Good morning, everyone, and welcome. I'm Robin Wilkey, Senior Vice President of Investor and Rating Agency Relations, and I'd like to welcome you to our financial analyst briefing this year. You'll hear from our speakers shortly. In the meantime, I'd like to introduce you to the other officers who are here today from Aflac, many of whom will participate in our Q&A panels. Their full bios are provided. Just let me go through very quickly who these people are. If you'll please stand when I call your name. From the U.S., we're joined by Ken Janke, Executive Vice President, Deputy Chief Financial Officer. I'm sure that almost all of y'all know him. Dan Lebish, Executive Vice President, Chief Operating Officer of Aflac Group Insurance. Audrey Tillman, Executive Vice President and General Counsel. Todd Daniels, Senior Vice President, Global Chief Risk Officer.
June Howard, Senior Vice President and Chief Accounting Officer, Financial Services. Mike Tomlinson, Senior Vice President and Director of Aflac U.S. Sales. Joining us today from Japan is Charles Lake, President of Aflac International and Chairman of Aflac Japan. Koji Ariyoshi, Executive Vice President and Director of Sales and Marketing. Sue Blanck, Executive Vice President of Aflac and Aflac Japan and Corporate Actuary. Masatoshi Koide. Koide-san is Executive Vice President of Planning, Research, Risk Management, Investment, Compliance, and General Affairs. Big job. Takashi Osaka-san. Osaka-san is Senior Vice President of Government Affairs and Research, Legal and Corporate Communications. Hideto Yamamoto, who is Senior Vice President and Chief Investment Officer of Aflac Japan. We're also pleased to have two of our board directors here with us today. Mr. Doug Johnson, if you'll stand. Thank you. Joey Moskowitz, who just joined the board this year. Thank you.
Mr. Johnson's a retired audit partner with Ernst & Young, and he's the financial expert of the audit committee and also serves on the executive committee as well. He joined the board in 2003. Mr. Moskowitz is retired Executive Vice President from Primerica. He provides insight into the analysis and evaluation of actuarial and financial models, which forms the basis of various aspects of corporate planning, financial reporting, and risk assessment. As I mentioned, he's new to the board this year. Before we begin, let me first remind you that within some statements you'll hear today are forward-looking within the meaning of the federal securities laws. Although we believe these statements are responsible, we can give no assurance that they will prove to be accurate because they're prospective in nature. Our actual results today could differ materially from those we discuss.
Please look at our latest 10-Q filing for some of the various risk factors that could materially impact our results. You'll find copies of the slides at your seats, so you can follow along and make notes. We will have three Q&A panel sessions this morning. What we will do is have ample time for questions for each segment. That means we will have a Q&A panel for Aflac Japan, a Q&A panel for Aflac U.S., and then a panel for financial, actuarial, and investments. Please remember, this webcast is being broadcast and is a webcast and as a courtesy, please turn off your cell phones and other electronic devices. Now I'd like to introduce our first speaker here. Dan Amos, as you all know, has been with the company full-time since 1973.
In 1990, he became CEO of Aflac and Aflac Incorporated, and in 2001, he was also named chairman. Dan will cover an overview of Aflac. Dan?
Thank you, Robin, and good morning, everyone. This year marks our 60th anniversary in the U.S., and last November, we celebrated our 40th anniversary of doing business in Japan. Today, we have the key members of our management team to present to you, and I'll be here to follow up with any questions that you'll have during the Q&A panels that was talked about. Let me start by sharing with you my thoughts on Aflac today and what I see in terms of a longer view. We have developed a product line that is focused, yet flexible enough to accommodate diverse consumer preferences in the U.S. and in Japan, thanks in part to the advertising campaign featuring the Aflac Duck. God bless that duck. The Duck's phenomenon has catapulted our brand awareness to over nine out of 10 people in both countries knowing us.
Our focus on supplemental voluntary segment in the insurance industry reflects on the needs and opportunities we see for our products. We continue to believe that we operate in the best markets for our products, where well-defined and consistent healthcare delivery is available, yet affordability is an ever-growing concern. Japan is a prime example of a combination of an aging population and a strained healthcare system, making our products even more attractive to consumers today. You'll hear more about this from Paul in his presentation. Of course, as people age, the incidence of sickness and disease increases, but the products are priced to accommodate those expected trends. While the demographic trends enhance the need for our products, Aflac is not exposed to significant claims risk.
Our goal remains to be the number one provider of cancer and medical insurance in Japan, and I'm sure we're going to be able to continue to achieve that. Yamauchi-san will tell you more about our success in that regard. Our distribution system is expanding in Japan. Our alliance with Japan Post combines the largest distribution network in Japan with the industry leader in cancer insurance. I believe that the relationship between Aflac Japan and Japan Post continues to be mutually beneficial as we make cancer insurance available to more and more Japanese consumers. We believe the value proposition of our products will only enhance as Japan Post moves toward privatization. I am excited about the strong growth in sales in our cancer products across all of our distribution channels, not just Post.
Our goal is to have a presence in all the outlets where consumers want to make insurance decisions. While Japan has seen many changes to the healthcare environment in the last few years, the U.S. has also had its share of changes, particularly in the U.S. healthcare system with the Affordable Care Act. According to an April 2015 Kaiser Family Foundation, when it comes to public support of healthcare reform, the passage of time and the favorable developments can make a big difference. The study indicates that the public's view of the Affordable Care Act is gradually improving thanks to the duration of time, and Americans have the ability to consider the changes, which is what I have thought all along, that once we got a healthcare plan, that we would always have it. It would vary some, but we would always have it.
We believe that the public perception continues to become more favorable, and the consumers become more and more familiar with what the coverage is with Affordable Care Act. It's not just what's covered, but it's what is not covered. The need for Aflac's products will become more and more evident. We also believe that Aflac's products provide excellent solutions at a very affordable premium. With that in mind, we're excited about the innovative products we're exploring and how it will benefit the consumers. We know from past experience that new products tend to stimulate sales, and we believe we have a product that can do that. We think new products enhanced coming that we will be seeing in the second half of the year is going to do just that for us.
Aflac U.S. has evolved from a one-channel model of career agents to a model that now includes insurance brokers. Our career agents focus on the smaller accounts which have and will continue to be the bread and butter. We're also concentrating on the broker market and are expecting strong sales growth there as it represents the mid to large-size accounts. As we continue to grow the two-channel distribution model, I believe it will prove to be the right approach that leverages the strengths and our brand. Aflac's established brand has served as an effective door opener and catalyst for many consumers and payroll accounts to be more receptive in hearing about Aflac products and how it can help them. At the same time, our well-known brand has increased expectations for servicing payroll accounts. Distribution is also important that we differentiate our company from the competitors through innovation.
We recently launched an initiative that no one in the insurance industry has ever attempted, no less done. The initiative is called the One Day Pay, and it allows us to process, approve, and pay the claims in just one day. Now, if you've seen our commercials before, you know we used to run it where it said we pay the claims in four days. Someone said to me, "Well, what's really the difference between one day and four day?" My answer is, nothing, unless you don't have the money. Unfortunately today, a lot of Americans do not have the money that's available to take care of those things. It really does make a difference when they need the money in hand. Teresa will be covering this more in detail, but it is something, as you can tell, that I'm very passionate and excited about.
The bottom line is that I believe we will continue to dominate the supplemental voluntary insurance market and be the best at what we do. Although I'm not satisfied with the U.S. sales growth in recent years, we're putting more new premium on the books than our next three competitors combined that are selling our type products. That gives me very little consolation for what I believe is a huge market here in the U.S. I believe the changes that we've made in our sales infrastructure will have a long-term impact on our business, but it never moves fast enough to me, and I want to see it move faster. I'm not going to be satisfied until I see a minimum of a 5% compound growth over the next several years. Let me be clear, I'm very happy with the consistent and predictable profitability of our products.
Now we just have to get the sales increases, and I believe we will do it. Having covered our operations, let me turn to the topic that I know is on your mind, and that is capital deployment. I know how important capital deployment is to you and our shareholders, and our three-year capital plan has been top of mind for Kriss and me. Over the next few years, executing on the capital plan is a top priority that will increase the available capital we will deliver to enhance shareholder value. Kriss and I are confident that it is reasonable and achievable, and we have both the capacity and the desire to accomplish that. Historically, we have weighed our capital deployment options. We have primarily considered projects for enhancing organic growth, acquisitions, dividend, and share repurchase.
While the scales have always tilted toward dividends and share repurchase, we continue to explore other options. We are and will continue to be very disciplined when evaluating these opportunities. While I'm not going to rule out anything, I can tell you that before we would pursue an option, we must first demonstrate to ourselves that it would be the best use of capital and would provide a better return than buying back the shares. If we can't do that, then we simply won't pursue it. I've been in the business now over 40 years, and as I have matured in my position, I can still tell you that I'm very excited about our business. I believe that one of the most critical aspects of my job is succession planning.
We have had tremendous management team currently in place, no matter how strong the team you have, there's always a need for continually strengthening your bench. It's because succession planning is not an end into itself. It is really an ongoing process. To do it right, we have to develop forward thinkers who embody Aflac's corporate culture. We know that having the right people in place at all levels, not just the CEO level, is what makes a company successful. The fact is, there's not really about just one person. There is no one person who is more important than the success of the company, and that includes me. Even with great successful planning, we have to be fluid and flexible. I wouldn't normally talk about one specific personnel change at a financial analyst meeting.
Ken Janke led the investor relations team for 25 years and almost everyone in the room knows him very well, I want to share a recent development. Ken has requested that his name be withdrawn from the succession planning process of the CFO. Having worked closely with Ken for 25 years, both Kriss and I hold him in very high regard and respect his decision. I have been actively pursuing candidates for the CFO position. I must say that Kriss and I are very pleased with the progress, and we expect to have the search completed by the end of the second quarter. I'm excited about the candidates and their tremendous experience. This will give Kriss time to work closely with the new CFO and continue fulfilling his responsibilities as President.
It's important that we bring in someone who not only has a new perspective, but who as a leader also enriches our corporate culture. Ultimately, the culture of the organization is very important as part of leadership because it helps define the common goals, objectives, standards of behavior that employees have come to count on. Just be clear, Kriss is not going anywhere. He said this before, but he has no plans to retire before he is age 70. I'm certainly not going anywhere myself. I have committed to remain with the company until I am at least 70 or as long as I'm wanted and needed. I'm, again, very proud of the management team, and I believe you're going to enjoy the presentations this morning. Let's get started, and then I look forward to answering your questions during the three Q&A panel discussions.
Thank you all for attending. Robin?
Thank you, Dan. Now I'd like to introduce, from Japan, Paul Amos. Paul moved from our U.S. sales force to the headquarters in 2005, and in 2007, he was promoted to President of Aflac. He currently resides in Tokyo as he oversees the Japan operations, and he'll be discussing an overview of Japan this morning. Paul?
Good morning. Last year, we celebrated 40 years in Japan. This important milestone was a reminder of the trust that policyholders have placed into us to be there when they need us most. As in the past, we plan to build on our position as a leading provider of cancer and medical insurance in Japan, strengthen our relationship with our key stakeholders, and provide value to our investors. My presentation will begin with an update on Japan's macroeconomic environment. I will then address Aflac Japan's standing in the market and our strategy for Japan moving forward. Japan faces the unprecedented challenges of keeping its economy running against the backdrop, a population that is shrinking in size and where the elderly is rising as a percentage of the total population. At the same time, Japan must also support a growing number of retirees without allowing its public debt to balloon.
Japan's Prime Minister, Shinzo Abe, is attempting to address these challenges through a range of reform, including his three arrow strategy, dubbed Abenomics, and his goals to exit deflation, shore up Japan's economy, and reign. Since we met last year, there have been a headwind to the economic recovery due to the larger than expected impact of the consumption tax increase in 2014, which I will discuss later. Accordingly, Prime Minister Abe has had to intensify his. In fact, in his policy speech to the Diet in February 2015, Prime Minister Abe vowed to take the most drastic reforms in the post-war era. The markets have responded positively. The benchmark Nikkei stock average, for example, has climbed 29% from October 2014 low to April, where it topped 20,000 for the first time in 15 years.
Similarly, consumer spending has risen since May 2014. The government has reduced its effective corporate tax rate by 4.9% since April 2014 to a total of 30.8%, with plans for further reduction, with details yet to be determined. Although it remains uncertain whether Abenomics will ultimately be successful, we are beginning to see meaningful change on the ground from an economic reform measures. The government, for example, is beginning to focus on Japan's more sensitive areas, including agriculture, women's empowerment, and labor flexibility. Of particular note, the Japanese government has implemented a stewardship code based on the principles for institutional investors to fulfill their fiduciary responsibilities and promote sustainable growth in companies in which they invest.
In addition, the Japanese government will soon finalize a corporate governance code aimed at fostering growth-oriented management to be adopted this summer. The Prime Minister is using his public visibility to encourage companies to raise wages. Taken in its entirety, we're beginning to see a change in the way businesses operate in Japan. Womenomics, or the increased participation of women in the workforce, is a primary way that the government is attempting to address the challenges of a shrinking workforce. In fact, last year, the government set a target for an increase in the proportion of women in leadership positions to 30% by the year 2020. Additionally, they have focused on reforms that encourage more flexible work arrangements for both women and men. At Aflac, diversity management is an integral part of our overall management strategy. We have implemented a number of measures to promote greater diversity.
For example, last year, we established a comprehensive leadership program called the Women's Empowerment Program, and we are working to raise the percentage of leadership positions occupied by women from our current 17.6% to 30% by 2020. Furthermore, in October 2014, Aflac Japan established a diversity promotion committee as well as a diversity promotion office to help drive our diversity initiatives. I am proud to report that on March 18, 2015, Aflac Japan was presented the Diversity Management Selection 100 Award in recognition of our diversity efforts. This award, launched in 2012 by Japan's Ministry of Economy, Trade, and Industry, recognizes leading companies that have created new value through diversity management. We are honored to be included on that list. Japan's population is projected to continue to shrink as a result of a declining birth rate and rapidly aging population.
Currently, one in four Japanese citizens is over age 65, By 2050, nearly 40% of Japan's population will be 65 or over. Today, approximately 60% of Japan household assets are held by senior citizens, This percentage is only expected to increase over time. With fewer workers supporting Japan's aging population, the publicly funded social security system is under increasing pressure to meet its financial obligations. Accordingly, the Japanese government is proceeding with comprehensive overhaul of social security system, including both healthcare and tax reform, aimed at securing stable revenues to finance social security. Raising the consumption tax is seen as one of the primary funding mechanisms for Japan's social security cost. In April 2014, the Japanese government raised the consumption tax from 5% to 8% in an effort to increase tax revenues.
As I mentioned earlier, the consumption tax increase had a larger than expected impact on Japan's economy. Japan's GDP fell 7.3% in the second quarter and 1.6% in the third quarter, pulling Japan into a technical recession. In November 2014, Prime Minister Abe announced his decision to delay by 18 months implementation of a planned second consumption tax increase from 8% to 10%. The next increase will go into effect in April 2017 without an escape clause. In his announcement, the Prime Minister made it clear that his focus on tackling deflation does not mean lowering the flag of fiscal reconstruction.
Having pledged to maintain its fiscal consolidation target of achieving a primary surplus by fiscal year 2020, the Japanese government will have to implement mid to long-term fiscal measures, including reining in social security costs and moving forward with social security reforms, including looking toward the private sector to cover the gaps. Now let me turn to Japan's public healthcare insurance system. Japan has a compulsory and universal public healthcare insurance system, Its costs are covered by premiums paid by the insured and their employers, in addition to taxes and co-payments paid by citizens. Over the years, the system has been under great financial strain due to Japan's aging population, declining birthrate, and increasing medical expenses. Co-payments have risen, This trend is expected to continue. Currently, co-payments for people under 70 and those with high incomes, irrespective of age, is 30%.
For people aged 70-74, the rate is 20%, and for people 75 and older, the rate is 10%. As co-payments continue to edge up, we anticipate the need for supplemental insurance will also increase. As I noted earlier, the Japanese Government is moving forward with a comprehensive overhaul of its national health insurance system. In January, the government approved an outline for planned health insurance reform legislation with the aim of securing long-term fiscal sustainability. Related legislation was submitted to the current Diet session in March 2015 and is currently under deliberation. Once passed, a series of reforms will be implemented for the fiscal year 2015-fiscal year 2018 and will include changing the responsibility for operating the national health insurance programs from municipal to prefectural governments.
The Japanese Government plans to remove the special discounts on health insurance premium for people aged 75 and older in the fiscal year 2017. Over the years, Japanese citizens have gradually been required to assume more responsibility for their medical expenses. These expenses include items such as extra charges for private or semi-private rooms, special medical treatments or medication not covered by the national healthcare system. As always, the insured also remains responsible for other out-of-pocket expenses, such as transportation costs for family members traveling to the hospital and daily necessities while in the hospital. According to the most recent survey by the Japan Institute of Life Insurance, roughly one-third of patients had more than JPY 21,000 of daily out-of-pocket expenses incurred by the patient and family during hospitalization, which is up 30% from just three years ago.
In the current environment, nearly 52% of Japanese citizens feel that the national healthcare system is inadequate. We believe consumers are not only worried about the current situation, but also of the future that could include increases in co-payments and reductions in the scope of government coverage. In this context, we believe the need for supplemental insurance will only continue to grow and become more pronounced. Our goal is to ensure that Aflac's products will be positioned to meet the changing and increasing needs of the Japanese consumer. Let me share some data to underscore my point. Japan's life insurance market is expanding, with the number of life insurance policies in force increasing. As of the end of December 2014, the total number of policies in companies in Japan was 149.7 million, of which 57.6 million were from the third sector.
Aflac remains disciplined when it comes to profit margins and risk appetite, particularly in the low interest rate environment of today. Let me reassure you, we are actively managing our first sector business. It is important to note that we allow a limited proportion of these products to be sold as an accommodation to certain distribution channels. As of March 2015, Japan had a total of 35 competitors selling standalone medical products and 25 standalone cancer products, including both life and non-life companies. This shows that the number of competitors has decreased, product competitiveness is on the rise with an increasing variety of products with shorter life cycles. The market is expected to continue to grow as consumer demand increases for third sector products that supplement the public social security system.
Since many insurance companies see growth opportunities in this market, as Yamauchi-san will explain, competition continues to intensify. Despite this situation, Aflac is determined to maintain and further expand its position as the leading insurance company in Japan's third sector market. Let me now turn to a discussion on our cancer and medical insurance from a life insurance industry-wide perspective. I am pleased to say that in September 2014, product line, New Cancer DAYS. This offering also included an exclusive product sold through Japan Post, and as Yamauchi-san will explain, sales surged following that release. I am proud of what the team has accomplished through New Cancer DAYS. The graph on the left shows the movement of the total number of policies in force for standalone cancer insurance in Japan. The figures have been steadily growing year by year and reached 21.7 million policies in December 2014.
The graph on the right shows Aflac Japan's market share with in-force cancer policies. As of December 2014, the share is at 67.6%. Though the competition continues to intensify, our leadership position remains unchanged. As shown on the graph to the left, the total number of policies in force for standalone medical products in Japan has grown every year. As of December 2014, there were 31.5 million policies in force, representing a 5% increase when compared to the end of March 2014. As the graph on the right illustrates, Aflac Japan's market share of all medical products in force is 17.8% as of the end of December 2014. When we entered the market in 2002 with the launch of our EVER standalone medical product, we quickly rose to become the market leader in new sales.
This slide compares our key indicators of that of MetLife and the four largest domestic 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 domestic insurers in terms of total assets and premium income. That said, Aflac remains at the top with Nippon Life in terms of total number of policies in force. Accordingly, Aflac Japan maintains its top-tier position within the industry. At Aflac, our strategy for growth over the decades has been simple, offer relevant voluntary products sold through expanded distribution channels to yield new accounts and customers. Yamauchi-san's presentation will go into greater detail about Aflac Japan's growth strategy.
Let me take a moment to provide you with an overview of what we have planned for the remainder of 2015. On the product side, this June, Aflac Japan will enhance our current EVER medical insurance product with riders related to critical illness. On the distribution side, our traditional agencies and alliance partners have been and will remain key to our success. We will also continue to gradually expand the number of post offices selling Aflac products and partner with Kampo to train Japan Post employees. In the coming year, Aflac Japan will be working closely with all distribution channels to continue to ensure mid to long-term sales growth. Finally, building relationships with existing customers will continue to be a priority for Aflac Japan, while at the same time we want to appeal to customers who are not yet Aflac policyholders.
We will look for ways to enhance our value and introduce new products that address the changing needs of Japan's aging population. As I mentioned earlier, this group currently accounts for 60% of Japan's household assets. Aflac Japan will continue to explore ways to deepen our relationship with our policyholders, and it is important for growing that segment. Let me reiterate that I am excited about what the future has in store for Aflac Japan. After almost two years of living in Japan, I've gained a deeper understanding of the country, and I am convinced that with change comes opportunity. Thank you.
Thank you, Paul. Our next speaker is Hiroshi Yamauchi. Yamauchi-san joined Aflac in 1976, where he served in the beginning in the actuarial department as section manager, and has held positions of increasing responsibility throughout the organization. He assumed his current position as President and Chief Operating Officer of Aflac Japan in January of this year. Yamauchi-san will provide information about Aflac Japan and its growth strategy. Yamauchi-san?
Good morning. I'd like to provide you with an overview of Aflac Japan's strategy for growth. 40 years ago, we pioneered cancer insurance in Japan. Immediately, people saw the need for the product, and our sales of cancer insurance grew quickly. Since then, we have focused our efforts on creating a variety of insurance products that help lift the financial burden and provide support when consumers need it most. Aflac Japan's 2015 management slogan is creation, collaboration, and challenge. This slogan emphasizes our objective to expand our business as a leading company of Third Sector insurance market. The current business environment surrounding Aflac Japan is more diverse and complex. Changes are coming more rapidly, and businesses can no longer grow by simply maintaining the status quo. In this dynamic and competitive environment, we are managing our business with that in mind.
Even under such times, however, our basic business principle remains unchanged. We will keep on working together with business partners such as our sales associates to meet the challenge of creating products and services that add value to the lives of people in Japan. Over 40 years, we believe Aflac has gained the trust of our customers and society at large, and our strong reputation and trusted brand continues to be important to our future growth. Before addressing strategic topics, I'd like to cover our business results for 2014. As you may recall, in 2013, we refocused our effort on the sales of our two pillar products, cancer and medical, which are part of the Third Sector. These products are more profitable when compared to ordinary life and annuity products.
This is particularly true in the current environment of extremely low interest rates because third sector products are much less interest sensitive than first sector products. As planned, first sector sales declined significantly in 2014 and Aflac Japan's total new annualized premium sales decreased by 23.3% last year. Keep in mind, first sector products have significantly higher premiums than third sector products. Additionally, the majority of premium from our large-selling first sector product, WAYS, was generated from consumers who used the discounted advanced premium or DAP. Total premiums are paid up front when the product is initially purchased. As a result, the reduction of first sector sales and the DAP payment method have significantly reduced cash flows to investments. Following a 4% increase in third sector sales in 2013, our 2014 sales target was to increase sales of cancer and medical products in the range of 2%-7%.
We are pleased that we achieved a 6.1% increase, which was at the high end of our annual sales product from the fourth quarter of 2014. Following the late September launch of new cancer insurance sales through all distribution outlets for the full year 2014, this success further solidified our position as a leading provider of cancer insurance. The significant increase in cancer sales also played a major role in Aflac Japan achieving sales results at the upper end of our annual target. For 40 years, Aflac Japan has been and will continue to develop innovative products in response to ever-changing customer needs and medical advancements. Our focus remains on the third sector. In the cancer space, Aflac has a dominant number one position, which results in product revisions taking place every two to three years.
As Paul mentioned in his speech, competition in the medical market has intensified with competitors continually developing products designed to differentiate their offerings. This requires we to stay in tune with the changing needs of market and enhance our medical products more frequently in order to maintain our competitive edge and number one position. We are continually looking for new ways to improve our products and introduce them to the market in a timely manner. Let me now provide you with an example of how we are responding to the changing needs of consumers and distributors through the introduction next month of our enhanced medical product. Traditionally, medical products were characterized as insurance to cover hospitalization and surgery.
We, on the other hand, introduced a new medical product in August of 2013 with additional benefits that reflects changes to the medical environment, including shortened hospital stays and increases in use of outpatient treatment. Our core medical insurance product remains unchanged. However, today, there is demand from customers and sales agents for protection that addresses critical diseases like cancer, heart attack, and stroke, which are the leading cause of death in Japan. In response, we will enhance our medical product with three new riders. The first rider pays a lump sum benefit for multiple occurrences upon diagnosis of these critical diseases. The second rider provides premium payment waivers upon diagnosis on any of these critical diseases. The third rider includes unlimited hospitalization coverage related to the number of days stayed upon diagnosis of cancer, heart attack, and stroke, and also expands hospitalization coverage for all other diseases.
In addition, we will provide supplemental services such as specialist referral and second opinion services to help policyholders select between treatment methods for serious diseases. By providing the most comprehensive medical product in the industry, I am confident that Aflac will remain the number one choice for medical coverage in Japan. Having covered third sector sales, I will now provide some information about first sector products. As Paul mentioned, we are actively managing our first sector business. However, it is important to note we allow a limited portion of these products to be sold as an accommodation for certain distribution channels, particularly our exclusive agencies. This helps our distribution channels provide comprehensive life and health protection to our consumers. In addition to our innovative product, having a wide array of sales channels also gives us an edge among competitors.
At Aflac Japan, we've enhanced and expanded our distribution network to give us more opportunities to be where customers want to purchase insurance products. This approach has produced great results. The traditional agency channel has been and remains key to our success and accounted for a considerable portion of our sales in 2014. This was especially evident during the fourth quarter of 2014, when sales by our traditional agency channel grew significantly as a result of the introduction of the new cancer product. I'll provide some detail about Japan Post in the next slide, but now I'll cover sales through large-scale non-exclusive agencies and banks. Let me start first with the large-scale non-exclusive agencies. We are pleased with the progress we've made through this channel in selling our third sector products.
We believe sales of Aflac products through large-scale non-exclusive agencies will increase with the enhancement of our medical product in June. As a result of our renewed focus on third sector products, which started in April 2013, third sector sales through the bank channel has shown steady growth. Going forward, we will further strengthen promotional efforts for third sector products sold through banks. Although first sector products have historically sold well through banks, it is important to note that sales of third sector products have increased for three consecutive years. Now, I'd like to review the progress of Aflac Japan's key strategic themes related to Japan Post. The number of post offices carrying Aflac cancer products increased by approximately 7,000 in October 2014, bringing the current total to about 10,000 postal outlets.
Going forward, we will continue to enhance preparation in anticipation for the sale of our cancer product at 20,000 post offices across Japan. Regarding the second strategic theme, Kampo started selling our cancer product in July 2014 and currently has 76 branches with representatives selling our cancer product, primarily to the corporate market. As a result of careful preparation and great working relationship, we continue to make progress with our sales through Japan Post. You will recall, we also created an exclusive cancer product for Japan Post. Since October 2014, sales results have been very good with both the JP exclusive cancer product and the regular cancer product. Our strategic alliance with Japan Post Group is a mutually beneficial initiative, and further enhancement of the strategic alliance is initiative key focus. Through the years, our brand has been enhanced through innovative advertising campaigns.
Since introducing the Aflac Duck in Japan in 2003, various unique characters associated with the Aflac Duck have been introduced, and consumer response to these characters, including the Aflac Duck, has been tremendous. Last year, we introduced a new character, the Hajimete Duck. The meaning of Hajimete is pioneer, and the intent behind the name is to remind consumers that we are the pioneer of cancer insurance in Japan. By taking a two-pronged approach to marketing, we simultaneously launched an advertisement campaign that features the Hajimete Duck and a separate product-oriented advertisement campaign, which focuses on product features. The consumers' intent to consider purchasing our cancer policy increased sharply. In response to the positive result, we are going to use the Hajimete Duck for medical products in addition to cancer products. Hajimete Duck will continue to represent Aflac as the pioneer of Japan's cancer insurance.
It will also draw attention to our number one status in the medical insurance market. The Hajimete Duck will promote the fact that we have been the leading company in terms of the number of medical policies sold for 12 straight years. In addition, for product-oriented advertisement campaigns that focus on the specific of our product, the Aflac Duck remains a feature in cancer advertisement, and the Black Swan remains the arch nemesis of the Aflac Duck in medical product advertisement. I'd like for everybody in attendance today to take a look at the new advertisement, which uses the Hajimete Duck. This ad campaign also features Aflac's founders, the three Amos brothers.
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Building and gaining trust is essential to forging strong relationships with our customers, thus increasing our opportunities to achieve sustainable mid- to long-term sales growth. We will strive to gain unwavering trust from our customers by strengthening relationships with them through continued effort to enhance the quality of our customer service. In order to maintain the trust our customers have in us, it is very important to ensure accurate and efficient payment of benefits and claims. The graph on the left shows the amount and number of policies related to the payment for cancer and medical products from 2008 through 2014. In 2014, we made more than 1 million claims payments, with JPY 320 billion paid in claims for cancer and JPY 119 billion paid in claims for medical.
By delivering on our promise to policyholders, we are able to maintain a strong company brand and win over the trust of our customers through the millions of claims payments we've made over the past 40 years. As you may know, Japan Financial Services Agency, or FSA, instructed all life insurance companies to thoroughly examine the status of benefits and claim payments. In February 2007. Since then, strengthening the claims payment framework has been an ongoing focus for Aflac. As a result, we have drastically reduced the number of underpayments. In fiscal 2013, our occurrence rate dropped to 0.005%, which is the lowest when compared against the four major domestic insurers. Making accurate and prompt payments is a fundamental and important part of our business.
We believe we have been able to strengthen the trust relationship with our customers through long-term initiatives that have led to claims being paid promptly and accurately. In addition, in order to maintain the trust from our customers, it is necessary for us to enable our customers to complete all procedures in a timely manner. With Japan's aging society expected to accelerate, special and cordial measures are needed for elderly people as life becomes more challenging in later years of life. At Aflac Japan, strengthening relationship with customers, including senior customers, is one of the top prioritized managerial issues. We will look to establish a business structure that makes it allows us to periodically and continually stay in touch with customers, while also making it possible to go through all the necessary procedure in a timely manner.
It is especially important for Aflac Japan to strengthen our customer base, which consists of 23 million policies in force. As we increase effort to strengthen relationships with our customers, sales of our product will be actively promoted. Let me conclude my remarks today by covering our sales expectations for the year. Third sector sales for the first quarter of 2015 increased by 21.3% compared to the year before. This is a result of continued third sector product promotional effort that center on the new cancer product. As anticipated, the sales of first sector product in the quarter decreased by 29.8%. This is due to limit we placed on the sales of saving-type product, particularly given the low interest rate environment. Overall sales were down 2.2% for the quarter. I'm now going to talk about the outlook for third sector sales for the first nine months of 2015.
We expect third sector sales to grow by 15% on average. However, we believe sales in the fourth quarter could be down significantly compared to the final quarter of 2014, due to the outstanding results. As always, we will be working to find ways to minimize that year-by-year decline. At the end of the second quarter, when we have more insight, we will give additional guidance for our expectation of full-year sales. For 40 years since its foundation in Japan, we have continually created new values as the leading company of the third sector market and won over the trust of countless customers. From here on onward, we will aim to become a company that can live up to the expectations from society and consumers and respond to customer needs by leveraging our leadership position. Thank you.
That was going to happen. All right. Next, we're going to have the Q&A panel for Japan. If you'll just bear with us for a few minutes, Yamauchi-san will be back up here. Joining Yamauchi-san will be Koji Ariyoshi, that I introduced earlier. On the end, you'll see Charles Lake. Yamauchi-san will be next to Sue Blanck, and between Ariyoshi-san and Sue, Paul Amos. Kriss Cloninger, and of course, Dan Amos will finish out the panel. Okay. All right. First of all, please wait for a microphone before you ask your questions. Once you get the microphone, tell us your name and firm you're with. Third, please limit your question to one with a follow-up and make sure your focus is on Japan as we'll have the U.S. panel after the U.S. speaks and also the financial and investments later. You're on.
Thank you very much. Juergen Feiner with Deutsche Bank. My first question is about the outlook for the kind of the fourth quarter sales, third sector sales. Is the reticence to give us more color today really dependent on or, I guess, connected to the medical illness rider that's going to be coming out in June? Is that what you're waiting to see how that sells, or are there other drivers that you're looking at?
Well, basically, our cancer sales have been very successful. We will maintain promoting this successful cancer product. On top of that, we will be promoting the medical product that we are planning to launch in June. Therefore, we will basically be pushing for these two products in a very intensive manner.
Great. Thank you.
Let me add a little bit of color just for that. The fourth quarter of last year was a huge quarter, and it's very difficult in a 13-week period to predict exactly how big sales are going to be. So far this year, I'm very happy with sales. In fact, I would say sales are slightly ahead of even where we expected them to be. It's difficult for us to say is we've given you the first three-quarter projection of the 15% or greater, and we're just trying to make sure that those numbers line up. We don't expect a downturn in sales sequentially. We expect sales to remain strong. We don't know how big the Ever plan will necessarily be, especially because we're seeing so much momentum continued in our cancer plan sales through all of our distribution channels.
Koji has done an outstanding job. Yamauchi-san has done an outstanding job, and the best thing I can tell you is that the invigoration through all of our channels, not just Japan Post, but especially in our associate channel, remains very strong. I'm very happy with where sales are, and I think they're going to make every effort to make sure that we hit our target for this year.
Thank you. One follow-up, and this is probably longer term. If I look at the key metrics slide you put up of Aflac against selected life insurers, it seems like premiums for policy for Aflac are about a third of what we see among competitors, so clearly much more affordable. At the same time, Paul, I think you mentioned that the net worth or about 60% of net worth, or of the net worth of the entire country sits with the 65-year-olds and above. That demographic is growing faster. Does that mean that over time it becomes more and more difficult to compete on affordability? Does that segment of the population look for more, maybe, complex products that have more estate planning and the like, with maybe a rider that deals with medical and cancer as opposed to a standalone policy?
I'll start while they have a quick conversation. There is no doubt that the continued aging of the population of Japan represents an opportunity for Aflac to continue to be successful. Given our large number of policies in force and our existing relationships with our policyholders, we believe that we can continue to leverage what's happening within the reform of the Social Security as well as healthcare system to sell potentially larger products, as well as continue to sell newer products. That is not formally been established. We're working internally on our future product development, but we do believe that the senior market represents long term, a viable chance for us to sell more insurance than we're selling today.
I'll add that we currently sell quite a bit in the senior market. Actually, our most recent product thrust has been to increase our penetration in the 20 to 40 age group. We find that we're very competitive at the older ages right now, at least our fair share, if not more than our relative quota at the senior ages. We don't ignore the senior age market right now.
Jay.
Thank you. Jay Gelb from Barclays. Paul, just to follow up on that last comment, when you're talking about no quarter-over-quarter decline in third sector, are you talking four Q of 15 relative to three Q?
Yes.
Okay. Thank you. The other one I wanted to follow up in is the competitive situation in the third sector. We heard a lot about at the Tokyo investor meeting that it was a competitive and intense competitive environment. I think you reiterated that today. Do you feel it's incrementally more intense now than it was in the fall? Is there any potential for that to abate if that's the case?
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We do not see that the competition in medical will slow down at all.
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That is the reason why we are going to be launching a very strong product in June so that we can win over our competitors.
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In terms of cancer and for cancer products, we have 40 years of history and tradition, and we do have very good experience in the cancer area, and our associates are very experienced as well.
I'd like to comment on that. I guess I'm the old-timer in terms of, I go back to the 2001 eras of deregulation and how everybody was going to put us out of business in cancer insurance, and no one ever dreamed we would even be selling medical insurance. I think it's important to note that to me, there was a major change when we got Japan Post in terms of, I see it as kind of a stamp of approval that we were the best in cancer insurance. I think the numbers reflect that we own that market. As long as we stay on top of that market, we're going to continue to own it.
I think our marketing team and Paul and Yamauchi and all the others associated with it have done a very good job in dominating that, and we've got it, and we're going to keep it. The medical business, it's been competitive all along, and the U.S. market has been competitive all along. It's just everything's moved up in speed in terms of new products, new everything. As I reflect back over the last five years or so, it's the same thing. It's just ratcheting it up to speed. It's just how we all don't accept the internet being slow now. If it took three seconds before, we want it one second. People that wanted their claims paid in four days now want it paid in one day. It's all about that.
I think our marketing department and our ability to develop products are as good as it's ever been. It's just different people come with different bells and whistles at different angles, and there are a lot of them. The Japanese are more attuned to products and the, I was trying to think of the term, but product loyalty, whether it's Louis Vuitton bags or it's Aflac cancer insurance. They like to have certain brands, and as long as you continue to make sure you stand out with superior service, you solve the claims out. That was 200. That slide to me, because it had the zeros compared to 1 million, 1.2 million, I think it was. We only had 200 claims that had a problem with them at all. I think that sets the tone.
Yes, competition will continue to improve better than anybody out there, and we just have to continue to stay on our toes and never slack up.
Thanks. Erik Bass with Citigroup. Staying on the competition topic, are you seeing any pressure on pricing, or is it just more product in the market, particularly from some of the new entrants and maybe the P&C companies? Are they trying to compete on pricing? Maybe if you can talk about just the margin that you're targeting on the new EVER product.
We do see some price competition. Our typical method has been to try to give a little bit better value to the customers with each product offering. You've heard me say probably at every FAB meeting, as we price a new plan, we are reflecting the favorable experience we saw from previous plans. What we also do is add more comprehensive benefits. We're still staying around a 19%-20% profit margin on the third sector business. We really focus in Japan on providing comprehensive coverage for our customers. We were one of the innovators and are continued to be the innovator in outpatient treatments, and those are becoming much more common in Japan and are very necessary for consumers to have.
That's really how we've maintained our edge is we have now, especially with this new offering, the most comprehensive product in the industry.
Go ahead, you do it.
One thing I just want to put in context, the much bigger point is the one Dan made. Don't put price competitiveness as the number one issue. The number one issue is time, speed to market. We're seeing the products last in the medical side less time than they did previously. That's really the issue. It's not so much the product pricing. We're keeping the profitability strong. We're having to launch the products every two years instead of every three or four years, which is a non-issue for us internally, given some of the innovation we've done and our continued focus on making our systems better.
Don't underestimate the operating expense ratio and what a distinct advantage it's given us over the competition.
They continue to watch those numbers, Yamauchi especially. That's his passion.
Thank you. Steven Schwartz, Raymond James. Two questions. Understanding, of course, you said many times there's only so much time in a day, agents selling cancer aren't selling medical. Were you still the number 1 medical provider, sales-wise last year?
Yes.
Okay. A question with regards, I think it's very important, a lot of clients ask with regards to Japan Post, what kind of legs does that have in terms of growth, do you think, Dan, over the intermediate term? Can that keep on growing, or is that a-
JP
or is that kind of a this type of deal, go straight up, straight down?
Charles is the one that probably can tell more. My gut is that it's going to last longer, but it will still come down at some point. It has longer period of time because we've rolled it out more compared to, say, Dai-ichi Life when we just, boom, introduced it. There was a big spike. I've always said, you've heard me say it, Steven, there's a spike, and then it comes down, and it levels off. Here, because of the way we've rolled it out, it's done more of this. I think it's going to do more of that and then come down some. I do believe that we're going to continue to go. Paul or some one of you all may want to comment, knows more about it.
Let me comment on it. Paul and Ariyoshi-san may have another comment. I think it's very important to, again, remember how important the infrastructure at Japan Post is to the entire nation of Japan. It is a nationwide network of postal service, yes, but has bank insurance, other services. It's a one-stop place for many folks in the village and so on. We are the only company that's there with this product. I think that's a huge potential that's a sustainable one in my view. I agree completely with what Dan just said.
Thank you.
Tom.
Thanks. Tom Gallagher, Credit Suisse. Can you dimension a bit the opportunity when you go from the first 10,000 to the next 10,000 of post offices? What the opportunity is? I presume there was more of an urban bent in the first 10,000. Can you give some color around that?
Ariyoshi-san.
As you know, our products are being offered through 10,000 Japan Post post offices already. We are going up to 20,000. The ones that are going to be added from this point on are much smaller sizes. These post offices are mainly in the regional area. I do believe that by adding these 10,000 post offices, sales by JP will increase. However, because these are smaller post offices, the productivity may not be as high as the first 10,000.
Just as a follow-up to that, do you have a way of sizing that, whether it's GDPs in those regions, or is it 10% of the opportunity or 15%?
Maybe 25.
25?
That's a ballpark. Who knows?
That's great. Okay.
It's not equal. That's what they told me. I'm just cutting through.
Let me add one other comment, in that we haven't seen the full effectiveness of the first 10,000. They're divided into 13 separate regions throughout the country. We have worked with those 13 separate regions. As you would imagine, the first couple, there are some that are really on board, some that we're still getting on board. Everybody is now coming on board. I believe that we'll see more effectiveness out of the first 10,000 as we move forward with our continued training, our efforts to work with those groups. Dan's right. The next 10,000 don't represent the same level of opportunity that the first 10,000 did, but we still believe there's a lot of, for lack of a better term, same store sales. There's a real opportunity for us to grow that.
Thanks. Randy Binner, FBR. I'm going to try a couple more on the sales outlook in Japan. The first is, since you all did give 2% to 8% sales growth outlook for 2016 and 2017, can you approximate how much of that percentage growth would come from Post? Is that-
Let me comment on that. You're looking ahead, I think, to-
To do with Japan, though.
You're looking ahead to the modeling assumptions, okay? I'm going to say, and I'm going to repeat in my speech, that those aren't sales guidance numbers. Those are sales modeling numbers that I picked. These guys didn't give me those numbers. I just said, "Okay, what's a reasonable range to do modeling for the purpose of projecting margins and the like, and looking at business mix?" I thought that was reasonable. Blame me for that. It's not official sales guidance. These guys would kill me if they thought I was giving official sales guidance.
It's not official or unofficial. It is only modeling.
Sorry, Kriss.
I want to say one thing again about Japan Post. I don't want you to undervalue what's in the other. Japan Post is uncharted waters, even for Japan Post. As Charles said, no one has ever gotten in all 20,000 outlets. We don't know what it's going to be. For us to look at 2016 would be unfair to us and unfair to you by us giving you a number, because we don't know. Are we enthused? Do we continue to see? The answer is yes. Are we willing to go out right now and make a projection? You can guess, and so are we. We do like what we're seeing.
Just jump into first sector, because that's, I guess, been a little neglected in the Q&A so far. Obviously, sales are going down there. It's interest rate sensitive. Is there anything changing in the rate environment or in the competitive?
We're monitoring rates really on a daily basis, because for now we are controlling first sector sales using sales caps because of where interest rates are. We are continuing to monitor the situation and continuing to keep our product position for the event when rates rise, that we will be ready to turn that spigot on and produce sales and produce cash, and then that'll be coming Eric's way.
As of now, that's not.
The interest rates have improved considerably from the beginning of the year. We're getting close to being able to do more, I believe. We've got to see rates come up a little bit more and stabilize.
To the Japanese consumer, consistency is very important. It's not an option for us to jump in and out of the market on a regular basis. When we commit to our distribution channels that we're making a favorable re-entry on first sector, that's something we're going to have to commit to for six months or 1 year at a time. We really want to see interest rates at a stable enough level that we can consistently commit to the channels. That said, it's very important for you to note, I said in my speech, that when it comes to our exclusive agencies, they depend 100% on us for product. We continue to allow them to sell first sector product because it's a necessary component of their product offering to consumers.
No matter what, we're going to continue to sell those first sector products through our exclusive agencies. As Sue said, we cap them in the other channels to prevent there from being an overly large amount until we get back to an environment that we believe will produce profitability that's in line with what you expect.
Just to note, we are making decent money in this current rate environment. We're mid to high single digit. It's just not as high as what we would want to see to really turn that spigot on. Also, don't forget, third sector, even in this low environment, is still right around 20% profit margin. We're watching things very carefully.
Eric Berg from RBC. In the discussion about distribution strategy, one of the planks of that strategy is to sell more medical through the banks. Promote third sector products through the banks. My question is, what has been the experience of let me start again. My hunch would be that banks are going to be more comfortable with financially-oriented products, annuities and the like, than with medical products. Maybe not. What has been the experience in Japan for you and others in selling medical products through the banks? I know you had WAYS, that was for a sector, I believe. Thank you.
The banks do have their insurance sales target.
They have their own targets of selling third sector products together with annuity and other savings type of insurance products.
The reason for them doing that is because of the customers that visit banks have the needs to be wanting to purchase those third sector products as well.
Actually, a third sector product sales in bank channel is increasing and it's growing. One is, of course, they would like to be earning commissions from our third sector products as well. Of course, as you mentioned, it is true that the annuities and savings types of products have more affinity to what they are used to be selling, but third sector product is also part of their sales.
I have just one question also about Japan, and maybe directed to you, Paul. What have been the most important ways, as you think about the last, say three years, that technology has affected the business profoundly, whether you want to talk about mobile computing, tablet technology on the front end. Relatedly, what are the ways in which technology really hasn't affected the business?
First of all, digital is pushing in every direction when it comes to insurance, but online sales in Japan remain almost non-existent. There are a few companies who are selling there. They're selling low premium, low profit products. We just believe the online market for actual e-commerce remains weak at this point. That said, 80% of consumers do their research online prior to purchase. We know that it's extremely important how we've had to shift our media mix in order to not only put ads on television, but to spend a tremendous amount of money in terms of going for the consumers online to actually capture their market attention, make sure our websites remain up to speed with the latest and greatest information. We're spending more time and effort on the digital side of marketing, but not necessarily sales.
From a technology perspective, we're also focused on improving our infrastructure internally. We continue to digitize many of the processes that have been manual processes over time. There's still a long way we can go with those efforts. We're working with external partners to look at new concepts. John Moorefield, our Head of Transformation in Japan, moved back over to Japan. He was originally our CIO of Japan, came to the U.S. for five years, and I brought him back when I moved to Japan. He's helping us put together a long-term plan where we believe we can continue to reap additional operational expense benefits and long-term productivity benefits by implementations of technology internally. I think there's a lot of opportunity, but the e-commerce continues to be something that we don't foresee being a big move comparison to the rest of the world.
Suneet.
Thanks, Robin. Suneet Kamath for UBS. Kriss, in the past, you used to show us a slide showing, I think, in-force premiums in Japan between first sector and third sector. I don't think it's in the current presentation, but as you think about the respective sales growth rates for those two products, should we expect that first sector premium in-force will continue to gain in share of total?
That remains to be seen. You're correct. The slide's not in this current deck for this particular meeting, but it will be in a supplemental deck that will be available later. That's correct, isn't it?
Correct.
We're going to have a supplemental deck of slides that aren't being presented today that'll provide you some more of that basic information. Where it's going, Suneet, I think depends on the path of interest rates. As Susan alluded to, if historic low interest rates prevail for some time to come, asset accumulation products will be more difficult to sell. They'll be more expensive for the consumer, the returns will be lower, and presumably, the demand will be less. If interest rates increase, you'll see more attractive pricing, better returns to the consumer, and probably higher volumes of the business being written. One thing I think about first sector products is that there are ways other than return that consumers can benefit from first sector products.
They can also benefit significantly from the protection, the death benefits and the like, the protection of income benefits that first sector and the blend of first and third sector products will provide. I think that'll be an opportunity for Aflac and other companies in the industry to grow first sector business, even if interest rates stay low. I think with our position and distribution, that I expect us to come up with some innovative products that are beyond the traditional products. Golly, I grew up a long time ago in this business, and I always analogized our Japanese business to what was going on in the mutual company environment in the U.S. in the '60s and '70s. The Japanese first sector products were very similar to those. Most of them were participating in nature. They were priced in a very simple way.
They returned excess returns through policyholder dividends rather than a universal life type excess interest or an excess interest whole life pricing mechanism, things like that. I think the Japanese first sector industry will get more creative in the future in response to the low interest rate environment. All that being said, I think first sector will make a little bit of headway against third sector business just because the premiums are larger, and I think as we take advantage of the distribution opportunities we've created, we'll see first sector grow as a percent of third, but probably not at the same rate it did from 2010 through 2012 in Aflac's case.
Okay.
Just one thing to add to that, first sector is very persistent, and we've seen very good low lapse rates, high persistency. You do need to be very aware of the impact limited pay is going to have on the in-force AP, and Kriss is covering that in detail in his speech.
Okay. Sorry to follow up. Just in terms of the product cycle being so much shorter in Japan and the importance of rolling out new products, are we just going to be in this environment where we just have a good year of Japan sales when you launch a new product, followed by a down year the next year because the comps are difficult, and then a good year the year after, and just kind of, is that going to be the pattern that we should expect?
I don't think that's the pattern you should expect. I think that the fact of the matter is we have a cancer and we have a medical plan. Koji's made his sales number 7 years in a row. I think that we continue to produce sales increases, but when you look at it on a product by product basis, and you're looking at cancer this year versus cancer next year, there obviously with difficult comparisons due to great product rollouts. On a product by product basis, I don't think you're going to see that. We do expect sales to increase incrementally year-over-year. I don't expect to see up year, down year.
We spend considerable time looking at the market, looking at the needs of consumers. Paul had talked about the aging market and the opportunities that are going to be there. We are continuing to look at ways to capitalize on that, either through pure third sector products or more hybrid products that involve some of the protection aspects, the first sector that Kriss talked about, along with some of the third sector components. We're continuing to push for that to where in total you shouldn't see this up and down.
To prove that, if you take out the life insurance, which is what we've said, we've had three years in a row, and we're expecting another increase next year.
Hi, thank you, Seth Weiss, Bank of America, Merrill Lynch. My question's on the competitive nature of third sector. In your prepared remarks, you spoke about enhanced hospitalization riders, which included critical illness such as cancer in the medical products. Is there more and more of an overlap when you look at competition between medical products and cancer, and is there some risk that medical products could encroach on your market share when thinking about cancer?
I don't really think you're going to see much of that because the focus you see on cancer insurance, critical diseases in the medical market is much more related just to hospitalization and not as much to treatment. They're really two distinct markets. Our cancer products are really going to be there to cover your treatments, and they actually coexist very well with the medical product that has enhanced hospitalization coverage for cancer.
Humphrey Lee, Dowling & Partners. I just want to follow up on the competition side. You talked about very competitive in the medical side. Are you seeing the competition kind of enhancing the benefits or are they enhancing the supplemental services? In that case, how should we think about these two kind of changes affects your kind of margins perspective? Will it be the higher benefit coverage affecting your margin, or is it the additional supplemental services that you provide creating more higher expenses for the product itself?
Let me start off, then Sue can follow up perhaps later. What we are going to enhance in our new medical product is to enhance our benefit. On top of that, we will be adding some services to our customers to perhaps provide advice on the medical treatments. For example, second opinion. This supplementary service is separate from the benefits that provide on our policies. In terms of profitability, maybe Sue can follow up.
Really just a couple things there. The first one is by enhancing benefits, we are not necessarily lowering our profit margin. There is a premium for those enhanced benefits. As far as the services, these are things that we are actually much better positioned to provide than our competitors. It's a very big differentiator for us, and it's at very low cost because we're not actually providing necessarily the exact service. We're providing access to the services, if that makes sense.
Okay. Just to follow on the, I think it was Erik Bass' question earlier, in terms of the competition, where are you seeing it? Are you seeing the domestic player being more competitive or kind of shortening the product cycle, or are you seeing the non-typical competitors are coming in?
In this one I might start and then toss it over to Yamauchi or Paul or Koji. We have seen smaller entrants come in, both domestic and foreign, and make some strides. What I'm seeing from the actuarial side is they're starting to see the impact of what they have sold and realize that some of their pricing choices may not have been resulting in exactly what they expected from their experience. It's not just on the premium piece. Administratively, I think some of the companies have run into some issues, and that actually is a big differentiator for us. It's one reason we have focused on outpatient, because we are very well positioned to pay outpatient claims effectively and accurately. That is something that's actually very difficult to do. It's something Yamauchi San made as a big focus when he was over administration.
These things really make us stronger. Competitors have been able to come in in small areas, but we are typically able to react pretty quickly and stay right on top.
Okay, we have time for just one more question. Jimmy Bhullar?
Hi, Jimmy Bhullar, JPMorgan. On your sales guidance for the first three quarters for the third sector, given the level of sales that you had in the first quarter and the addition of new banks, or new post offices, sorry, it seems like the 15% guidance for the first three quarter results are conservative. Maybe if you can talk, is that right, or are you seeing any other headwinds or something else that makes you somewhat concerned?
I am going to be achieving more than 15%.
Let me provide a little more color. Just smile. The one issue that we may have in the second quarter is we've released now the information that we're going to have this new medical product launched at the end of June. Therefore, for the next five or six weeks, we may see medical sales dip off a little bit just because of seasonality and whenever you make an announcement. I may come back with second quarter sales being slightly less strong, Koji's right. Far, we're running ahead of projections. Things look better than we expected, and that gives us more of a positive feeling about 2015 than what we had previously.
That decline in sales in anticipation of new product probably comes back.
Oh, yeah. You get right back in the third quarter. It's just timing.
This is a couple of years out, the consumption tax increase from 8% to 10%, how do you expect that to affect your sales and/or margin?
That's not till 2017, I don't think on sales we're willing to go out at this point. Margins we can talk about.
No, just the incremental impact.
I know.
We are not foreseeing an impact on our insurance sales when the consumption tax is raised from 8% to 10% in two years. When the consumption tax rose last year, there really was no impact on our sales.
Just to touch on the profitability piece of that, we're already anticipating that in our product pricing.
Okay. Thank you, everyone. We're going to take a quick 10-minute break. We will start promptly back here in 10 minutes. Please make sure you're back in your seats. Thank you.
[Break]
If we could please have everyone join us and take your seats. Before we begin our next session, the hotel has notified us that there is a planned fire drill today, and they cannot tell us what time the planned fire drill is going to happen. I wanted to let all of you know that it is planned by the city, not by the hotel, and certainly not by Aflac. Although we do hope you all have your accident policies paid up to date. Please do not worry if in the middle of a presentation you do hear something, because they've let us know it is absolutely planned and they're just doing some testing of the alarms. I guess this comes on the back of those of you that were at Mini FAB.
You can't say that we don't have exciting things happen at all of our conferences. No, you will not have to leave the building. Kriss just made a good statement as always. You do not leave your seat or building unless we tell you to. That's correct. Don't worry about it. Okay. Next, we will hear from Teresa White. Teresa joined the company in 1998, and last year she was promoted to President of Aflac U.S., and this morning she's going to give us an overview of Aflac U.S. Teresa?
Thank you, Robin. Good morning. Today I'll provide an update of our strategy and business operations in the voluntary worksite market in the U.S. Let me begin with the overall market backdrop and the outlook for our products. Although the U.S. economic environment has been challenging in recent years, especially in the small business market, macroeconomic data suggests a continuing recovery and expect it to carry through 2015. General optimism has been growing among small business but has leveled off since reaching a high point in December 2014. The unemployment rate continues to decline, and the consumer price index has shown slight improvement, with continued growth projected for 2015. Overall, these conditions point to a better general business environment than we've operated in in the last couple of years. We're also beginning to see some stabilization regarding healthcare reform.
While some employers hesitated to make healthcare decisions in the short run, we believe the new healthcare environment has resulted in more standardization of coverage that more clearly defines the need for our products. As the gaps in coverage become more evident, we believe healthcare reform will amplify the need for voluntary products. As you can see here, the market is expected to grow at a rate of about 5% annually for the next four years, with sales through the broker channel expected to grow at a faster pace. We continue to believe the opportunities in the U.S. are vast. Based on the most recent U.S. Census data, there's approximately 5.6 million firms with fewer than 100 employees in the U.S., employing more than 35 million people.
The mid-size market is made up of more than 90,000 businesses employing approximately 22 million workers. Then the large case market includes a relatively small number of firms. However, that market accounts for more than 46% of employees in total, offering us the potential access of more than 53 million workers. With sales expected to grow at a faster pace, we believe that we can be very successful in that mid and large case market in the future. The key to our success is to meet the unique needs of each of these markets. With this in mind, we've reevaluated our sales strategy last year. As a result, we realigned our distribution and sales infrastructure to better take advantage of the opportunities in each of these markets.
As I mentioned earlier, the small case market continues to provide great opportunity for Aflac, with approximately 90% of all Aflac accounts that are currently in this segment. As part of our new strategy, we provided additional incentives to our career sales force to focus primarily on the small case market. This presents a great opportunity for our independent career agents who typically drive sales of our individually issued products through employers in this small case market. These career agents have been and will continue to be a critical part of the success in marketing to these smaller employer groups because they have to engage the employees face-to-face and enroll them as policyholders. In this segment, employers are starting to send employees to the exchange or offering major medical.
As employees in this segment offer or obtain that major medical coverage, they're also looking to fill some of the gaps associated with the high deductible health plans. This creates a great opportunity for our career sales agents, and it provides options for them to provide coverage to make sure that we maintain or we fill those gaps. Our products greatly improves the participation rate with our field force. However, as voluntary benefits continue to become a more essential offering, employers are shifting the risk to employees and the implementation of mandated healthcare, it also offers an opportunity for Aflac field force to really provide a holistic solution for enrollment through our proprietary exchange, Everwell. This new system, which was rolled out throughout 2014, allows our career agents to enroll customers in voluntary insurance products along with other core benefits like network vision and dental, as well as major medical.
This system links to subsidy eligible plans through the connectivity to the public exchange. Our goal is to provide our career agents with easy-to-use technology that helps them to offer clients a full range of plans and options that fit their needs. These tools also provide the opportunity for increased account penetration, as well as increased policies per policyholder. While many agents still use our S&G enrollment tool, we expect to incent our sales force to convert to using Everwell for more of their enrollments, as it enables the agent to provide more comprehensive solutions for healthcare needs. Although our experience with Everwell is still somewhat limited, our results so far have demonstrated an increase in account penetration as well as an increase in policies per policyholder.
We view our career force as an important part of our distribution and will continue to cultivate the channel in the coming years with an intense focus this year on three elements that help drive sales in the small case market. Recruiting is one of the most important areas of our career sales force. As you know, the recruited agents metric includes both career agent recruits as well as broker recruits. As I mentioned in the first quarter conference call, we did expect some disruption in this number, primarily due to the changes that we've made to our distribution system. We've initiated activities to increase recruiting levels and have seen positive results in some of our markets. We're analyzing results in markets where we don't see success, and we're developing customized tactics and campaigns to increase recruiting in those areas as well.
Make no mistake, we'll continue to focus on our recruiting as this is really an important driver for sales growth. We know that many of the needs of the small case market are best met with an agent who has a one-on-one relationship with the employer. The second area of focus for the new sales strategy is to ensure consistency in how we approach the account management in our field operations. Our market directors are driving best practices and overall accountability to better serve our valued clients. Through this initiative, our market directors have increased annual premium in our existing traditional accounts by 4.5%. The small case market, which represents, again, 90% of our accounts, has always been Aflac's bread and butter. As such, ensuring strong persistency at these smaller accounts is a priority. Finally, we know that compensation is the most effective means of our sales force.
We've modified our career distribution model to better align compensation with sales growth. Last year, we introduced a small market renewal incentive for our career agents so that their compensation is more closely tied to their performance in the less than 100 market. We also made changes to our field leadership compensation. This change was prompted by our conclusion that the old compensation model was not properly aligned with sales growth and the success of Aflac U.S. We believe some results have indicated our compensation strategy has improved. We began tracking the correlation of compensation to sales growth in 2012. The chart on the left has over two and a half years of data, while the chart on the right shows the two quarters since our sales changes were implemented.
It's noteworthy that the correlation between year-over-year sales growth and compensation has increased from 0.11 for 11 quarters under the old model to 0.82 for the two quarters under the new model. The strong correlation reflects the change to the salary market director position. We're seeing momentum as our sales force is adapting to our new sales distribution model. Obviously, some organizations are further along than others, but the bottom line is that we're better off today than we were prior to making the changes, as more of our leading indicators are showing better results. While our career agents focus on the smaller market, brokers provide access primarily to the markets with greater than 100 employees. The product needs of these market segments vary, ranging from products that are individually underwritten to group products that are fully customized.
With respect to enrolling employees, businesses in these segments utilize agent-assisted enrollments as well as alternative enrollment tools, such as third-party call centers and self-service technologies. As you may recall from last year's financial analyst briefing, we discussed two separate broker channels, one of which we refer to as core for the midsize market, and the other, which we primarily focused on, was the large case market. Our research showed that brokers wanted an easy-to-understand model, single point of contact, and a great brand. Therefore, it made more sense for Aflac to consolidate these two broker channels into one. This new model positions Aflac to better deliver a consistent customer experience and enhanced operations. Our new broker sales model also addresses brokers' needs by providing them with specific points of contact that are assigned to them because that's who they do business with.
These assignments are extremely important to us in that the broker sales professional's role is to understand their assigned broker's go-to-market strategy. Additionally, these professionals gain insight into the client base and plans offered in each of these brokerage houses in order to provide recommendations as to how Aflac products might fit in their overall portfolio. We've made headway in recruiting broker sales professionals, many of whom have come from brokerage houses or group carriers as well. These sales professionals are wholesale in that they're compensated based on the sales that they drive through their broker partners. Additionally, we've created educational materials, white papers, and other tools to assist brokers in understanding the voluntary market and how our products complement the major medical plans that they currently offer their clients.
Since our broker channel consolidation was in the first quarter of 2015, we've had initial responses from brokers that have been very positive. For the remainder of 2015, we'll spend time automating our processes and pressure testing our new career and brokerage models. This has not been an easy task, and I'm extremely proud of the leadership on both the career and broker sides as they collaborate to reduce channel conflict and ensure that the needs of the accounts and the customers are the priority. The second of our strategies is to focus on product innovation. Innovation in the insurance industry comes from understanding and adapting to what customers want and need. It's our objective to provide needed products at the right time, through the right distribution channels, and of course, at the right price points.
Understanding the customer's needs has driven and will continue to drive our focus on product innovation. For instance, we understand that the average major medical deductible for the bronze-level plan is more than $5,000, and most Americans aren't prepared financially for this expense. Recent independent survey data showed that 52% of workers say that they can't afford $1,000 in out-of-pocket medical expenses. Additionally, last year, Aflac's WorkForces Report revealed that more than half of workers would have to use extraordinary means, such as borrowing from their 401 or using a credit card, just to cover costs associated with an unexpected serious illness or accident. Because we understand the financial strains consumers face, we introduced a critical care rider in 2014. This unique rider provides benefits for specified situations where out-of-pocket expenses are expected to exceed deductibles.
This rider can be attached to any of the three most popular standalone products, which are the cancer insurance, accident insurance, and our short-term disability. We also understand that the needs of employers to have benefit enrollments conducted in an efficient manner is very important to them. For this reason, we've developed a full suite of guaranteed issue policies for individual and group products. This means valuable coverage is available with very little time spent answering medical history questions, which speeds up that enrollment process. Currently, Aflac offers the lowest individual guaranteed issue requirements in the market. With the introduction of our first guaranteed issue payroll life product in early 2014, Aflac cemented its leadership position in the individual market by completing our portfolio of guaranteed issue product offerings.
Finally, we understand that associates and brokers need products that will fit the different types of benefit solutions that they're looking for. For this reason, the HSA compatible options are available on all of our products. In addition, we believe that the breadth and depth of our group product portfolio is industry-leading, which gives us maximum flexibility for all size employer groups and the ability to customize the best plan to meet the needs of the employees. As the leading provider in the United States in our core product lines, we'll continue to focus on our product innovation, understanding the needs that are met for our clients are important. We continue to believe product innovation has placed Aflac in the forefront of market leadership and that we will remain there.
One of the hallmarks of Aflac's customer service is the speed and fairness we demonstrate in paying our claims. We know that it's important to our customers to have immediate access to claims payments that are due to them. We continue to look for ways to differentiate Aflac in the market, and for years, our claims have been paid in an average of four days, as Dan stated. In 2015, we took initial steps to further focus on reducing the claims payment turnaround to process, approve, and pay our claims in just one day. The One Day Pay initiative launched nationwide and was announced during Dan Amos' interview on CNBC in January, and then the following day at the Grammys.
One Day Pay is an industry-first initiative that allows us to process, approve, and pay eligible claims in just one day, getting the cash in the hands of the policyholders quickly. We estimate that 70% of our policyholders have policies eligible for One Day Pay. We've received great feedback from claimants, and we're encouraged by the initial usage of this industry-leading claims practice. In the first quarter of this year, 25% of eligible claims were submitted through our SmartClaim process, which facilitates one-day payments. Our goal for 2015 is to process nearly two million claims via One Day Pay. I hope you've had an opportunity to see some of our recent commercials featuring One Day Pay. Building a brand is generally accomplished by entertaining people while getting the message across.
You'll see our next commercial, which aired earlier this week during the season finale of "Dancing with the Stars," that the duck isn't good at certain things, but he is good at paying claims in one day.
Aflac? Aflac.
I thought you said this guy was the best. Oh, he's a horrible stylist. He's the best at paying claims fast. Really? Mm-hmm. Paid mine in just one day. One day? Yeah. Wow.
In just one day, we approve and pay. One Day Pay, only from Aflac.
Additionally, to illustrate the compassion and dedication our employees have to paying claims fast, we've asked our employees from our claims department to share in their own words what it means to help our policyholders, and we've posted these videos online. This morning, I'd like to share one of the features from claims specialist, Lisset Perez.
Our priority is our customer, and it's not that we are going to do things halfway. We go above and beyond to be able to help them. A child was hurt, and I received the claim, but not all the information was included. We reached out to the parents, and we said, "We need you to sign the documents at the hospital so we could be able to help you as soon as possible." We were able to do that. They were very grateful. If we need to call out to reach out to the policyholder or the provider, that's part of our daily job. It's a way of paying our claims faster and getting the help out there faster. Every day, I reflect on how many people I was able to help. It's an amazing company. If we are fast in paying, we are keeping the promise.
My husband has been working here for 27 years. We truly enjoy helping out. I am Lisset Perez, claims specialist one.
We continue to strengthen our low-cost model. We expect the U.S. market to become increasingly competitive. It means that it's essential that we minimize the expenses associated with running day-to-day operations. This will involve new work processes and solutions, new technologies, and the elimination of non-essential work processes. Minimizing our routine expenses will allow us to free up resources for key initiatives. In order to meet our overall corporate objectives, we must balance our key tenet of customer experience with our four tenets of operational management, which include expense control, operational efficiency, risk management, and people, a seamless customer experience regardless of the strategic decisions we make. With the majority of expenses allocated to personnel, balancing the customer's needs and wants with expense control objectives can be particularly challenging.
We continually employ alternative work solutions such as nontraditional workforce, resource sharing, reallocation of staffing, elimination of non-essential processes, and various other ways. It's this balance that allows us to continue to maintain our strategic operational agility. We have also effectively utilized strategic sourcing and procurement within Aflac to ensure that we're getting the best value with our vendor contracts. During the last two years, operational areas have reduced expenses by $17 million. We've been able to redirect these savings to other areas, primarily to support our distribution model and our cybersecurity initiatives. These low-cost efforts also aided in offsetting some of the expenses related to the new sales strategy.
In the first quarter of this year, the added expense from changes that we made to our sales structure were approximately $19.5 million net of capitalization, which was a bit below what we had anticipated, and we expect it to run around $20 million-$22 million as a run rate for the four quarters of this year. I believe that our efforts to drive sales and control operating expenses will pay off for Aflac. Sales results for the first quarter of this year were essentially flat. That follows a fourth quarter of 2014 increase of 14%. It's important to note that as we build out our sales operations, specifically our broker channel, more of our sales will skew toward the fourth quarter. This has somewhat magnified the seasonal pattern of our sales.
We also expect to see higher operating expense ratios in the next two quarters, directly attributable to changes that we've made in our sales force model. Even with these higher expenses, we expect to achieve relatively stable profit margins for the year. We believe maintaining a disciplined approach to total company expenses and focusing expenditures on key areas will enhance revenue growth in our future. Our vision is simple, to be the number 1 multi-channel distributor of supplemental products to employers while enjoying industry-leading growth and profitability. I believe that's a realistic vision, and I remain very excited about our opportunities in Aflac U.S. Thank you.
Thank you, Teresa. Now, we're going to have the Q&A panel discussion for Aflac U.S. Teresa's going to be joined by Mike Tomlinson and Dan Lebish, in addition to Dan Amos and Kriss Cloninger. Again, I don't think I need to repeat the rules. If everybody's good with them. Okay. Tom?
Thanks, Robin. Tom Gallagher, Credit Suisse. Teresa, can you just provide a little bit more behind the story of how you see the changes in the U.S.? By that I mean, if I just listen to your presentation, it sounded like you've re-segmented the target market you want your career agents to go after. I presume they were going after larger accounts as well. I think Dan has alluded to that in the past. Is that really what's changing here? That's the 1st question. So far, how was that met with success, or where would you put yourselves along those lines?
I agree, yes, we have resegmented our market, less than 100 account cases. Really, that's where our field agents were successful anyway. They were more successful in that area. We've been trying to build out this broker strategy, one of the things that we needed to do is incent our career agents to sell in the area where they were more successful anyway. That also allowed us to now look at the broker, consolidate all of our broker channels, and then drive a broker strategy. Each of those different channels need something different. The employers associated with those channels need something different as well. It also allowed us to start focusing on specific strategies for the less than 100, and then those for the brokerage markets as well.
Teresa, I'd like to add just a little more color to that, too. Tom, as Teresa mentioned, that focus began in earnest last year. The beginning of the year, we increased the renewal commissions for our field management team, then mid-year, we increased their first-year commissions on under 100. To give you some additional perspective, eight of the last 10 months have seen a sales increase in the under 100 market. Each of the last three quarters have seen a sales increase in that market. While those sales increases are not yet where we want them, we feel very good about our progress.
Is your total market actually growing? If you step back and say you're the dominant provider in the market, I think you're three times bigger than anyone else. Is that overall market still growing? If so, how much is it growing? Do you think after these distribution fixes set in that you'll continue to grow along with the market?
Yeah. I think in one of my slides, we basically see, this is Eastbridge and some of the other studies, 5% increase in growth in the market. The majority of the growth is happening on the broker side. So while the split, migrating our field force, the less than 100, and then providing an opportunity to grow the brokerage market, that's really the side that we're really dependent on accelerated growth in that spot of the market.
I would just supplement that by saying that this past year, as we've kind of developed two different models, what I would call a retail model with our agents, a wholesale model working with brokers, we've gone out and increased our broker sales professional force considerably. We have now over 120 people that are broker sales professionals coming from either brokerages or from past other carriers that were in the group market, working directly with brokers in a wholesale model.
Okay. Ryan?
Thanks. Ryan Krueger with KBW. Based on the success you've had so far with the U.S. sales reorganization, do you still feel comfortable with the 3%-7% sales guidance that you provided for the year?
Absolutely. I feel very good about three seven.
Then, at this point, what % of your sales are through the broker channel versus the career agent channel? How do you expect that to change over the next few years?
Right now it's about 30% through the broker channel.
Do you expect that to increase going forward, or do you expect it to remain pretty constant?
Absolutely. We expect it to increase as the market increases from a brokerage perspective.
Okay, then just one last quick one. The expense guidance you provided for the sales reorganization, I guess, are you actually paying higher compensation, or is it more just related to the accounting of having salaried employees versus purely commission-based employees?
When you look at the sales force, what Mike had talked about with the sales market renewal incentives and some of the things we're doing for the sales force, that's specifically increase in commissions for them to focus on the less than 100.
No.
When you look at the market directors, that is a salary position, but it has a greater upside as sales increase. Basically what we wanted to do is align sales increases with increased compensation.
We're keeping the renewals, so it'll wash out over a period of time. It's just the front end of the money for changing it to salary, but we'll get it back. It will pay back easily. In fact, it'll be more profitable.
We're keeping the renewals on the business they wrote while they're market directors. They retain the renewals from the business they wrote when they were independent contractors.
Right.
That's correct.
In addition, we're picking up all the administrative expenses, including office space, contest expenses, etcetera, that they used to fund out of their own pocket. That's an additional expense burden to Aflac now compared to what they used to pay for out of their own commission base.
If they don't have a 5% increase, they're all going to make less money.
Yeah.
If they do the 5%, they're fine, and it should be a wash for us. Under five, which is what we want, and you saw that in the chart of how that broke out.
I think, Dan, you had said after two years at 5%.
Yes
It would be a total wash with the expense portion.
Right. It gets profitable after that.
Right. Jimmy?
Jimmy Bhullar, JPMorgan. There's been talk by a few major medical companies about trying to be more active in the supplemental market. I'm just wondering if you've seen more companies come in and sell similar products.
You want to take that?
Yeah, absolutely. The increasing competition in the VB market, I think, speaks volumes to the opportunity that we have in this sector of the U.S. industry. Again, and it was mentioned earlier, keep in mind that we are more than two and a half times larger than our next nearest competitor. In fact, the broker side of our business is larger than any of our competitors. Broker is approximately 30% of our business, and that segment of our business is larger than our competitors, and it is growing at a much, much faster rate than our competitors.
I will say that we are seeing more non-traditional competitors, some of the major medical carriers that are coming into the VB space. Most of them, as Mike just said, are really looking at group as a platform, and they are really brokers, going through brokers. Our brokerage strategy is very important to us because that's really where you'll see the competition more so.
I think some of those companies obviously have the group relationships from the major medical side.
That's correct
What else are they competing on? Are they competing on different types of products, pricing? What else?
Well, they do have-
One thing they don't want to compete on is claims payments. That's one of the whole ideas here about the One Day Pay. Major medical carriers can't pay as fast as we can. Even if they get it down from whatever days, 30 days, 45 days, let's say they could figure out how to get it down to 10 days. They still don't want to even talk about 10 days with us doing one day. This is a great divide that I believe separates us from the others trying to enter the market against us. That's not a subject matter, if I'm a CEO of a major medical carrier, I want to talk about, and that's all we want to talk about. I believe that's going to give us such a distinct advantage going forward because the consumers do need the money quickly in today's environment.
I'll go back to your question.
Just lastly, you made the Group acquisition a few years ago. As the healthcare space overall and the supplemental market evolves, are there capabilities that you lack, things that you could consider adding to through acquisition?
There are always things that we look at and we assess. Today, our focus is primarily on the broker channel. We see a lot of growth potential in that channel, and we're basically adding products, value-added services, that type of thing, to really enhance that channel. Outside of that's really been our focus at this point.
We will be looking for other things that will enhance it. What we don't want are unprofitable or break-even products that some of them might sell.
That's right.
If it fits our niche, we're constantly looking for that. Yes, we will do that.
Thank you.
Okay. Colin?
That's nice. Colin Devine, Jefferies. Dan, I'm glad you mentioned that on the break-even and profitable point. Teresa, are you able to measure profitability by the brokers you're using? Obviously, it's one thing to add sales, but are you adding really profitable sales? As you acknowledge, a very competitive market. The second question on the One Day Pay, what are you doing to track that this is actually bringing in incrementally more profitable clients or that you're not sacrificing some profitability by moving from four days to one day?
Well, I'll answer.
The one-day
The One Day Pay. Number one is, it's going to save us money. It is, we lose the float, but where we save is they have to go through our systems to file. If you had an error and you gave the wrong address, we would get it in, we would send it back. The actual number of employees, if I had to relate it to something, it would be like SmartApp. On our SmartApp, we took from 7-10 days to be able to process an app to one, and the number of people that we ended up hiring were 30% less. This One Day Pay is actually going to lower expenses, not raise expenses for us, because it won't take any of the system. 70% of these apps or.
Claims
claims will be able to come in this way. It's a win-win for everyone in terms of.
Okay. I'm not sure we totally got that question answered.
All right.
Are you able to track or are you tracking?
All right. That was the last part of your question
the expense ratio on the one day and the benefit ratio on the one day, what it was in the past, right? Are we going to see the benefit ratio start to weaken a little bit? Because I presume if you're paying claims in one day.
Right
You can't check them the same way you did.
Yes, we can because it's computer-driven.
It has edits contained within the program itself.
You're not concerned you're bringing in a client that may be less desirable?
No, we are not. We think that we're fine in that. Again, we're indemnity in nature. The way that we're set up, if it was a major medical policy, I might be concerned. The way that we're doing it and the way we track it, all we think we're doing is we're speeding up. To your point, we are monitoring, and it is a valid point. Go ahead.
Yeah. What I wanted to say in response to that, we have processes in place where we're monitoring our claims experience, and that's always. As we monitor our claims experience, we do the assessment to say, are we having experience that's higher than what we had planned. Now, our short-term disability, our disability pieces, that's not One Day Pay. That's not in that number. The other ones really are in line with what we had planned. We do watch that, but that's in the normal course of our watching our benefit ratios. That's something that happens monthly, daily.
Okay.
I did also want to respond to your question about broker sales. I think it's important to note that our broker sales are not just of group products. They sell both individual and group products. In fact, right now, about two-thirds of the sales of broker sales are on the individual side, about one-third are on the group side. They really are representative of our overall both product experience and our overall claims experience. The margin's consistent in that business just as it is on the agent side.
Are you able to track profitability by broker?
If you don't mind, I'm going to jump in from the audience, the Corporate Actuary. We are monitoring it completely. That's what actuaries do. Actually, so far, we've seen better claim experience through the One Day Pay. We think the act of having to go through and actually check all the claims is really making people aware that they have to have appropriate documentation, and so they're being careful with what they send in. We've got our systems ready to monitor the experience separately, and so far everything looks good, but it's really too early to tell what's going to be there in the long run. We're on it.
We can monitor by broker every account on a group basis and what the profitability is.
You can or you do?
We do. We haven't rated anyone separately at this point, but we do know exactly what they are.
One Day Pay applies to all of our business we produce, not just broker business. It's existing policyholders as well as new policyholders. As Sue said, we've only been in it a couple of months. We'll be able to comment more fully this time next year.
My prediction is, in two years, everybody will be doing One Day Pay. They're going to have to figure out how to get there. If they can do it, who knows? It applies to all the business world, how everything's moving faster and faster. It's like when we were bragging about four days last year. Used to you bragged at 10. Now you brag at four, now you're at one. Can't get any faster than that. We've got that, we want to hold that, and we think that's part of the brand that separates us.
Eric?
Hi, Erik Bass, Citigroup. Dan, in your initial comments, you had mentioned your goal for the U.S. is getting to kind of a 5% compound growth rate for sales, and I think that sort of is in line with the industry growth numbers that Teresa outlined. Is that what you think of as the long-term growth rate potential for the U.S. business, or could it be higher than that?
I want it to be higher. I think the market's there to be higher. I think what this team here is doing can do that. If I had to give you an analogy of what I think is going on with our U.S., it's like building a new house versus remodeling one. We're trying to remodel our structure to where we've got a broker network, and we've got an individual sales force. It would have been so much easier to have just bought a company and done a broker. If you did it, you couldn't have taken the Aflac brand with it. If you couldn't take the Aflac brand with it, you left the most important element.
Getting this right of this division and going back to early on, one of the questions is, "Well, tell me what the difference is." It's partly perception with our agents. They weren't writing many accounts under 100.
Over 100.
I mean over 100. They were writing only under 100. The perception was is they were going to. They had written some schools, counties, boards of educations, and things like that more so. What was happening more and more is, as you move to larger accounts, you ended up having human resources people. When you had human resources people, they wanted brokers more. It was just a gradual shift. We have divided this, and when we get it right, we're going to be hell to deal with. I think we will get this thing right. You go through just telling you, "Okay, you can no longer do this," or, "We don't want you doing that." Psychologically, it's a problem. That's why we need to keep hiring more people to resolve that problem long term.
I do believe we've got it right. We just need the time element to do it. If that takes place, then yes, we'll do better than five. Teresa and I were talking, we want to get this year under our belt, see what happens, and then we'll go on from there.
All right.
I think one of the things that feeds that opportunity is when we talk a lot about the two models, is that while they are two separate models, they collaborate and feed each other. There's a lot of time on the career agent side where they come across a case, large case, where a broker's involved, they can pass it over to the broker channel to work. Couldn't do that before. A lot of times on the broker channel side, we're working with a case, and we can bring the field in to do the enrollment. We feed each other. It's a lot of synergy between the two models that make us very strong.
That synergy gives us a competitive advantage also to have a field force of nearly 40,000 monthly producing agents that can assist the broker side for enrollments. Puts us in a pretty unique position.
Steven.
Yeah. Steven Schwartz, Raymond James. Teresa, without having last year's presentation in front of me, maybe I'm wrong, but my assumption is that the changes that you made in the broker channel was in the 100 to 1,000. Is that correct?
Yes.
What-
Yeah, 100 up.
Okay. What were those changes, in particular, before and after, and why were those changes made? The fourth quarter was very good, and my understanding was is that really came from that 100 to 1,000.
Right. The only changes that we've made, and I shouldn't say only because they were huge changes. There were a group of people who were still in the hierarchy on our sales side. In order to get our sales force, and they were called broker development coordinators, and they reported into our market directors. The only way that we could make sure that we didn't have confusion in the marketplace was just to We call that our core broker. We need to move all of broker activities under one organization. That's what we did. We chose not to mess with it in the fourth quarter because, as you know, fourth quarter is the largest sales activity going on from the broker perspective. They already knew that we were going in that direction first quarter.
We just chose not to make the change until first quarter of this year.
In those medium-sized accounts, I think part of the story was is that you had agents, for lack of a better term, embedded in some of those accounts. Is that still going on?
Absolutely. Actually, it's taken off. It's really doing well. We call them wing men. In the initial presentation that I presented, all of the activities that we said we were doing, we're still doing those activities because they did serve us well. There are key learnings across both of those broker channels, we're also making sure that we have a full range of product offerings. That's why you're hearing that a lot of our brokers are selling individual product as well because they weren't educated on the differences between our individual and group products. We have an opportunity to put the wing man there in those offices. They can educate on both product sets and then really look at what the client set needs and then determine which products to offer. It's been working well for us.
We've actually expanded that on a national basis. I can't name them, there are two large national brokers now where we are putting wing men in across the entire country into their offices. That helps them a lot because what brokers don't want to spend a lot of time working on are the smaller cases under 100. We basically give them a resource in their office. There are also a lot of brokers not real familiar with voluntary products, we give them subject matter expertise in their office. That person also is in the office and able to tell us, "Oh, there's a larger case now. We need some other help. Bring our broker sales professional to help with this case.
Okay, thank you.
Hi. Michael Kovac, Goldman Sachs. Question on Everwell for Teresa here. How much of your business today is coming through that channel? You mentioned that there's a higher policy per client on that side. Can you kind of quantify what that level is?
Everwell, this year, was just a year of kind of intro-ing it and getting it out to our field force. Right now, it's a very small portion going through Everwell, probably less than 1% going through Everwell. I can't remember who was asking the question. I wasn't looking. Okay, sorry about that. Right now, we don't have a lot of volume on Everwell. I believe we had about $4.5 million go through Everwell last year. This year, we're expecting about $20 million, $29 million to go through Everwell. We're basically ramping that up as we move into 2015.
Seeing really encouraging improvements in terms of penetration. You mentioned our goal was 31% penetration within Everwell accounts. First quarter, we were 44.9%, and our goal for policies per policyholder was 1.88, and we came in at 1.93, so significantly higher participation rates.
Okay, we have time for one more question. Ian?
Thank you. Ian Gutterman with BAM. Maybe just to expand on Eric's question about the sales. If I were to ask, if you were to get to 7%, whether it be this year, 2016, 2017, forget the years, if you were to get to 7% or better, what's the main driver? Is it increased group penetration? Is it the changes in the agent compensation driving their sales? Is it One Day Pay leads to a sales surge? What would be the biggest driver, do you think?
I'd say increased penetration, absolutely. I'd say also the migration or focus on broker channel, building that broker channel, a huge part of it. I'd say making sure that we continue recruiting and focusing on our less than 100. I think it gives people an opportunity to play where they're going to be successful. I think those all are going to be a big part of that. One Day Pay also gives us a lift because it's a differentiator. What we hear anecdotally with One Day Pay is we had two people going in for this client, competing for this client, and they say, "Well, do they pay in one day?" This is what we hear anecdotally from our field agents, but at the end of the day, that buzz out there does help our sales. It increases our sales.
Ian, I would piggyback on that. Both channels, I mean, obviously, the broker channel, we had 23% growth in that channel last year on nearly a half a billion dollars worth of sales. That channel, we expect significant growth out of. The career channel, we still have about 90% of the market that we haven't penetrated in the under 100 career channel. There is lots of opportunity, especially with healthcare reform. That segment of the small business market in the U.S. is needing assistance more than even the larger businesses are. Tremendous opportunity there. In that space, we need to grow our distribution.
Just to follow up, Dan, on the call, you said you'd have more visibility on confidence in the full-year goal at mid-year. Teresa seemed to express some confidence. Does that suggest you're seeing enough midway through the second quarter to feel good about that?
Yes. I mean, we're running up for the second quarter right now, I frankly would've wanted it to be more. I think what I'm seeing is fourth quarter is going to be the strong quarter because of the broker activity.
The only comment I'd make of what they're saying is, remember, our field force did not like brokers, and brokers did not like our field force because we were calling on their accounts, always trying to get them. To me, what we're accomplishing with this team we've got here is they're making that work. When that works, sales are going to do much, much better.
Thanks.
Okay. Thank you very much. Thank you all panelists. Now we're going to move to a different area of the business, and that is investments and financial. We are going to have two speakers today, and then again, we will have a group of panelists that will be up here to take your questions. If you'll bear with me for just a second, I'm going to introduce our first speaker today. You'll hear from Eric Kirsch. Eric joined Aflac in 2011 as Senior Vice President and Chief Investment Officer, and was promoted to Executive Vice President in 2012. Today, he will cover Aflac Global Investments. Eric?
Thank you, Robin. This morning, I would like to focus on 2015 investment themes. Like our peers, Aflac currently faces challenging global macro conditions, including historically low yields, tight spreads, and volatile exchange rates. However, our investment goal is to achieve superior returns over market cycles by making tactical asset allocations within a strategic asset allocation framework. While some asset classes may outperform others during market cycles, we believe our asset allocation process will make positive contributions to performance over the long term. Aflac is unique, however, in that 88% of our assets back yen liabilities in Japan, a debt market that is predominantly made up of Japanese government bonds, or JGBs. As such, long-dated JGBs serve as a natural benchmark relative to our yen liabilities when performing a strategic asset allocation analysis.
Given this unique aspect of our business, I will focus today on the Japan portfolio, which is also the main driver of our consolidated investment results and factors impacting its performance. As you can see, the Aflac Japan portfolio has a 44% allocation to JGBs and approximately 90% of the assets are yen-denominated when you include the private placements and hedged dollar bonds. This reflects our emphasis on matching assets and liabilities. At the same time, the portfolio reflects our efforts to generate additional income and to diversify the portfolio by taking on risk beyond JGBs in the form of credit risk, foreign interest rate risk, and currency risk. Most notable among our diversification efforts has been the increase of our allocation to dollar bonds, which we initiated in 2012 and now represents 23% of the portfolio.
I'll give you a closer look at the $19.7 billion in the Aflac Japan dollar portfolio. As you can see from the chart, the dollar portfolio is primarily invested in investment-grade corporate bonds, as well as bank loans and high yield bonds. The portfolio has an average book yield of 4% and an average quality of BBB+, which reflects a very recent allocation to high yield bonds and an increase in our bank loan allocation, which I will address later. We currently hedge 60% of the currency risk associated with these dollar assets. However, an important aspect of the dollar portfolio has been its contribution to net investment income. As this slide shows, Aflac Japan's dollar-denominated interest income, which includes the dollar coupons from the reverse dual currency bonds, has grown with the dollar program.
Prior to the ramp-up of this program in 2012, dollar assets accounted for 33% of Aflac Japan's net investment income. Today, it represents 48%. When this interest income is converted to JPY, which has been weakening relative to the USD, we have experienced a significant boost in GAAP net investment income in JPY terms, and hence, FSA earnings. In addition, the dollar-denominated income is a natural hedge for our GAAP earning stream in USD terms since we convert this income back to USD, thus reducing translation impact a portfolio of all JPY income. As you can see, our net investment income excluding translation has also continued to grow. You can see that from the first quarter of 2012 through year-end 2014, our Japan new money yield outperformed 20-year JGBs on average by 77 basis points, which is reflected in operating earnings.
If you adjust the new money yield for hedging cost activity, which is reflected in net earnings, we outperform 20-year JGBs by 65 basis points. A large part of this outperformance was the contribution of the U.S. dollar program. As we look prospectively at investment opportunities, we will underweight any JGB purchases due to current market conditions of extremely low yields, continue to expand into dollar asset classes, and build our growth asset portfolio. It should be noted that cash flows associated with the first quarter new money yield of 1.13% were invested entirely into JGBs but only represented about 5% of expected investable cash flows for the year. As such, both the new money yield and the JGB investment are not representative of our planned asset allocation for the year.
When we started the hedge dollar program in 2012, 3- to 12-month forward hedging costs on an annualized basis were approximately 45 to 60 basis points. Declined significantly to a low of 17 to 26 basis points during 2014 as the differential between U.S. and Japan short-term interest rates narrowed. Currently, forward hedging costs are running at approximately 45 to 80 basis points on an annualized basis, and these costs are reflected in net earnings. Since inception, the hedge dollar bond program has significantly outperformed a comparable 20-year JGB portfolio by cumulatively adding over $629 million in operating earnings compared to a JGB portfolio. When you adjust that number for hedging costs, the outperformance was $550 million in net earnings.
Further adjusting for the opportunity cost to income from the cash settlements on our hedges, we outperformed by $447 million from the program's inception in July of 2012 through March 31, 2015. Since the inception of the hedge dollar program, we have expected higher hedging costs as well as higher U.S. interest rates. However, we believe our comprehensive investment and hedging strategy will allow us to mitigate some of the impact of increasing hedging costs and still earn an attractive spread to JGBs. Our strategy for mitigating the effects of increasing hedging costs and rising interest rates has three components. First, while we believe that strategic asset allocation plays a large role in generating superior risk-adjusted returns, we also believe that we can opportunistically make tactical allocations to higher-returning assets when relative value presents itself.
Therefore, we anticipate investments in assets like commercial mortgage loans, middle-market loans, emerging market debt, equity, structured assets like collateralized loan obligations, to name a few. We also see opportunities to increase the earnings from Aflac's asset pool through asset rotation and duration management. The second component of our strategy is managing currency exposure as measured by the dollar hedge ratio. With our dollar program backing JPY liabilities, we have explicitly taken on currency exposure, and we can proactively manage this market exposure by adjusting the hedge ratio associated with those dollar assets. Our neutral hedge ratio is primarily based on having enough dollar assets to hedge Aflac Incorporated's equity in Aflac Japan. Our current risk guidelines allow us to adjust that ratio up to approximately another $2.5 billion of dollar exposure.
This is examined regularly by our management and adjusted based on a number of variables around GAAP equity volatility. Our decision to take more dollar risk, and therefore adjust the hedge ratio, will incorporate our market views on currencies as well as the impact on asset rotation opportunities, hedging costs, and overall return forecasts. Our proprietary tools allow us to model various market scenarios and consider the potential model portfolio's trade-off between currency exposure, asset allocations, and the performance of the program against the JGB portfolio, including potential impacts to capital, taxes, and gains and losses. Finally, we are strategic in our choice of hedging vehicles. We use a combination of liquid forwards and customized option strategies such as structures such as collars. Generally, our hedges are short-term and typically have maturities from 3 months to a year.
This allows us to manage our hedging costs and activity in the most capital-efficient manner. Let me provide an example of our investment process at work. This past December, we found an attractive relative value opportunity as credit spreads in the high yield market increased by as much as 200 basis points relative to the lows in July. To take advantage of this opportunity, which we felt was driven by market liquidity issues as opposed to a decline in credit quality, we sold $1 billion of existing investment-grade holdings and subsequently allocated roughly half of the proceeds to bank loans and half to high-yield BB credits. This asset rotation resulted in incremental annualized investment income of approximately $19 million per annum and reduced our duration by over three years.
Had the book yield generated by this asset rotation been included in the new money yield calculation, it would have been 4.04% for the first quarter rather than the reported 1.13%. We currently hold a view that the dollar will remain strong against the yen for the next 12 to 24 months. We plan to increase our dollar exposure and reduce the hedge ratio. Though there's no guarantee of always being right in our views, we will benefit by having lowered notional hedges and reduced hedging costs. We are increasing our collar structures. We believe they are a more capital-efficient tool to reflect any increased dollar exposure while providing tail risk protection in the event the yen should strengthen. The dollar program is reviewed regularly and our strategy adjusted accordingly. While we saw great relative value in the program these past few years, this may not always continue.
If we were to enter an environment where yen assets were expected to outperform dollar assets, we can reduce the size of the dollar program as well. A reduced program allocation would also mitigate rising hedging costs. While we anticipate the net earnings of the program to contract in the near future based on diverging monetary policy, we do expect that our active investment decisions will allow us to outperform the JGB benchmark over market cycles and provide diversification to our overall asset pool. As you know, we completed a review of our strategic asset allocation at the end of 2014, which identified an allocation of up to 4% of the consolidated portfolio to growth assets. Assets such as public and private equity, real estate, and infrastructure, just to name a few. We believe growth assets will provide both diversification and long-term returns above fixed income assets.
I must stress that we will be selective and opportunistic in building this portion of the portfolio over the next few years by buying when relative value exists. We intend to average into attractive market opportunities, which can provide exposure to different vintage years. We expect a full allocation of up to 4% to growth assets could take us three to five years, depending on market opportunities and available cash flow. We also committed to increasing outsourcing of core and growth asset classes. Last year, we funded a small active equity mandate, added to our bank loan mandates, and initiated a middle-market lending program. Over the next few years, we will gradually build a strong growth portfolio, which will be a solid complement to an already diverse portfolio.
In closing, despite the enormous challenges emerging from the financial crisis, our transformation program has set the stage for us to continue to generate strong risk-adjusted returns. I am confident we will continue to find attractive investment opportunities in face of strong market challenges. Thank you.
Thank you, Eric. We'll conclude this year's meeting with a presentation from Kriss Cloninger. Kriss joined Aflac in 1992 after spending 15 years as a member of KPMG's audit team for Aflac. He's President of Aflac Incorporated and Chief Financial Officer, he'll present a discussion of Aflac's financial results and capital management. Kriss?
Okay, the wrap-up player here. This afternoon, or actually it's not afternoon yet, but next bit of time, I'd like to discuss the framework we're using to develop our capital management plans, the business modeling assumptions that form the foundation for those plans, our current expectations regarding capital deployment over the next three years. First, let me review our operating structure and give you some recent history. Aflac Incorporated's principal subsidiary is American Family Life Assurance Company of Columbus, or Aflac. On a U.S. GAAP basis, we report two operating segments, Aflac U.S. and Aflac Japan. For financial reporting purposes, the Aflac U.S. segment includes Aflac Columbus and Aflac New York, which is a subsidiary of Aflac. Aflac New York, of course, is subject to the insurance laws of that state.
The Aflac U.S. segment also includes Continental American Insurance Company, or CAIC which is branded Aflac Group Insurance. CAIC is a subsidiary of Aflac Incorporated. Although Aflac Incorporated can receive cash from borrowings, its principal source of liquidity is from the 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, our state of domicile. Typically, we declare a dividend from Aflac to Aflac Incorporated each quarter to fund our shareholder dividend. In 2014, we increased the dividends to the parent company by about 54%.
Aflac Incorporated's cash outflows can vary a bit year by year, primarily as a result of share repurchase activities and maturing debt obligations. Interest expense has increased over time, largely due to our increased borrowings, although it will decline this year due to the make-whole transaction we completed recently. Aflac Incorporated's cash outflows are primarily to counterparties for operating expenses, interest expense, and debt repayments. In addition, Aflac Incorporated may supply capital support to Aflac Group if needed to fund its growth. Historically, the parent company has used capital that is not needed to support the insurance operations to provide for a cash dividend to our shareholders and for the repurchase of our shares. We've steadily increased the shareholder dividend for the last 32 consecutive years. Aflac Japan remains the primary contributor to the overall operations.
In the first quarter of 2015, Aflac Japan represented approximately 74% of pre-tax operating earnings, down slightly from recent years, primarily reflecting a weaker yen to the dollar. Aflac Japan's operating earnings benefit from its large block of in-force business. In fact, we estimate that 94% of Aflac Japan's premium income will be derived from renewal premiums this year, with the balance coming from new sales. In the first quarter of 2015, our other reportable segment, Aflac U.S., represented approximately 26% of pre-tax operating earnings. Aflac U.S. revenue growth is largely driven by the rate of premium income growth, which has grown at an average of 3.2% over the last five years, reflecting the weaker sales trends that we discussed earlier today. That weaker growth has been somewhat offset by a general improving persistency rate.
In addition, I'd note that from a currency perspective, combining Aflac Japan's dollar-denominated net investment income with the operating profits from Aflac U.S., approximately 48% of our consolidated earnings are dollar-denominated. Last year, I showed you Aflac Japan's expected benefit ratios, expense ratios, and profit margins compared to total revenues for the years 2014 through 2016. The benefit ratio in 2014 fell below our expected three-year range. This was due to favorable claims trends from our medical and cancer business. In addition, the impact of reinsurance and the effect of the weaker yen on the dollar also contributed to the decline. The expense ratios were within the estimated ranges. The pre-tax profit margin was just above the top end of the range for the core health block due to the lower benefit ratios, while the ordinary life block ratios fell within that range we predicted.
In total, the pre-tax profit margin was also within the expected range. As in previous years, I would again like to emphasize that what I'm about to cover simply presents you with our modeling assumptions and does not, I repeat, does not represent official sales guidance, as I said in an earlier Q&A. As we discussed earlier this year, it's our expectation that third sector sales in Japan will be very strong through the first nine months of this year. Consistent with our sales guidance, we're assuming third sector sales growth will be down sharply in the fourth quarter. The sales themselves, we expect to be about the same. Again, for projection purposes only, we're modeling a 2% to 8% increase in third sector sales growth for 2016 and 2017.
For the first sector, we're modeling a sales decline of 25%-40% for this year, which produces sales that are comparable to levels seen in 2010 and earlier. For 2016 and beyond, we're modeling first sector sales to stay around the level of 2015. You'll note that our projections assume new money yields will be slightly lower than last year as a result of the continued low interest rate environment. We've modeled them to be in the range of 1.6%-2% for the three-year period, and we believe these to be conservative projections. We're also assuming that our persistency in Japan will be stable. Before I briefly share our expectation of operating ratios for the next three years, let me first show you the impact that reinsurance and the limited pay products will have on Aflac Japan.
To gain additional historical perspective on our operating ratios, you can review the latest statistical supplement that we publish quarterly. Our reinsurance program impacts the premiums, benefits, and profits of Aflac Japan. This slide shows the historical and projected future impact of reinsurance on Aflac Japan's premiums, benefits, and earnings. Reinsurance also impacts our operating ratios. In 2013, reinsurance reduced our benefit ratio by about 12 points compared to what we would have seen without any reinsurance. The impact grew to 51 basis points in 2014, and we saw a full year's impact of the tranche one of the reinsurance and a partial year impact for tranche two. For 2015, 2016, and 2017, we anticipate that the benefit ratio will be reduced by approximately 100 basis points each year as a result of the three reinsurance tranches we've executed so far.
While we don't see a direct impact on expense amounts due to reinsurance, we do see an impact on the expense ratio resulting from the reduction in premium income. The expense ratio wasn't materially impacted in 2013, but in 2014, the ratio went up 34 basis points. For 2015, 2016, and 2017, we expect the expense ratios will be 60-65 basis points higher in each year than they would have been without the reinsurance. Additionally, the profit margin was not materially impacted in 2013, but in 2014, we saw an increase in the profit margin of 18 basis points due to reinsurance. For 2015, 2016, and 2017, we anticipate an increase of 35-40 basis points as a result of the reinsurance activities to date. As I'll discuss later, the retrocession program has reduced the profit impact on a consolidated basis.
As you can see from this next slide, premium growth will be suppressed in future years by the limited pay products as they reach paid-up status. After reaching paid-up status, these policies will no longer contribute to premium income. However, because we accrued a deferred profit liability during the premium period, as our accounting policy requires, profits will continue to emerge fairly evenly over the life of these policies as the deferred profit liability is released. No impact on profits, but a reduction in revenues. These projected ratios represent what we expect the average ratios to be in the 2015 through 2017 period, including the impact of the limited pay policies and the three tranches of reinsurance that have already been executed. These ratios are substantially the same as those projected for the 2014 to 2016 period.
Like Aflac Japan, we projected ranges for the three-year average benefit, expense, and profit ratios from 2014 through 2016 on the Aflac U.S. business and showed you those at last year's analyst meeting. For the U.S., we don't break out the product categories as we do in Japan because most of our U.S. products that we sell have similar financial characteristics. In 2014, the actual benefit ratio fell below our anticipated range due to better than expected claims experience. The expense ratio was slightly above the range we had established, because as we discussed in our earnings release and earlier today, our expenses were higher due to our salesforce management reorganization, and those additional expenses will continue to impact us through 2016. The final 2014 profit margin came in slightly above the high end of our projected range, though.
Let me address the assumptions we're using for modeling the U.S. business. Again, I'd emphasize that these are simply modeling and sensitivity testing assumptions. For the years 2015 through 2017, we're modeling sales growth of 3%-7%. In terms of new money yields, we've modeled investment yields in the 3%-4% range for the three-year period. These new money yields reflect current interest rates, current credit spreads, and investment durations, and we anticipate that persistency will remain fairly stable throughout this outlook period. This next slide shows the anticipated three-year average ratios for the period 2015 through 2017 for the U.S. business. We're estimating that the benefit ratios will be a bit higher than they have been for the last few years.
Due to the changes we made in the salesforce compensation model, we expect the expense ratio also to be slightly higher than in recent years. As a result, margins should be in the 16%-18% range, which is similar to what we've experienced in recent years. No major change there. A few moving parts, no major change on a net basis. Next, I'd like to briefly discuss our risk management activities associated with what we believe to be the top enterprise-wide risk that Aflac faces. We've been very focused on enhancing key strategic global risk management programs and policies for the company, and we've made progress addressing the required risk measures and activities associated with the ORSA framework. This includes developing a risk appetite statement, as well as enhancing and enriching our risk identification process and our capital modeling capabilities.
The first risk I want to touch on is financial market risk. As you know, our regulatory capital levels in Japan, and to a lesser extent in the United States, are exposed to market risks. These risks include interest rates, currency rates, and credit spreads. They impact our capital ratios, and therefore our ability to repatriate capital to the United States, and ultimately, pass that capital up to the parent company. I'll discuss that in some more detail shortly. Second, we face a brand risk. The well-known Aflac brand can be put at risk by a variety of factors. However, we're particularly sensitive to risk arising from compliance issues, regulatory oversight, or changes to our financial strength and debt ratings.
To mitigate these risks, we have a very strong compliance effort both in the U.S. and Japan, and we regularly meet with regulators, including at our annual Supervisory College meeting, which includes representatives both from our state of domicile, Nebraska, and the regulators from the FSA in Japan. We're exposed to IT infrastructure risk from a technology perspective. We depend on our systems for interacting with employers, policyholders, sales associates, and brokers. Some of our systems are legacy systems that rely on older, less efficient software. However, we are continually upgrading systems and retiring old platforms where appropriate. In light of continuing threats to government and corporate information systems, cybersecurity is a high priority. To better address this risk, we've engaged prominent cybersecurity advisors to assist our Chief Information Security Officer.
Our Global Information Security Council has a global cybersecurity response plan in place. Additionally, we've raised employee awareness of cybersecurity through conducting training exercises both in Japan and the U.S. Regarding currency risk, we view that from two perspectives. The first is translation risk, which affects us primarily from a financial reporting standpoint, and the second is transaction risk, which has an economic impact on Aflac. We'll go in that in more detail next. As we've discussed in the past, our earning sensitivity to currency translation has varied over time. In 2013, for every one yen move on the average annual exchange rate, our earnings per diluted shares were impacted by about $0.043 per share.
In 2014, that impact declined to $0.032 per share. In 2015, we estimate our sensitivity to the yen will further decrease in the range of $0.027-$0.029 per share for the full year. This decline in currency sensitivity is driven by two factors. The increase in dollar-denominated assets that Eric discussed that are held in Japan's investment portfolio reduces the sensitivity to the yen-dollar exchange rate changes. The weakening of the yen means we report fewer dollars from our JPY-based earnings as they're translated. As Eric discussed, we do hedge a portion of the dollar assets held by Aflac Japan to accomplish currency matching relative to our JPY-denominated Japanese liabilities.
We hedge a portion of the parent company notes payable from USD into JPY, and as of the end of the first quarter, we had $3.7 billion worth of our dollar-denominated debt obligations swapped into JPY. These swaps are held through the maturity of the debt instrument. We had JPY 40.8 billion worth of debt securities that we originally issued in JPY and today hold in JPY. We're also holding $2 billion in dollar-denominated debt that hasn't been swapped. Maintaining our debt obligations in JPY helps us hedge a portion of the currency risk, while at the same time, we pay a significantly lower interest rate. We actively hedge cash flows that are remitted in JPY from Aflac Japan to Aflac U.S.
For 2015, we expect to receive an additional JPY 170 billion in profit repatriation, JPY 15 billion of which is earmarked for JPY debt repayment later this year. Of the remaining JPY 155 billion, we've hedged JPY 123 billion into dollars at an average exchange rate of about JPY 116 to the dollar for what we expect to get back this year. We've also hedged about JPY 60 billion of our expected repatriation for 2016 and a smaller portion of the 2017 expected repatriation. Let me turn to the capital plan itself. As we've previously communicated, we've been very focused in developing and looking at a multi-year strategy relative to capital generation and deployment. I'll start this discussion by outlining our views on the importance of capital adequacy. First, we want to demonstrate a strong financial profile as measured by our risk-based capital, our RBC ratio, and our solvency margin ratio, our SMR, in Japan.
It's our objective to maintain a minimum range of 500%-600% for both the RBC and SMR capital measures. Additionally, we're comfortable with the debt to total capital ratio around 25%, and it's also important for us to maintain appropriate capital levels to support our current financial strength and debt ratings we get from the various rating agencies that rate us. Achieving these objectives will allow us to continue to deploy capital in the form of shareholder dividends and share repurchase. Alternatively, it may allow us to consider other opportunities to deploy capital to enhance shareholder value, which I'm going to discuss in a bit more detail later. Our RBC ratio encompasses both our Columbus-based, U.S. operations and our branch operation in Japan. Aflac's RBC ratio improved 159 points in 2014 to 945%.
The increase between 2013 and 2014 was largely due to the growth in our capital surplus from earnings. Aflac's RBC ratio is impacted by changes in the JPY-dollar exchange rate due to the relative size of Aflac Japan's business. A significant portion of our statutory capital is dollar-denominated. Therefore, total adjusted capital, or our TAC, which is the numerator of that ratio, is only slightly influenced by currency fluctuations. Historically, the company action level, which is the denominator, is more sensitive to changes in the exchange rate. Therefore, when the JPY weakens, JPY-denominated assets and liabilities are translated into fewer dollars. When the risk factors are applied to those lower dollar amounts, the result is a decrease in the denominator, which leads to an increase in the risk-based capital ratio.
The relationship of foreign currency to the RBC ratio has changed significantly since we began the hedged dollar investment program for Aflac Japan in 2012. Prior to 2012, our RBC declined as the JPY strengthened. Since that time, we're less sensitive to foreign currency changes for two reasons. First, the required capital is not as sensitive to currency changes as it was in prior periods due to the JPY weakening. Secondly, total adjusted capital is affected by the hedged dollar program because it includes the unrealized gains and losses on the derivative contracts used to hedge the dollar-denominated principal amounts. As of year-end 2014, the total adjusted capital was in a net JPY liability position. As you can see in the chart, a strengthening JPY has very little impact anymore to these RBC ratios, or I should say at the present time.
This chart also shows the impact on the RBC ratios from credit migration. Our analysis shows that a one-notch downgrade on 15% of our investment holdings, excluding U.S. Treasuries, would result in a decline of about 114 points in the 2014 RBC ratios. Japan's SMR is similar to the RBC concept. But unlike the RBC ratio, the capital component of Aflac Japan's SMR includes unrealized gains and losses on investments that are classified as available for sale. As a result, the SMR is exposed to market risk, and we must thoroughly assess when contemplating the appropriate level of the ratio itself and the amount of capital we might repatriate to the United States.
Over the last two years, Aflac Japan's SMR has improved significantly to 857% at the end of 2014, primarily due to the reinsurance transactions we've entered into, the increased unrealized investment gains we've experienced, and a weaker yen to the dollar. As this chart suggests, we routinely stress test our SMR by exposing it to various changes in interest rates, exchange rates, and credit spreads. It's important to note that the impact from changes in these variables on SMR is not linear due to the effect of unrealized gains and losses on the solvency margin capital amount, which is the numerator of the formula. Unrealized gains benefit the numerator by 90% of their value. However, unrealized losses reduce the impact on capital by 100% of their value.
In addition, a value called the core margin is impacted by unrealized losses net of taxes, which further reduces the solvency margin capital amount. The core margin is not increased when assets are in an unrealized gain position. Now, this core margin concept was introduced in 2012 into the SMR computation, and it creates a ceiling for taking credit for policy reserves that are in excess of the cash values in the contracts or the related regulatory reserves that are called the ZILMR reserves in the FSA financials. Over time, our SMR has become less sensitive to yen interest rates as measured by the changes in the yields of 10-year JGBs. Our use of the policy reserve matching or PRM classification has reduced the volatility associated with changes in Japanese interest rates.
The growth of Aflac Japan's investments in U.S. dollar securities, which are classified as available for sale, caused the SMR to become more sensitive to changes in U.S. interest rates. Aflac Japan's SMR is also exposed to foreign currency risk. The non-yen assets we hold in our portfolio affect SMR in two ways. First, they carry a higher capital requirement than yen-denominated assets, and the capital requirement is significantly less for non-yen assets that are hedged into yen. Secondly, the exchange rate influences our reported surplus position in yen when we translate unhedged dollar-denominated assets. A stronger yen would negatively impact surplus as the dollar assets would translate to a lower value in yen terms, but increase surplus when the yen weakens. Finally, the SMR is influenced by the credit spread risk. As spreads widen, the solvency margin gross amount is negatively impacted.
There tends to be a negative correlation between credit spreads and risk-free rates, which tends to mitigate the net effect of the changes in asset value. As you can see, all four of the SMR sensitivities improved in 2014. I'd note that the improvement was largely due to the significant unrealized gains in our portfolio that have resulted from lower interest rates. Because of the impact of the core margin, the sensitivities would increase if the unrealized gain in our AFS portfolio declined, and would be further magnified if the available for sale portfolio deteriorated into a net unrealized loss position. In managing Japan's capital position, we consider several factors. First of all, the regulatory minimum for SMR is 200%.
Next, we want to ensure that we allocate sufficient capital to meet minimum SMR levels and to reinforce our commitment to our policyholders by maintaining a minimum floor SMR of 500% in accordance with our risk appetite statement, and as part of Aflac Japan's governance process. The framework minimum of 600% is chosen at management's discretion to allow us time to mitigate adverse changes in SMR values so that we're not likely to pierce the 500% floor. We then evaluate the overall volatility of SMR using probabilistic, stochastic, and deterministic modeling to determine the overall buffer that's necessary to withstand anticipated market volatility. We believe that in current market conditions, our March 31st, 2015 SMR, which we estimate at 898%, is appropriate given our unrealized gain position and the potential market volatility. As of March 31st this year, unrealized gains accounted for approximately 210 SMR points.
As I've mentioned before, we don't consider unrealized gains as available for capital deployment. We hold them in SMR as we judge appropriate. As part of our capital management plan, we entered into a reinsurance transaction on March 31st this year, which released JPY 130 billion worth of FSA reserves. This resulted in about JPY 90 billion of FSA net earnings, net after-tax earnings, JPY 30 billion of which was used to increase our repatriation anticipation for 2015. The remaining JPY 60 billion remains earmarked as future deployable capital, and was excluded from our March 31 SMR calculation. While this transaction, the reinsurance transaction, results in cash outflow due to the payments of taxes, it does provide a cost-effective way to position us to achieve our capital deployment plans.
Finally, I'd like to emphasize that we have various tools available as part of our capital planning in the event that we need to quickly enhance SMR. These include the established reinsurance program we've put in place over the last couple of years. In addition, we have a line of credit that's multicurrency that can be used either by Aflac or Aflac Incorporated. If we need to increase capital, regulatory capital quickly, the credit line would be an effective short-term tool to utilize. Now I'd like to continue our discussion of capital by recapping our reinsurance program. In 2013, Aflac Japan began our reinsurance program by ceding a portion of the EVER Block of medical business. Since that first transaction, we've secured additional reinsurance on portions of our EVER and Rider Max blocks. In addition, some of the reinsured business was retroceded from the reinsurer to Aflac Incorporated subsidiary, CAIC.
By passing the risk of the reinsured block to the reinsurer, we accelerate recognition of FSA basis profits inherent in that reinsured block and enhance our capital management capability in a cost-effective manner. This next slide provides details of the reinsurance transactions we've completed through the first quarter of this year. To date, the program has resulted in a release of nearly JPY 300 billion of FSA reserves. We believe we have significant capacity for additional transactions. However, as I've mentioned previously, we'll be deliberate in determining the appropriate size and timing of those transactions. We consider both current business opportunities and capital planning scenarios to evaluate our immediate and midterm needs. As we've previously communicated, the purpose of the first reinsurance transaction in 2013 was to enhance our SMR. That transaction added approximately 111 points to SMR in 2013.
The transaction we completed in 2014 was smaller, but it marked our first use of a retrocession arrangement. The retrocession agreement between the reinsurer and CAIC ceded half of our 2014 reinsurance transaction to CAIC. Although it was relatively small in size, the retrocession effectively lowered the cost of the capital-raising technique. As I just discussed, we completed a sizable transaction at the end of this year's first quarter on a portion of the Rider Max business. You'll note that a significant portion, 90% of that risk, was ceded to CAIC, which significantly, substantially reduced the cost. The retrocession transactions will flow through our GAAP financials in the parent company other operations section of our summary of operating results that we provide in our statistical supplement. Retrocession reduces the cost of the reinsurance program on a consolidated basis.
For the three-year period, 2015 through 2017, we anticipate a benefit of approximately JPY 1 billion annually from the retrocession arrangement. We estimate that the reinsurance programs completed to date will have reduced operating earnings per share by $0.01 per share in 2013, $0.05 a share in 2014, and we expect a net cost per share of $0.05-$0.06 per share for 2015 through 2017, so really no material change compared to 2014. This next slide shows our profit repatriation for the last five years as well as our anticipated repatriation for 2015. As a result of the significant decrease in the realized investment losses, as well as the benefits of our reinsurance program, profit repatriation has continued to improve over that period. We anticipate repatriating approximately JPY 200 billion this year.
Based on our forecast for 2016 and excluding any future reinsurance agreements, we anticipate 2016 repatriation will be in the range of JPY 120 billion-JPY 150 billion of the FSA after-tax earnings. Additionally, the JPY 60 billion of deployable capital from our last reinsurance transactions might be utilized for repatriation depending on our capital position and our evaluation of opportunities. This demonstrates how we're using our reinsurance program to support both capital adequacy for our Aflac Japan policyholders, as well as to support the capital flexibility requirements or needs of the corporation. First, we have opportunities to drive organic growth. This can include items internal to Aflac, such as new product opportunities or other costs relative for growing the business.
Additionally, it might also include targeted acquisitions for organic or inorganic growth within the insurance space. Capital deployment would also include debt buybacks similar to the transaction we executed in March of 2015. We do expect operating EPS accretion of $0.07 per diluted share in 2015 and $0.10 a share in 2016 from reduced interest expense as a result of this last transaction. We also deploy capital to increase our investment flexibility. Examples of this include the hedged U.S. dollar corporate bond program for the Aflac Japan investment portfolio, as well as the bank loans in the high-yield asset categories Eric discussed. As he mentioned, we continue to evaluate additional ways, such as the possible expansion of the unhedged dollar exposure in the Japan portfolio and growth assets to effectively utilize capitals to support our investment activity in order to enhance our investment results.
Most importantly, cash dividends and our share repurchase program continue to be an essential part of our strategy for returning capital to shareholders. As we continue to evaluate alternative uses of capital, share repurchase will continue to be the base against which all other opportunities will be measured. Now let me turn to how we evaluate opportunities for the use of capital. As part of our capital plan, we consider financial and qualitative factors we believe are important when evaluating capital usage. On the financial side, we look at the impact on revenue, earnings per share, and return on equity measures with a short, mid, and long-term perspective. Following the financial evaluation, we look at other characteristics of the deployment. These include evaluating the impact on our risk profile, including execution risk.
Finally, we assess the overall compatibility with our business model, including possible brand impact, as well as potential synergies to our business model. It's clear that for many years, our preference has been to use excess capital to fund cash dividends to shareholders and the repurchase of our shares. As you can see, we were very conservative when it came to deploying capital during and immediately following the financial crisis. During that time, our payout ratio averaged only about 25% of operating earnings, and that was primarily driven by our desire to continue our record of increasing the annual cash dividend to shareholders. Much of our earnings were used to cover the investment losses we realized as a result of the financial crisis. However, as these losses diminished, cash flows available to shareholders increased.
This chart assumes that we're increasing the cash dividend generally in line with earnings growth before the impact of foreign currency in 2015. It also assumes that we repurchase $1.3 billion of shares this year, which is our previous guidance. For 2016 and 2017, it's our current plan to increase the capital deployed for the benefit of our shareholders to $2.1 billion and $2.2 billion respectively. I guess it's respectful and respective. Let's take a quick look at Aflac's capital deployment history from 2009 through.
Ladies and gentlemen, may I have your attention, please. This is a hotel fire safety direction. At this time, we'll be conducting a test of the hotel fire safety system. Please disregard the alarm you may hear or the instruction you may see. Ladies and gentlemen, may I have your attention. This is a hotel fire safety direction. At this time, we'll be conducting a test of the fire safety system. Please disregard any alarm you may hear or the instruction you may see. Thank you for your cooperation.
I'm glad Robin warned us about that. Otherwise, I'd have thought one of you just said, "This speech is running too long." "Let's call the hotel." I'm going to wrap it up, I guarantee you. Let me try to do it before the alarms start, okay? Let's take a quick look at Aflac's capital deployment history. From 2009 through 2011, we deployed $2.2 billion in total, the majority of which was cash dividends to shareholders. From 2012 through 2014, we deployed about $4.1 billion, with more than half of that used for share repurchase. While we always primarily focused on protecting our policyholders, for 2015 through 2017, we still believe there will be opportunities to deploy approximately $6.3 billion-$7.5 billion of capital. We will also continue to evaluate all options when it comes to deploying capital and growing the business. As we approach mid-year, we're focused on several priorities.
We're committed to achieving our operating earnings per share growth target of 2%-7% before the effect of the yen. We're also focused on maintaining our operating returns on shareholder equity in the range of 20%-25% before the effect of foreign currency. As always, delivering on our promise to policyholders remains a top priority. Therefore, we want to produce risk-based capital and solvency margin ratios that are consistent with the managerial objectives that we've set. We also want to enhance shareholder value through increased dividends, share repurchase, and other attractive capital deployment opportunities. I hope that this presentation, though it was long, gives you a better sense of the framework we're using to develop our capital management plans, the business modeling assumptions that form the foundation for those plans, and our current expectations regarding capital deployment for the next three years.
I also hope that you have a strong sense of our commitment to thorough and transparent disclosure. That's it from me. Now we can do the Q&A.
Before we start that, we're going to have a very quick break, and you may hear the siren noise, but it is just a test. I personally talked with the fire department chief out there, so no worries. Let's take a very quick break, and then we're going to start Q&A.
[Break]
Okay, everyone, I'd ask you to take your seat, if you would, and we're going to begin our final Q&A panel. That we give as much time as possible, again, please limit your questions to one and a follow-up. Please, Cathy, and start with Jay, since his hand's been up for five minutes.
Thanks, Robin. Jay Gelb from Barclays. Kriss, on the chart where you talk about capital deployment outlook, the projected range for 2015 to 2017 is $6.3 billion-$7.5 billion. If I look at the prior chart, the deployable capital, if I add up the three years, it's $6.3. I was hoping you'd give some greater explanation of where that additional $1.2 billion of deployable capital comes from.
Yeah.
Actually, more specifically, what it would be used for.
Well, we're in the process of evaluating appropriate uses. I will say that what I've tried to do in this presentation is to provide you with the framework and talk about some of our objectives for capital deployment. As I said, historically, we've had a strong orientation to shareholder dividends and share repurchase. That's not to say that we've never looked at other opportunities for capital deployment. I'm going to give a little bit of a long answer on this first question, not that we didn't anticipate we might be asked that, but I want to give you a little more framework for what we've been talking about. I'll say that historically, Dan and I and the management team have looked at other opportunities to deploy capital to enhance growth in one way or the other.
We've had acquisition opportunities brought to us, we've used really two lenses to evaluate those opportunities. The first lens generally related to our marketing and our organic growth. We looked at whether or not the acquisition would add either product diversification or distribution diversification that would allow us to improve our sales growth rates, our revenue growth rates compared to what we were achieving. For those of you who have followed the company for a long time, you knew that the first 20 years Dan and I were together, we experienced growth rates and operating earnings per share, really the fundamental growth of the company in excess of 15% per year, excluding the impact of currency. We did that for 20 years.
The financial crisis hit, we saw various headwinds of various types that I won't bother to talk about today, but just to say the organic growth has declined some. Just a historical perspective, we still consider ourselves having significant opportunities to grow, we just need to find those opportunities. We've got strengths that Dan talked about earlier in terms of the strong underlying operations both in Japan and the United States. We've got strong branding in both countries. I'm going to let somebody else talk about that, but I just wanted to bring that up to say that we looked at the impact on marketing and growth as the first thing we evaluated when we considered alternative uses of capital in the past.
The second lens we utilized would be the impact on the financials with the relative contribution of the target opportunity, what it would bring to the table compared to our ability to deploy capital through share repurchase. Share repurchase is a tool we've used to enhance our earnings per share growth rate for many years. We really started the program in earnest back in 1994. We're not newcomers to this thing. We've been doing it for a long time, and don't want to go into any war stories over that, but that's been our track record, okay? Today, we're looking at an environment where growth's been a bit more challenging to achieve, yet we want to deploy capital in a prudent manner. Capital is hard to get. It's hard to go out and ask somebody to give you money. It's hard to earn the money.
When you're in the position that you've got access to capital, you've got to respect that position, you want to treat that capital very well, and you want to utilize it in an appropriate manner. There's almost biblical principles around the deployment of capital and how you protect and utilize capital. I won't go into that, but there are. We've got a strong position in generating capital in our company overall, and I was trying to give you a framework for what I thought was a reasonable and realistic measure of what we believe we'll be able to achieve over the next three years, kind of from a conservative perspective. Barring any market meltdowns, et cetera, similar to what we had during the financial crisis.
If things continue as they are and the economic and business conditions continue, I think the 6.3 is a pretty achievable number, and I put a higher number in there of 7.5 to say, there's some upside to this. We could probably do more reinsurance transactions. We could probably realize some other ways to grow our capital. Let me point out that those capital deployment numbers exclude any capital obtained through debt offerings or anything like that. I'm not trying to include any debt transactions to enhance capital and deployable capital there. Just to put that into framework, the 6.3 to 7.5 is what I considered a reasonable framework. Now, our capital plan as far as deploying capital, it's going to be in a constant state of refinement as economic and business conditions change over time. I'm going to stop there.
I'm sure some of the rest of you will have questions of a similar nature, but I wanted to make that kind of an introductory elaboration on what I tried to do during the speech.
My only follow-up, Kriss or Dan, from an acquisition standpoint, are you only looking at bolt-on opportunities, or should we start considering something more transformational?
Well, we don't have anything in the pipeline at the moment that would be outside our area of expertise. If by bolt-ons, you mean things that we consider to be within our current business model and the like, I'd say that's what we've looked at historically. I'd want Dan to comment on other opportunities like that.
Well, let's be clear. We aren't trying to announce we're going to acquire something. That's not what we're saying. We still believe that at this moment, the best use of capital has been to buy the shares back. Let's be clear there. Now, are there other things out there with slowdown in growth, top line, all of a sudden you have interest rates move back up, life insurance becomes a bigger part of our Japanese operations? Things can change. I don't want to send a signal here, we do want you to know that we're not just looking one direction and not broaden our base. We think it's our ultimate responsibilities as leaders of the organization to make sure we're getting the best return on our capital for you, the shareholders, in whatever way that might be appropriate. From that standpoint, that's all we're saying.
We have nothing in mind right this second. We're just looking forward and trying to figure out with this as we did this three-year plan, well, Kriss and his team did, that we've taken all those things into consideration.
Okay.
Thanks. Tom Gallagher, Credit Suisse. Kriss, if I look at page 23 where you show the Aflac Japan 2014 outlook, and I look at some of these assumptions, particularly the profit margin assumption average over three years, that would imply, if I'm doing the math correctly, that profit margins for 2016 would come down a bit, at least if I take the midpoint of that range of 19%-22%. You did a little under 21% in 2014, and I think your 10-Q says 2015 is supposed to be consistent with 2014. Anyway, the building blocks here would suggest in line to slightly down profit margins in Japan in 2016, if I'm doing the math correctly. Based on everything you've said, it also sounds like revenues would be flattish at best, given some of these reinsurance deals and the revenue trends that we're seeing here.
Does all that imply 2016 Japanese earnings should be down or flat at best, or am I misreading that?
Well, as we said earlier, the impact of low interest rate environment is having some impact on our ability to write first sector business and to invest cash flows at strong yields. Yeah, the Aflac Japan earnings are under some pressure from those business conditions, as well as the effect of the reinsurance is dragging the Japan direct earnings down. As I said, the retrocession that shows up in a different part of the financial statement offsets some of that on a consolidated basis.
Right
to the extent that we've created a bit of a drain on Aflac Japan earnings. I think you're interpreting the numbers reasonably correctly, but just keep it in the context of low interest rates and we were trying to deal with 1.6%-2% and then continue the decline we had in the first sector sales in 2015, points to lower revenue growth. We have some revenues coming off due to the limited pay, but I tried to show you that that's not going to impact profits. The effect of the reinsurance is, I quantified what I showed you. Aflac Japan looks bad because it comes out of their top line and bottom line to some extent. I don't know, Ken or Todd, you may want to add any more to that.
No, I think that's it.
Okay.
Just as a follow-up to that, I understand there's a lag, part of this is simply the impact of first sector-
Right
too, right? Especially as you stop growing that. If we look out to 2017, 2018, even if you wanted to go out beyond that, I assume the mix shift, back into third sector and away from first sector, you should get to the point, and at some point, where you start to see margins improving. I realize we're in sort of that transition phase now. I mean, is it going to take three, four years for that to fully turn around, or might it come quicker than that?
Well, we're still writing about as much new business in, even though growth rates of first sector business are way down, the absolute volume of first sector production is still significant relative to third sector production. I think I answered to Suneet earlier, I think first sector is going to continue to grow as a % of total for some time to come, even though the production's off. The mix shift has slowed away from first sector business, but it's not going to be a decline in first sector business as a % of total. I think we're still going to see some impact on the average margin overall. As I've tried to point out over the last couple of years, the darn first sector business is profitable. It's adding to revenue growth, and we're making a fair amount of money on it.
It's adding value to the company, so I still won't apologize for it.
Richard?
Richard Waggoner with Citadel. I've got an investment question for Eric, and then also for Kriss as well. When you think about the risk tolerances around taking more of a directional tilt, directional macro tilt in the portfolio, how do you think about that, and how do you think about the $2.5 billion additional unhedged U.S. dollar exposure that you talked about? How do you arrive at that level, and how much flexibility is there on that over time?
Sure. Let Eric start with that, and Todd may want to contribute to it. We did a fair amount of risk work, in talking about the extra $2.5 billion of potentially unhedged dollar investments in Japan. Eric, please start.
Sure. I'll address it from a portfolio perspective and perhaps, Todd, pass it to you for the specifics of the $2.5 billion. From a portfolio perspective, go back to my comments earlier for the Japan portfolio. Yen liabilities, all in yen, and from a risk-free perspective, we could just build a portfolio of JGBs, perfectly match our interest rate risk. Cash flow variability for us is not very large, and have a pretty matched book. Of course, we're willing to take some risks to earn additional income above that JGB risk-free rate. When we think about risk buckets and ways to add value, you've got credit risk, you've got foreign interest rate risk, you've got asset class risk, and foreign currency risk. That's a natural part of a foreign, large global portfolio.
We do believe that we should be able to use FX risk, interest rate risk, credit risk, as a diversifier. Because on all of these tools, we do expect over time to perform very well, but we'll acknowledge on some of these directionally, we may not get it right in a particular period, but one of the other risk factors may come into play and be a strong performer. Some of it's market driven, the beta of the market, and some of it will be our investment actions. Relative to the currency piece, historically, we just looked at the currency as what's Aflac Inc.'s equity in Aflac Japan, and that was the amount of unhedged assets. A few years ago, when we grew the dollar program, we said we really ought to look at our dollar exposure in total. Rather than fix the number at the Aflac Inc.
equity level, there should be allowed some variability, because that would allow us to more efficiently run the whole dollar program to make sure it's as profitable as it can be. One of the items that we had to thoroughly examine was, well, how much additional dollar exposure would be appropriate? That's my handoff to Todd.
Thank you, Eric. Start with the GAAP equity at the Inc. level. If you think of wanting to preserve that in dollar terms, that's your starting point. Then we said, "Okay, what level would we be comfortable going above and beyond that for dollar exposure?" That gave us some modeling points, and we started with a 25% level of that GAAP equity. Then you have to net out what position we're in at that time. As of the end of the year, we were in a net JPY liability position because of some of the cross-currency swaps that we have at Inc. and the repatriation hedges that we have in Columbus. When you net all that together, you come out with about $2.5 billion-$2.8 billion of potential unhedged exposure.
You have to weigh that against, of course, the relative cost of that capital in Japan from an SMR perspective. That's where the framework is currently. I don't believe that Eric would say tomorrow he's going to unhedge $2.5 billion worth of assets, but legging into this position monitoring SMR is part of this entire framework as we complete it and build it out.
Great. I want to just make one additional comment. We talk about starting this dollar program in 2012. We started it a long time ago, back in the 1990s. Yes. We were sitting in Japan, paying higher tax rates than we do today, and investment yields were declining, and we realized that based on our liquidity characteristics and the like, we could invest a lot of our equity in Aflac Japan in dollar securities. We did that back in the 1990s, and we built about, I think it was about a $7 billion portfolio. It wasn't brand new in 2012. 2012, we started using the hedge dollar program with more of the funds supporting Aflac Japan liabilities. Previously, though, we had invested a lot of the Japan equity in dollars. I just want to point that out. It's not brand new to us at all.
We wanted to earn higher investment yields and pay lower taxes. That was a simple common sense approach to capital management we used in those days.
Kriss, just to add on too, I think number one, we're trying to preserve the yen liabilities that we have and hedge what portion of the dollar program we have to protect those yen liabilities. That's number one. As Kriss pointed out in his speech, we try to look at the economics of hedging and take advantage of those conditions when it comes to interest-level transactions like cross-currency swaps and other things that we've done with our debt.
As I said several times, policyholder protection comes first.
That's correct.
That's where we are. I interrupted, I think, your follow-up, maybe. No. Okay, sorry. Thanks for the answer. All good. Okay. Steven Schwartz.
Steven Schwartz, Raymond James. One for Eric and then one for Kriss. Eric, you've built up a very professional organization, but you built it up back in a day when your cash flows were huge from first sector. I guess the question is, how do you look at your staffing in regards to the new monies down, but on the other hand, you're transforming the portfolio?
A few comments. First, the organization has been terrific because they helped me build the investment organization. I should comment, despite the increase of expenses that we have, and there's a JPMorgan industry study, we still are the lowest in the industry in terms of investment expense per assets, which is consistent with our corporate philosophy. Nevertheless, I would absolutely segregate new money. We've got $100 billion of assets, generally. Those assets need credit analysts to watch them. They need technologists who put in systems to track them. They need compliance and legal functions. Whether or not there's a dollar of new money doesn't matter. Those are all fixed costs that have to happen.
Having said that, and this was a part of my speech, even if there wasn't any new money from operations, there's a JPY 100 billion pool of assets that we don't assume is all held to maturity. Technically, from an accounting perspective, we still have some old HTM assets, our strategy is not buy and hold, it's buy and manage. When we did the relative value trade, if I don't have analysts and traders in the markets, how would we take advantage in December of that opportunity? We're constantly, one, looking at those opportunities within our guidelines and risk limits, and secondly, there's going to be new opportunities. We're constantly talking to Wall Street bankers, different asset managers for what asset classes exist that perhaps are appropriate for Aflac Japan. That takes staff, research.
It's just not, gee, is there a new JPY to invest? It's what can we do with the current pool of assets and generate more income out of that, while of course protecting our policyholder money every single day as the markets are volatile. It's not only credit risk. Again, we've taken on interest rate risk, currency risk. Our analysts and traders are analyzing that all the time, and our risk managers as well as partners.
Okay. For Kriss, really a two-parter. The excess reserves in Japan, what level are they currently at, and does the JPY 6.3 billion of deployment, does that envision taking that number down?
We've removed roughly JPY 300 billion of FSA reserves in excess of statutory reserves that relate to the number you talked about. We'll have a slide in the supplemental deck, talks about the excess of FSA reserves over statutory reserves that I've referenced in the past. Let me just say that we still have significant additional capacity for re-insurance to reduce some of those excess reserves if we want to. I always like to point out our first priority is to protect the Japanese policyholders. Even though we've got reserves there that are in excess of U.S. stat, we have to be prudent and thoughtful about how we utilize those reserves or perhaps release some of those reserves by re-insuring the risk out of Aflac Japan.
All I really want to say, Steven, I don't know whether it'll totally address what you asked, we've taken down JPY 300 billion of it. We've got significant room to do more, we're going to be prudent about it.
Did the JPY 6.1 or whatever that number was, JPY 6.3 over three years of deployment, did that assume further deals or no?
Not a material amount. Probably a little bit. I told you, out of the 2015 transaction, we have left about JPY 60 billion sitting in Aflac Japan so far, pending further opportunity for deployment. We said we were going to take out repatriation of approximately JPY 200 billion this year. I think we got, I said JPY 120 billion to JPY 150 billion is what we anticipate as our after-tax FSA earnings are repatriatable deployable earnings in 2016, we'll get the JPY 60 billion in excess of that. If earnings continue on the same track, I think we can get to the JPY 6.3 pretty easily. We might have to have a small reinsurance transaction. Quite frankly, I think we'll continue looking at the desirability to utilize additional reinsurance in the future. We still got a couple of other reinsurance potential partners that would like to join our program.
Our current partners are receptive to doing additional transactions if we so desire. Again, I just want to say that I don't want to do additional reinsurance deals for the sake of doing the deals. I've got the potential to do that, no problem hitting the JPY 6.3 under current business conditions. I'm not absolutely sure I have to do it to get there.
Okay. Thank you.
John?
Thanks, Robin. John Nadel from Piper Jaffray. Kriss, just real quick on cash at the parent. How much do you want to keep there on an ongoing basis? If I'm not mistaken, after you called the debt very recently and made the make-whole provision, I think cash net at the parent is somewhere in the range of $1.7 billion-$1.8 billion. Is that reasonable?
Let me turn to Ken to do that. He's been handling most of that, so I think it's appropriate he responds.
That's pretty close. The cash and cash equivalents was a bit higher than that, but when we look at kind of cash at the parent that could be used, it's not encumbered in any way. It's around the $1.5 billion. In terms of, I guess, for lack of a better word, a buffer that we like to keep, we like to keep about $500 million of cash at the parent company, which is more than twice our annual interest expense.
Yeah.
We like to keep a buffer of about $300 million just for liquidity at the insurance subsidiary.
Okay, that's helpful. Thank you. Just a quick one on the Japan overall pre-tax operating margin. I think last year, if you looked out for the three years 2014 through 2016, it was 19%-22% range. This year as we look out 2015 through 2017, the upper end of that range has come down a point, so it's 19%-21%. Obviously, maybe mincing words here or getting a little bit too nuanced, it seems like the reinsurance transactions are boosting that profit margin as a % of premiums. I think the better U.S. dollar investment income should be positive there as well. I'm wondering why the upper end of the range comes down.
I think it's primarily due to mix and you're sort of getting in a rounding issue between one and two.
Yeah
21, 22. I don't have the analysis in front of me as to these three things contributed to that one point difference. In general, the trend has been continued growth of First sector business as a % of the total, the continued low interest rate environment.
Okay.
We talked about those things.
It really is that mix.
Yeah.
Okay. If I can sneak in one more, Robin, just real quick. The cash flows, Eric, that you're expecting to invest in 2015, if there's any significant change you expect over the next couple of years in Japan?
Sure. For this year, it'll be within a range of about JPY 2 billion-JPY 2.5 billion. You'll recollect in the first quarter, we didn't have a lot of cash flow because we had taxes, repatriation. It's a very small number for the second quarter, too, most of those cash flows are back-ended towards the end of the year. I'd also keep in mind, we can't necessarily forecast what I call this tactical asset allocation. When those things do occur, those will become new cash flows as well. You all can get an idea of where we're investing funds and how we're changing the yield of the portfolio. Given the strategy, we would expect those things to occur more often. Most of that JPY 2 billion-JPY 2.5 billion is really internal cash flow, as I term it. The external cash flow would be the premiums from operations.
You've heard everybody discuss around the first sector product. That part has certainly come down, I get that information from the business side and we take that into account into our forecasting.
Okay.
Thanks. Sean Dargan from Macquarie. If I think about the difference between the $7.5 billion of deployable capital and $6.3 billion, maybe I'm thinking about it the wrong way, it's $1.2 billion placeholder for M&A. Just trying to think how you're viewing the world. It doesn't sound like you want to do a greenfield operation in Southeast Asia or anything like that. If you got the scale in a business, you think you have greater growth opportunities in the U.S. in, say, voluntary benefits than Japan? Is there one area that seems more attractive, one country that seems more attractive than the other right now?
I guess I'll answer that. We haven't gotten that far. We've really just been working on the capital plan and what we want to do. I would rather have our U.S. operation grow faster than our Japanese operation, only because of balance. The Japanese operation's wonderful, I'm glad to have it grow, that would be the only reason. Also, you've got 300 million plus people. You've got a population that's growing. Certainly, from an economic standpoint, the growth possibilities in the U.S. are greater. From that standpoint, I'd have to say I would lean toward that.
Hi. Thank you. Seth Weiss, Bank of America, Merrill Lynch. Want to follow up on the deployable capital, the $6.3 billion-$7.5 billion range, maybe ask it from another lens in terms of thinking about sources of that capital. You talked about reinsurance. If we exclude the JPY 90 billion positive effect of the reinsurance deal from 2015, it leaves us with about $5.5 billion of capital using that low end. Is it fair to categorize that all as free cash flow? Are there other sources that we need to be thinking about in terms of thinking what the normal free cash flow from operations number is?
I think it's fair to consider that free cash flow. I think we would normally have some accretion to GAAP equity through normal growth that we might choose to retain within the organization. In general, the deployable capital, I meant to convey is free cash flow available to shareholders, either directly through shareholder dividends or share repurchase or acquisitions designed to enhance shareholder value. Those are the three options I was thinking about.
Is it fair to categorize That number represents about 50%-60% of operating earnings if you look at consensus expectations for the next three years. Would you categorize 50%-60% as a normalized free cash flow conversion ratio?
Any comments from that?
No, I think that's fair. We don't really look at it that way, I think that that number is probably reasonable.
Okay. Just one quick follow-up on the SMR and-
I will point out just that the reinsurance that generates deployable capital is a cash consumer because we're releasing liabilities. We're not bringing additional cash into the company through reinsurance. The only cash outflow associated with doing the transactions is taxes. We had like JPY 40 billion of taxes, so that's a cash outflow, therefore, it reduces cash available to us. I just want to point that out. It's not like reinsurance is a source of cash.
Right. The next step is how are you going to monetize that transaction as you release those liabilities, and they flow through the FSA accounting statements. There are various sources of cash. We could clip coupons, we could take the cash flow to investments and pull that back to the United States, or transfer assets in kind or sell assets. There's an opportunity cost with every one of those, and that's something that we have to factor into our thinking and do factor into our thinking.
Okay. We're running tight on time. Eric?
Thanks. Eric Berg from RBC. Kriss, just for pardon me, for 2017, where you show $2.2 billion of deployable capital as a possibility. In the absence of further reinsurance transactions, or assuming, using your words, they're modest, and assuming too that statutory earnings in Aflac Japan grow modestly, if at all, what are going to be the components of that $2.2 billion? Where is that going to come from, in approximate terms? Thank you.
The principal flow of funds to the parent company is earnings from Aflac U.S., earnings from Aflac Japan. The core operating results of Aflac Japan are a substantial component of that. When I say modest reinsurance, yeah, modest is about all we need. Probably less than a third of what we've done over the last three years in terms of reinsurance would be required. I said JPY 120 billion to JPY 150 billion of FSA earnings for 2016. If you say, "We're going to get about that in 2017," You have reinsurance, the release of funds of JPY 60 billion to get you to $2.1 billion, $2.2 billion. I consider that modest.
For the U.S.?
It's been running about $800 million or something like that, I think. I don't remember the exact number. We've had, this year, in the aggregate 2014, we had about $2.4 billion of statutory earnings between Japan and the U.S.
Depending on what the yen dollar does to us over the next 2 years, we should have that level or perhaps more. The yen weakening might hurt us some there, but it ought to end up in, I'd say, in excess of $2.2 billion. Between $2 billion and $2.4 billion is my best guess.
Okay. Thank you, Kriss. All right. Before we adjourn, I'd like to mention that we are in the process of creating our fact book that will not only contain the presentations and the slides that you see today, but will also include other presentations I think that all of you have found helpful in the past. I want to also say on behalf of Dan Amos, our Chairman and Chief Executive Officer, Kriss Cloninger, our President and Chief Financial Officer, that we would like you to join us next door for lunch, and you can continue having conversations with our management team there. Finally, I want to thank all of you for attending this meeting. If you want to follow up on anything, you know the number of Aflac IR, so please give us a call if we can answer any questions. Again, thank you so much for coming today.