ACA, they still want to offer their employees attractive benefits worry about the associated expenses.
In the post-ACA environment, our career associates are required to be knowledgeable about various ACA rules and regulations and how major medical plans and voluntary products can be combined to offer employers the best fit for their needs and the needs of their employees. As a result of their expertise related to voluntary products and how these products fit in this post-ACA environment, our career agents are well positioned to assist employers with ACA compliance by ensuring employees are educated on choices regarding coverage. Our career agents have taken on a more consultative role by offering holistic solutions to employers that encompass both products and services. Everwell allows our agents to offer third-party insurance products through partnerships with leading brands in dental, vision, and major medical, as well as Aflac voluntary insurance products.
With Everwell, our agents can walk employers through their obligations and responsibilities when it comes to healthcare and design a benefits package that fits their unique needs, the unique needs of their business, and the employee segment. We've seen significant increases in Aflac participation within accounts that offer the Everwell platform. Through the first quarter of this year, account penetration with Everwell was 10.6 percentage points higher than the account penetration through our SNG, our SmartApp Next Generation enrollment platform that's been in place since 2003. We saw growth with the adoption of the platform year-over-year. We still have a long way to go, and at the end of the day, our plan is to eventually replace our SNG with Everwell. As I mentioned, we're working on deepening relationships with brokers.
As we pursue this goal, we offer certified Aflac enrollers who are specifically trained and selected to serve the large case brokers. In addition, many of our veteran career agents work closely with broker sales teams to offer education and other value-added services to assist brokerage firms with understanding and positioning voluntary products with their customers. We're offering better tools to support the broker user experience, especially in the enrollment process. Additionally, we're enhancing web services to allow for faster integration between Aflac systems and broker platforms. We also provide custom enrollment communications and education through co-branded materials, including videos and websites, in addition to thought leadership content through white papers and the Aflac WorkForces Report. We must design our product offerings to be more relevant and to provide holistic solutions to brokers, employers, and employees.
Later this year, we'll be considering the possibility of adding true group products to our voluntary product offering. Because of the profit characteristics and administration not being compatible with Aflac's core competencies, we're looking to partner to provide the true group solutions without assuming the risk. In addition to product design and offerings, we believe that investing in technology and new systems will help us to drive an increase in our broker sales. To that end, we're automating an end-to-end solution to assist brokers who typically sell group products, which Fred will discuss a little bit later in his presentation. Finally, we designed the compensation plan with our broker support team to drive pay for performance in that they primarily are paid based on the business written by brokers who they partner with.
Overall, I'm very pleased with the progress that we've made with the growth in our broker operations. In addition to our focus on growing distribution and providing tools to help increase sales, we continue to drive initiatives to improve our customer experience and maintain our account and premium persistency. Of course, our significant brand awareness helps. We have to also protect our brand and undertake initiatives to improve our customer experience and enhance account management. Maintaining stable persistency is a key objective. While we've continued to improve persistency in our traditional business, our group business has followed the conventional trend of being less persistent. As a result, in an effort to improve group persistency, we're working on initiatives that focus on enhancing the customer experience.
This includes conducting research to better understand what drives premium persistency, in addition to the communication preferences of our customers and identifying where we can improve our service. For any business model that experiences rapid growth, inefficiencies can develop when the short-term tactics are implemented while long-term strategies are being developed. We've experienced some of those challenges with the growth of our group business. As a result, we're taking action to address inefficiencies that we've experienced. We anticipate that while there will be a short-term negative impact in persistency, we're confident that the efforts that we're taking will result in long-term strategies that drive persistency and profitability. Through these efforts, we expect to see improvements in these metrics over the course of the next two to three years.
Last year, we implemented two specific initiatives driving persistency and, more importantly, demonstrating our commitment to our customers, One Day Pay and J.D. Power Contact Center Certification. With our One Day Pay initiative, we process, approve, and pay in just one day. In 2015, not only did we pay 1.2 million claims in one day, but 100% of eligible claims that were submitted through the One Day Pay process were paid in one day. We estimate about 70% of our policyholders have policies that are eligible for claims processing through One Day Pay. It's hard to believe that One Day Pay started just over a year ago, through March of this year, already over 44% of eligible claims were submitted through that smart claim process. We continue to receive a great deal of positive feedback on One Day Pay from our customers.
In 2015, our claimant satisfaction score, which measures customer satisfaction with our service, increased by four percentage points. According to Hall & Partners, during the same timeframe, Aflac's integrity score increased by seven percentage points. In sum, the improvements in these two measures tells us that when we focus on the needs of our customers, our customers trust us more. In addition, independent research has shown that about a third of the general market, including employers, consumers, and brokers, state that One Day Pay significantly increases their interest in Aflac products. We believe One Day Pay is proving to be a differentiator for Aflac that can help maintain persistency and improve penetration as word of it continues to spread. Therefore, we will continue to drive adoption of One Day Pay.
As I mentioned earlier, One Day Pay is not the only way that we're demonstrating our commitment to our customer service, and thereby driving persistency. Earlier this year, our contact center operations achieved the prestigious J.D. Power certification for providing outstanding live phone channel customer service experience under the J.D. Power 2015 Certified Contact Center program. This distinction acknowledges a strong commitment to providing an outstanding customer experience according to J.D. Power, which reinforces our efforts to keep customers and policyholders satisfied, which helps to maintain stable persistency. As I've mentioned, we look for opportunities to provide solutions for agents and brokers to offer employers and their employees.
While we will continue to innovate when it comes to our suite of Aflac products, we recognize that there are opportunities to drive deeper penetration and further broaden our reach by having a full suite of consumer solutions that include products closely related to our core lines of business and technology to support the work site. When you look at the demographics of the workforce, millennials made up 36% of the workforce last year, and by year 2020, the demographic is expected to grow to 50% of the workforce. One of our goals has been to expand our reach to better connect with this segment of the population. It is especially essential to look at the age ranges of the working population since 98% of our sales in the U.S. occur at the work site.
For example, within the last year, we've rolled out new updates to our accident product to include market leading enhancements and unique benefits such as organized sports benefits. We've also developed new short-term disability benefits for a product that'll be introduced later this year. The benefits offered and the way we offer them, the product, are designed to attract the millennial generation. In addition, we've launched a suite of solutions and tools designed to simplify the administrative processes such as ACA reporting and Health Advocate. Last year, we purchased a small company called Empowered Benefits. This company provides technology solutions driven by online trends in the insurance and benefits space. Empowered Benefits was an early innovator of online health tools and is also responsible for building out the Aflac Everwell platform.
While representing a modest investment of our capital, Empowered Benefits represents an exciting technology hub to develop innovative solutions designed to augment our core U.S. business model. As you know, we've had great success over the years with our innovative commercials featuring the Aflac Duck. It's also important that we broaden our approach to ensure that we connect with different segments of the population. We all know that social media plays an important part in the lives of millennials, what better way to connect to this group than to design specific ads for social media that target younger people where they focus so much of their time? The Aflac Duck has over 750,000 followers on Facebook, today, I'd like to share one of our social media ads, I hope you'll enjoy it.
Crazy.
Unbelievable. Ruined my weekend, that's what that did. At least we have hot coffee.
That is true, my friend.
Excuse me. We're ready.
We're invisible.
Don't worry, he'll walk back in a second.
He didn't see you.
Did you mumble the address? Maybe you said 4454 instead of 4544. You should call again and make sure.
Do you have any crackers?
Guys, I think we just need to realize that this food isn't coming. Excuse me. Which line am I supposed to be in?
The one that's out the door into the parking lot.
Oh, no. I made an appointment in advance.
It's the same line.
Danny Smith?
Okay, he says that they can do any time from 5:00 P.M. next Thursday to 3:00 P.M., three weeks from Tuesday. What? Look, the game starts in five minutes. He says that's the window. Ugh. Your window is. Hey, I just got paid from my last visit. I can't believe I got paid in just a day. Some things don't take forever.
As I mentioned earlier, the tremendous growth in our group operation, which has more than 150%, has grown more than 150% from 2010 to 2015, has largely been accommodated by adding human resources, which, as you can imagine, has resulted in inefficiencies. To address this issue, we've developed a technology roadmap that provides us with the infrastructure for the future that will achieve efficiency improvements, lower expense ratios, and reduce operational risks. More importantly, it provides the capabilities demanded by brokers, employers, and consumers. At the end of this multi-year project, we'll have an end-to-end group system that will provide capabilities for all of our group constituents. Long term, our goal is to enhance the customer experience as well as to generate expense savings through the implementation of various operational efficiency measures, which will allow us to find additional cost saving projects.
Fred will cover a lot of this in his Aflac U.S. financial outlook, what I'll say is our long-term goal is to drive profitability for the U.S. to reinvest some of those profits back into our model to drive long-term growth. Our vision is simple. It's to be the number one multi-channel distributor of supplemental products to employers while enjoying industry-leading growth and profitability. I continue to believe that this is a realistic vision, I remain excited about the opportunities to grow this U.S. operation. Thank you.
Thank you, Teresa. We're going to have the Q&A panel for Aflac U.S. Dan, if you would join us, and also Andy Glaub, Director of U.S. Sales, will join us. I'll just remind you while everyone is coming up here again, that if you would focus your questions on operational and sales areas, then we will have the financial presentations after this. Okay, I think we're ready. First question? Can't see that far.
John Barnidge. John Barnidge, Sandler O'Neill & Partners. You mentioned that millennials will make up 50% of the workforce by 2020, 98% of your sales is at the worksite. With the sharing economy disrupting the employment workforce, especially for millennials, how do you see this changing your sales approach over the intermediate term? Thank you.
In the immediate term, with regard to millennials, what we're looking at is we have opportunity. Many millennials are looking to work for themselves and to be independent contractors, we're doing some things from a college recruiting perspective and recruiting them into our field force. From a sales perspective, we've seen in the workforce, I think about 14%, a little over 14% of our current policyholders are millennials, we just did an analysis very recently, of the new sales, we saw that 44% of new sales were millennials. We're starting to see an increase in the number of millennials that we're selling to in the workplace. We're still able to reach them through the workplace. We have a couple of different strategies from a millennial perspective.
One of which is our advertising strategy as well, which you saw with the social media.
Okay.
Larry Greenberg from Janney Montgomery Scott. On the One Day Pay, recognizing that
There are a lot of positives that you've alluded to. Are you seeing any impact on any of your claims trends, frequency, severity, fraud, anything in those areas?
Absolutely. We are seeing a trend of more claims filed. Normally, the trend is people will have a group of claims, and they will wait and file all of those at once. What we're seeing is because of how quickly we're paying the claims, we're seeing a lot more individual claims being filed a lot quicker, we are seeing that dynamic change. Other than that's the biggest dynamic that we've seen changed with One Day Pay.
The other comment I would make is that because they're being submitted through a system, there are edits throughout that system, therefore, it will not accept the claim unless all the different parts of the claim document are completed properly. Actually, you take out some of the human interaction and the possibility of mistakes there by having this all online.
Yeah. The other piece is, because it's still the same claims, but now they were bundling them before, now they're basically having these individual claims that they're filing. Same amount of money, but they're filing them as individual. The other thing you asked was related to fraud, and we've actually seen a reduction in our fraud with One Day Pay.
Let me make one other comment. I think that when you take a consumer and you bundle it and you give them one check, they're happy. Under this new scenario, they may be filing four or five claims. They're going to be happier because they get paid five different times, exactly what they said and exactly in one day. I think it's going to ultimately help with persistency and just overall claim satisfaction.
Jay?
Jay Gelb from Barclays. My first question was on this plan to offer a group insurance product. I believe you mentioned it would be without assuming underwriting risk and potentially partnering with another insurer. Can you tell us a little bit more about that?
Well, currently, we're still in negotiations of the contract. However, the plan is to offer a true group product. We're looking at products like universal life, whole life, disability, short-term, long-term. With those products, we are looking at basically partnering with a person or a vendor partner to offer those products so that we don't assume the risk. We want to look at it, and we also, from an administrative standpoint, are not designed to administer true group product as well. We're looking to partner with someone to offer a holistic solution, specifically right now in the large case market, because that's what our broker partners are wanting us to do.
Okay. Separately, on the operational efficiency, there's a mention in there of a $50 million three-year initiative on the Aflac Group end-to-end platform. Should we expect $50 million of increased expenses going through the income statement over the next three years?
Yeah
I don't know what the return on that investment will be.
Right. I'll let Fred cover it in his financial piece. It is $50 million three years, we have a holistic plan dealing with customer experience, specifically customer experience, operational efficiency metrics that we know that in the group business, we've utilized human resources to accommodate a lot of the growth, which you heard me say. Then we're also looking at retooling some things in our IT to have quicker integration of some of the tools that we'd like to offer to our clients as well. Fred's going to provide you a holistic response from a financial perspective and rolls through the P&L.
Has that impact started yet? Have we seen that in 1Q?
It's already baked into the numbers that you see. The expense ratios are already baked into the 2016 numbers.
Ryan?
Thanks. Ryan Krueger, KBW. I just had a follow-up on the true group initiative. To the extent you partner with another firm, is this something that would generate fee income for Aflac? Then over time, do you see a potential opportunity as you get more comfortable with that product starting to assume some of the risk on Aflac's balance sheet?
I'll answer.
Go ahead. At this point, we're still negotiating contract. What we know is that we don't know enough about it to assume risk, so we are exercising caution to watch how the business materializes, how we sell it, how they administer it, and so on. We plan to negotiate into the contract specific service levels and specific clauses that help us to protect our brand as well. There are a number of things that we're still working with the team on. Todd Daniels may have a little bit more that he might want to discuss on this, do you have anything else, Todd, that I'm forgetting? Okay. No. Right now, I won't say we're in early stages, but I'll say that there's still a lot of details that have to be ironed out before I can adequately answer your question.
Steven Schwartz.
Yeah. Hi. Steven Schwartz, Raymond James. Just another follow-up. Teresa, today, if you're with one of the major brokers, you're basically just offering cancer and hospital indemnity and other things, and now the idea is that there's going to be this Aflac bundled product with many more?
Right. Yes. Today, brokers are offering, for example, Aflac's critical illness or accident policies. They're wanting to offer universal life policies, whole life policies. Today what they're doing is they're utilizing various vendors to offer these bundles to just kind of pull it all together. They love our brand. They see that our brand is increasing penetration and accounts. They're asking us, "Why don't you guys offer this so that I can go to you and have one slot for Aflac?" What we're doing is we're providing that holistic solution for them and allowing them to be able to do that through Aflac.
Is this going to be important in a particular segment? I'm thinking the middle as opposed to the very large.
Right now, what we're seeing is many of our larger cases are asking for this. Certainly the midsize brokers will also look at this as an option as well. Many of them, quite frankly, and it's counterintuitive for me because in large case brokers, they have a number of different relationships. Many of them are finding that as they work with Aflac and they work with our broker sales professionals, that offering one solution may provide them with more benefit and ease their administrative expenses from a brokerage firm perspective.
Okay. One more, if I may. You mentioned the development of certified enrollers. Are these Aflac employees?
These are not employees. They're Aflac agents. I'll let Andy talk a little bit about that.
These are our career associates that have gone through a certification to work with our brokers to be their enrollment team.
My understanding was that brokers tended to use, they were actually independent enrolling firms, maybe I'm wrong about this, and that they had developed relationships with these independent enrolling firms. Early on, I think one of your issues was that you actually required brokers to use your agents as enrollers. I don't think that's the case anymore. Is this advantageous? Is this something brokers really want?
We see brokers who want to use a third-party enrollment firm, we also see them wanting to use our career sales force in many cases.
Okay. All right. Thank you.
I want you to remember that the cost associated with an enrollment firm, they have to actually pay that cost, right? The cost associated with an associate assisting them with enrollment is zero. They don't have a cost except for the associate gets commissions on what they sell. The other thing that we've heard from brokers who have utilized our sales associates is that they've seen increased penetration in accounts when utilizing our associates. There's been somewhat of a win-win bringing the voluntary experience to the table, increased penetration in those accounts.
Thank you.
There's no one else in the industry that can bring forth a sales force that can help the enrollment. If we can get one-on-one enrollment conditions, and we're able to do in certain cases, especially when it's broad based, going back to the point of the true group life or whatever it might be, or the major medical. If we're under that Everwell platform where we're going in and we're presenting everything, that's one way to do it. If it's a large broker, it's another way to do it. Ultimately, we believe that, and are seeing some shift in brokers wanting to use our agents. It depends on how well they're trained.
That's right.
That's why Andy's making sure that they're well trained, because you only get one shot at a broker. If you mess up with them and put somebody that's not good at what they do, they're not going to go back with you. He's controlling that, and that's making a real difference.
Okay. Anybody else? All right. Thank you. The panel will now go down, and we'll move to our next session today. Next, we'll hear from Fred Crawford. Fred joined Aflac in June 2015 as Executive Vice President and Chief Financial Officer. He most recently served as Executive Vice President and Chief Financial Officer of CNO Financial Group. Fred also spent more than a decade at Lincoln Financial Group in roles of progressive responsibility, including Executive Vice President and Chief Investment Officer. Fred.
Thank you, Robin, and good morning. With nearly 11 months as CFO of Aflac, one of my top priorities has been to meet with investors and rating agencies to gain insight into their perceptions of Aflac, including observations on financial performance and driving value. During these visits, there have been certain recurring comments, my presentation today is designed to address these themes. Additionally, I want to provide a look at important financial topics that will help you gain a better understanding of expectations for Aflac's future. My goal today is to help you understand how we plan to drive earnings and shareholder value over the long term, while also addressing short-term opportunities and challenges in both the U.S. and Japan. More recently, there are understandable concerns over Japan's negative interest rate environment and how we plan to navigate this challenging landscape in the future.
With hedging costs on the rise, questions about our hedged U.S. dollar portfolio in Japan and the associated risk has also been top of mind. We've also worked very hard in examining our capital management philosophy, wanting to determine the appropriate balance between dividends, share repurchase, and reinvesting back into our business model to drive growth, with a 33-year record of increasing the dividend always at the forefront of our mind. Finally, I will add to the comments of my colleagues and hope to provide greater transparency into our formula for driving long-term shareholder value. With the exception of upwardly revising our third sector sales guidance in Japan, there have been no notable changes in the outlook for our 2016 key metrics, including margins, capital deployment, EPS, and ROE estimates. I'll begin today by discussing key earnings drivers and the outlook for our Japan operation.
Last year, we provided details from the impact of reinsurance on premiums, benefits, and profits. With no material reinsurance plan near term, we would not expect any impact in 2016 and 2017 when comparing those results to our 2015 performance. I'd like to remind you that the paid-up period for the Five Pay Ways product will peak in 2017. As such, we expect earned premium in 2016 and 2017 to be negatively impacted by approximately JPY 30 billion and JPY 40 billion, respectively. This does not have an impact on earnings, as profitability is spread over the expected life of the product. We expect benefit ratios to remain strong in the near term, recognizing that we are coming off a year of favorable experience in our core lines of business, both medical and cancer.
We are off to a solid start in 2016 and have continued to see relative stability at these favorable levels. We believe claims trends continue to benefit from fundamental changes in Japan's healthcare system, which include natural incentives to reduce total days of hospitalization. For instance, more procedures and surgeries are being performed in an outpatient basis. When looking at first sector products, recognize these products naturally carry a higher benefit ratio and lower expense ratio. However, we do not foresee a material impact on our overall ratios from our first sector product strategy in the near term because the lapse rates are very low at 1% or 2% annually, and we expect only a modest level of first sector sales in the future. We expect continued stability in our expense ratios.
We continue to invest in IT and administration with near-term efficiencies gained from these process improvements reinvested back into our platform. Therefore, we expect overall expense ratios and profit margins will remain in the range of their current levels for the next three years. Now let me address our economic exposure to low and even negative rate environment in Japan. Paul and Yamauchi-san provided a strategic overview of the actions we are taking to limit the sale of WAYS and child endowment, which together make up about 18% of our total in-force block of business. We have just over JPY 8 trillion in statutory reserves, with approximately 36% of those reserves allocated to life insurance, which mirrors our first sector business.
When looking at gross premium valuation or GPV analysis for the Japan business, we have strong aggregate margins across all blocks of business at around 21%, and first sector products at approximately 11%. The margin represents the projected present value of profits over gross premium calculated on a closed block basis. Holding to current allocations, when we stress our first sector business for both zero JGB new money rates and hedge costs at 200 basis points indefinitely, we would continue to maintain positive GPV margins. Our current hedge costs on our U.S. dollar investment portfolio are approximately 110 basis points. These GPV margins are calculated on a U.S. statutory basis. On an FSA basis, a higher level of reserves is held, resulting in an even lower likelihood of reserve strengthening.
When stepping back and looking at our business as a whole, we greatly benefit from our dominant and diversified position in third sector businesses, where margins and reserves are extremely strong and morbidity trends are the primary driver of profitability. We are currently investing at rates that support our pricing assumptions. However, as we look ahead, the interest rate environment becomes more challenging, and we anticipate the standard rate used to establish regulatory reserves in Japan will drop significantly from 1% today to 25 basis points in early 2017. As Paul and Yamauchi-san noted earlier, we are taking significant pricing action in the fourth quarter on our WAYS product, targeting a 10%-14% internal rate of return. Our approach to repricing includes a healthy level of conservatism embedded in all key assumptions.
While we expect a reduced level of first sector sales in the future, our approach to pricing WAYS products will further build actuarial margins from their current healthy levels. In summary, our balance sheet in Japan is well positioned to absorb low and even negative JGB rates. Over the longer term, we expect to be committing less capital toward first sector products, given their relatively lower and more volatile return profile. Capital will then either shift to expanding our more profitable third sector business or be repatriated to the U.S. Turning to the U.S., as you know, most of the products we see in the U.S. have similar financial characteristics, or sell in the U.S. have similar financial characteristics, including margins. We do not segregate them by product category as we do in Japan.
Benefit ratios have been trending favorably for the past few years. We are gaining confidence that these favorable trends will continue as we move forward. Over the next three years, we would expect similar ranges to those we discussed on our 2016 outlook call, but more favorable to what we had forecasted at last year's Financial Analysts Briefing. We think trends in the healthcare utilization and hospitalization will continue in the near term, favorable trends, as consumers struggle to afford higher deductibles and co-pays. The growth in healthcare costs is exceeding the income growth for most workers. We generally price our products for higher benefit ratios. Assuming the business performs to our pricing expectations, we would expect some natural upward pressure on our ratios from new business over time.
The expense ratio in the U.S. has been elevated in recent years as we have been actively investing in our U.S. platforms, both the group and individual business models. Teresa outlined initiatives to drive increased sales growth and penetration. While these initiatives have naturally pressured our expense ratio, overall profit margins in the U.S. have been near record levels because of the declining benefit ratio in part. We believe it's prudent for us to reinvest some of these profits to both defend and build market share. One area of focus in the near term is our growing group business. Keep in mind that when I use the term group, I'm referring to the sale of group products, whether they are sold through our broker channel or traditional career agent channel.
While group business generally has lower profit margins than individually underwritten business, the growth of the voluntary market is being dominated by group voluntary insurance. Investing in our group platform is critical to securing important brokerage relationships and achieving our organic growth targets in the U.S. Our group business has experienced significant growth since the purchase of CAIC in 2009. We've grown from roughly $ 104 million in earned premium in 2010 to over $ 400 million in 2015. Today, Aflac Group represents roughly 8% of our earned premium in the U.S. but is growing in importance as we further penetrate the broker and large case market. Last year, Aflac Group represented 14% of total new annualized premium sales in the U.S. As Teresa noted in her comments, the outdated administrative platform at Aflac Group has been stressed by significant growth in new accounts and the complexity of the business.
We plan to invest a total of $50 million over the next three years, including 2016, to drive efficiencies with a portion of that spend capitalized. Our plan is well underway, and we expect improvement in GAAP profitability pre-tax of $40 million-$50 million by 2019 when compared to 2015 levels. We believe the investments we are making today will drive down future expenses and also improve persistency. Similar to our Japan business, we expect to reinvest those expense savings back into our overall U.S. IT roadmap to ensure platform modernization continues as we grow our sales. Turning to the investment arena of our business, let me comment on our strategic and tactical investment strategy within this challenging market environment. We have been successfully navigating a low interest rate environment in Japan for many years, we recognize the latest move down is more challenging.
We believe the actions taken on our first sector products will dramatically reduce the sale of WAYS and child endowment and will reduce associated asset flows. As I discussed earlier, our balance sheet and actuarial margins can withstand significant new money rate pressure for an extended period of years, our adherence to strong asset liability management provides us time to adjust. Our Japan portfolio contains approximately $40 billion in JGBs, with an average duration of 17 years and a yield to maturity of 1.7%. As we discussed during the first quarter earnings call, we purchased 70% of our 2016 budget for JGBs, or roughly $1.2 billion worth early in January before the Bank of Japan took dramatic action to lower most of the yields in Japan, as you all know.
Our yields on purchase of January were slightly over 1%, with an average duration of 22 years. We are evaluating our future allocation to JGBs considering the negative interest rate environment. However, long duration JGBs support both our ALM framework and are efficient from an overall capital and SMR ratio perspective. In addition to our disciplined approach to expanding and diversifying our U.S. dollar program, we have been expanding investments in alternative yen-denominated fixed income products to supplement the JGB market and continue to explore further opportunities. As we continue through 2016, our new money rates will naturally fluctuate as we execute on our strategic asset allocation and recognizing the natural timing issues associated with putting cash to work. In other words, together with our advanced purchase of JGBs, we are expecting stable net investment income in 2016.
A natural question is how to calibrate the 2017 earnings impact of lower JGB rates as our first sector strategies take hold, we are no longer helped by our tactical pre-buy of JGBs in 2016. Setting aside hedge costs and the impact of exchange rates, our new money rates continue to be influenced in 2017, mainly from executing on our strategic asset allocation and mix of investments. To illustrate, we estimate that if first sector asset flows came down in 2017 in the range of JPY 50 billion, our new money rates decline approximately 20 basis points from pre-BOJ actions, the result is an estimated impact of only JPY 1.5 billion-JPY 2 billion on net investment income, holding all else equal. Very important, this is isolating the impact of our first sector actions and recent JGB declines in yields as compared to our original plan for 2017.
When considering overall 2017 net investment income trends, realize we have and will continue to experience natural headwinds from higher yielding assets maturing into a generally lower rate environment. We will provide commentary on our investment activity each quarter and remain actively engaged in exploring strategies to defend net investment income. Investing in select growth asset classes is critical to navigating the low rate environment both in Japan and in the U.S. It is important to understand that our investment in growth assets is not only consistent with our peers, but more importantly, it is aligned with our strategic asset allocation and liabilities. Ultimately, we are targeting an asset allocation at or below the industry average of approximately 4% of total invested assets. I firmly believe this strategy is sound and necessary for diversification and ultimately higher yields in value creation for Aflac.
The purchase of growth assets will take time given that we use external managers and require a thorough due diligence process. In addition, there is a natural lag between asset selection, commitments, and funding. Which means the full funding may take a couple of years even after selection is made. This strategy works well as it allows us to invest naturally throughout economic cycles and gives us time to adjust tactically based on market conditions. While we expect the yields on growth assets to benefit us over the long term, they are capital-intensive securities. We expect to gradually spend down some of our excess capital in support of this strategy. We will continue to review our strategic allocation to alternatives and the pace of build against other potential risk-adjusted uses of capital.
While these investments will add to short-term volatility in the operating earnings, it is important to remember that our insurance products tend to be longer-term in duration, have very strong persistency, making growth assets ideal in terms of funding liabilities in Japan. We expect these asset classes will deliver long-term excess returns over a traditionally highly rated fixed income portfolio and provide diversification. There is a natural J-curve effect, particularly with private equity investments, that pressures near-term investment income as you build towards longer-term economic surpluses. To date, we have invested approximately $750 million in both Japan and U.S. equities, with $357 million in the first quarter. We plan to commit up to an additional $1 billion in growth assets by the end of 2016.
We show ranges here in the forward portfolio build, recognizing we will be opportunistic in our execution of this plan and this relative use of our capital. Our U.S. dollar program in Japan and related hedging activity is an area of focus among investors. It introduces a level of complexity into our business model that requires continued attention. We maintain an unhedged position roughly equivalent to the equity we have in our Japan branch. This is based on the simple recognition that this gap equity belongs to our dollar-based investors and should be held in dollars. We also maintain a risk budget supporting a modest increase in unhedged dollar investments for the purpose of mitigating hedge costs. Roughly $2.8 billion in additional U.S. dollar risk.
We are currently utilizing about 40% of that budget to help manage hedge costs and settlement risk. As such, should hedge costs spike unexpectedly, we could support a larger exposure to unhedged dollar investments. We maintain $21 billion in U.S. dollar program with a hedge ratio of approximately 65%. We expect the U.S. dollar investment program will continue to deliver significant positive excess returns relative to JGBs, net of hedge costs and over the long run. We fully anticipate periods of larger increases in hedge costs, and we closely monitor that risk. We employ a number of tools to help mitigate this risk, including asset allocation within the dollar program, diversification of hedge instruments, adjusting the tenure of the instrument, and utilizing the dollar risk budget.
As hedge costs have increased recently and JGB yields have fallen, this program continues to build significant cumulative value for Aflac Japan and the enterprise as a whole. In the first quarter conference call, I mentioned that we were evaluating whether to reflect hedge costs in our operating earnings. We concluded that beginning in 2017, hedge costs will be included above the line. While this change may add some volatility to our operating earnings, we believe that we can limit this volatility while ensuring hedge accounting flexibility. We will begin including hedge costs in our December outlook call guidance later this year. For 2016, we estimate the realized hedge costs will be again, around 110 basis points. I will begin my discussion on capital management with a brief overview of our cash flow model.
Although Aflac Incorporated can receive cash from borrowings, its principal source of liquidity is from operating units. Aflac Japan remits a portion of its FSA-based after-tax net earnings, as well as allocated expenses to Aflac U.S. Aflac Japan also pays a management fee directly to the parent company. Aflac U.S. remits allocated expenses and management fees to the parent and may pay dividends to the parent within the limitations imposed by Nebraska. That's our principal state of domicile, as you all know. Our ordinary dividend capacity is based on the greater of 10% of capital and surplus or the previous year's statutory income. Repatriation amounts are driven by overall capital conditions, most notably the strength of our SMR ratio and FSA earnings.
You can see that in 2015, we had a sizable dividend up to the holding company, driven by our decision to repatriate approximately ¥90 billion of FSA after-tax earnings derived from reinsurance transactions. Once we repatriate capital from Aflac Japan, we then pay a statutory dividend to the holding company. In the last few years and as we project forward, we would estimate our ordinary dividend capacity to be in the $2 billion range. However, we typically dividend less in order to maintain our core RBC ratios and to fund growth and investment in the U.S. The elevated dividend in 2015 increased our holding company liquidity and has funded an accelerated level of repurchase in 2016. Within holding company liquidity, as shown on this slide, there is a $500 million minimum balance we intend to maintain at all times.
It does not include collateral balances related to the parent company derivative activity, prefunding of debt, and non-operating balances. This slide shows our repatriation history and isolates the impact of reinsurance transactions. The timing of reinsurance-driven FSA earnings and repatriation can vary as we have retained a portion of after-tax reinsurance earnings at Aflac Japan to support the SMR. We estimate that for the fiscal year ending March 2016, our FSA earnings will be approximately JPY 150 billion, which is a bit lower than our more recent annual earnings run rate. Items that act as headwinds to FSA earnings include a strengthening Japanese yen, which we gain back over time via converting repatriated Japanese yen to U.S. dollars, and low new money rates and rising hedge costs.
In terms of reinsurance, we have executed on three transactions with a balanced approach to retain a portion in Japan while repatriating the remainder to the U.S. We believe our current reinsurance capacity is around JPY 300 billion before taxes. This is a conservative approach as the amount is derived from certain blocks of medical business with proven excess reserves in which we have successfully reinsured parts of the block previously. Should we execute on reinsurance for capital management in the future, our plan is to remain balanced in terms of repatriation and retention for SMR purposes, particularly in this low and unprecedented Japanese interest rate environment. Our SMR ratio has remained strong despite recent market volatility. We evaluate our estimated SMR on a monthly basis to ensure a sound understanding of the various factors associated with the sensitivity shown on this slide.
There are natural stabilizers as spreads and absolute rates tend to move in opposite directions with both U.S. Treasuries and JGBs considered two of the world's flight to quality investments. To help ensure sound risk management, we took extra steps this year to provide for a safety net should SMR move temporarily below our 600% framework minimum. One of these steps was initiating a JPY 110 billion reinsurance line of credit with Munich Re on a previously and partially reinsured block. The reinsurance agreement would have the effect of raising JPY 75 billion after tax and would be the equivalent of roughly 130 points of SMR. This amount is not included in our JPY 300 billion of reinsurance capacity noted earlier in my comments.
We also recently put in place a committed JPY 100 billion multi-year line of credit with a group of Japanese banks for the express purpose of temporarily providing downstream capital to Aflac Japan should our SMR come under extreme pressure. The reinsurance line of credit and the committed line of credit are both defensive in nature, and these measures afford us increased confidence in our ability to repatriate a portion of our annual FSA earnings. We determine the overall adequacy of our SMR utilizing a comprehensive framework, looking at impacts from stochastic scenarios and various deterministic stresses. We seek to maintain SMR levels above 600% with a 90% confidence level as calculated under stochastically derived scenarios. If the SMR falls below this level under these tests, then we ensure that there are sufficient committed facilities to recover the SMR in an appropriate timeframe.
With respect to our RBC ratio, we have maintained a stable ratio of around 900%, despite maximizing our statutory dividend in 2015. Our RBC is relatively sensitive to market movements, with the exception of exchange rates and credit migration. We maintain excess capital in our U.S. operations. However, this capital is difficult to both isolate and release as our Nebraska legal entity owns the world's largest financial service branch. We have an outstanding track record of returning capital to shareholders. Our return of capital has been supported by the repatriation of approximately JPY 120 billion or $1 billion in proceeds from reinsurance alone since late 2014. In addition, we have benefited from strong credit conditions with upgrades outpacing downgrades and net realized gains in investment portfolio. As we look to 2016, we anticipate deploying JPY 2.1 billion between cash dividends and share repurchase.
That amount is being supported by a continued spend down in reinsurance-driven excess liquidity at the holding company. As I mentioned earlier in my comments, we do not anticipate any new reinsurance transactions in the near term. However, our long-term range estimates show we have the capacity if we choose to execute on additional reinsurance for either defensive or opportunistic reasons. The bottom end of our forecasted range includes a recurring deployable capital generation in addition to a spend down of excess liquidity at the holding company. The high end of the range requires drawing from excess capital in Japan, the U.S., and a modest amount of debt capacity as we would otherwise naturally de-lever with retained earnings over time. As you look at the range, we recognize that on a rolling three-year basis, the forward range of deployable capital has been somewhat reduced.
Along with reduced contribution from reinsurance, this is simply the cumulative result of absorbing increased hedge costs, the overall lower yield environment in Japan, and caution with respect to increased volatility and overall economic conditions which play into exchange rates and credit markets. We are committed to maintaining our 33-year track record of cash dividend increases. Share repurchases continue to be the standard against which all other alternatives must compete for our deployable excess capital. We expect to invest more of our excess capital back into our core business model, with that reinvestment taking several forms. We will invest in our infrastructure to improve productivity and update our Japan and U.S. platforms. We look for opportunities to enhance our business through corporate development activities, including technology and new business innovation.
Finally, as mentioned earlier, we are also building out our growth asset portfolio, which will draw from our excess and deployable capital. We've allotted an opportunistic portion of our capital deployment plans. M&A has not been and will not be a fundamental strategy for Aflac given our dominant platforms and core competencies, but it is important for us to remain aware of opportunities. Our allocations depicted on this slide are not designed to be precise estimates, but directionally how we would depict our capital deployment priorities and approach. Absent a compelling return opportunity, we would put funds designated as opportunistic to work by repurchasing stock given the low execution risk and long-term return expectations. As we look to 2017, we will make a few adjustments to how we approach guidance and report our results.
Rather than providing short-term sales guidance, we will provide longer-term sales growth estimates commenting on near-term developments and trends that may impact those growth rates. We will continue to provide an annual EPS guidance range in absolute dollar terms, but we'll assess our EPS ranges to accommodate planned changes in our definition of operating earnings and our investment strategy. As noted earlier in my comments, we plan to include hedge costs associated with Aflac Japan's dollar program in our definition of operating earnings beginning in 2017. Additionally, we'll provide range-bound guidance for both deployable capital and share repurchase for the coming year as part of our annual outlook calls in December, recognizing our desire to be more tactical in our approach given evolving capital conditions and emerging opportunities.
As you've heard from Dan and Paul and Teresa and Yamauchi-san in their comments earlier today, we believe understanding our formula for driving long-term shareholder value is extremely important. In Japan, we are shifting our capital allocation away from lower return and more volatile first sector products in favor of our higher return core third sector health lines. We will continue to develop new products with an eye towards maintaining our strong market share and developing new third sector products. In the U.S., we are working to become more essential to the broker, the agent, the employer, and the employee with the simple goal of increasing our penetration in core, highly profitable voluntary supplemental health business. In order to do so, we need to expand our offerings of both insurance products and administrative solutions.
We seek to accomplish this in a less capital-intensive way and are unlikely to manufacture or administer non-core lines of business, which generally have lower and more volatile return profiles and are claims-intensive operations. Investment in our platforms with the goal of increasing operating efficiencies is a key part of our formula for driving value. We are also actively investing to advance our technology, seeding select areas of innovation and strategic investment. A good example of this is a small acquisition of Empowered Benefits that Teresa discussed earlier. The total capital outlay was less than JPY 40 million and was somewhat consistent with a traditional R&D investment. We need to do this as we look to innovate in the benefits space. We will continue to build out our strategic asset allocation to grow assets at a measured pace through external managers to drive greater long-term economic returns.
Finally, we are committed to a track record of dividend growth while tactically repurchasing our shares. We remain focused on risk management and maintaining simplicity and transparency in our business model. We're known for our industry-leading ROE. We have one of the lowest costs of capital in the industry. We will continue to work hard to preserve and leverage our unique competitive position within the insurance industry. Thank you for your attention, and I'll hand back to Robin.
Thank you, Fred. I must say that although Fred's been a part of the Aflac family for less than a year, he's certainly been an important one, and he became a member of the family in a very short period of time. Thank you, Fred. Now, as we have done for many, many years, we will end today's presentation with a discussion with Kriss Cloninger. Kriss joined the company in 1992 after spending 15 years as a member of KPMG's audit team for Aflac. He is President of Aflac Incorporated and a mentor to many of us here. Kriss will now present a discussion of strategies for corporate governance and transition. Kriss?
I hope you all appreciate these catchy little songs we used. Personally, I like the Eagles song that says, "Get over it." That's been my favorite, but they didn't ask me. Today, I've been asked to conclude the meeting by discussing my plans for the future, including my role of president of the corporation. Basically, I plan to focus my attention on the proper execution of certain key strategies and in overseeing the transition of several corporate functions I've been involved in. I believe that one of my most important responsibilities is to make sure that we continue to drive Aflac's long-term growth in shareholder value. As one of Dan's trusted advisors and a business partner for more than 30 years, one of my key roles has been to see to it that our vision for the company is implemented effectively in a prudent manner.
A significant factor in the execution of our vision has been the effectiveness of corporate governance activities. Remaining involved in governance, both as president and as a board member, is one way I'll continue to contribute. I also plan to spend a significant amount of time working with Todd Daniels, our Global Chief Risk Officer and Chief Actuary, who was recently promoted to Executive Vice President, and I'll work with him on matters directing and enhancing company value through effective risk management within each of our segments, including Aflac U.S., Aflac Japan, Aflac Global Investments, and Aflac Incorporated. Additionally, as President of Aflac Incorporated, I'll continue to serve as a strategic consultant and advisor on a variety of corporate initiatives. For many years, our simple, straightforward business model has contributed to our ability to achieve and maintain industry-leading margins.
As a result of our focus on maintaining strong fundamentals in our core businesses, over the years, we've produced solid earnings growth in both of our major operating segments. While I'm no longer in the financial driver's seat, Dan has told me that he expects me to be seated in the passenger seat, ready to grab the wheel, as it were, if needed, in order to avoid any action that could potentially distract from our longstanding record of profitable growth. I don't really expect to have to do that. That being said, keeping an eye on key initiatives that require substantial capital or critical risk-return dynamics remains a vital part of my responsibility. We're working on several initiatives, both in the U.S. and Japan, that we believe will strategically position us for the long term in each market.
For example, you heard Teresa describe how her teams are focused on the first two years of their technology roadmap that's designed to enhance efficiency and profitability at Aflac Group. This is a major initiative that we're spearheading while preparing for ongoing changes in the healthcare market and our growing position in that market. My role is to provide oversight, guidance, and advisory input as appropriate. I also closely monitor developments with the strategies Paul and Yamauchi-san discussed in their presentations, including enhancing our business returns through investments in technology, risk controls, pricing and distribution incentives in support of our first sector strategy, as well as our innovative third sector product we plan to roll out in July. As part of our normal operations, staying current with global regulatory developments is also a central part of our proactive risk management program.
As the regulatory landscape continues to evolve, I work with Todd Daniels and Charles Lake to monitor how we stay involved with potential changes that may impact our capital and risk structure. Finally, I've always played a key role in helping build the culture here at Aflac and will continue my efforts to provide input in areas such as talent management, incentive compensation, and organizational structure in the U.S., and Japan, and at the corporate level. Our focus on strategic and financial governance has been and continues to be an important discipline. In recent months, we've realigned our executive management committees to mirror the three major board-level governance committees.
These strategic moves were made in an effort to emphasize the importance of strong risk management, the confluence of investment strategy and capital management, and the need to actively investigate growth initiatives or opportunistic ventures which may enhance both our core product offerings and our distribution system dynamics. Internally, we formed the Global Executive Management Committee, or GEMC, to work with and evaluate the activities of our three core governance committees: Global Risk, Global Investments, and Global Capital. In my role as president, I co-chair the GEMC with Dan, and we along with the segment leaders, provide executive guidance regarding the key initiatives of the GEMC on an enterprise-wide basis. This committee structure is designed to ensure the accountability of all key members of executive management to perform and execute on vital strategies we've identified for driving Aflac forward.
The Global Risk Committee serves to provide oversight to the overall risk management framework of Aflac Incorporated and subsidiaries. The function of this committee involves overseeing the processes for identifying, assessing, measuring, monitoring, controlling, and mitigating the key risks associated with Aflac. This committee also ensures transparency and appropriateness of reporting to Aflac's executive leadership. Todd Daniels chairs this committee. In this role, he has the primary responsibility of ensuring that the audit and risk committee of the board of directors stays informed on the key risks that Aflac faces and the mitigation strategies that management has identified to offset these risks. Eric Kirsch, our Global Chief Investment Officer, chairs the Global Investment Committee, which serves to provide comprehensive governance oversight and timely decisions related to all aspects of Aflac's investments.
This committee also serves a consultative forum for facilitating cross-functional communication of information critical to the proper management of the company's investment portfolio. The GCC, or Global Capital Committee, serves to evaluate the best uses and management of Aflac's capital. The function of this committee entails recommending and overseeing any significant transactions or issues that could impact the capital levels at any of our entities, as well as ensuring the transparency and appropriateness of reporting to the GEMC. The Global Capital Committee is chaired by Fred Crawford. We believe this governance structure will help ensure that Aflac will continue to deliver on our objectives. All of these committees have a clear, concise process for the identification and expression of corporate functional and decision-making roles within the organization.
These roles have been designed to better support the needs of our segments and to build across divisional links that are necessary for developing the global capabilities of our business as a whole. As many of you know, my plan is to retire most likely at the end of 2017 when I turn 70. Accordingly, transition planning has been a crucial part of my thought process in recent years. Ensuring that I hand off responsibility for several important corporate functions, including financial and actuarial operations, along with risk management, has been a high priority for me. My heart and soul have been with Aflac and all the people we touch for more than 30 years. As we move forward with the plans I've discussed today, I'm confident that Aflac will continue to be well-managed for years to come.
Hiring Fred Crawford as CFO was the first major step in this transition plan. In his 11 months at Aflac, he's demonstrated both the breadth and depth of his understanding of complex corporate financial matters and certainly has hit the ground running as CFO. I'm confident in Fred's ability to navigate the company through the global financial markets, and I'm very pleased with his commitment to continue managing the company with strong core financial values. Additionally, having worked closely with Todd Daniels for several years, I have total confidence that his expertise and capabilities will hold Aflac steady to its historically sound actuarial and risk disciplines. I'm privileged to have had the opportunity to work closely with many members of our executive team on key matters as we've transitioned into this new executive team structure.
I know that the Aflac you have come to appreciate for its transparency and sound risk management disciplines will continue to operate on the same basis well into the future. I hope this presentation has provided you with a better understanding of our objectives going forward. It's been a great pleasure to work with each of you who have had a personal, a professional, and perhaps a financial interest in Aflac over these past three decades. I can truly say that I've been blessed in many ways by my Aflac career and would not have chosen any other one. I'm not gone yet. Now I'd like to invite the other Aflac panel members to come join me for our final Q&A session. Thank you all for the privilege of speaking to you today.
Get over it. Get over it. All this whining and crying, it makes you look sick. Get over it. Get over it
As usual, Chris is still bossing me around. We were supposed to have a 10-minute break, but, in his normal way, he's taking control, so we're dispensing with the 10-minute break, folks. Sorry about that. We're going to remain up here with Chris, Dan, Paul, Fred, Todd, and Eric. Chris, since you're pulling the levers here, anybody have questions and want to start? Ryan, right there. Kathy?
Yeah.
Thanks. Ryan Krueger with KBW. I had a couple for Fred. 1, I was hoping maybe you could quantify your view of the U.S. excess capital position. I'll start with that and then have a follow-up.
Sure. Measuring the excess capital position in the U.S. is not an easy task with our current structure, which I alluded to in my prepared remarks. Obviously, the fact that we own not just a sizable branch, but one of the largest financial service branches in the world, that plays heavily into what you can deem excess and not excess. Having said that, we have done some work around this. This has been an essential part of what we're trying to focus in on because we realize that the risk profile of the U.S. business is extraordinarily stable. It's also the type of business, I'm sure you would all agree, that is generally a lower risk or capital at risk type business as U.S. life businesses go, certainly.
Right at the moment, we would say conservatively that we'd estimate the excess capital in the U.S. to be in the neighborhood of $1 billion. That's a round number, and it's round on purpose. That is, it's an estimate. We've got to be careful about it. The release of it would require assessing very carefully the risk dynamics of the branch and how it plays into our statutory results. You also need to recognize that there would need to be work with regulators, for example, and even rating agencies to ensure our top ratings before you could just go and release that type of capital. At the moment, I'd prefer to refer to it as excess capital in the U.S. as opposed to deployable capital in the U.S.
It does in fact factor into the range we provided of the $5.8 billion-$7 billion range over the next coming three years.
Does the bottom end assume none of that is deployed, and the top end assumes some portion of it?
That's right. The bottom end would be really the recurring free cash flow of the company, which might be worth talking about. Another natural question to get is what is that natural recurring free cash flow as a company? That's easy to see, very transparent in Japan. Once again, as you move into the U.S. platform, it starts to get melded together with our Columbus-based operations. We would assess the free cash flow generation to be in the range of around $1.6 billion-$1.8 billion annually. That's nothing more than a repatriation of roughly JPY 130 billion-JPY 160 billion, depending on financial conditions in Japan, plus another $300 million to potentially $400 million of free cash flow in the U.S.
Realize that may seem light in terms of free cash flow in the U.S., but our U.S. entity has to make up for the tax differential between Japan and the U.S., so it has a very high effective tax rate on its cash flow, if you will. Together with another 100 million or so of miscellaneous types of cash flow, that's what gets it up to that number. Realize I'm also assuming that all the management contract flows, all those intercompany flows that you naturally see at most insurance companies, those tend to match up pretty identically to our debt service. That's why I come up with that free cash flow. If you do that math and you add up, take the midpoint, $ 1.7 billion times three, you see we're a little short of $ 5.8 billion as that low end of the range. What is that?
That's the continued spend down of the billion dollars of reinsurance proceeds generated throughout 2014 and into 2015. Okay. That's where that low end of the range comes. The high end then comes from executing on excess capital in either Japan, the U.S., or maybe some modest levering.
Thank you.
Jimmy.
Hi, Jimmy Bhullar from J.P. Morgan. First question for Eric on just your strategy for new money allocation, given where rates are. Should we assume that you'll buy any JPY JGBs in this, given where rates are, or/and what about the plan for increasing or reducing your exposure to U.S. dollar investments?
Sure. Obviously, it's a very challenging environment. One of the things that comforts me, as you know, is we did a strategic asset allocation when I first got here. We redid it a year and a half or so ago. When you have a good, well-sounded plan, it does make it a little easier to deal with these challenges because you know what the various options are. Nevertheless, we still have to explore even new options. With respect to the challenge of negative rates and JGBs, they will continue to be a core of the portfolio and an asset class we'll need to look at. Fred mentioned, you've heard we bought 70% of our allocation this year, but a good portion of what's left will probably be in other yen assets. Not JGBs, but for instance, in Japan, there are municipal bonds.
There is a smaller corporate market. There's an RMBS market. With the build-out of our global investments platform, we have the capabilities to invest in those instruments. Naturally, their yield is driven off of JGB yields, but we obviously have the capability to assess credit risk, mortgage risk, if you will, and therefore enter into those asset classes. In addition, we continue to look at opportunities to expand out the dollar program. When we started that dollar program a few years ago, I think I almost trained you all to think of it as just a fixed income program because that's where we predominantly went to U.S. dollar fixed income, right down the fairway of investment grade. That dollar program can include any asset that's a dollar asset. Fred mentioned earlier, we have invested in U.S. equities on behalf of Aflac Japan.
That's part of the dollar program. We've started commercial mortgage loans both for Aflac Japan and Aflac U.S. We've started middle market loans. Direct lending is a very attractive space for insurance companies, and we're into that. We are exploring other asset classes such as infrastructure on the debt side. We continue to find ways to diversify that dollar program, obviously subject to the hedging program when it's for Aflac Japan. Through that, we gain more diversification opportunities to try to enhance yield as best we can within our risk limits and with what the market has to give us. We are continuing to find ways to diversify, but nevertheless, it's a challenge, and it keeps us on our toes.
On, Fred, you mentioned a low likelihood of charges on the first sector business that's on your books. Can you discuss the type of ROEs you expect to earn on that on the in-force block if we stay in the current environment in terms of rates and if hedging costs remain where they are right now?
Yeah. Somewhat depicted on the slide, the product that we had been selling prior to the repricing has been generating returns in the 6% to 10% range. Obviously, the big impact that's giving rise to the pricing is certainly new money rates, but even more impactful than that is the leg down, if you will, on the standard rate used for reserving purposes in Japan. When that moves from 1% to 25 basis points, you're effectively kicking up substantially the reserves and the reserving pattern on these products and need to price accordingly to maintain the returns. Realize that the product we have sold historically, we've gone out and bought assets. We run fairly tight ALM standards, we've tried to lock in those higher yields, if you will.
I think I mentioned our JGB portfolio currently yields about 1.7%, which gives you an idea of the effectiveness of a long period of time of buying up assets to back these products. That's just an example. That's whereabout I would put the returns based on some of the estimates we have. Certainly, there's going to be portions of that block that will perform better than others, for sure.
Okay, thanks. I think putting the hedging cost above the line is actually a good decision overall.
Thanks. Sean Dargan from Macquarie. I have a question about your philosophy of making use of reinsurance in Japan versus reinvesting more heavily. Are we to understand that you see higher return potential in writing more third sector business? Rather than giving the premium from those high margin products away, or is there a change in philosophy here?
I want to make sure I'm understanding your question. Is your question, what's the philosophy around executing on more reinsurance?
I guess two questions. What is your philosophy around making use of reinsurance going forward?
Is that tied to what we see on the pie graph of reinvesting more in Japan?
It's available to us, is the way I would say it. If you look at some of the FAB material last year, you'll notice you've all taken note, I think, over the years of the actuarial section, if you will, in the FAB book. Over the years, we've talked about the differential between FSA reserves and statutory reserves, which has tended to travel around JPY 750 billion, to give you an idea. Quite a bit of a gap between those reserves, and that's often been referred to as the "excess reserves," if you will, that we have in Japan. However, we would not characterize that as all easy and reliably able to execute reinsurance to free up that capital. At the same time, we would never repatriate all of that reinsurance.
We would typically have a balanced approach to retaining some in support of the balance sheet and SMR ratio, repatriate the rest. What we decided to do, because the conversation around that range of deployable capital is just that, deployable, is really focus in on where we have reinsurance capacity on blocks of business, where we have capacity set up with proven providers like a Swiss Re and a Munich Re and other reliable reinsurers. We've done transactions before, and it's logical that no matter what the market conditions, because these tend to be morbidity-based blocks of business, we could go out even in volatile markets and go out and get reinsurance done for either defensive purposes or offensive purposes. That's really where we come to that JPY 300 billion pre-tax of reinsurance capacity.
Our philosophy remains the same, that is before you go through the exercise of reinsurance negotiations, working with, of course, the regulatory community, retention, repatriation to put that capital to work, we want to see a very good opportunity for that freed up capital. We want to see that opportunity generate good cash flow going forward. It's always possible that we use it to deploy that capital back to our shareholders. It could be that that's the highest and best use of it over time. At the moment, we're really focusing on trying to find ways in which to grow the business. That's really priority one for us right now.
Did you?
Mike Kovac, Goldman Sachs. Wanted to ask a question as you were thinking about the roll forward of your repatriation. This is something that, Fred, you've talked about in the past. Can you discuss where you see that in 2017 and beyond, given that the yen will be sort of at a lower rate as you go into future quarters?
Yeah. A couple of things around. The leading indicator, if you will, of your repatriation is, let's just assume the SMR ratio remains in solid shape, that we're retaining all of the healthy margin above and beyond our 600% framework. It really becomes about the cash flow generation, which is mostly depicted by the FSA earnings. We have over the years, if you follow Aflac, we've over the years repatriated in the range of 80% of FSA earnings to maybe as high as 100% of FSA earnings, depending on, again, capital conditions in Japan and the strength of our ratios. When we look at FSA earnings going forward, a few things to keep in mind.
One is when the yen strengthens, you will in the short run generate less in the way of FSA earnings as we are effectively converting the dollar-based coupon income in our dollar program into less yen. Order of magnitude, about every 10 yen to the dollar movement equates to about roughly a JPY 7 billion-JPY 8 billion reduction in FSA earnings. Okay? That's after tax. Realize, if I'm bringing back JPY 130 billion-JPY 160 billion a year, okay, I'm obviously converting a very large amount of yen back into presumably higher value dollars. I gain all that back on the margin. In fact, I end up net to the good from a strengthening yen, but over time. Why over time? Because I tend to hedge out about 18 months in the future.
I am gradually legging my way into a lower and lower yen to dollar exchange rate. I eventually get that cash flow back, but it takes a little bit of time. That's one dynamic. Realize hedge costs run through FSA earnings. As hedge costs rise or fall, that will play into your FSA earnings, and we need to play that out. After that, job one is protect, defend the balance sheet in Japan because we make long-term promises, and that's essential to the franchise. We'll forever look at capital conditions such as credit markets, what's going on with spreads, downgrades and upgrades pace. We'll look at those things before we make a judgment call on what to repatriate. More recently, we've been repatriating 80% of FSA earnings. Why? Because we just went through a quarter of particularly acute volatility.
Spreads gapping out, concerns over the energy market, et cetera. If we see things stabilize and normalize, you may see more buoyancy, if you will, to the repatriation effort. Hopefully, that helps.
Yeah. Thanks.
Okay, Randy Binner.
Yeah, Randy Binner, FBR. I wanted to go back to the sensitivity analysis that was provided in one of the first pie charts in Fred's presentation. Just reviewing what you said, I think you said you were zero on all JGB durations and that your hedge cost was 200 basis points, which is maybe 80 higher than where we are now. I just wanted to confirm I got those numbers right, then the questions would be, was that a positive margin you held on the overall book, meaning including third sector, or was that just a margin within first sector? How big is that margin and what do I need to do to break that stress scenario? The only reason I say that is I think that the Japanese said that they would consider going further negative, the central bank. They've said it.
Yeah
they do what they say sometimes, right?
Exactly. We tried to provide a sensitivity analysis or a stress test, if you will, so you could kind of get an idea. First of all, it is on actually specifically child endowment and WAYS products, which are two of the larger buckets of product. Realize not all first sector product has the same types of interest rate sensitivity. There are so-called protection oriented, if you will, first sector products that can be less sensitive. Child endowment and WAYS in particular, obviously, we sell a lot of that or have in the past. Those are the key areas to zero in on. The stress test we ran was if you just assume a zero rate on JGBs, and we tend to invest about 30% of our cash flows in JGBs, that will gradually rise over time depending on our SAA.
If you just make that assumption, if you just freeze the SAA, in other words you're saying to Eric can't somehow find alternatives, which is a big assumption because he's working on alternatives every day. You invest in JGBs at zero and you hike up the hedge cost by 90 basis points from the 110 we're currently enjoying. If you do that work, that tends to run about roughly a 2%-3% or so GPV margin, which is not terrible. It's thinner than the 11%, no question. Realize it's not uncommon, at least in my experience, it's not uncommon in loss recognition testing, and these types of margins on annuity-based business to have 5% margins, 6% margins, 4% margins is not entirely unusual. Under stress conditions, we think that's pretty good. It does not mean you're out of the woods.
It does not mean a type of strengthening is completely out of the question. Remember, holding those indefinitely, so no recovery in those rates, that's, we think, a pretty strong test.
Steven Schwartz.
Just some follow-ups. Fred, on that same chart, the 20% valuation margin that you cited, was that just on WAYS and child endowment?
No, the 21%, first of all, it's the GPV margin.
Right
on a statutory basis. That is on the entire block of business, including third sector and first sector, and that's a 21% GPV margin. In my prepared remarks, I mentioned that the margin on our first sector business is approximately 11%. You can think of that as essentially WAYS and child endowment as well.
If I may, let me just explain for a minute what that means from a gross premium valuation perspective. We're actually taking the in-force block and we're running it out over its lifetime. In Japan, that's over 100 years. You discount your cash flows back using some yield path, which an example of the stress is the 200 basis points hedge cost on dollar new money plus the zero JGB yield indefinitely, that you take that out 100 years, discount that back. How does that compare to your statutory reserve balance? Is it positive or negative? That gives you an indication of whether or not you need to increase your reserves. We do that by line of business.
It's our normal testing. I'm sure you've heard the word Super Care and dementia in the past. That's what would lead to those reserve increases in prior years. That's kind of the mechanics of it. We also do the cash flow testing. The cash flow testing uses similar cash flow approach. We start with a beginning asset balance equal to a statutory reserve. We take assets, we carve them out of the portfolio and run those out over time. For a life insurance product, when you're looking to increase reserves, you'd have to fail both of those tests, essentially.
It's done on a closed block basis. When you think about Paul and Yamauchi-san and what they talked about on the strategy, realize that this is what makes it so important to shut down the sale of product that's coming on automatically at a thinner actuarial margin, if you will, and aggressively reprice your product for the rate environment and discount standard rate environment, such that when you sell new product, you year in and year out contribute or gain back some of that margin you may have lost under stress conditions. It's run on a closed block basis. New business or some level of new business should be additive over the years.
Okay. One more. We discussed first sector repricing. Is there any intention, is there any need to reprice third sector at all given the negative interest rate environment?
We're going to look at that as we introduce new product. I think in April of 2017, when the standard reserve rate will change, I believe the plan is to introduce a new cancer product. Is that correct, Paul?
Yeah, we're going to release a new EVER plan.
A new EVER, so a new medical in April of 2017, then we'll have a revised cancer product shortly thereafter. They don't create the same type of capital strain that the first sector does. They don't have the same contribution up front, and they have a faster payback based on where the products are currently priced.
Thank you.
Eric Berg.
Pardon me. Thank you. Eric Berg from RBC Capital Markets. Just one question, Fred. Can we infer from your comments that since generally speaking, statutory reserving both here and in Japan is more conservative than GAAP
Because you seem to have a nice cushion statutorily, you're fine on the GAAP side as well. Can we infer that?
Yes, in terms of for first sector business, okay, both statutory GPV and GAAP GPV is substantially similar in the margins. On an FSA basis, okay, realize, and you might recall this also from the material you've seen us provide in the past, it's not uncommon for your margin on an FSA reserving basis to be much larger because, of course, as mentioned earlier, there are more aggressive reserves or stringent reserve standards on the product. That's what I meant in my prepared remarks by saying on an FSA basis, we're in even better or more comfortable position relative to low for long or even negative JGB rates.
I'm really talking about.
Yeah.
You're reporting to your shareholders uniquely on a U.S. GAAP basis.
Yep.
You have a premium deficiency reserve study that you have to do.
That has nothing to do with your stats, what we've been talking about today.
Yeah.
It follows a similar but not identical approach, as I understand it.
Yeah, it's not identical, but the margins on these particular products tend to be substantially similar between GAAP and stat. When you go to third sector products, there actually is more of a difference on statutory and GAAP. GAAP will tend to have marginally thinner margins than statutory, but on these particular products, they tend to be closer together.
Eric, I'd point you back to last year's actuarial discussion that's in the book, the FAB printed materials. There's a chart in there that actually has our historical gross premium valuation margins on a GAAP, stat, and FSA basis.
Thank you.
Okay. Oh, Suneet?
Thanks, Robin. Suneet Kamath with UBS. Just a question on ROE. If I go back to last year's FAB, I think you gave us 2015 guidance of 20%-25% operating ROE, there was nothing in this year's presentation. Just curious where you see the ROE trajectory of the company over the next few years.
The ROE trajectory would be consistent with what we said on our outlook call for 2016. The range we provided there, I think it was 18%-21%, if I recall right. There's some movement in the way we calculate the ROE that's worthy of note. Obviously, currency can play a role in it. When we say currency neutral, we mean typically the numerator, i.e., the operating earnings. In the denominator, if you track our ROE, you'll see that we've got certain translation, if you will, adjustments that run through. When you have a yen strengthening, it has the effect of actually kicking up your equity, if you will, in our calculation in the way we calculate it. I think over time, that's something we're going to want to take a look at in terms of there's nothing wrong with the way we report it.
It's a matter of understanding the mechanics, you do have a little bit of variability in the denominator of our ROE brought on by currency movement. In this case, it contributed to equity and thus lowered our ROE over past years.
How sizable is that? Have you quantified it?
Not top of mind, but if you go into our supplemental material for the quarter, you'll be able to see it. Go to our balance sheet disclosure in the early part of the supplement. Go down to the shareholder equity, and you'll see a line in there that is really effectively that translation adjustment. You'll see, not surprisingly, when the yen went from 121 to 110 or really on average about 115, you saw that movement and the pickup in equity, and that's the line item you want to focus on. That's what's been contributing to some movement in ROE. Fundamentally, returns remain very strong, as you can imagine. ROEs are in good health.
Casey. To your left there.
Humphrey Lee, Dowling & Partners. I recall last year's FAB you talked about you could potentially look into other geographic region. Any updated thoughts on that regard?
Danny, you talking about into other countries?
Yes.
I'll take that. We have constantly looked at other countries. If you remember, for you to go back a long ways, you'll remember that when I first took over as CEO, we were in I think six or eight-
Eight or nine
eight or nine other foreign countries. We weren't making any money in any of those countries. Although we'd been doing business in Canada for 12 years and in Taiwan for over 10 years. We made a decision to sell those operations. One of the things that I found way back then, and it still seems to be true today, is Japan and the U.S. has more life insurance in force, we don't have numbers on health insurance, but on life insurance, than the rest of the world combined. We started spending our money on national advertising and trying to build the U.S. and the Japanese operation. I still believe that's by far the biggest opportunity for growth in the company. Can we go into China, for example? We've looked at that. There are issues out there. They don't have standardization of treatment.
They don't have what would be equivalent to the American Medical Association. They have outstanding treatment in Shanghai and some of the major cities, but in the outlying areas, it's somewhat arcane in the way they approach medicine. The other thing is you can only own 49% of it. You can't own the majority, so you really do not have the control. We looked at back when Brazil was hot. We looked at Brazil. Glad we didn't do it.
We've looked in Europe. One of the problems with Europe that we run into is they're usually joint partnerships of some sort. The Swiss will do a deal with England, and they'll come out with a product that they sell together. Problem we run into is every time we look at that and we talk about a joint deal, they're all for it and will do it. What they then want is a joint deal with Japan, and we're not willing to swap those amounts because we feel like the golden duck, we'll call it- is in Japan, and we're not going to touch that. Right now, we continue to look. We may go to Canada. We've got 70%-plus name recognition in Canada because of the bleed over of the TV ads. The only place we don't is in the Canadian cities that are French.
We can look. We still are constantly looking for that, but we feel like that the market, especially in the U.S. and Japan, is so big that we need to continue to concentrate on it. Anybody has any suggestions on what's out there that we need to look at, we'll be glad to.
One of the comments I made at AFA, some of you that were there, I got really a generic question about the regulatory landscape. One of the comments I made is there's a sweet spot emerging in the marketplace in terms of scale and size and diversity and unnecessary or enhanced regulatory scrutiny and burden placed on the company. I think one of the things that we constantly talk about internally is before we think about another country or frankly, any sort of transaction that would be of size, we're not exactly incented, if you will, by either shareholders or the regulatory landscape to get larger. I think the sweet spot is how you are a large, dominant, with scale player in very robust marketplaces, in this case, Japan and the U.S., without getting too complicated and bringing additional scrutiny onto yourself through a sizable balance sheet or presence.
I feel like we operate in a really nice environment, and we talk about that internally.
Okay. Steven?
Another follow-up to an answer, Fred, that you gave the JPY 1 billion in excess capital that you think you might have, generally speaking, in the U.S. Is that based on some estimate of what you think First, I'm assuming that excludes-
Japan. This was if the U.S. was-
That's right.
completely alone. Okay. Is that based on some estimate of what you think total adjusted capital would be?
That's right.
relative to some RBC level?
Yeah. It's attempting to effectively come up with an RBC, if you will, on a U.S.-only basis. Generally speaking, we would peg that RBC at actually largely consistent with what we're reporting now as an RBC, and as you know, we hover around the 900% range. It's very complex. I really caution everyone because when you actually go down the road of producing a real-life blue book, those of us in the room who have actually produced real-life blue books know that there's a lot of moving parts. It can get complicated really quickly. Tax treatment, IBNR, all these issues. Assets, what assets are where and what the charges are on those assets. You've got to really be careful. Generally speaking, it tends to hover around the $4 billion mark in terms of the numerator TAC-
in and around the $400-$450 in the denominator of required capital, and that's where you hover in and around that 900%. I think that's essentially what you're asking. How do you get to that? That's obviously a sizable RBC on a company like ours, but realize we also are extremely highly rated. I think I might have mentioned this to you before, but we are literally the highest-rated stock company in the Moody's insurance universe, for example, and we like those ratings. It drives our cost of capital down below 8% as a company, together with our JPY borrowing capability. Before we just go talking about releasing capital and what excess is necessary versus what excess is truly deployable, we've got some work to do. We've got some work to do. That's kind of where those numbers come from.
All right. Would there be anything maybe excess in the reserves? Any thoughts on that?
We don't think so. Todd, I'll let you comment. No doubt there is, but we don't look at it that way. We don't look at the reserve category in the U.S. as somehow freeing up excess capital. Todd.
Yeah. When we've done some of the analysis on the blocks of business in Japan, we're comparing it to what we consider economic reserves. If you put it through an economic capital type formula, what economic reserve would you have to hold? For some of these blocks of business in Japan, it's very attractive for us to execute reinsurance. We've done similar analysis on the U.S. blocks. They're not quite as attractive from an economic perspective. It's more analysis that we need to do in the future.
All right. Thank you.
Okay. Before Kriss grabs the wheel from me again, I'd like to just make a few final comments. I want to thank all of our speakers, as well as our investor and rating agency relations team in the U.S. and Japan who've worked tirelessly day and night to bring all of this together. David Young, Delia Moore, Daniel Bellware, Mike Pina, Casey Tate, Martha Hill, Jessica Shin, Kathy Shin, Kuroda-san, Horie-san, Chin-san, Murakami-san, Tachiki-san, Shigeru-san, and Heidi Carlisle from our travel department. Before we adjourn, I'd also like to remind you about our upcoming analyst meeting in Japan scheduled for September 12th. We hope that all of you will be able to join us. We'll be providing more details in the next few months. If you have any questions, please give us a call.
We're in the process of assembling a book, as we have always done, with all the presentations, not only today, but also with presentations from the actuarial team, Charles Lake, that help you gain further insight into our operations in both U.S. and Japan. Lunch will be served next door. We would love for you to stay and interact more with our management team. If we can help you with any questions, please give us a call. We hope you will all stay in touch with us. Thank you so much.