Morning, everyone. Thank you for joining us today. Before we start, I want to let you know, in case you don't see me, you'll find copies of the slideshow in your seat, so you can make notes and follow along. They're in the green binders. Following all the presentations, we're going to have a Q&A session before lunch, which should provide plenty of time for your questions. If you would, please hold your questions until then. Like last night, the meeting today is going to be webcast. Again, I'd like to ask you to please take a minute, check to see that your phones, droids, BlackBerries, and other electronic devices are turned off. Finally, I'd also like to remind you that some statements that you'll hear today are forward-looking within the meaning of federal securities laws.
Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they're prospective in nature. Our actual results could differ materially from those we discuss today. Please look at our latest quarterly earnings release or 10-Q filing for some of the various risk factors that could materially differ from our results. With those announcements out of the way, we'll begin this morning's program. Our first speaker today is Tohru Tonoike. Tohru is a former Aflac Incorporated board member who joined our management team in 2007. He is President and Chief Operating Officer of Aflac Japan. This morning, he will offer an overview of Japan and its markets.
Thank you, Robin, and good morning. Today, I would like to outline the insurance market in Japan and Aflac Japan's business management. The number of life insurance policies in force in Japan increased last year due to strong bank sales and the growth in the policy count of third sector products, including cancer and medical insurance. The total number of policies in force for all life insurers at the end of December 2011 was 126 million, up about 4.1 million from the end of March 2011. I want to mention that many of the numbers we use in our presentations today refer to numbers on an FSA basis. Let me remind you that the FSA operates on a fiscal year of April 1 through March 31.
Aflac Japan's number of policies in force has been steadily increasing over the past 37 years as a result of growth in new business and the high persistency of our in-force business. We established a solid position as Japan's number one life insurance company in terms of the number of individual policies in force in fiscal year 2003 and have remained number one since then. Aflac's number of policies in force at the end of December 2011 exceeded 21.6 million and accounted for 17% of the total number of individual policies in force of all life insurers in Japan. The total number of new standalone life insurance policies in Japan, including first sector and third sector products, declined from fiscal year 2003 through fiscal year 2006. However, this number turned upward in fiscal year 2007.
This increase reflects the fact that life insurance statistics began including new policies sold by Kampo, previously known as Japan Post Insurance. Kampo, a company that exclusively sells first sector-based policies, took over the postal life insurance operation following the start of the privatization process in October 2007. Although the inclusion of Kampo in the total life insurance new business increased the overall first sector contribution, thereby reducing the overall third sector contribution, the third sector still accounts for about 40% of combined sales. We believe consumers continue to find value in products that provide living benefits such as cancer and medical. One major reason consumers choose living benefits centers around Japan's rapidly aging society. According to the latest results of the national census, which is carried out every five years, it was in 2010 that Japan's population peaked.
Currently, the number of deaths has been exceeding the number of births, resulting in a population decline. Japan's population was 127.8 million as of October 2011 and is anticipated to drop below 100 million by 2050. To support this forecast, let me share with you some results of population estimates conducted by Japan's Ministry of Internal Affairs and Communications at the end of March 2011. According to this estimate, 40 out of Japan's 47 prefectures saw a decline in population. As a large portion of the baby boomers are now starting to reach retirement age, the population aged 65 and older will surpass 30 million, accounting for more than 23% of the Japanese population by the end of 2012. What's more, the primary reason for Japan's shrinking population is its low birthrate.
The birthrate was 1.39 in 2011, far below the estimated level of 2.08 that is required to maintain a stable population size. The population in Japan is expected to continue to decline because young people represent a declining percentage of the total population as the birthrate remains very low. Japan has a national healthcare system that covers all Japanese citizens. However, as fiscal resources are tight in all areas, including medical, nursing care, and pension benefits, it is clear that the difficult fiscal situation will persist going forward. According to the government estimates, the nation's medical expenses will increase by JPY 6 trillion by 2015 and JPY 21 trillion by 2025. As you can see, the growth of medical expenses is significantly outpacing GDP growth.
Because of the rapidly aging population and higher co-payments for medical expenses, the market for third sector products has been steadily expanding, and this trend is expected to continue. As a natural consequence, the competition among private insurers in the third sector market has intensified. However, we believe we can expand our leading position as the third sector market continues its growth in the future. When Aflac began its operations in Japan in 1974, we were the first life insurance company to sell cancer insurance in Japan. However, mid-sized insurers and other foreign insurers followed suit and entered the market in the early 1980s. This market was opened to all life and non-life insurers in 2001. As of April 2012, Japan had a total of 39 competitors selling standalone medical products and 25 selling standalone cancer products, including both life and non-life companies.
While this represents slight declines from the previous years in the actual number of competitors, it doesn't mean the threat from competitors is lessening. The merger of some non-life insurers resulted in the merger of their subsidiary life insurers, thereby reducing the total number of competitors. Given a series of new product launches and product revisions in the pipeline from our competitors, we believe the market for third sector products will remain very competitive. The number of Japanese who are diagnosed with cancer has been increasing since cancer became the leading cause of death in 1981. In 2010, one out of every three deaths in Japan was related to cancer. Cancer-related deaths exceeded the number of deaths from heart attacks and stroke combined, which are the second and third cause of death.
In addition, 2005 statistics from the Foundation for Promotion of Cancer Research indicate that approximately 54% of men and 41% of women will be diagnosed with cancer in their lifetime. Because cancer has become such a relatively common disease in Japan, the government enacted the Cancer Control Act in 2006. In the following years, government efforts to educate the public about cancer and the importance of early detection have heightened cancer awareness among the Japanese population. In addition, cancer treatments are going through significant advancements and becoming increasingly diverse. For example, more patients are receiving anti-cancer drug treatments and radiation therapy. Cancer remains the most expensive illness to treat in Japan. Consequently, I believe it is natural for the public to have higher expectations from cancer insurance to assist with the fight against cancer.
Next, I would like to show you some data related to Aflac Japan's core lines of business, cancer and medical products. These slides reflect FSA-based fiscal year data and include products sold only by life insurers. The data reflects the latest figures based on each life insurer's financial statement for the third sector of fiscal year 2011, ending at the end of December 2011. Additionally, some non-life insurers also sell medical insurance products. Because third sector sales data is not disclosed by non-life companies, we were not able to include it in the statistics shown on these slides. The graph on the left side shows that the number of policies in force for standalone cancer products in the life insurance industry is growing each year. The graph on the right side illustrates Aflac Japan's share of in-force business for cancer insurance.
Aflac Japan remains a market leader with a year-end 2011 market share of 74% of in-force cancer business. As shown in the graph on the right side, Aflac's share of new business for cancer insurance remains high at 50% for the April to December 2011 period. Aflac's share rose in 2011 thanks to the strong sales of Cancer Days released in March 2011. This enhanced product has benefits that provide extensive coverage for outpatient treatment in light of the changing landscape in cancer treatment. This feature attracted a lot of consumers, further reinforcing our market positions. At the same time, as I mentioned, we vigorously promoted partnerships with local governments in cancer prevention and education, and we have partnership agreements with all of the 47 prefectures in Japan.
Following the enactment of the Cancer Control Act, local governments and consumers are increasingly aware of the necessity for cancer prevention and insurance. Because Aflac is the pioneer of cancer insurance coverage, consumers have placed their trust in our company and our products. We work hard each day to be good stewards of that trust. A big part of that means continuing our never-ending efforts to create superior products that remain relevant to diverse consumer needs, while also providing valuable information to consumers about cancer prevention, coverage, and cutting-edge treatments. This slide illustrates the growth of policies in force for standalone medical insurance and Aflac Japan's share of the market. Aflac had a 19% share of in-force business at the end of December 2011.
Although we were not the first insurer to enter the medical insurance market in Japan, we quickly became the leader in that market when we launched EVER in 2002, we are committed to remaining in that position. Aflac Japan's share of new business for standalone medical insurance was 16% for the April to December 2011 period. As we have previously discussed, competition in this market remains high. In 2009, we revised our EVER medical product to include enhanced surgical benefits and gender-specific premium rates. Most recently, in January 2012, we further strengthened our medical portfolio with an upgrade to our New EVER product, improving it to include even more advanced medical treatment options than its predecessor. Mr. Ariyoshi will discuss the benefits of this product later. In line with the product revision, we created a more powerful version of the Maneki Neko Duck called Maneki Neko Duck X.
We will vigorously promote this revised New EVER using the new character. This slide illustrates market penetration rates for various insurance products in Japan. In 2010, 79.2% of Japanese citizens were covered by some type of life insurance. Although the market penetration for cancer insurance has increased over the last 10 years, it is still only 33%. With cancer being the leading cause of death, combined with the fact that cancer is a disease of age and Japan's population is aging, the need for cancer insurance will intensify. Additionally, we believe the recent efforts by government at both the national and local level to promote cancer awareness will further drive consumer demand for cancer insurance. Meanwhile, medical insurance penetration stands at 72.3%. Although this number is much higher than cancer, we see opportunity for further growth.
While the national healthcare system provides some level of coverage for citizens, it does not cover all expenses. Over the last three decades, Japanese consumers have been required to pay more out of their own pockets towards their healthcare. As I stated earlier, because of Japan's rapidly aging population, low birthrate, and the likely increase in national healthcare expenses, I believe there is opportunity for expansion in the medical insurance market. Aflac Japan has five key competitive strengths that help us stand out within the industry. These competitive strengths include product distribution, internal controls, financial strength, and administrative efficiency. We have consistently maintained our competitive edge in these areas and anticipate that strength to continue.
Mr. Ariyoshi and Mr. Shinkai will offer some information about products and distribution later in their presentations. I want to emphasize that we are focused on remaining the leading provider in the third sector market and are committed to providing competitive products that match the needs of our consumers. In addition, we will further reinforce our existing channels, such as traditional channels and bank channels.
At the same time, we plan to integrate all these channels effectively to further increase the productivity. Let me move on to internal controls and financial strength. In recent years, financial institutions around the globe have come under increasingly intense scrutiny of their risk management procedures. Aflac Japan has implemented an internal control assessment based on the J-SOX Act, which is the Japanese version of the U.S. Sarbanes-Oxley Act. In addition, we continue to focus on enhancing our robust corporate governance system by further strengthening compliance and internal audit systems and by adopting comprehensive integrated risk management processes. At the same time, as we strive to improve our administrative efficiency, we will aggressively pursue business process improvements and IT infrastructure enhancements to reinforce efficient and accurate policy administration.
I believe this will enable us to continue to provide customers with quality services and build upon our strengths in this increasingly competitive third sector market. Thank you for your attention.
Next, we'll hear from Koji Ariyoshi. Koji joined Aflac in 2008 after working for AXA and ALICO in Japan. He is Executive Vice President and Director of Marketing and Sales at Aflac Japan. This morning, Koji will discuss Aflac Japan's marketing and sales activities. Koji.
Good morning. Today, I will cover marketing and sales strategy and supporting activities, beginning with Aflac Japan's product mix. This slide shows new annualized premium by products over the last three years. Due to the significant contribution from WAYS and our child endowment products, total new annualized premium sales showed significant growth in 2011. Our WAYS products sold particularly well in the bank channel, which Mr. Shinkai will discuss later. With regard to the sales of the third sector products following the rollout of Cancer DAYS in March 2011, we saw a 5.10% increase in the cancer line of the business compared with 2010. This slide shows FSA-based share of new annualized premium in the third sector market. The foundation of our product portfolio has been and continues to be our cancer and medical products.
We believe our competitive advantages, such as branding and the number one position in policies in force in the industry, allow us to grow our product offerings and meet the evolving needs of consumers. Aflac Japan remains the number one provider in the third sector market by revising current product offerings and developing new products. We are proud to be the number one provider of cancer and medical products in Japan. We believe Japanese consumers will continue to face an ongoing burden of rising health-related expenses. This is largely due to Japan's aging population, declining birth rate, and expensive state-of-the-art medical advances that are not covered by the national healthcare insurance system. As such, we anticipate the need for third sector products will only continue to grow in the future. As a leader in the third sector, we are focused on maintaining our number one position.
Let me now discuss the current competitive environment for cancer insurance sales. Public interest in cancer has heightened as a result of the Japanese government's national cancer awareness and prevention programs that began in 2007. Aflac is partnering with all of the local governments in Japan to provide assistance in promoting their programs. As a pioneer of cancer insurance, we believe this partnership benefits the government, Aflac, and especially Japanese citizens. The sales increase in 2011 reflects the success of the revised Cancer DAYS introduced in March 2011. Leveraging its significant competitive advantages, Aflac Japan maintains a dominant position in the cancer insurance market. A large number of competitors continue to operate in the medical market and create new variations of medical product offerings.
This is because they recognize that the need for medical insurance among Japanese consumers continues to rise as a result of increases in medical expenses that must be shouldered by Japanese consumers. Even in this strong competitive market, Aflac Japan continues to maintain its number one position in the medical insurance market. In January 2012, we upgraded new EVER products to make our medical products even more attractive in this competitive market. This slide shows companies that are top of mind when consumers were asked which insurance company they would prefer to purchase a cancer and medical insurance from. Aflac continues to be cited as the most preferred choice. This confirms that consumers' view of our strong brand and their recognition of their value of our products are factors that have bolstered consumers' preference for Aflac products. This graph shows our sales results for third sector products.
Sales of third sector products in 2011 increased a tremendous 58.2% over the previous year, in great part due to our child endowment and the WAYS product, which sold particularly well through the growing bank channels. While the profitability of our child endowment products is lower than that of other products we offer, it is important avenue to new customers and importantly, is conducive to cross-selling. In 2011, our traditional associates channel succeeded in cross-selling third sector products to about 14% of customers who have purchased. Sorry, about 40% of customers who had purchased our child endowment policies. Mr. Shinkai will discuss further how our banking channel has become a greater contributor to our top-line growth. Aflac Japan started with affiliated corporate agencies as its main distribution channel. Today, our sales channels have expanded to also include individual independent agencies, Dai-ichi Life, post offices, and banks.
As you can see, our constant efforts to develop new sales channels have contributed to our growth. Today, we are taking on new challenges through the utilization of the Internet, the expansion of a new face-to-face direct sales channel known as Aflac Consultants. I will share some of the examples later on specifically how we are using the Internet and the first kind of activities Aflac Consultants are engaged in. This slide shows the number of new recruits and newly recruited producers. As you can see, we have been successful in our recruiting efforts. As we look ahead to our recruiting strategy, our primary focus is on enhancing the productivity of new agencies rather than recruiting a specific number. To help the newly recruited agency get off to a good start, we provide intensive training programs.
We also offer an advanced commission payment system, which is designed to aid new agents financially as they begin their career in the insurance business. We believe this support system will only help us improve the number of producing agencies. This slide shows our product launches since 2006. As I indicated, our primary focus remains on being the leading provider of third sector products, including cancer and medical, and reviewing these product lines to ensure benefits remain relevant to consumers. These products also provide an opportunity for future sales. When we revise the product offerings, we reach out to nearly 14 million existing policyholders with upgraded policies to ensure their coverage remains relevant in today's environment. We utilized this process with new cancer-based products that we introduced last year.
Most recently, in January 2012, we upgraded our New EVER product, improving its advanced medical treatment coverage to be better tailored to consumer needs. Aflac has been using the Manekineko Duck, a popular promotional character for the EVER product since 2009. In connection with the launch of the upgraded New EVER product in January 2012, we have transformed the Manekineko Duck to Manekineko Duck X. This New EVER product provides coverage for advanced medical treatments and includes a survival bonus rider. We believe that the Manekineko Duck X helps convey the message that New EVER has become ever more powerful or beneficial to policyholders. I would like to show you Manekineko Duck X. Okay. As I mentioned earlier, we have partnered with local governments to launch programs in support of cancer prevention and education. These programs have contributed to an increase in cancer screening rates.
Aflac is the only insurer that has formed a partnership with all of the 47 prefectures in Japan. We have also partnered with the 12 largest cities in the nation. With a desire to share the knowledge we have gained through our cancer insurance business, we are partnering with local governments to help communities and citizens by providing information on many topics related to cancer, including cancer education and awareness, prevention, diagnosis, and treatment options. We cannot avoid mentioning the Great East Japan Earthquake of March 11, 2011. Aflac has launched a campaign called We Are One Family, through which part of the sales of each cancer or medical insurance policy is donated to the earthquake victims. Agencies who support our initiative also donate part of their commissions. More than 3,500 associates across the nation have supported the campaign.
In 2011, with their cooperation, we donated about JPY 155 million to help the more than 1,500 children who have lost their parents in the earthquake and tsunami. We will continue to reach out to these children in 2012, as they will need long-term assistance. While it's important for us to make a contribution to society as a good corporate citizen in Japan, our ultimate promise is to be there for our policyholders when they need us most. In the first quarter, new annualized premium increased 53.8% over the first quarter last year. We are also pleased with how sales are going with our upgraded New EVER products. This year, we will continue to focus much of our marketing efforts on enhancing sales of our third sector products.
The number of new policies in cancer and medical also increased 30.2% and 1.8%, respectively, over first quarter 2011, which shows a significant improvement in our third sector product sales. As we've conveyed, the foundation of our product portfolio has been, and continues to be, our cancer and medical products. Regarding base, excluding 5Pay, in the traditional channel, about 80% of customers purchasing the product also bought our cancer or medical insurance at the same time. Meanwhile, in the bank channel, we will put more emphasis on marketing third sector products to existing policyholders. In the third sector market, we will continue to focus on our integrated marketing strategy, which brings together our channels, products, and promotions. In light of the current operating environment, we will segment the market and tailor our sales approach, both product and distribution, to better meet the differing needs of consumers.
We recognize that part of our future distribution strategy, we must identify the market segment that represents opportunity for growth and the most effective distribution channel to reach those segments. With that in mind, we create a new distribution channel called Aflac Consultants. Aflac Consultants are internal distribution channel with ability offer insurance consulting to customers to determine plans that meet the specific needs of each individual. As a result of being able to offer comprehensive coverage proposals, including ordinary life and the third sector products, the productivity of this channel is high. It is also effective and controllable means for Aflac to create loyal customers and accumulate sales skills and knowledge that can ultimately be rolled out to other agencies. Our analysis shows that we are currently under-penetrated in the market segment with consumers who are in their 20s to 40s.
This age demographic prefers a face-to-face consultative meeting prior to making a purchase, while at the same time being more technologically savvy. In response, we plan to improve our website by allowing them to make an appointment online with an Aflac salesperson. Especially in competitive urban areas, we believe we can better connect with these potential customers using this newly created channel. Aflac Consultants and existing service shops could strengthen in also consultative sales. As we announced at the first quarter release, we have upwardly revised our sales targets. We now expect 2012 sales to increase 10% over last year. I am confident that Aflac Japan will achieve this revised target in 2012 while maintaining profitability. Thank you for your kind attention.
Hisayuki Shinkai will be our next presenter. Shinkai-san joined Aflac in 1999 as General Manager of the Public Relations Department. He was promoted to Senior Vice President in 2002 and to First Senior Vice President in 2006. Prior to joining Aflac, he worked for the Long-Term Credit Bank of Japan. He's responsible for all departments related to bank sales. This morning, he will discuss Aflac Japan bank channel sales.
I'd like to provide information about the sale of insurance products through the bank channel. As of March 2012, this year, Japan had a total of 403 banks, including mega banks, regional banks, and Shinkin banks. These banks represent our target market and have a total of about 21,000 branches that employ more than 400,000 people in Japan. The mega banks include Mizuho, Tokyo Mitsubishi UFJ, and Sumitomo Mitsui. We have also included Resona as a mega bank due to its large and extensive nationwide sales network. With an average of 550 branches per mega bank, these four mega banks offer a wide range of banking services throughout Japan. As of March 2012, there were 106 regional banks in Japan. Regional banks use the over-the-counter sales method as a primary means to sell insurance products to their customers, followed by door-to-door sales.
Shinkin banks are cooperative financial institutions specializing in services for small to medium-sized businesses and individuals. Their sales activities are deeply rooted in local communities, and door-to-door sales make up a significant part of their detailed business. Japan's banks have several characteristics that lend themselves to insurance sales. First, consumers are already very comfortable doing business at banks, and banks have already earned the confidence and trust of their customers. In fact, at the end of December 2011, 57% of Japanese household financial assets were in either cash and deposits at banks. This is almost four times that of the U.S. Second, when customers in Japan purchase a financial product, they often visit banks to transfer funds from their accounts. Hence, they effectively have the opportunity to complete the purchase of financial or insurance products in one convenient and streamlined process at the bank.
Third, the door-to-door sales approach of both regional and Shinkin banks has enabled them to build strong relationships with their customers. In December 2007, restrictions on the bank sales were removed, and the banks were permitted to sell all insurance products, including those in the third sector. Since then, we have secured agreements with 372 banks, which is more than 90% of all banks currently operating in Japan. We believe this number is significantly greater than any of our competitors. Within the extensive reach, both the number of bank branches and salespeople selling our products has significantly increased. At the same time, productivity within the bank branches has also improved as the confidence level of the salespeople has benefited from intensive training by Aflac staff. For example, in the first quarter of 2011, approximately 28% of all bank branches selling our products sold at least one policy per month.
That number grew to approximately 40% in the first quarter of this year. Looking at our most productive mega banks, approximately 98% of these banks branches sold at least one policy per month in 2011. For the most productive regional banks, 89% of these bank branches sold at least one policy per month. These numbers show that there is a great opportunity to grow bank sales by increasing branch level productivity. Although it has been more than four years since through the regulation on the sale of insurance products through banks, consumer awareness of this availability remains low. In fact, only about 40% of consumers are aware that banks are selling insurance products. As consumer awareness increases, we believe we will have a greater opportunity to grow sales through the bank channels.
More banks have been increasing the number of Aflac products they sell as they respond to the needs of consumers by using consultative sales methods. For example, in 2008 and 2009, most banks were selling cancer and medical products only. The number of banks selling child endowment rapidly increased in 2010, and the sales of WAYS dramatically increased in 2011. This trend has continued into the first quarter of this year. This slide shows quarterly bank sales growth going back to 2010. As you can see, sales in the second quarter of 2011 declined slightly due to the impact of the earthquake and tsunami, but sales have recovered and gained momentum since then. In the first quarter of this year, new annualized premium, new AP sales, set a new record. This success is largely attributable to WAYS.
In looking at the bank's new annualized premium sales contribution by product, WAYS is a primary driver of sales. In the first quarter of this year, WAYS accounted for 82% of new AP sales. During the same period, child endowment represented 13% of new sales, which was a significant decline from a year ago. WAYS has been a popular product with banks and their customers. One key reason is that many consumers keep a significant amount of money at banks to prepare for retirement, and they're looking to place their money in safe and dependable products sold through banks. WAYS provides the initial safety of life insurance, but also provides future protection through conversion options. Banks find selling WAYS appealing because its significantly higher premiums generate attractive commissions.
Additionally, the extensive and effective training we provide to bank employees who are selling this product provides a strong differentiator to our competitors. WAYS conversion options include medical, nursing care, or an annuity at the predetermined age. This slide shows different premium payment variations of the WAYS product. There are two general premium payment types of WAYS, which are age paid-up and year paid-up. Age paid-up is to pay premiums until a predetermined age. For example, if a policyholder bought WAYS at the age of 50 and the predetermined age was 70, the policyholder will pay premium for 20 years. Year paid-up is for consumer under 50 years of age. These consumers pay cumulative premiums over a five or a 10-year period. Each of these types of WAYS allows two payment methods.
One is level payment, which accepts monthly, semi-annual, or annual premium payment. The other is a discounted advanced premium payment, which is a lump sum payment of cumulative premiums at a discount. In looking at Japan's total bank sales in third and fourth quarters of 2011, mega banks were the largest contributors with a significant sales growth of WAYS. In the first quarter of this year, sales of WAYS by regional banks rapidly increased, therefore, their contribution exceeded those of mega banks. This slide shows the average new annualized premium per policy sold at banks. As you can see, WAYS has the highest average annual premium among our products, accounting for more than 10 times the premium of our third sector products, such as cancer and medical.
Although the commission percentage paid per yen premium on WAYS is less than that of our traditional third sector products, the higher premiums on WAYS provides banks with very attractive commissions. Likewise, consumers purchasing child endowment products may opt for different payment options. Most customers choose the discounted advanced premium payment method for both products. This is primarily because many bank customers have a large amount of money available to make lump sum premium payment, and they receive a discount on the total premium paid. This provides value because the discount is more than what consumers can earn from most saving accounts at banks in Japan. In the first quarter of this year, the discounted advanced premium payment option represented 50% of new AP from sales of child endowment and more than 90% of WAYS.
Our profit margins are significantly enhanced when policyholders elect to pay premiums upfront using discounted advanced premiums. Kriss will cover the profitability in more detail later. The first quarter bank sales were up 208%, which was at the high end of our expectations. One of the reasons for this increase is that we doubled the number of banks selling WAYS from a year ago to 203. Also, our first quarter was the bank's fourth quarter and the fiscal year end. Like most organizations, the banks typically push sales at year end. In preparation for their 2012 fiscal year that started in April, banks set annual sales targets. Through an analysis of their sales target, we gained better visibility into what banks will do for the year. We believe much of the momentum we saw in our first quarter will continue during the second quarter.
We still believe that the second half of the year will see a decline in bank sales as we have significant headwinds with the third and fourth quarters of last year. Additionally, as you can aware, we have shifted our focus away from the sales of child endowment at banks since last year, and in April of this year, we introduced a cap on the sales of our child endowment and five-year pay WAYS. The cap on five-year WAYS pay is to mitigate potential intermediation risks in the future. Once the cap on five-year pay WAYS is reached, we'll stop selling the five-year pay product. This reflects our need to balance relationships with banks while also influencing product mix. With better understanding of banks' plans for their fiscal year 2012, we have successfully negotiated with the banks on these cap settings.
Our revised sales projection for the banks channel is to see a sales increase of 40% or more for the full year 2012. In 2012 and beyond, we'll strengthen the measures to achieve more cross-selling with child endowment and WAYS, thereby increasing the sales of our more profitable third sector products. While we have shifted our focus away from child endowment, this product remains attractive to banks as it provides them with opportunities to gain new customers. We will train salespeople at the banks to promote cross-selling using packaged approach, including a brochure that contain both child endowment and our third sector products together as a bundled product offering. We have also started sending direct mailings on cancer and medical products to existing policyholders of the child endowment.
80% of customers acquired through banks are brand new to Aflac, whereas on the child endowment product have been enabling us to build a new customer base by attracting customers whom we could not reach through existing channels. As I mentioned earlier, the consumer awareness of insurance sales at banks is low. We will use our strong brand and Aflac Duck to raise consumer awareness to continue to enhance sales through this channel. At the same time, we will endeavor to increase productivity at each bank branch. Currently, only 40% of all bank branches sell at least one policy per month. Based on the success we have had at our most productive bank, as I mentioned earlier, this number could be as high as 100%, providing significant potential for future growth.
We will continue to work on improving the breadth and depth of the productivity at the branch level. As we look to the longer term, a flow of dated JGB redemptions presents further opportunities within the bank channels. In this low interest environment, we expect that most of the proceeds from the maturing dated JGBs will be invested in assets other than JGBs. These dated JGB holders typically want principal guarantee long term fixed income instruments, and our WAYS products can meet their needs. These redemptions present great potential for many years to come, and we are confident that our great relationships with banks will aid us in capitalizing on this opportunity. We believe the bank channel still has the potential for growth, and it is great channel for our products.
While the speed of growth for this channel will decline as we have penetrated further into the bank sales force, we believe growth will continue through this channel in the coming months and years. Thank you very much.
Thank you.
We will now turn to our U.S. business with the first presentation by Paul Amos. Paul moved from the sales force to the headquarters in 2009. He's President of Aflac and Chief Operating Officer of Aflac U.S. Today Paul will give us an overview of the U.S. operations and distribution systems.
Good morning, and thank you. My presentation and the one that follows will provide you with an overall picture of our business operations in the United States. I will begin today by giving you an update on the voluntary insurance market. It's been Aflac's longstanding goal and its vision to be the leading provider of voluntary insurance in the United States. As we pursue that vision, we do so by using a strategy for growth that we've used for years, both in Aflac Japan and in Aflac U.S. We develop relevant products and sell them through expanded distribution channels, yielding new accounts and customers. By remaining focused and committed to this simple, consistent, and effective strategy, we gain greater access to potential customers.
Michael Zuna, Aflac U.S. Senior Vice President and Chief Marketing Officer, will cover specifics about the products that we offer, and I'll focus on the distribution side of our strategy. First, let me briefly cover the concept of voluntary products because of the evolution of voluntary product offerings, it is directly tied to our evolution of our distribution channels. Since 1955, Aflac has sold individually issued products primarily to smaller businesses through what we call our traditional sales channel. This historically has included an extensive network of commission-based independent sales associates who are the foundation of our distribution system. Aflac's traditional sales channel comprises a team of more than 78,000 sales associates. This channel continues to be the driving force behind the relationships that we've developed with hundreds of thousands of the nation's small businesses.
For years, other companies have tried to replicate, and in some cases even buy a sales distribution channel like ours. We regard our success in the market as essential to our operating model, and we are going to continue to protect and enhance and empower our traditional sales channels. For 45 years, Aflac as a company, most people would never heard of. That all changed in 2000 when the Aflac Duck came onto the scene and a new era was born. By 2002, the bold Aflac Duck campaign had become an advertising sensation, and it catapulted Aflac's brand recognition to a point where more than 9 out of 10 people recognized the Aflac brand. From 2000 to 2002, the Duck, and our resulting brand recognition, drove an incredible demand for Aflac products. The number of small business leaders who sought to offer our benefits to employees increased exponentially.
Just as noteworthy was the way that our popularity expanded the size of our traditional distribution channel of individual sales associates. Suddenly it seemed everyone wanted to be affiliated with Aflac. As the 2000s progressed, the voluntary worksite insurance market evolved in terms of the types of products employees were buying. Sales of individual voluntary products were stagnant or declining while group sales were increasing. By 2007, the broader insurance market showed that contributions to voluntary insurance sales by individual agents were decreasing as contributions by insurance brokers increased. We did not have significant access to or relationships with the brokers that determined voluntary insurance sales in the large case market, meaning businesses with more than 500 employees. For that reason, we reached out to regional and large insurance brokers to determine how we could enhance our appeal to brokers.
They told us that our lack of group products was a major reason that they could not offer Aflac products to their accounts. Armed with this knowledge, we realized that the question wasn't whether we wanted to add group products to our portfolio. The question was what was the best way to add group products. Our options included an internally group product platform being built, seeking a joint venture, or acquiring a company that offered group products. After considering product time to market, costs, risk and reward, and experience, we concluded that our acquisition would be the best course of action. This option would give us immediate access to a portfolio of ready-to-sell products and the expertise of management with a proven track record in underwriting and administration capabilities with group products. As you'll recall, in October 2009, we acquired CAIC, now branded Aflac Group Insurance.
This acquisition was a critical step toward competing in the group product arena. It gave us instant access to the products that we lacked, proving to insurance brokers that we were serious about doing business with them. This was a major step in expanding our presence with the medium and larger businesses, there is no doubt that it was the right decision for us. As the growth engine at Aflac U.S., group products are transforming our business. Having a portfolio of individual and group products has allowed us to go into the marketplace with the best of both worlds while also providing our customers with more options. While Aflac remains the leading provider of individual voluntary insurance in the U.S., we've seen the demand for our group products rising year after year.
For example, in 2001, individual products represented 61% of worksite sales with group insurance lagging behind at 39%. The most recent data shows that in 2011, sales of group policies eclipsed those of the individual counterparts to comprise 55% of the total worksite sales in the industry. This affirms our decision to expand into the group insurance arena, we're confident that our strong brand, superior service, and comprehensive product portfolio will make us number one in sales of group voluntary also. Our entrance into the group insurance market has also opened up opportunities for some of the seasoned associates who for many years have been focused on the sale of individual products. Many have surpassed our initial expectations in terms of group sales, thanks to the consultative sales model that positions group products as the best fit for certain accounts.
At the same time, our veteran agents have been driving growth within their existing book of business. Through a combination of individual and group sales, they are doing an outstanding job of increasing penetration in their existing accounts while securing new accounts also. We're also seeing tremendous growth at our Aflac Group Insurance operations. We plan to add 375 jobs at Aflac Group this year, which will bring the total workforce to more than 800 employees. This far exceeds our previous expectation of growing Aflac Group to 400 employees by 2015. Let's look at the potential market for Aflac by business size. The most recent data from the Small Business Administration shows that the U.S. has more than 5.7 million businesses with fewer than 500 workers, that these businesses employ more than 56 million people.
That's nearly half of the total workforce, it is a large universe of potential customers. When you look at this potential market for Aflac after the addition of group products, you'll see there are 18,000 businesses with 500 or more workers employing 58 million additional employees. The key word is additional, because as I mentioned, our efforts are designed to expand our reach, not shift our focus. In other words, we're expanding our target market from just small businesses to businesses of all sizes. Our portfolio of group and individual products provides consumers with outstanding value while giving employers the choices that they demand. As a result, the Aflac brand outshines those of our competitors in both individual and group voluntary markets. To put the growth into perspective, the U.S. Census Bureau data that you saw just shows 114 million full-time employees in the U.S.
92% of Americans are aware of the Aflac brand, which translates into 105 million U.S. workers. Based on the study from Hall & Partners, 94% of those 105 million workers, or 99 million people, do not currently have access to our products at their worksite. With healthcare in the forefront of so many consumers' minds, our strong brand is accelerating our potential to grow the business. Referring back to our strategy for growth, once we've added group products to our portfolio, it's time to further build out our distribution system to reach large accounts. Even before acquiring CAIC, we officially launched a broker initiative called Aflac for Brokers. This initiative was managed through a distribution system more closely aligned with our traditional sales associates. Despite our initial concerns about the potential channel conflict, Aflac's associates have effectively partnered with small and medium brokers.
These partnerships are providing increased access to existing accounts and generating broker referrals, which lead to new accounts. While we saw some success in the broker market early on, there were limitations around simultaneously managing the various needs of our traditional associates and the broker community, more specifically, the large brokers. It became clear that the infrastructure that we built out nurtured Aflac U.S. over five decades was better at serving our traditional channel. We needed a separate and distinct channel devoted to large brokers. As many of you know, Aflac Japan has experienced great success in developing diverse distribution sales channels and supporting the unique needs of these channels through separate specialized infrastructures. We identified that we needed to carve out a distribution channel particularly geared for large brokers, and we knew it would have to be managed separately by experienced individuals.
With that in mind, I want to share with you how we've segmented our approach to improve our reach to the large case market. To cater to the unique needs of the top 50 insurance brokerage houses, we've created an entirely new and separate infrastructure called Aflac Benefit Solutions, or ABS. ABS, a subsidiary of Aflac, is a separate independent insurance agency. We established our ABS office in Metro Atlanta to ensure the operation is accessible to our business partners. The head of ABS, Chris Koval, is here today, and Chris has decades of experience with large insurance brokerage houses. I hope that you'll have the opportunity to speak with him. He knows the importance of staffing ABS with experienced professionals who understand the business from top to bottom. Individuals with insurance experience who have firsthand knowledge of the unique needs of large brokers.
I believe we're expanding our reach in a much better way through ABS. Carving out ABS as a distinct sales channel dedicated to the needs of the large national brokers is not only beneficial to our broker channel, but it also helps our traditional sales channel because each distribution avenue now receives focus and attention that will help them drive sales. The vision for ABS is simple and targeted, to be the preferred and trusted partner among the top 50 brokers in the United States to make Aflac the number one provider of voluntary benefits in the large case market. We are pursuing our mission to ensure that each of the top 50 national brokers has a formal voluntary benefit strategy by effectively using voluntary benefits to grow their client bases and improve their clients' overall benefit offerings.
Following through on our promise to provide products and services that add value will help us solidify long-term relationships with the large insurance brokers. However, building those relationships is not an overnight process. We believe that over time, the strides we are making in pursuing large businesses will help Aflac achieve its goal of being the number one provider of voluntary benefits to employers with more than 500 employees. I can tell you that we are already making tremendous inroads in establishing critical relationships with our focused and dedicated approach. We believe our value proposition for large brokers is now in place, and we expect our progress in building those relationships will benefit brokers and Aflac for years to come. Keep in mind that while we are in the early stages of building a meaningful presence in the large case market, the potential for Aflac is huge.
Having healthcare market affects our business. Actually, as I mentioned, we believe it presents Aflac with opportunities. Just take a look at Japan's healthcare environment. Its citizens are covered by nationally sponsored healthcare plans, yet they still greatly benefit from the financial protection that Aflac products help provide. While a large number of people here in the U.S. are covered by comprehensive insurance through their employers, these individuals still have to pay out-of-pocket expenses. The affordable and relevant benefits of Aflac products can lighten the financial burden regardless of where comprehensive coverage is obtained. This clear need for voluntary products, combined with the evolving healthcare landscape, has resulted in many new companies entering the voluntary insurance market. Because the voluntary market is not directly subject to the reforms mandated by the Affordable Care Act, or ACA, many comprehensive insurance companies, in particular our market.
I want to point out one thing. These new entrants are making forays into our market as a contingency plan for healthcare reform, but not for Aflac. Voluntary insurance sold at the worksite, large and small, is our primary focus. That focus has contributed to our market leading position in voluntary individual products, and we are starting to see indications that consumers prefer Aflac group products to the competition. As I mentioned, we believe larger businesses will seek guidance from insurance brokers to help navigate through many of the healthcare options. From there, two primary factors have the potential to elevate brokers' focus on voluntary products. First, employers subject to the ACA will, in all likelihood, have to shift more costs to employees, reduce benefits, or both to control costs while continuing to offer solid coverage.
Second, the new medical loss ratios required of major medical plans have put significant downward pressure on broker fees and commissions. We are seeing growing enthusiasm among brokers, both small and large, who are realizing that offering Aflac's diverse line of supplemental products to their clients provides them with an ideal opportunity to grow their business without reduced commissions. Aflac has spent more than five decades establishing the competitive strengths that have propelled us to our market-leading status in the individual voluntary market. This graph illustrates Aflac's domination of that market when compared to other companies in the voluntary worksite insurance industry. While Aflac has maintained its market-leading status, our market share took a slight dip around 2008. This reflects the fact that more companies are entering the voluntary insurance market. In fact, nearly every major insurance carrier has entered the voluntary worksite market in one way or another.
In recent years, we've seen companies try to mirror our products and marketing campaigns to gain access to small and large case markets. While our competitors are attempting to come downstream from the large case market into the small account niche, we're not only protecting our share of the market that Aflac has dominated for many years, but we are also proactively launching initiatives that I described to capture more of the large case market. By doing so, we're maintaining our dominance in the small case arena while simultaneously growing a foothold in a market that until now has been largely untapped for Aflac. I've spent much of my presentation today talking about what we are doing to position ourselves for future growth. I am very pleased with the ways that many of our initiatives, as I've discussed today, are already positively affecting our sales performance.
You can see, Aflac U.S. generated a 6.8% increase in new annualized premium sales for 2011, which was above our target of 0%-5%. I'm also pleased that we are off to a good start this year. Aflac posted a 4.5% increase in new sales in the first quarter of 2012. The United States continues to provide a vast and accessible market for our products. Looking ahead to the remainder of 2012, we believe it is reasonable to expect Aflac U.S. sales to increase in the range of 3%-8%. Economic conditions have improved, we cautiously look ahead. We believe we have put the right people and processes in place to grow sales this year and to further penetrate the market. I shared earlier that it is our longstanding goal and vision to be the leading provider of voluntary insurance in the United States.
We look to the future, we will maintain the leading position and work to enhance it. Our individual and group products and our brand strength set us apart from our competitors and make us the insurer of choice for individual consumers and for businesses of all sizes, from the smallest of sales associates and the largest of national brokers, from the humblest of mom-and-pop stores, to the biggest retailers and corporations in America. We will accomplish our vision by remaining true to our strategy for growth, by offering relevant products through expanded distribution channels, by continuing to be proactive in responding to changes in the U.S. and workplace demographics, by being mindful and tactical to the evolving healthcare environment, and by leveraging our strong brand in each of these endeavors. ABS is one way we're expanding our reach, we won't stop there.
We're continually exploring additional opportunities to establish a distribution presence while taking into account the various needs of our customer demographic segments. Consumers' preferences change with respect to how and where they want to buy voluntary insurance, we'll explore additional distribution channels. We will be where American workers want to purchase voluntary insurance, we'll continue to look at the wants and needs of the consumers to identify the ways and channels that we can fulfill those needs. We consider new avenues, we will closely evaluate their propositions for risk and reward, cost, and economies of scale. The kind of potential I'm referring to can't be accomplished in a week, a month, or even a year. I'm talking about Aflac's long-term potential in the United States, I can tell you it's there. The best is yet to come for Aflac U.S.
Michael Zuna is up next. Michael joined Aflac in 2009 as vice president of marketing. Last year, he was promoted to senior vice president, chief marketing officer, where he is responsible for all marketing activities, including advertising and branding. Prior to joining Aflac, he served as managing director of Saatchi & Saatchi New York. Today, Michael will share details about Aflac's U.S. marketing plans.
Good morning. It is great to be back here with you again. I am pleased to have the opportunity to update you on some of the things we have accomplished the past year. As Paul mentioned earlier, we are seeing tremendous opportunities for growth within our market. Aflac has historically been the leader in the voluntary insurance market. Over the past few years, we have seen an increased competition. Aflac retains the lion's share of the business, and we intend not only to keep it that way, but to also grow our share.
I'll take you through my team's objectives as well as the strategies we've put into place to help our agents and brokers reach prospective customers, decision-makers, and existing policyholders at moments that most influence their purchase decisions and then convert those moments into sales. Consumers need the protection our voluntary products offer now more than ever, whether that coverage is provided on an individual or a group platform. Our products provide value that is both real and life-changing. Each day, policyholders let us know that Aflac products have meant the difference between paying their mortgages or losing their homes, between paying their car notes or finding alternative transportation, and even between receiving medical treatments or forgoing needed care. As this chart shows, annual spending on healthcare costs rose from nearly $2,200 per employee in 1999 to more than $5,400 in 2011. Healthcare costs have also significantly affected employers.
Additionally, for families, the Milliman Medical Index indicates annual healthcare costs have more than doubled in less than nine years. Employee share of those family costs is at an all-time high of 39.7%. Aflac's job is to protect policyholders from rising out-of-pocket healthcare costs and at the same time, support employers by providing supplementary plans that improve their workers' benefit packages at little or no cost to their businesses. With rising healthcare costs as the backdrop, keep in mind that for more than five decades, Aflac has provided an extra layer of financial protection to policyholders. Our products pay cash directly to policyholders in the event of sickness, injury, or death. They're sold primarily at the work site on an individual or group platform and are designed as an addition to, not a replacement for, major medical insurance.
The benefits can be used in any way policyholders see fit to help pay out-of-pocket medical costs, the mortgage or rent, utility bills or auto payments, in short, any bill that threatens their financial security. The success of our products, whether they're group or individual, depends largely upon how well they address, and in some cases anticipate, the needs of consumers and our distribution team. Addressing those needs is critically important when we're developing new products, but we must also observe the fundamental principles of sound risk management. Aflac was founded on a customer-centric philosophy. We continue to develop both group and individual products with simple and clear policy language. From application to claim, we ensure that our processes are streamlined, efficient, and effective. This is consistent with Aflac's belief that an insurance contract should clearly communicate what the consumer can expect to receive.
As competition increases and our market evolves, we must create and execute a product strategy that fits the needs of businesses and consumers, one that provides a competitive edge with respect to the benefits we offer and how our products are priced and marketed. We've significantly increased our competitiveness by adding group products to our portfolio. Our suite of insurance products is tailored to fit the needs of all consumers as well as all businesses, no matter how large or small. We continually enhance our policies to increase their value to consumers. For example, in the second half of 2011, we unveiled a new short-term disability product, and in the first quarter of 2012, a new cancer product. Our new disability product is much more appealing to consumers because of its lower income requirements, higher maximum issue and renewal ages, higher maximum benefits, and lower premiums.
Likewise, we've made our new cancer product more competitive, and we've simplified it so that it's easier for our customers to understand and for our agents to sell. Additionally, we've expanded our product marketing campaigns to include all product lines. We're also focused on developing campaigns that integrate individual and group offerings. For example, we have been very successful in cross-selling our group critical illness coverage as a quote, "wrap" to new or existing individual policies. Through this cross-selling, we increase our share of wallet and improve our account penetration, which in turn improves persistency. Another recent effort is our short-term disability launch. We developed a direct marketing campaign aimed at existing accounts that didn't offer our short-term disability product. The theme was, quote, "Deal employees a winning hand with short-term disability from Aflac," end quote.
Components included a letter to decision-makers touting the product's benefits, a follow-up email, and lastly, a deck of, quote, "Aflac Duck playing cards." We plan to roll out revisions to some of our other products with the goal of making them more competitive and easier to obtain while maintaining sound returns for investors. We are also focused on developing products directed at specific customer segments. As you know, marketing plays an important role in driving revenue through increased production in terms of both new annualized premium and earned premium. In an effort to meet and exceed our sales and operations target, we've developed a clear and focused strategy centered on accountable marketing. Accountable marketing is an objectives-driven system built around comprehensive and strategic programs. Insurance is an emotionally driven purchase, but our marketing efforts are rooted in facts, research, and accountability.
We're informed by robust data and analysis that improves our execution. We use our research to target specific markets and channels. We're focused on consumers, businesses, brokers, and agents. We've identified objectives, strategies, and tactics for each. We've also aligned our messaging and our media to meet the specific needs of our market segments. I will elaborate on this shortly. Put simply, we believe our marketing comes down to four broad objectives or areas of execution, driving brand preference and demand, integrating programs by segments and channels, expanding our sales funnel and converting what we call shelf space. This is a continuous process that is the foundation of everything we do.
Because we created the concept of supplemental insurance and for quite some time were virtually the only company in the supplemental market, generating brand preference among consumers isn't something Aflac has historically had to spend much time on. However, in recent years, our competitors have become more aggressive, and we've seen new entrants into our market space. Aflac sales still outpace those of our top four rivals combined. Some competitors are aggressively trying to chip away at our market share. We don't take their efforts lightly. We're driving brand preference and demand by focusing on consumers to generate three key outcomes: unaided awareness, understanding, and consideration. In today's world, consumers want complete control over their decisions. They are immersed in technology and therefore have unprecedented access to information and choices. As a result, understanding consumer behavior becomes a marketing necessity.
Consumer behavior is driven by three factors: core personality, which is unique to each individual, the attitudinal mindset each individual has towards external stimuli and choices, and lastly, real-world interactions driven by personal experiences, behaviors, and decisions. Decisions about insurance are driven by internal and external influencers. Our goal is to isolate the factors that are determinants of consideration, financial soundness and concerns, planning for the future, and opinions about voluntary insurance. Unaided awareness is a measure of the number of people who, without prompting, express knowledge of a brand or product. Brands that are a part of a consumer's initial consideration set are up to three times more likely to be purchased than brands that are not a part of that set. 85% of workers say brand name and reputation are important when selecting benefits. 42% say they are extremely important.
Thanks to our Aflac Duck, unaided awareness of our company, its brand name and recognition is nearly unrivaled. More than 92% of all Americans have heard of Aflac. That gives us a jump start on the competition. The next element of brand preference and demand is understanding. We'll continue to use the duck to entertain and to keep the Aflac name front and center among consumers. Our messaging increasingly focuses on taking consumers from awareness to understanding. Next, there's consideration. When someone is ready to buy, how likely is he or she to consider our product? We're using marketing to generate consideration, the kind of driving curiosity that prompts a decision-maker or a consumer to want to learn more about a product. Once they have the knowledge they seek, we want their urgency to transform into an immediate desire to purchase.
Our objective is to shorten the sales and marketing process from consideration to transaction, closing the sale fast. This slide shows that consumer consideration of Aflac and its products is on a steady upward trajectory. We're working toward that objective with broad media efforts across television, print, and online channels that drive awareness and product understanding. The goal is driving relevance and immediacy so that customers get exactly what they want when they want it. The second objective I mentioned is integrating marketing programs by segments and by channel. Just as the insurance needs of individuals are unique, the needs of the businesses and brokers Aflac serves are unique, too. That's why we've strategically divided our market into segments and channels aimed at a variety of situations and needs. We make things just right for companies ranging in size from the very large to the very small.
Some prefer to work with brokers, while others prefer the intimacy that comes from working with an individual agent. We have products and services that meet a wide range of needs, too. We don't want businesses, agents, or brokers to be forced to scout their own solutions. We give them a suite of ready-made solutions tailored to their needs. A good example here is our product offerings. Larger accounts and brokers generally prefer to work with group products. With the acquisition of Aflac Group, we can better tailor our product offerings to meet that preference, while smaller companies continue to be comfortable with our individual products. Technology is another area in which Aflac provides different solutions depending on the size and needs of a business. Large accounts generally require electronic enrollment capability and employee communications, and Aflac provides those services.
In fact, we're working closer than ever with IT and administration to enhance our enrollment technology because we know ease of enrollment drives increased account penetration. Since smaller businesses usually don't invest in electronic enrollment platforms, we have alternate ways of conducting their enrollments, including face-to-face, call center, and web methods. The next marketing objective is expanding our sales funnel for our distribution. We know that more agents generate more demand, which in turn generates more accounts and revenue. That's why in 2011, we launched our first national recruiting campaign. The powerful, integrated, and testimonial-based effort relied on strategic media buys and included television, newspaper, and digital ads, search engine marketing, optimization, top job sites, and our first-ever bilingual television ads featuring Aflac agents.
The results were encouraging. This year we launched a new testimonial-based ad campaign that focuses on agent stories and highlights the four key message points that drive agents to join Aflac. Aflac is financially strong, provides the support needed for success, places no limitations on individual success, and offers career with personal control. We're using the results and feedback generated by the initial launch in the year's first ad flight to optimize our campaign for the remainder of 2012. In other words, we intend to generate better results by adjusting the mix of channels on which we purchase airtime, the times at which the ads are shown, and the frequency with which they appear, all with the goal of attracting best-in-class new agents. During the first ad flight, we saw a 60% year-over-year increase in leads with the same spend.
The cost per lead of our TV spot was 21% lower than last year's cost and beat forecasts by 47%. Advertising has a direct correlation to leads, as you can see from the chart. Short-term ups and downs are important, but not as important as growing recruits on a sustained and cumulative basis. We will continue to push toward those long-term objectives. We are also working to increase our coordinator base, especially at the lower levels, to better convert leads into recruits and ultimately into producing agents. Increased annual premium is the result of activity and productivity. We look at the number of average weekly producers as well as the dollar amounts they're bringing in. As this chart shows, both the number of average weekly producers and the dollars per average weekly producer declined in the years in which our sales growth was headed in a negative direction.
We turned both of those key drivers of sales growth around in 2011 and continue to aggressively develop and implement programs that keep the number of average weekly producers and the dollar amounts they're generating on a positive trajectory. A critical driver of this growth over the past year was recruiting, but our coordinator base did not keep pace. Since last year, we have increased efforts to expand our distribution infrastructure. Due in part to the success of the coordinator in training program, we have essentially filled our bench. Going forward, we expect to see continued coordinator expansion, which ultimately allows us to extend our reach to our customers. We have discussed the importance of shelf space many times, and it continues to be an important component of our success, especially in today's environment.
In a down economy, payroll accounts sometimes increase, we don't see a resulting bump in sales. We do, however, have an opportunity to create shelf space for the future, which can drive sales within those accounts when the economy starts to improve. In 2012 and beyond, marketing is increasing its efforts to capitalize on accrued shelf space through additional enrollments by upselling and cross-selling to existing policyholders and by retaining more of our existing customers. In the end, it's all about maximization. Maximizing the number of policies sold at the enrollment, maximizing share of wallet, and maximizing earned premium. Cross-selling and upselling are both key to increased retention. According to the Database Marketing Institute, quote, "The value of a second policy is much more than the additional profit from that policy. The value is in increasing the retention rate, the persistence of that first policy.
Somehow, when people own two or more policies from a company, they are more loyal than if they just own one." End quote. In other words, the more policies a customer has with Aflac, the more likely he or she is to continue doing business with us, and that drives our earned premium. The second component of our accountable marketing focus is our commitment to comprehensive strategic programs. This includes optimizing our marketing strategy and innovative marketing model. We've found that a disciplined approach to marketing and optimized marketing strategy based on careful planning and comprehensive research is more successful and also reflects a disciplined use of our company's financial resources. We want every marketing dollar we spend to deliver maximum value by differentiating our company and our products from those of our competitors.
We continuously look for ways to generate larger returns by reallocating our investment rather than by adding more dollars to our marketing spend. This philosophy is not limited to our media mix. Rather, we look at the entire spectrum of our marketing plan to identify, evaluate, and implement opportunities in our pursuit of higher returns on our marketing investment. We are leveraging econometrics to maximize the return on every dollar. For example, we've used our econometric media model to identify the maximum point at which we generate a positive return on revenue for every marketing media dollar spent. Additionally, over the last few years, we've shifted marketing dollars to segments that drive greater access and create the most shelf space in order to sell to employees and businesses. This strategy is designed to grow our B2B and broker markets.
While marketing to consumers continues to be important, we recognize that access to those consumers at their work site via brokers and employers is an important part of our business model. We are closing linking our marketing efforts to operations and results. For example, a cross-divisional task force is focused on improving account, policyholder, and Aflac Group customer retention. The task force includes key personnel from marketing, sales, administration, IT, and other areas. Results are encouraging and are directly attributable to cross-company collaboration. One major area of focus for us is social media, which we're using to harness the voice of the consumer. We monitor for mentions of our brand across numerous social media platforms, and when we see that a customer has expressed dissatisfaction, we enter into the conversation to address their issues.
For example, Aflac Phyllis, one of our brand protection coordinators, responds to Twitter users by asking them to explain their concerns and by helping resolve their problems. The conversations are public, and those who view the back and forth unfolding in real time can see we are serious about customer service. Likewise, when we see a positive mention of Aflac on social media platforms, we'll enter the conversation and express our thanks. Another area of focus is thought leadership, through which we're engaging in a dialogue about benefits with employers. Healthcare reform, regulatory changes, the prolonged recession, and our nation's slow economic recovery have left employers confused about the benefits landscape. We're filling the void with the Aflac WorkForces Report, which is based on interviews with 1,876 benefits decision-makers and 6,151 employed adults. The WorkForces Report gives employers a snapshot of how their workforces feel about their employer-sponsored benefit plans.
Through this report, we're positioning Aflac as a trusted advisor that brokers, accounts, and consumers can turn to for objective advice about their benefits offerings and selections. Through our innovation and sales technology, which requires marketing to work closely with IT, we are developing tools that positively affect our sales and marketing efforts. One example is the creation of the automatic proposal tool, which we recently rolled out for our broker partners of Aflac Group. The automatic proposal tool transformed a manual sales process that took an average of 10 days or more into a process that produces results in just five minutes. Retail sales operations are transforming the sales experience, both for our agents and consumers. Our popular show car program, which stars the number 99 Aflac Ford Fusion, now features two haulers that house our first-ever retail sales and service stores.
The haulers are true mobile storefronts, complete with SMG computers that instantly submit policy information and applications, as well as screens that showcase our latest commercials and our product, client, B2B, and broker testimonial videos. Through our ongoing partnership with Aflac's customer assurance team, we've arranged for accounts and policyholders with service issues to use VIP hotlines to immediately speak with internal customer service agents. Call center representatives are notified of each pit stop in advance so that they can be prepared to answer questions about the account being visited and the policies being made available to its employees. The haulers connect with customers in an environment that sparks their emotions and also generates strong brand preference and demand. The third and final component of our accountable marketing strategy is robust data and analysis. Our business environment is becoming increasingly complex.
Increased competitive intensity among our traditional rivals, a sluggish economy that has struggled to recover from a prolonged downturn, and skittish consumers and business decision-makers who are sensitive to price require that we stay ahead of potential roadblocks and challenges, whether they're economy or consumer driven. We increasingly rely on robust data as well as marketplace and consumer analysis to inform us and aid us with our marketing decisions and perfecting our execution. We are putting our research to use in developing our market-based focus, in creating models linking marketing activities to sales and profitability, and by focusing key performance indicators and targets by activities and by audience, consumers, businesses, brokers, and agents. Data and analysis is critical to the development of effective marketing initiatives.
According to the McKinsey Global Institute, the ability to digest and leverage the vast amount of information driven largely by online activities is a key business differentiator. McKinsey describes the transactional data churned out by companies as "big data." With so much data available, it is imperative that companies find a way to maintain focus on what is relevant to them as a business. In fact, it is a competitive advantage to successfully navigate through the wealth of information and use it in a way that drives results. Once relevant data has been extrapolated, it drives analytics and research, which in turn drives strategy and execution. I shared with you earlier how we are taking information we gather from Twitter and using it to turn negative customer experiences into positive ones.
We use a mix of survey and web analytics to measure how marketing affects brand perception, and through analysis, ideation, and testing, drive our marketing to be more effective. As I mentioned at the start of my presentation, our marketing strategy is centered upon accountable marketing that is driven by strategic objectives, integrated programs, and clear metrics. We are laser focused on achieving clear and specific metrics across our marketing mix. Ultimately, it is our targets and metrics that matter most in terms of delivering value to all of our policyholders, shareholders, and everyone who counts on Aflac. I want to thank you for being here and for listening.
We're running pretty much on time, we're going to take a quick 10-minute break. Also want to let you know that outside on the tables, we also have some Aflac playing cards that I believe Michael mentioned earlier. If you want to take those and can take them, help yourself to that. If everybody could be back in about 10 minutes at 9:45 A.M., please. Okay, we're about to start our next presentation. The first speaker for this session is Eric Kirsch. Eri joined Aflac in 2011 as first Senior Vice President and Global Chief Investment Officer, and he is responsible for Aflac's global investment portfolio and investment teams. Prior to joining Aflac, he served as managing director and global head of insurance asset management at Goldman Sachs. He's also spent nearly three decades altogether at Deutsche Bank Asset Management and at Bankers Trust.
Today, he'll review our portfolio, investment activities, and the transformation of our investment funds. Eric?
Good morning, and thank you for being with us today. This past November, I was privileged to get the opportunity to become the global CIO of Aflac Investments. While challenges lie ahead, the opportunities are considerable, and I am very excited about the future. I'll discuss where our investments portfolio stands today and the investment activities during the past year. I will also give you some insight into what the future holds for Aflac's global investment strategies. Our investment objectives are primarily driven by careful consideration of our liabilities and capital requirements. With these in mind, our investment strategies are designed to achieve the highest attractive risk-adjusted returns with an eye towards quality, diversification, and liquidity. In Japan, our liabilities are yen-denominated, have long durations, and are generally not very interest rate sensitive. Our investments are generally focused on longer duration, yen-denominated fixed income securities.
These include both government securities such as JGBs, as well as credit investments, which are primarily privately issued. Over the past few years, sales of our first sector products such as WAYS and child endowment have grown. While these products are more interest rate sensitive than our traditional products, they still have long durations. As this block of business grows, we will fine-tune our investment strategy to take into account the liability sensitivities to changes in interest rates. In the U.S., our liabilities tend to be shorter than in Japan, and our investment strategy is tailored accordingly. This past year, our primary focus has been on risk management. We have been investing our significant cash flows in assets of relatively higher quality and liquidity. We have also spent considerable time analyzing the impacts of rising interest rates on our portfolio and capital ratios.
Finally, we initiated a global strategic review, which I'll discuss in more detail later. I'm pleased with the results of this review thus far, and we expect the recommendations will provide significant long-term benefits to our investment organization and strategies we deploy in the future. I'd like to take a few minutes to review the financial markets performance over the past year and provide context to the landscape upon which Aflac has deployed its investment strategies. As you all know, the financial markets experienced significant volatility over the last year with the European crisis at the epicenter. Let's examine the world's largest bond market, the U.S., and how interest rates were impacted. During the course of the past year, interest rates fell significantly across the curve, especially on longer-dated issues of 5 years to 30 years, which declined between 124 and 117 basis points.
This reflects both a flight to quality from the European crisis and the pursuit of monetary policy easing by the Federal Reserve to help promote economic growth. In Japan, interest rates declined last year, although they didn't drop precipitously the way U.S. Treasuries did. For example, over the last year, yields on 20-year JGBs fell 31 basis points from 2.07% to 1.76%. Ultimately, the base yields in our major markets, the U.S. and Japan, fell, which of course impacted the yields on our new investments throughout the year. Like all global investors, Aflac was not immune to the volatility in Europe. Given our European investment exposures, we carefully managed through the crisis. As you can see from the chart, European financial sector spreads hit unprecedented levels of nearly 500 basis points during September and over 450 during November of last year.
Yields on financials hit all-time highs, reaching close to 7% in November, reflecting the lack of confidence in the sector. The crisis reflected systemic monetary and fiscal policy issues throughout Europe, placing the entire financial system at risk of default and putting in doubt the ability of governments like Greece to even operate. We saw intense negotiations between nations, along with monetary actions by the ECB, to restore confidence in the financial system and markets late in the year. During December, the ECB enacted the long-term refinancing operation, otherwise known as the LTRO, lending over $1 trillion to financial institutions to ensure liquidity and reduce the risk of default. This had the effect of calming markets as seen in terms of the large drop in spreads and yields since December of last year, it took the Lehman shock event off the table.
I believe Europe will remain an issue for some time to come. U.S. markets were affected by the European situation last year, particularly in the financial sector. Given the global nature of our financial system, there was a great risk of a domino effect. Spreads in the financial indices rose to over 350 basis points during the second and third quarters. Like Europe, when markets began to calm in the fourth quarter, we saw a large drop in spreads and yields across financials and other fixed income sectors. Keeping the economic backdrop in mind, I will now review our investment portfolios. As you can see, we maintain six separate investment portfolios, each of which have a specific purpose and are matched against a particular operating segment. On a consolidated basis, our invested assets total more than $98 billion.
Approximately 91% of our invested assets are associated with liabilities from the Japan business segment. For more than 20 years, Aflac Japan has maintained an allocation to a portfolio of dollar-denominated investments. The rationale behind this portfolio has been to take advantage of diversification by being invested in the U.S. markets and to seek more attractive yields. In addition, by investing a portion of Aflac Japan's equity in dollars, we have helped mitigate the currency impact on Aflac's consolidated GAAP equity. About 9% of our consolidated holdings back the U.S. business segment. This includes portfolios backing the respective books of business for Aflac New York and Aflac Group. We also maintain a small portfolio at the holding company level. The primary purpose of this portfolio is to temporarily hold capital until it is deployed for corporate purposes.
Let me note that this slide presents pro forma book values at March 31st, 2012. The adjustment amounts to $580 million that includes the disposal of 4 Tier 1 and 2 lower Tier 2 securities that we impaired during the first quarter but were sold subsequent to the end of the quarter and were associated with our de-risking program. We will include these transactions in the numbers throughout much of my presentation as these disposals were subsequent events to the first quarter. Our portfolio increased 13.5% this past year. As you can see, the focus of our new investments has been on fixed maturities, which have been increased to 93.5% of total investments. In addition, we have continued to reduce our holdings of perpetual securities, with these investments having been reduced by $2.4 billion.
As of March 31st, 2012, perpetual securities represent just 5.3% of our total portfolio, down from 8.8% last year. Finally, our exposure to asset-backed CMBS and RMBS sectors remain negligible, accounting for under $1.3 billion of assets. As seen on this slide, the credit quality of our portfolio remains very high, with an average portfolio rating of single A. The greatest change in credit rating came in the double A category, which increased from 32.7% of the portfolio to 41.5% at the end of March 2012. This was primarily due to increased purchases of JGBs with both new investment cash flow as well as reinvestment proceeds from de-risking activities. You'll also note that our holdings of single A-rated bonds decreased from 31.9% to 28.3% year-over-year. Our triple B investments are 22.9%, and our below investment grade issues decreased to 5.4% from 8.8% last year.
I'm pleased with the progress we have made in maintaining a high average quality portfolio while also reducing our holdings of riskier assets. Next, I will review the sectors that we are invested in and the changes to our overall fixed income allocation. JGBs increased from 19.4% as of March 2011 to 32.9% at the end of the first quarter 2012. This reflected a number of investment themes, including maintaining higher quality investments given the risk arising from the European crisis. We chose to avoid lower quality investments that might decline in value given the volatility we saw across markets. We chose to cease making new investments in Europe around November of last year, so the availability of private placements was generally much lower.
You'll note the significant decrease in our investments in the financial sector from 32.5% at the end of March 2011 to 24.2% at the end of the first quarter of 2012, resulting in the sector proportion declining by over 25% or 8.3 percentage points. This reduction came primarily from our timely de-risking activities, which I will review in more detail later. Other sectors remain flat, but I would emphasize the changes in our sector allocations have increased our credit quality profile while reducing risk to the financial sector and the overall credit risk in our balance sheet. Given the size of our balance sheet, we invest on a global basis and seek to diversify risk by country, as well as seek out attractive investment opportunities in the growth markets of the world.
Japan is our largest region for investments, having risen to 38% of our assets at the end of March 2012 from 26% at the end of March 2011. Given that almost 90% of our liabilities are in Japan, we expect the country to remain a key part of our investment activities. Our European exposure has decreased from 35.8% to 27.2% at the end of March 2012, again, reflecting our de-risking activities and desire to reduce our exposure to the region given its economic volatility and risk. I recognize that our European exposure has been a source of concern for you. It has been for Aflac as well, and certainly is one of my highest concerns. I want to emphasize that as a global investor with a long-term horizon, we should have an allocation to the European markets, but in the right proportions, sectors, and individual issues.
Through our de-risking activities, we have made significant reductions in our European exposure, which places Aflac in a better position to withstand the challenges that Europe will face over the next few years. Investments in the U.S. slightly decreased to 15.8%, primarily due to the proportionate increase in our Japanese business as opposed to any specific investment views. Let me comment on our portfolio from an accounting standpoint, specifically the composition of available for sale and held to maturity allocations. We are currently allocated evenly between the two accounting conventions. This represents a shift from a year ago when we were allocated about two-thirds to AFS and one-third HTM. We have been developing capital strategies, in particular focused on our capital ratios to protect our portfolio from a rise in interest rates.
Given that the majority of our assets are yen-denominated, increases in JGB yields pose the greatest challenge to our solvency margin ratio. Under FSA regulations, the unrealized gains and losses of securities held in HTM do not impact our SMR. For this reason, we targeted JGB purchases as well as a reallocation of JPY 500 billion of existing JGBs into HTM over the past year. At our current allocation, we are comfortable that we have achieved mitigation against the rise in interest rates. Currently, our allocations are more evenly distributed between HTM and AFS. I would also note that we monitor our liquidity needs and believe that our current allocation is more than adequate. You will also note our fixed maturities in HTM went down from 32.5% at the end of the first quarter of 2011 to 26.6% at the end of March 2012.
Our future credit investments will primarily be allocated to AFS to provide us with greater flexibility for portfolio management actions in the future. We carefully monitor our largest exposures. Since I've discussed our largest holding, JGBs, I'd like to now look at our top 10 credit related positions excluding JGBs. Israel Electric remains at the top of the list. You may recall that it was previously classified as HTM, which constrained our ability to undertake any discretionary risk reductions. The security was downgraded to below investment grade last year, which led us to reclassify as AFS. From a credit standpoint, the bonds are ultimately backed by the State of Israel, and we are comfortable holding the position. However, we recognize the geopolitical risk in this region of the world, and we are exploring ways to reduce the net risk position for Israel Electric.
The other top exposure is the Republic of Tunisia, which played a central role in the Middle East Arab Spring we witnessed last year. Prior to these events, Tunisia experienced growth above 3% and exhibited decent fiscal discipline for many years. Two positive attributes which we have allowed the country to make its transition easier. Despite the relatively smooth political transition, political risk remains, as well as significant economic challenges. These factors were our basis for reclassification of Tunisia as below investment grade, despite the sovereign still being rated investment grade. Like other outsized exposures, we will opportunistically explore ways to reduce the net risk position for Republic of Tunisia. While the exposure to Republic of South Africa is significant, we remain comfortable with the credit due to its strong, steady growth in recent years and the relatively low public debt balance.
The listing of UniCredit S.p.A. as our fifth largest exposure is a bit misleading because we view our risk as more distinct than UniCredit S.p.A. Our consolidated exposure to UniCredit Group actually lies at its German and Austrian subsidiaries. While stress on the parent obviously negatively affects the subsidiaries, we believe that the risks associated with Italian ownership have been significantly mitigated by the higher capitalization of these subsidiaries and the regulatory oversight provided by the German and Austrian governments. This regulatory oversight has led to reduced financial exposure of the subsidiaries to the Italian parent, and in conjunction with the strong capital ratios of the subsidiaries, leads us to view the risk more distinctly than UniCredit S.p.A. risk. Investcorp is a unique story due to its private equity focus and its administrative headquarters being located in the Kingdom of Bahrain.
As a below investment-grade financial institution, there are risks with Investcorp, such as liquidity and capital markets accessibility. However, we are currently comfortable with Investcorp due to its strong capital base, with core capital exceeding 21%, currently strong liquidity position, and management sound risk management practices that have the majority of the assets domiciled outside Bahrain. Apart from Investcorp, the remaining top 10 exposures are in financial institutions that are comfortably rated investment grade, and we view as strong, high-quality institutions. For our top exposures, if it is an HTM, as listed, we expect to hold these positions for the long term, unless significant credit changes occur. Where we have AFS flexibility, we will examine further strategies to reduce the maximum exposure of each issuer to between a half and three-quarters percent of the total portfolio value. In total, our top 10 positions have been reduced by 8.2%.
The average size of these positions has decreased to JPY 600 million as of March 2012, from JPY 700 million at the end of the first quarter of 2011. In aggregate, we are pleased with the progress we have made in reducing the concentration in our largest holdings. One of our highest priorities over the past year has been to reduce our exposure to perpetual securities, particularly those based in Europe. I am pleased to report that we made excellent progress and reduced our exposure by more than 33%, going from $7.3 billion to $4.9 billion. This included both Upper Tier 2 and Tier 1 securities. We executed on our de-risking program throughout 2011 and into the first quarter of 2012. You'll recall that at the end of 2011, we further sought to reduce our European exposures and identified JPY 150 billion of assets, primarily in European financials.
In the fourth quarter of 2011, we took a change of intent impairment charge in the fourth quarter. During the fourth quarter of 2011 and first quarter of 2012, we successfully implemented the program, disposing of more than JPY 130 billion of exposure. Within these transactions, we were able to opportunistically dispose of JPY 35 billion in two Tier 1 securities. As I mentioned on our fourth quarter earnings call, our strategy was to reduce the amount of exposure we had to financials in Europe where it made sense, and today, we've substantially completed this exercise. In light of continued risk to the financial sector, we will remain vigilant in managing our exposures, but I am very satisfied that we are in a better position given the current state of the world.
This slide shows greater detail regarding our financial and sovereign exposure on a global basis across Europe and within the PIIGS countries. As of March 31, 2012, we reduced our global exposure by $4.5 billion to about 23% of the portfolio as compared to March 31, 2011. In Europe, we reduced our exposure by $4.4 billion to 11.6% of our portfolio. And finally, we reduced our PIIGS exposures by $1.5 billion, and we have no remaining perpetual securities. Looking at our direct non-senior financial exposure in Europe, last year we had $10.2 billion in exposure, which declined to $5.9 billion as of March 31, 2012. This represents a reduction of more than 42%. While exposure still exists, any additional impact should be less than what Aflac has experienced over the last two years.
As I said, we are confident that we can manage through the volatility and our continued growth in assets and capital will strengthen our balance sheet. The market value of our assets has improved throughout the past year. A year ago, our entire portfolio's market value was slightly less than book value by roughly $400 million. As of this March, market value is $1.8 billion above book value. This reflects both tightening spreads over the past few months and an overall decline in yields in the past year. Although most of our financial measures are measured by book value, the market value of our assets provides us with a good gauge of performance relative to the market. In addition, the unrealized gains and losses impact our SMR, therefore, this positive trend has continued to our improving ratio.
Our overall portfolio has improved in the past year in just about every measure. Whether we look at quality, exposure across geography or sector, or types of instruments we hold, Aflac's assets have only strengthened to support our policyholder liabilities and enhance return for our shareholders. I am pleased with the results to date. Our portfolio has made significant improvements in its credit exposure with an increase in senior debt and a reduction to subordinated debt. You can see this trend developing since the early stages of the financial crisis. Our de-risking efforts to reduce subordinated exposure, along with the overall portfolio growth, have resulted in the subordinated proportion of the portfolio being cut in half versus 2009. Also, our exposure to senior debt has increased from about 75% in 2009 to more than 88% today.
As I mentioned, it is important to note the excellent job that Aflac Investments has done to be proactive in our de-risking activities. Prior to the financial crisis, our strategy of investing in private placements with a focus on European sovereign and financial institutions served us well. We were able to achieve diversification from the risk of investing too heavily in JGBs while obtaining higher yields by taking on credit risk. Just about every insurance company will accept a reasonable level of credit risk to achieve competitive returns. Aflac's investment practices, specifically purchasing privately placed securities, were unique amongst insurance companies, particularly those in Japan, who typically have much higher exposure to JGBs. When the European financial crisis erupted, we needed to adjust our credit exposure and risk accordingly.
We executed over 177 specific de-risking transactions between January of 2009 and March 2011, representing a reduction of more than $6.6 billion in book value. Additionally, we exchanged nearly $700 million of securities for more senior notes, thereby improving the overall quality of our portfolio. Our activities included reducing our exposure to Greece, Ireland and Portugal, including both sovereign and financial institutions. Between April and March 2012, the European crisis hit unprecedented levels, as I showed you earlier in my discussion of the European market. Therefore, we continued our risk reduction strategy with another 114 transactions representing $5.3 billion of reduced exposure across Europe. Let me point out that when I discuss Europe during my presentation, I am using the term in the broadest sense to include everything from the U.K. to the Nordic countries.
Since 2009, we have executed more than $12 billion of financial transactions to substantially reduce our European exposure. We believe our activity peaked in 2011, which certainly coincided with the heightened volatility in Europe. Through the first quarter of 2012, we reduced our financial exposure by $1.3 billion, though the majority of this was related to our impairments in the fourth quarter of last year and the subsequent disposal of the securities. While it is difficult for us to know for sure how long the European crisis will last, I do believe it will not be as challenging as last year, given the progress the Europeans have made on fiscal and monetary policies. Nevertheless, we will see some more volatility. Spain is a good recent example, with its continuing fiscal deficits and high unemployment rate.
While the possibility that Aflac's portfolio and investment results may be impacted by this volatility, our reduction in European exposures, coupled with the low investment grade puts on a number of those exposures, will likely result in a lesser impact than in prior years. I think we have done an excellent job of execution and significantly reduced our exposure, which provides a greater degree of comfort for our future performance. In relation to financials and sovereigns, our exposure to the PIIGS countries has been reduced to $2 billion with no financial or sovereign exposure to Greece or Portugal. Our exposure to Ireland, which is the Bank of Ireland, is senior debt. Although DEPFA Bank is listed as an exposure in Ireland because it is licensed and domiciled there, we view it as a German risk, given that it is owned by a German holding company.
While Italy will continue to experience some volatility, we are confident that our exposures will be fine, and we continue to hold them. Additionally, we believe Spain will continue to experience volatility, though we believe appropriate fiscal and monetary measures will be implemented. I'd also note that we have a big put on more than $380 million of our Spanish regional debt. As I mentioned earlier, we have no perpetual exposure in any of the PIIGS countries. We will continue to closely monitor our credits as well as the macro environment in the PIIGS countries. Should either our credit opinion change or we determine the geopolitical situation is too volatile, we will take further actions as appropriate. Aflac's operations in both the U.S. and Japan continue to generate strong cash flows.
In 2011, our cash flows almost doubled to more than $14 billion, and in the first quarter of 2012, we generated nearly $5 billion, a quarterly record. In 2011, we invested money in difficult credit markets and achieved a new money yield of 5.75% in the U.S. and 2.48% in Japan. These yields declined in the first quarter of 2012 to 4.8% and 2.03%, respectively, reflecting the lower level of interest rates, as I described in the earlier charts. The growth of our net investment income continues to be an important contributor to Aflac's earnings. As you can see, our net investment income has consistently grown, reaching $3.3 billion in 2011. Our challenge remains finding attractive investments with meaningful yields that meet Aflac's quality and diversification targets. As with all insurance companies around the world, declining interest rates remain a challenge.
Our declining portfolio yields reflect this low interest rate environment and our conviction to maintain high quality in our investments while resisting the temptation to stretch for yield. At the end of March 2012, the portfolio yield stood at 6.66% for the U.S. and 3.18% for Japan. When I joined Aflac's investment team, I initiated two comprehensive reviews to better position our company to be a world-class investment organization. I would like to take a few minutes to update you on both. One of the strategic reviews involved McKinsey, a leading management consulting firm. McKinsey undertook a comprehensive review of our investment capabilities both in Japan and Columbus. They conducted interviews with our investment staff and senior management and benchmarked our organization against a dozen industry peers, both in the U.S. and Japan.
Their focus was on investment process, risk management, organizational resources, including employee count, technology, and middle and back-office support, and how much we spend on the investment functions. The McKinsey team also reviewed industry trends, including investment and regulatory themes. This was critical to determine what our future vision should look like. We believe the results of this assessment will help us build the transformational roadmap of the investment area and obtain our goal of being a world-class investment organization. Our mission is clear, that is to be a world-class investment group to support the goals and objectives of one of the largest insurance balance sheets in the world. Historically, we have been focused on net investment income with appropriate objectives of diversification and risk control.
We see the future investment management process focused on economic returns, where we will seek to maximize risk-adjusted returns subject to our specific liabilities and capital requirements. We will be able to create liability benchmarks and invest with an eye towards outperforming the minimum return required to meet our liabilities within our capital and risk requirements. We believe this strategy will allow us to expand our investment universe while generating better returns at lower risk. Our new approach will require investment in our business and the development of new capabilities. However, I am confident these efforts will enhance returns beyond our current levels, supporting future earnings growth. To achieve our goal as a world-class investment organization, we are embarking on a new operating model that will be focused in six key areas.
These include defining the role and value proposition of the investment function, as well as building out a world-class investment risk management function. We will also utilize outsourcing as a mechanism to gain access to new asset classes, thereby tapping into some of the best investment management firms in the world. We will create a global organizational structure with top talent to pursue premier global investment opportunities. Finally, we will further develop our global technology and operations platform to support our robust investment activities. These activities will all occur within the framework of a comprehensive governance structure designed to protect the interests of our policyholders and shareholders, including the integration of our global operations within the regulatory environment of the U.S. and Japan. We also partnered with Goldman Sachs Asset Management, or GSAM, to perform a comprehensive asset allocation study for Aflac.
The work is highly customized around our specific liabilities and capital framework. As you can see, this is a comprehensive program. It begins with GSAM understanding Aflac's business model to include the nature of our liabilities, cash flow profile, and asset duration characteristics. The analysis takes into account the different features of our product offerings in both the U.S. and Japan. We will monitor our product mix to ensure the investments backing our liabilities are properly aligned. The program will also help us develop benchmarks for investment and risk purposes. Finally, the study will provide new insights into investment choices that go beyond Aflac's current investments. The project began late last year, and GSAM will submit their report and recommendations at the end of June. An efficient frontier depicts the lowest risk portfolios for a targeted level of expected return, subject to constraints.
For each point on the efficient frontier, there is a corresponding model portfolio asset allocation. These allocations are designed to maximize the benefit of diversification across asset classes and sources of risk and expected returns. Insurer characteristics drive a large number of constraints, such as ALM and regulatory capital. Moving toward the efficient frontier represents a more sophisticated view to the investment process. An efficient frontier analysis is a quantitative input to the investment process, but it is not the sole determinant of investment decisions. Moving toward an efficient frontier asset analysis is one way we are enhancing our investment management process. As part of the GSAM review, they will recommend a set of potential optimal portfolio solutions that are more efficient and effective than our portfolio today. Those solutions will be defined in terms of long-term return versus risk levels.
As you can see from the chart, the portfolio solutions will be designed to include new asset classes with higher return potential and lower risk, resulting in an overall portfolio that should outperform our current investment strategy. Because the analysis and report are not finalized, it is premature for me to provide you any estimates. I hope to be able to provide greater detail on our second quarter earnings call. As a result of both the McKinsey and GSAM reviews, we expect to build an investment program that adds significant value to the organization and ultimately our stakeholders. This chart represents the value chain of the investment function from the capital allocation process through risk and performance reporting. For Aflac, our investment function will focus on strategic and tactical asset allocation as key drivers to generating superior returns. Security selection is the third component of this value proposition.
Defining the strategic asset allocation, or SAA framework, starts with the understanding the risk allocation that management makes to investments, along with a careful analysis of our liabilities and product needs. Quantifying these two critical variables allows us to design an optimal SAA program that will generate returns in excess of those required to meet our liabilities. The SAA defines the menu of investment options, including strategic weights that fit our risk profile. We will then evaluate these investment opportunities and make tactical decisions regarding the timing of investments, along with tactical weights versus the optimal SAA. Similarly, there will be periods of underweighting for an asset class that is expected to underperform.
We will also have the flexibility to be neutral to our strategic weights or not invest in a particular asset class at all. Ultimate security selection will be executed by the Aflac investment team as well as outsourced investment advisors we may choose. Of course, all of this activity will be performed in collaboration with our risk management teams. We will employ a sophisticated risk management culture along with a process to measure our risk against acceptable levels. Risk management will be incorporated into our investment process while maintaining a continuous feedback loop to our management, board, and regulators, ensuring Aflac investments is making prudent choices. A world-class risk management process is crucial to our success in ensuring we keep our promises to our policyholders. Our robust risk management process will be designed to measure and quantify the risks we're taking, inclusive of our liability risks, benchmarked against capital volatility.
These risks will be transparent to our investment teams, as well as independently reviewed by senior management, the board of directors, and our ERM offices in both the U.S. and Japan. To accomplish this, we will utilize state-of-the-art tools to automate tasks and reports. This review framework will ensure that any risks we take are appropriate and measurable. We will apply sound methodology to assess the effectiveness of our investment team within our established risk profile. Ultimately, this process will develop and enforce a risk-conscious culture throughout the investment organization. As we expand our investment program, we believe it would be appropriate to have many of the investments in our new asset classes outsourced. I envision Aflac will retain core competencies in government and credit investments, both public and private.
In our strategic review, it is clear that building critical mass in each of the potential new asset classes listed on this slide would be costly and take years to accomplish. By building an outsourcing function, the investment team can focus on the merits of the asset class, and when we identify the right investment opportunity, we will outsource the actual implementation to some of the world's leading investment advisors to manage a portion of our assets. This will allow us to tap into their scale and expertise, acquire superior performance while assessing their intellectual capital. Based on our initial review, we believe that we will allocate up to 25% of our assets to outsourcing over the next five years. Keep in mind, this target will be continually reviewed.
We firmly believe that this new set of investment opportunities will allow us to build portfolios that have the potential to generate returns above our current levels. Our new mix of investments should also provide greater diversification and lower levels of risk. Our new organizational structure will create a global investment group led by an executive management team of seasoned investment professionals in key investment functions. Our strategies will be executed locally and led by our regional CIOs in both the U.S. and Japan. Global functions will include ALM and asset allocation, investment outsourcing, global credit, macro research, and global risk management. This new structure will allow us to focus on key investment functions with teams working under one global process, leveraging their expertise within their respective regions.
Our investment chief operating officer will be responsible for all global support functions, including technology, human resources, and regulatory issues, to name a few. This is a brand-new focus at Aflac, and the structure will ensure we have high-caliber middle and back-office support for the global investment teams. Our investment operations will be located in New York, Columbus, and Tokyo. As you can see, our front-office functions will be in New York and Tokyo. In addition to our regional CIOs, our New York and Tokyo offices will have portfolio managers, research and trading teams, as well as other global front-office functions. Columbus will continue to be an important location designed to support New York and Tokyo, providing risk management, infrastructure, and other support for the key investment functions. We believe the new organization will provide substantial benefits to our stakeholders by generating attractive returns with appropriate risk.
We currently estimate expenditures, including outsourcing, over the next three to five years on this new structure will be three times current levels. Importantly, however, we will be able to invest in our new infrastructure within our corporate EPS targets. As we implement new strategies, we will generate returns that ultimately enhance the value of the investment functions. In fact, our current estimates indicate that an additional 10 basis points above our current yields will cover the cost of the transformation. As Dan mentioned last night, we expect that during the third quarter, we will be able to initiate some of the recommendations from the GSAM project. For instance, we will look to buying public fixed income dollar-denominated assets and swapping them into yen. We will also begin our outsourcing program. With these new investment strategies, you should expect to see a gradual reduction to our allocation to JGB investments.
This will result in a more diverse portfolio that will provide us better returns and portfolio management flexibility. The transformation of the investment function is a key component to Aflac's long-term success. Having built investment businesses before and with over 30 years of investment experience, I look forward to leading our efforts in this transformation. As we move beyond the current state, we are clearly excited about the opportunities before us. This comprehensive build out is comprised of 35 different project initiatives. As you can imagine, it will include detailed planning around optimal staffing levels, along with finding top caliber talent to join our team. It will also require implementation of sophisticated IT resources to support that team and our vision. Keep in mind that the transformation I've outlined is not immediate, and as you can see from the slide, it will evolve over the next two years.
I've spent today's presentation outlining both the current state of investments and my vision for the future. The past year has been a period marked by volatilities in the market and therefore, continuing portfolio de-risking efforts for Aflac. I have no doubt that Aflac Investments will be a world leader and contribute significant value added for our policyholders and shareholders. I look forward to reporting on our progress regularly and sharing the improved investment results with you. Thank you.
Our next speaker is Ken Janke, who's spent virtually his entire career at Aflac and has also been a great mentor to me. He joined Aflac in 1985 as manager of investor relations and was promoted to senior vice president of investor relations in 1993. In 2010, he was promoted to Executive Vice President, Deputy Chief Financial Officer. Ken also chairs Aflac's corporate disclosure committee, and this morning he's going to discuss Aflac's capital position and capital management.
Thank you, Robin, and good morning, everybody. Let me begin this presentation of our capital position and capital management with a description of Aflac's organizational structure. Aflac Incorporated's principal subsidiary is American Family Life Assurance Company of Columbus, or Aflac, which is domiciled in Nebraska. On a U.S. GAAP basis, we report two operating segments, Aflac U.S. and Aflac Japan. For financial reporting, the Aflac U.S. segment includes Aflac New York, which is a subsidiary of Aflac. Aflac New York is domiciled in New York and subject to the insurance laws of that state. The Aflac U.S. reporting segment also includes Continental American Insurance Company, CAIC, which is domiciled in South Carolina. CAIC, now branded as Aflac Group Insurance, was acquired in 2009 as a subsidiary of Aflac Incorporated.
Aflac Japan, which operates as a branch of Aflac, is regulated by Japan's Financial Services Agency, or FSA, on a standalone basis. However, as a branch operation, the insurance laws and regulations of Nebraska also apply to Aflac Japan. These regulatory rules relate to operations, marketing, investments, and capital levels. It's important to remember that Aflac Japan's branch status influences the manner in which we manage our business, especially as it relates to our capital and our cash flows. Although we do assess capital levels between the two segments, our principal focus is how the state of Nebraska views our capital level for the entire Aflac Insurance subsidiary and how the FSA views Aflac Japan's capital on a standalone basis. The capital levels of our operating units are influenced by our desire to maintain appropriate risk-based capital or RBC ratios for each regulated subsidiary.
Aflac's RBC ratio comprises our Columbus-based U.S. operations and our branch operation in Japan. Aflac New York has to meet its own risk-based capital requirements. Aflac New York's RBC ratio has improved significantly, last year especially, reflecting increased capital that resulted from strong statutory net earnings. Aflac Group's RBC ratio declined over the last two years due to its very strong sales growth and subsequent capital strains. As you'll see later, Aflac Incorporated has contributed capital to Aflac Group in 2011 and 2012 to support this growth. For Aflac, our principal operating subsidiary, we want to maintain a risk-based capital ratio that supports our ratings and compares favorably to our peers. In 2009, we added an RBC ratio objective to our officers' management incentive plan compensation.
In addition, RBC ratios that we achieve over a three-year period are the basis for the vesting of all performance-based restricted share awards. Aflac's RBC ratio has been strong for several years. We intentionally reduced our ratio, though, from its 2006 level of 601 as we deployed more capital in 2007 and mid-2008 for the repurchase of our shares. In addition, our 2008 RBC ratio was negatively affected by realized investment losses and the 25% strengthening of the yen. Downward ratings migration on certain investments and fairly sizable capital losses lowered our RBC ratio in 2009, although this was largely offset by a $500 million capital contribution from Aflac Incorporated to Aflac. Our ratio improved significantly in 2010, reflecting strong surplus growth and an improved portfolio profile as measured by NAIC asset risk rating. Our RBC ratio benefited again in 2011 by the improvement in the NAIC portfolio ratings.
By de-risking certain lower-rated invested assets and reinvesting in higher-rated securities, we were able to enhance the overall ratings risk of our investments. There was no change last year in the ratio from a securities diversification standpoint for the number of issuers in our portfolio, and there was little change in concentration risk. However, our capital and surplus was negatively impacted by the extensive portfolio de-risking we undertook in 2011. The impact of de-risking on surplus was magnified last year because of limitations of statutory Deferred Tax Assets. In addition, the stronger yen-dollar exchange rate lowered the RBC ratio in 2011. Despite the decline from 2010, our 2011 ratio of 493 was at the high range of our corporate objective of 400%-500%. As we've discussed in previous years, the company action level is proportionately more sensitive to changes in the exchange rate than total adjusted capital.
That occurs because a significant portion of our statutory capital and surplus is effectively hedged by dollar-denominated assets in Japan. As a result, our RBC ratio declines when the yen strengthens because required capital increases at a greater rate than total adjusted capital. In 2009, approximately 73% of our statutory capital was dollar-denominated, reflecting the retention of more yen capital in Japan. In 2010, the portion that was dollar-denominated increased to 81%, and it was approximately 84% in 2011. As such, the RBC ratio sensitivity to the foreign exchange rate was little changed in 2011 compared with 2010. Using the data in this slide, every JPY 10 move in the annual exchange rate would have resulted in an average change of about 47 points in the RBC ratio last year.
As you know, the yen has weakened somewhat since year-end 2011, and had the year-end exchange rate been the same as it was at March 31, our RBC ratio would have been 512 rather than 493. We do have options at our disposal to mitigate future risks to the RBC ratio. As I suggested earlier, we've been very effective over the last few years at managing our investment portfolio in a way that lowers required capital by selling riskier assets and purchasing investments with higher ratings. Although this slide indicates we've completed this strategy, it is actually an ongoing activity. There are additional risk mitigation actions we can take that we have not yet employed. For instance, we could increase the portion of our statutory consolidated capital that is denominated in yen to help reduce foreign exchange risk.
This could be accomplished by simply leaving more capital in Japan, as we did in 2009, when we repatriated only 34% of our after-tax profits on an FSA basis. Alternatively, we could hedge a portion of Aflac Japan's dollar-denominated investments to effectively convert that portion into yen-denominated securities. These two approaches would increase the amount of our yen-denominated capital exposed to foreign currency changes. While these strategies were initially developed to accommodate a shock to the solvency margin ratio or SMR, they'd also benefit the RBC ratio. We're also in the process of finalizing a multi-currency line of credit equal to JPY 50 billion for the use of either Aflac or Aflac Incorporated. If we need to increase our regulatory capital level very quickly, a line of credit is an effective short-term tool we could use until a long-term solution is identified.
In addition to U.S. regulatory requirements, we must also meet the capital requirements of Japan's FSA. In that regard, Japan's solvency margin ratio is pretty similar to the risk-based capital concept. Like the RBC ratio, a minimum solvency margin of 200% is required. Our SMR, as you can see, has been very stable over the last three years under the old calculation method. Unlike the RBC ratio, the capital component of Japan's solvency margin ratio includes unrealized gains and losses on investments that are classified as available for sale. Because of the long-duration nature of our invested assets, this is the most volatile component of Aflac Japan's regulatory capital. The FSA implemented changes in the solvency margin calculation that took effect for fiscal year ended March 31, 2012. The basic formula remains unchanged.
For the numerator of the calculation, there are limitations on recognition of policy reserves in excess of cash surrender values. For the denominator, the assumed volatility is significantly higher for asset and interest rate risk under the new method. Because investments classified as available for sale are mark-to-market for FSA-based reporting, Aflac Japan's regulatory capital is sensitive to interest rates. This graph shows the relationship of our SMR on a new method to changes in 10-year JGB yields. Using the data in this chart, our 2011 solvency margin ratio of 547% would change by approximately 190 percentage points for every 100-point change in 10-year JGB yields. We focused last year on reducing the sensitivity of the ratio to interest rate changes, primarily through increasing the portion of the portfolio that's classified as held to maturity.
Like our RBC ratio, Aflac Japan's solvency margin ratio is also exposed to foreign exchange risk. With respect to the SMR, foreign exchange impacts us in two ways. First, assets denominated in any currency other than yen have a greater capital requirement in the SMR formula than do yen-denominated assets. Second, as the yen strengthens to the dollar, the translation of dollar-denominated assets results in fewer yen per dollar than would have otherwise been reported on an FSA basis. Therefore, the stronger yen produces a smaller contribution to capital than if the yen were to weaken to the dollar. Based on the data in this slide, every five yen move in the yen-dollar exchange rate last year would've resulted in an average change of about 36 points in the SMR.
If the year-end exchange rate was the same as the March 31 exchange rate, our SMR would've been approximately 585% last year rather than 547%. I should point out here that we do routinely stress our solvency margin ratio by exposing it to various increases in yen-dollar interest rates and/or a stronger yen-dollar exchange rate. We have also applied severe stress scenarios, including a replication of a Lehman shock event accompanied by significant defaults in Europe and a scenario of a substantial spike in interest rates. Although we do not view these scenarios as probable, they do provide a better understanding of the SMR sensitivity to those risks, and that process helps us focus on options to mitigate that risk. We have several strategies to reduce risk in the solvency margin ratio.
One of the strategies we employed to reduce interest rate risk was the JGB swap program that Eric referred to. We sold approximately JPY 500 billion or $6.2 billion of JGBs that were classified as available for sale and repurchased similar securities but designated those as held to maturity. You may also recall that in early 2011, we purchased $1.8 billion of Treasury STRIPS to take advantage of the yield differential over JGBs and enhance investment income. By the end of the year, we had sold all of the STRIPS at a pre-tax gain of $573 million, net of foreign exchange losses. Because of the greater capital charge on foreign-denominated assets, our year-end SMR would've been approximately 31 points lower had we not sold the Treasury STRIPS. We also enhanced our solvency margin ratio through a surplus relief transaction, which I'll describe shortly.
We're currently exploring strategies and costs related to hedging the risk of higher interest rates on the SMR. The other potential actions I referred to earlier in relation to the RBC ratio also apply to the SMR. We could enter into currency swaps to hedge the foreign exchange risk of Aflac Japan's dollar-denominated portfolio. It would obviously have negative implications for investment income growth, but it would be effective at enhancing the SMR in the event of significant yen strengthening. Finally, the line of credit we are establishing would allow us to provide capital support to Aflac Japan very quickly should there be an unexpected event such as a sharp rise in rates. Let me comment further on the surplus relief transaction that I referenced. I should note that this is not considered reinsurance under current GAAP or statutory accounting standards.
These types of transactions are a common practice for insurers operating in Japan for FSA-based reporting. Aflac Japan recognized approximately JPY 20 billion in ceding commissions in March of this year for policy issues from April 2011 through March 2012 for three of our products. These products include our medical product, EVER, and our cancer policies, Cancer DAYS and Days 1 Plus. The ceding commission will be amortized over six years, and the risk will be captured on Aflac Japan's books in April 2015 through March of 2017. We estimate that this transaction benefited our solvency margin ratio by approximately 20 points at March 31, 2012. We report our financial results on three accounting bases. The results of Aflac Incorporated and subsidiaries are reported on a GAAP basis, and we report our insurance subsidiaries on a U.S. statutory accounting basis. For Aflac Japan, we also report on an FSA basis.
As you know, GAAP accounting is accrual based and reflects the concept of a going concern. Statutory accounting is a combination of accrual and cash accounting, and FSA accounting is more cash based. Statutory and FSA methods are also more conservative than GAAP accounting, especially in the area of reserving and expense recognition. On an FSA reporting basis, we began using the standard reserving interest rate for third sector products in 2001, and in 2007, a standard mortality table for third sector products was introduced. FSA-based accounting has emerged to be the most conservative method in recent years. To give you a sense of how these accounting methods differ, let me show you a comparison of Aflac Japan's results for 2011 on the three accounting bases.
Although there is no separate statutory accounting-based entity for Aflac Japan, we have provided a condensed income statement for the branch to illustrate how results differ among the various accounting methods. As you can see, revenues emerge more quickly on an FSA basis due to the cash nature of that accounting method. In particular, Aflac Japan's FSA-based revenues have been significantly influenced by the strong sale of our WAYS product, in addition to the advanced premium payments related to customers who pay all of the premiums at once. At the same time, the sale of WAYS and the more stringent reserving for third sector products have been increasing Aflac Japan's benefit expense on an FSA reporting basis. Although Aflac Japan experienced strong pre-tax operating earnings growth on an FSA basis from 2007 through 2011, it was noticeably lower than our statutory and GAAP-based earnings.
With the differences in accounting methods as a background, let me turn to a discussion of Aflac Incorporated cash flows, which can be influenced significantly by Aflac Japan's profitability. Although Aflac Incorporated can receive cash from borrowings, the principal source of liquidity for the parent company is the operating unit. Aflac Japan may remit a portion of its after-tax net earnings, as well as allocated expenses to Aflac U.S. Aflac Japan also pays management fees directly to the parent company. Aflac U.S. remits allocated expenses and management fees to the parent and may pay a dividend to the parent within the limitations of our domicile state of Nebraska. The Nebraska statute references the restriction on dividends without prior approval as the larger of 10% of prior year's statutory surplus or prior year's statutory operating income.
The Nebraska Department of Insurance defines operating income as after-tax operating earnings less realized investment losses. Due to the significant investment losses incurred as a part of our 2011 de-risking activities, the maximum dividend allowable in 2012 without regulatory approval is $637 million, as determined by the 10% of surplus measure. The largest capital flow from Aflac Japan to Aflac U.S. is profit repatriation. Let me comment a little bit more on that topic. We operate under the principle of self-regulation when determining an appropriate level of repatriation in Japan. We are not required to seek prior approval from the FSA, but we do indicate the planned level of profit repatriation in the financial statements we file with the FSA for the fiscal year ended March 31. Profit repatriation is directly related to Japan's net income on an FSA reporting basis.
Our principal consideration when determining the portion of Aflac Japan's profits we will repatriate is the level of our solvency margin ratio. Assuming that we view our ratio as appropriately strong, we have generally remitted up to 80% of Aflac Japan's FSA-based net income, although this has varied somewhat from year to year. Prior to the emergence of the financial crisis in 2008, we repatriated 100% of our FSA net income to fund our share repurchase activities in the second half of that year. In the midst of the financial crisis and due to our concerns about the impact of spread widening on our solvency margin ratio, we elected to repatriate a lower percentage of net income and retain more capital in Japan in 2009. In 2010 and 2011, the percentage we repatriated returned to a more normalized level.
However, our FSA-based net income declined sharply in those years, primarily reflecting the decline in earnings related to portfolio de-risking. I'd like to point out that there are differences between the U.S. and Japan regarding the deductibility of investment losses. Realized investment losses are deductible from ordinary income in Japan, which is not the case in the United States. Portfolio de-risking has resulted in lower tax payments in Japan, and since Aflac Japan is a branch of the U.S. subsidiary, taxes paid in Japan generate foreign tax credits for the consolidated U.S. return. Investment losses in Japan have resulted in fewer foreign tax credits, which means the U.S. segment has been responsible for a greater portion of the cash payment of U.S. taxes since de-risking began.
We estimate that in the last four years, Aflac U.S. has paid an additional $730 million in taxes as a result of our de-risking activities in Japan. This increased cash burden on the U.S. segment has impacted the way that we've managed our cash flows in recent years. I'd like to emphasize, though, that once the de-risking losses are behind us, we expect to see a significant increase in FSA-based net income, and therefore, the potential for greater repatriation. Excluding net proceeds from financing activities, the largest cash flows to the parent company are dividends from our principal insurance subsidiaries. Typically, we declare and send a dividend from Aflac to Aflac Incorporated each quarter to fund the shareholder dividend. However, because of available cash at the parent company and our desire to maintain a strong RBC ratio, we dividended less to Aflac Incorporated in 2010.
In 2011, we only declared two dividends to the parent, totaling $282 million. As you can see, allocated expenses have been little changed over the last three years. Management fees charged by Aflac Incorporated to its subsidiaries represent the revenue stream to pay for services performed by executive officers, corporate-level functions, and debt management. Management fees have steadily increased over the last three years due largely to the increase in interest expense on our corporate-level debt. The expenses paid by Aflac Japan represent costs incurred at the holding company for the benefit of the insurance company. In general, all eligible expenses are billed to the insurance company's branch and other legal entities based on a percentage of revenue contribution. Any expenses that are disallowed in Japan, such as interest expense, are then borne in total by the U.S. operation.
In 2009, we had two debt issuances in addition to two small loan transactions. We issued senior notes in the dollar market in 2010 and Samurai notes in 2011. The primary purpose for these issuances was to refinance maturing notes. In each case, however, we had debt capacity beyond the maturing obligation, and we issued more than was required for the refinancing. Aflac Incorporated has additional sources of cash, which are reflected in the other line. These sources include investment income, as well as cash from the exercise of stock options. Aflac Incorporated's cash outflows are primarily to counterparties for operating expenses, interest expense, and debt repayment. In addition, Aflac Incorporated has provided capital support to Aflac Group to fund its rapid growth.
Finally, the parent company uses capital that is not needed to support the insurance operations to provide for a cash dividend to shareholders and for the repurchase of our shares. Aflac Incorporated's cash outflows can vary quite a bit from year to year, although operating expenses have remained relatively stable since 2009. Interest expense, on the other hand, has increased, reflecting our increased borrowings at higher rates of interest. In addition, the stronger yen increased interest expense related to our yen-denominated debt during this period. As I mentioned earlier, we are committed to funding the growth of Aflac Group, and in 2011, we provided $40 million of capital support to that rapidly growing business. As I indicated, we contributed capital to the Aflac subsidiary in 2009. Aflac Incorporated's cash outflows also include capital that we've deployed for the benefit of our shareholders.
During the financial crisis, we were very cautious about deploying capital. Although the quarterly cash dividend was 20.8% higher in 2009 compared with 2008, it remained unchanged until the fourth quarter of 2010. Similarly, we suspended our share repurchase activities until the fourth quarter of 2010. In 2011, we increased the quarterly cash dividend payment by 10%, and we purchased six million shares in the second half of the year. Based on the parent company's cash position at the end of 2011 and the proceeds from our successful debt offering in February, we have cash resources at the holding company to meet this year's cash needs. As such, we currently do not anticipate making any dividend payments from Aflac to Aflac Incorporated in 2012. I'd note that we currently estimate we will repatriate between 30 billion JPY and 34 billion JPY this year or $375 million to $425 million.
This is better than our most recent estimate of 25 billion JPY. However, we won't make the final determination of that amount for a few more weeks, and we currently expect this year's profit repatriation will likely remain in the U.S. segment. I would note that our current outlook for 2013 profit repatriation is in line with what we've communicated over the last several quarters. Assuming no material investment losses from June of this year through mid-year 2013, we would expect profit repatriation to reach about 90 billion JPY or approximately $1.1 billion. That also assumes that we view our solvency margin ratio as being adequately strong and able to accommodate potential risks. We expect allocated expenses in 2012 to be little change from 2011, although we are anticipating roughly a 5% increase in management fees.
Operating expenses at the parent company are expected to increase to about $70 million, reflecting higher anticipated retirement expense and lower parent company investment income. Interest expense will also increase, largely reflecting the greater amount of debt on our balance sheet. We've already sent $40 million to Aflac Group in 2012, which was the amount we had budgeted for this year. As I mentioned, our debt repayment in June has already been refinanced. We again expect to increase the dividend in line with this year's growth in operating earnings per diluted share before the effect of the yen. As has been the case for the last two years, we anticipate the board of directors will contemplate any increase in the dividend to be effective with the fourth quarter payment. These cash flow estimates assume we will not repurchase shares in 2012.
We will continue to reevaluate share repurchase as the year progresses, and we currently expect to have some resources available at the parent that could be used to buy back our stock later this year. This chart shows the cash position of Aflac Incorporated over the last several years and our estimate for 2012. Cash outflows have exceeded inflows to the parent in 2011 and 2012 due to lower dividends from Aflac. However, as you see, we currently expect to have a cash balance of $217 million at the end of 2012. I hope these last several slides have given you an idea of how we are thinking about our various cash flows and how we manage them. I would emphasize again that once the significant investment losses from de-risking are behind us, the strong cash flows from Japan will emerge again and should do so very quickly.
That will greatly enhance our ability to return capital to shareholders. Let me briefly turn to Aflac Incorporated's debt maturity schedule. As we've stated in the past, our overall preference is to issue debt in yen. Significantly lower interest rates, combined with yen cash flows to service yen-denominated obligations, make that market particularly attractive to Aflac. At March 31, approximately 49% of our outstanding debt was either yen-denominated or swapped into yen obligations. In 2009 and 2010, we issued debt in the U.S. dollar market because Japan's debt market was essentially closed to foreign issuers. Last year, the Samurai market provided attractive financing opportunities, and we issued JPY 34.2 billion of three-year and JPY 15.8 billion of five-year notes. In 2012, we returned to the U.S. dollar market and issued JPY 750 million of senior 5- and 10-year notes, which we subsequently swapped into yen obligations at very attractive rates.
Please note that in 2013, we have no debt obligations maturing. In thinking about Aflac's debt capacity, we focus on cash flows, our ratings, and our debt-to-total capital ratio. Our computation of debt to total capital includes long-term debt but excludes unrealized investment gains and losses in shareholders' equity. Because a large portion of our outstanding debt is yen-denominated while most of our equity is dollar-denominated, a strengthening yen increases our reported debt balance in dollar terms. As a result, our debt-to-total capital ratio increases somewhat as the yen strengthens, and the reverse happens when the yen weakens. Our debt-to-total capital ratio at March 31 was higher than normal because we have pre-funded the June maturity. Excluding the notes that mature in June, our pro forma debt to total capital ratio was 23% at March 31. Our capital management objectives are fairly straightforward.
We want to demonstrate a strong financial profile for the benefit of our stakeholders, especially our policyholders, by maintaining an RBC ratio in the range of 400-500. We would also like to keep our SMR in the range of 500-600. As we've said repeatedly, we're comfortable with debt to total capital up to 25%, and we want to support our current financial strength and debt ratings. For our shareholders, we want to return excess capital through steadily increasing cash dividend payments and the repurchase of our shares. I hope that this presentation has given you a better understanding of our capital position, cash flows, and how we're approaching capital management. Although we're another year removed from the depths of the financial crisis, we remain aware of potential risks to our capital position and our capital adequacy ratios.
We will continue to manage our capital in a way that demonstrates strong support for our policyholders and enhances shareholder value. Thank you.
We'll conclude the presentations today with Kriss Cloninger. Kriss joined Aflac in 1992 after spending 15 years as a member of KPMG's audit team for Aflac. He is President of Aflac Incorporated and Chief Financial Officer. Kriss will present a discussion today of Aflac's capital position and financial results. Kriss?
All right. Good morning. I'm going to conclude this year's meeting with a discussion of Aflac's financial results. Let me start with an overview of each of our segments. I'll go into more depth on the development of our operating ratios, the returns, and modeling assumptions. Aflac Japan remains the primary contributor to our overall operations. In the first quarter of 2012, Aflac Japan represented approximately 79% of our pre-tax insurance earnings. Please note that the segment and consolidated financial results for both 2010 and 2011 have been restated to reflect our adoption of new accounting guidance for deferred acquisition costs. As you know, the main components of total revenues are premium income and investment income. The largest component, premium income, has benefited from a predictable and stable source of renewal revenues.
In fact, we estimate that 88% of Aflac Japan's premium income will be derived from renewal premiums this year, with a balance coming from new sales. Aflac Japan continues to produce increasing revenues in yen terms. The growth rates have been declining somewhat in recent years due primarily to lower new sales contributions from 2006 through 2008. Slower investment income growth due to low yields. However, revenue growth rates began improving in 2009 and continue to improve, reflecting strong new premium sales growth, particularly in the ordinary product line. It's worth noting that the exchange rate can influence the rate of investment income growth when reported in yen. Dollar-denominated investment income accounts for about one-third of Aflac Japan's total investment income. As such, when the yen strengthens to the dollar, the growth rates of investment income, revenues, and earnings are suppressed in yen terms.
Of course, the opposite occurs when the yen weakens. However, there's no impact on a consolidated basis as reported in dollars. Japan's benefit ratios steadily declined from 2007 through 2010, due primarily to improvement in claims experience in our block of core health insurance, mainly cancer and medical. With the significant increase in the production of our child endowment and WAYS products, the benefit ratios flattened out and started to increase slightly in 2011. I'm going to cover that in some more detail a bit later. Total operating expenses as a percent of revenues have remained in a fairly narrow range for the last five years, but have trended downward, in part reflecting the influence of lower commission expenses on the child endowment and WAYS products. In addition, Japan's low expense ratio reflects efficient operations and a strong and stable persistency rate.
As a result, our pre-tax profit margin has steadily increased over the last five years. I consider this a significant accomplishment in light of the low level of available investment yields over the last several years. However, we expect this expansion to reverse slightly as we see further changes in our business mix and as low interest rates continue to impact our income statement. Total profits, on the other hand, should continue to increase as we expect higher revenue growth due to the larger premium per policy on these lower margin life products. The expanded profit margin over the last several years has enabled us to grow pre-tax operating earnings at a significantly faster rate than total revenue growth. In the near term, we expect to see revenues grow more rapidly and margin expansion to play a less prominent role due to business mix changes.
A little later, I'm going to give you more detail on the major product segments and their profit characteristics. Our other reportable segment, Aflac U.S., accounted for the remaining 21% of pre-tax insurance earnings in the first quarter of this year. Aflac U.S. revenue growth is largely driven by the rate of premium income growth. Premium income slowed to single-digit growth in 2008, reflecting a combination of weak sales due to economic conditions and lower persistency rates. Revenue growth in 2010 benefited from our acquisition of Aflac Group, and we've since experienced improved sales results. In addition, the persistency of our U.S. business improved by 140 basis points in 2010, and last year, our U.S. persistency rate improved again, rising by 260 basis points to its highest level in more than 10 years. Over an extended period of time, the operating ratios of Aflac U.S. have been very stable.
However, the benefit and expense ratios in 2010 were influenced by lapses associated with the loss of a large payroll account at the end of 2009. As a result, the benefit ratio declined, reflecting the release of benefit reserves associated with the lapsed policies. The higher expense ratio in 2010 reflected increased amortization of deferred acquisition costs, or DAC, for those lapsed policies. However, the net impact of the reserve release from the DAC amortization was a sizable benefit to the bottom line in 2010. In 2011, the benefit ratio returned to a more normalized level. Expenses as a percent of total revenues have been stable over the last five years. As a result, the profit margin has remained in a narrow range with the exception of 2010 when it benefited from those lapses I mentioned.
We expect the operating ratios to remain fairly stable to slightly improved in the future for Aflac U.S. Despite the very difficult earnings comparison to 2010, pre-tax operating earnings were down only slightly in 2011 and exceeded our expectations. We expect a continuation of improved revenue growth with stable margins that should result in sustained growth in Aflac U.S. profits. Although Aflac Japan is the dominant segment of our total company results, Aflac U.S. remains a significant and important contributor to our growth. Interest expense in 2011 was above the 2010 level and reflected higher debt balances and increased interest rates associated with our 2010 dollar-denominated debt issuance. Interest expense also reflected the impact of the stronger yen-dollar exchange rate on our yen-denominated interest expense.
Parent company and other unallocated expenses in 2011 were fairly consistent with 2010, and our consolidated tax rate has been very stable over the last several years. At the bottom of this slide, you'll see the per share impact from the changes in the average yen-dollar exchange rate for the last five years. The impact from currency fluctuation has tended to smooth out over the long run. However, for the last four years, our results on a per share basis benefited significantly from the strengthening of the yen. Our sensitivity to currency change has increased in the last few years, primarily due to the greater portion of our consolidated earnings that are derived from yen-denominated sources. In addition to net earnings, we believe that an analysis of operating earnings, which is a non-GAAP financial measure, is vitally important to an understanding of Aflac's underlying profitability drivers.
We define operating earnings as the profits we derive from our operations before realized investments gains and losses, the impacts of derivatives and hedging, and non-recurring items. We use operating earnings to evaluate our financial performance because realized gains and losses, the impact of derivatives and hedging, and non-recurring items tend to be driven by general economic conditions and events, and therefore can obscure the underlying fundamentals and trends in Aflac's insurance operations. As Eric discussed, our realized investment losses were sizable in 2011 due to portfolio de-risking. Investment losses in the first quarter of 2012 were significantly lower than the prior year. The impact from derivatives and hedging on net earnings are primarily associated with changes in the fair value currency swaps on certain investments that were required to report separately for accounting purposes and credit default swaps.
In the future, you'll also see this line reflect the change in the fair value of the yen-dollar swaps associated with our most recent bond issue. Now I'd like to turn to a more in-depth look at our operations in Japan to give you a better understanding of the benefit, expense, and profit characteristics of our various product categories. As you can see, Aflac Japan's revenue composition has changed over the last three years. In this chart and the many that follow, the core health and other category includes our core products, cancer and medical, along with several products that we're not actively marketing at present, such as care and annuity. It's important to note that the other component of this category represents less than 10% of total revenues for all years presented. The ordinary category includes WAYS, child endowment, and other life products.
As a result of our success in selling these products, especially through the bank channel, the contribution of the ordinary product line has grown significantly. In 2009, ordinary insurance was 9.7% of total revenues. By 2010, ordinary had increased to 15.2% of total revenue. For a number of years, the benefit ratio of our largest product category, CoreHealth, has been declining. This decline has been driven by improving claims experience, particularly in our cancer line, and a shift in the mix of business within this product category toward products with lower benefit loss ratios. As you'll recall that Japan's national healthcare system has been under severe pressure to reduce costs. The government's modified their reimbursement practices to pay more per day for shorter hospital stays, which has had the effect of significantly shortening hospital stays.
This shortening of stays has been particularly noteworthy on our cancer business, causing the ratio of actual to historical experience for Aflac to fall from about 83% in 2005 to 75% in 2010. This decline occurred at a much faster rate than we originally expected. That does mean, of course, that there is probably less room for additional reductions in average hospital days in the future. We do expect to see further improvement for some years to come. Claims for our medical products have also been lower than our original expectations since the products were introduced. Like cancer insurance, we expect this favorable experience to continue, yet there is somewhat less room for significant levels of claims improvement in these medical products because the average hospital stays for the non-cancer medical events are much shorter than they are for cancer treatments.
The other major factor influencing Aflac Japan's overall benefit ratio has been the change in business mix over time. Our efforts at broadening our product line have significantly changed our in-force business. For many years, the mix change trended toward lower benefit ratio products, including our medical products and health insurance riders. More recently, the business mix has been affected by the sales of our child endowment and WAYS products. Reflecting the trend of favorable claims experience, the benefit ratio for our CoreHealth products has steadily declined over the last several years, dropping from 59% of revenue in 2009 to 57% in 2011. The benefit ratio for our ordinary products has been higher than that of our health products, and has increased somewhat in recent years, rising from 73.4% of revenues in 2009 to 77.4% in 2011.
Now, this increase primarily resulted from the shift in sales to products with higher benefit ratios and higher premium rates, such as child endowment and our unique hybrid life product, WAYS. When you look at things in total, the higher benefit ratios of WAYS and child endowment have offset the downward trend in the health benefit ratio. Given the change in the mix of Aflac Japan's business, we expect the total benefit ratio will increase somewhat over the next two years. Although the expected benefit ratios of our ordinary products are higher than our other health products, the commission expense is lower for each of these products in relation to the total revenues. In general, products with higher benefit ratios have lower expense ratios, which can be seen in our ordinary business over the last two years.
The expense ratios for the core health block have been stable over the last several years, as there's been little change in the product mix within that block. The expense ratio for the ordinary category has dropped from 14.9% in 2009 to 11.2% in 2011, primarily due to the lower commission rates on child endowment and WAYS. While lower interest rates are impacting the profit margin for our ordinary products, we believe that the total profitability for these lower margin products is still within an acceptable range. As we said in the first quarter, we're currently in the process of evaluating the pricing of our entire product line using lower assumed interest rates. I can tell you that we will definitely be working toward repricing our ordinary life products over the next year.
Keep in mind that this takes some time because it involves the alignment of sales and promotional programs as well as system changes. We're also looking at different asset allocations, as Eric mentioned, that will generate better returns on the cash flows generated from WAYS. As the pre-tax profit margin for our core health products continued to increase, rising from 20.2% in 2009 to 22.6% in 2011, the profit margin of the ordinary business declined slightly from 11.7% in 2009 to 11.4% in 2011. In total, though, the overall profit margin increased from 19.3% in 2009 to 20.9% in 2011. With the strong sale of WAYS and its influence on our operating ratios and financial results, I thought it'd be valuable to review that product in a bit more detail.
In 2011, the new annualized premium sale of the WAYS product in Japan was JPY 42.1 billion, accounting for 32.9% of sales. This product is a traditional ordinary life product at its core with fixed premiums and fixed benefits. The average premium size for the WAYS product is about 10 times that of our health products. The average face amount is less than JPY 5 million per policy. What makes this product unique is that it includes a feature that gives the policyholder the option to convert some or all of the life insurance coverage to medical, care, or annuity coverage at a predetermined age on a guaranteed issue basis at premium rates in effect at the time of election. Consumers have various WAYS premium options to choose from, including five pay, ten pay, and paid up at a specific age.
Cash values are reduced by 30% when policies are surrendered prior to reaching paid up status. The issue age on these products has primarily been 50 and older for policies that are paid up at a specified age, and younger than age 50 for five and ten pay products. As we discussed last year, a customer may elect to pay all of the premiums up front in return for a small discount. We refer to this payment method as discounted advanced premiums or DAP, where the consumer pays all of the premiums up front at a discount, which is currently 1%. Aflac invests these funds and earns an interest spread over the discount, this increases the profitability of WAYS considerably. More than 80% of all new annualized premium sales of WAYS are sold with the discounted advanced premium.
This feature is attractive both to consumers because of the discount, and beneficial to Aflac. We also realized some profit enhancement from child endowment and WAYS by cross-selling other products. In fact, our recent experience has been that four additional cancer or medical policies are sold for every 10 child endowment policies in the non-bank channel, and eight additional cancer or medical policies are sold for every 10 WAYS policies in the non-bank channel. That enhances the profit margin associated with the sales to those customers. When WAYS became a larger portion of our new business, new money rates in Japan were higher than the rates we're seeing today. The profit margin for the WAYS products was about 20% of premium when investing WAYS cash flows at 2.5% new money, and it dropped to about 15% when new money rates are at 2.25%.
At 2% new money, the profitability of WAYS is approximately 10% of premium. At 2.5%, which we experienced roughly through the third quarter of 2011, the WAYS profits compare favorably to our core health products. The WAYS profitability is more sensitive to investment yields than our core health products. The internal rate of return, or IRR, as shown on this slide for this product, is also sensitive to new money rates. The IRR on a US statutory basis is 23% with 2.5% new money yield, and it drops to 10% with a 2% new money yield. Let me make a few comments about our pricing philosophy. For years, most of you have heard me say that we primarily price to achieve a certain profit margin expressed as a percent of premium.
My definition of profit is the excess of the present value of revenues, both premium and investment income, over the present value of policy benefits and expenses. That's at a cash viewpoint, which I believe best reflects the economics of the product and is the most appropriate basis for decision-making. This concept of profit does not depend on the accounting model used or any capital allocation process. We do look at internal rates of return, but we find that those rates of return are generally consistent with and move in the same direction as our profit measures. By IRR, we mean the discount rate at which the present value of the initial investment in a block of business, represented by accounting losses and capital requirements, is equivalent to the present value of profits on that block in subsequent years.
The one difficulty with using IRR is that results vary depending on the accounting basis or the capital allocation method used. In this presentation, we've chosen US statutory as the basis for computing IRR, as I believe that's the most common basis used by US life companies and the one you're most likely to see. I would note that for US statutory IRR purposes, it's our practice to establish the statutory reserves and to provide for additional capital at levels that would support a 450% RBC ratio. In addition, for IRR, we've chosen to provide a point estimate rather than a range to illustrate what we believe will be the most likely result. Obviously, the IRR will vary, just as the profit results vary within the illustrated range.
Given all these points, we believe that the best estimate for our IRR on our medical and cancer products is about 22%, assuming a 2% new money yield, along with U.S. statutory reserves. I'd also like to address another issue that's been on the fringes, the possibility of disintermediation with the five-pay version of the WAYS product. We believe the five-pay version has a greater risk of disintermediation than the other WAYS products because full cash values are available at the time the policy becomes paid up, which in this case is the end of the fifth policy year. In addition, five-pay WAYS is sold primarily to younger customers, so there's very little mortality charge during the premium period, which leads to higher cash values as a percent of premium at the end of that five-year period.
We've analyzed the possible strain on cash flow if interest rates rise and policyholders decide to take their cash value when the policyholder becomes paid up. Our projections show that our estimated investable JPY cash flow is more than adequate to fund five-pay WAYS cash values, even if 100% of the policyholders lapse their policy when it becomes paid up. Obviously, it's highly unlikely that every owner of a five-pay WAYS product would lapse at the paid-up date. However, this extreme scenario demonstrates that we'll not be required to sell assets at losses to fund cash surrender values if interest rates increase. In addition, a significant increase in policyholders electing to cash out would likely coincide with a significant increase in new money interest rates. Under this scenario, we would experience an overall benefit from investing at those higher rates.
In this slide, we've assumed that there's a 100 basis points increase in interest rates, and it shows that we'd benefit from an increase in investment income of approximately JPY 3.7 billion in the first year. Assuming that all the investments occur at the middle of the calendar year. Investment income would increase by more than JPY 11.2 billion in the second year, as we receive the benefit of two years of those higher interest rates. In the third year, the impact grows to more than JPY 18.2 billion. As I believe most of you are aware, we're limiting sales of the five-pay version of the WAYS to mitigate any potential disintermediation risk in the future. Some of you have asked why we're selling WAYS and not selling single premium whole life.
I wanted to take a little bit of time to explain some of the differences, and to indicate why we decided WAYS was the best product for us to offer. First, let me start by outlining what single premium whole life insurance is in Japan, sort of generically. The policyholder pays the full policy premium at the issue date in exchange for life insurance coverage during the insured's lifetime. However, single premium whole life in Japan has initial predetermined periods, such as five to 10 years, where the death benefit and the cash surrender value is capped at the single premium amount that's actually paid. Now, this means two things. First of all, during this predetermined period, if the policyholder dies for any reason other than an accidental death, the policyholder only receives a return of premium paid and not the face amount of the contract.
Therefore, single premium whole life products in Japan effectively do not provide insurance protection during the predetermined period, except in the instance of accidental death. Second, during this predetermined period, if policyholders lapse or surrender, they're entitled to a maximum of a return of premium paid without a surrender penalty. This does in fact pose a significant disintermediation risk for the insurer in the event interest rates rise. After the predetermined period, the single premium whole life policyholder would be entitled to the insurance face amount for death at any cause, and a cash surrender value that increases over time. There are two important distinctions between WAYS and single premium whole life that I'd like to point out. For this illustration, we'll be using the five-pay WAYS.
First, as it relates to the life insurance protection, the death benefit for WAYS is the full face amount, which significantly exceeds the premiums paid, and that benefits consumers. Second, there's a 30% surrender penalty with WAYS during the premium paying period that provides a significant disincentive to policyholders to lapse during this period. As I mentioned before, the surrender penalty protects Aflac from early surrenders. This chart shows the relative return to the policyholder as a percent of cumulative premiums paid for a single premium whole life product, a five-pay WAYS product with discounted advanced premium, and a regular annual premium five-pay WAYS where there's no discounted advanced premium. Generally speaking, life insurance products in Japan are only allowed to have surrender charges during the regularly scheduled premium paying period.
Because all of the premiums for single premium whole life are paid at issue, the full cash surrender value is available to the policyholder with no surrender charges immediately after issue. If the policyholder surrenders a WAYS product, though, the policyholder receives premiums not yet applied to their policy, plus the cash surrender value. The WAYS policyholder paying with regular annual premium has no advanced premium and only receives cash surrender value if they lapse. Both WAYS policies become fully paid up at the end of year five, at which time the surrender charge disappears. The value of the surrender penalty is largest on WAYS later in the premium period when the risk of disintermediation may be more likely just because of the passage of time.
You can see the DAP policy has a higher percent of cash value available after five years because the 1% discount slightly reduces the total premiums paid. The purpose of this comparison is to point out that the WAYS product is more protected against the risk of disintermediation than single premium whole life, primarily due to the surrender charge. I just want to point out that these product features lead to significant differences in the underlying profitability between the two products, and it illustrates why WAYS is a better option, we think, both for consumers and for the issuing company. I noted earlier that we're pursuing repricing of our ordinary product line to accommodate the low interest rate environment. Modifications to our premium rates take time due to systems and distribution issues, among other factors.
The purpose in repricing our ordinary products is to respond to changes in available investment yields in order to maintain margins. However, the Japan standard interest rate, which is the rate required for determining reserve values, also influences our thinking on product repricing for new policy issues. That rate is set for each FSA reporting period, and it applies to all business issued from April to March for that fiscal year. That's the fiscal year Japan uses. The rate is based on the average 10-year JGB rates over a period ending in September of the prior year, using the lesser of a three-year average or a 10-year average. If the average of the 10-year JGB yield is greater than 1.026% from June through September of this year, the standard reserving rate will remain at 1.5%.
The average is less than 1.026%, which it's presently less than that today, the rate will drop to 1% effective for business issued April 1, 2013 and later. Based on previous industry experience, this event would likely prompt a round of repricing most products in the Japanese market, not only by Aflac, but by others, most likely, in order to avoid additional surplus strain associated with the higher required policy reserves associated with lower assumed interest rates. Let me comment on our return on equity results. For this illustration, we've used segment profits and segment equity computed on a GAAP basis. In addition, when calculating operating ROE by segment, the shareholders' equity component was adjusted to remove the impact of unrealized gains and losses. Aflac Japan's return on equity is influenced by business mix, investment yields, exchange rates, portfolio de-risking, and capital considerations.
ROE on an operating basis has remained within a narrow range from 2007 to 2011. For the Japan segment total ROE, the impacts of de-risking and capital preservation are apparent in 2011. We anticipate that Aflac Japan's ROE will remain relatively stable over the next several years. Aflac U.S.'s ROE is also influenced by market conditions, portfolio de-risking, and capital considerations. On both an operating basis and a total basis, ROE in the U.S. has remained within a relatively tight range from 2007 to 2011. In 2008, operating ROE increased as dividends to the parent significantly exceeded profit repatriation from Japan in order to support increased levels of share repurchase. For total ROE, this impact was mostly offset by realized investment losses. We also anticipate that U.S. ROE will be relatively stable over the next several years.
On a consolidated basis, Aflac's business model has generated industry-leading returns on equity for many years. From 2007 through 2011, Aflac's consolidated ROE, not operating but total, averaged 19.3%. Excluding realized investment gains and losses from earnings and unrealized gains and losses from equity, our operating ROE averaged 25.2% over that same period. While the effect of lower interest rates has been reflected in our financial statements, our returns remain strong reflecting the high profitability of our insurance operations. I'd like to point out that our corporate returns on equity are generally higher than our segment results due to our capital structure and our capital management practices, primarily share repurchase. Our focus for the future is on maintaining strong fundamentals in our core businesses and producing strong earnings growth.
Our goal for 2012 is upwardly restated to reflect adoption of the new accounting for DAC, is to increase operating earnings per diluted share by 3%-6%, excluding yen changes. As you heard from Dan last night, our objective for 2013 is to increase operating earnings per diluted share by 4%-7%, excluding the impact of the yen. You may have also heard him say something about 5%. I won't go into that at the moment. It's also our objective to produce operating returns on average shareholders' equity of 22%-26% for this year and next. We believe those objectives are achievable and are based on reasonable assumptions. As I take you through the next several slides, I want to remind you that the numbers I'm showing you are modeling assumptions.
They primarily come from the people preparing the models, not necessarily the people that are in charge of the sales or the other aspects of operations. They're based on me looking at the business saying, "What have we done? What's reasonable? What do I want to do sensitivity tests for?" The marketing people aren't responsible for these assumptions, just me. That's all to say that these aren't necessarily our official operating objectives for either this year or next. They're just used to set our financial targets. For Japan, our sales assumptions for 2012 is that new annualized premium sales will be up 5%-10% and flat to down for 2013. Just to reflect for a moment, if I had put it in there, we expect 2012 Japan sales to be up 40% or 50%, you'd have laughed me off the stage last year.
That's why I just say they weren't done with the marketing season. For new money yields, we've used a range of 2%-2.5% for 2012 to 2013. It's important to note that we're seeing an increase in overall market investment yields. That is, we don't expect that risk-free interest rates will improve. Rather, we are assuming that we'll have a different asset allocation next year, as Eric discussed, particularly for Aflac Japan's investment cash flows. We anticipate this will enable us to achieve better returns. This year, in this presentation, we decided to provide some more detail to support our guidance. You've been asking for it, so here it is. Each product category shown on this slide reflects ratios for benefits, expenses, and profit margins to total revenues as reflected in our corporate model that we use to develop our guidance.
The ratios represent the projected two-year average ratios for 2012 and 2013. There are going to be trends and seasonality reflected in our actual periodic quarterly results. At the end of 2013, we expect that if we look back, the actual results for these ratios will fall within these ranges over the two-year period, 2012 to 2013. Note that in total, we expect the benefit ratio will increase slightly, while expense ratio will decline from the level we saw in 2011. We project that the average profit margin will decline slightly from the 20.9% margin we experienced in 2011. Our actual results will obviously vary based on differences between our assumed volume mix by product category. When you do your own modeling, you can use your own judgment in estimating our aggregate results.
I hope you get the benefit from this information in gaining additional insight into how our business varies and how we develop our guidance. For Aflac U.S., we're assuming sales are up 3%-8% in 2012 and flat to up 5% in 2013. Again, I'll emphasize that these are simply modeling assumptions and sensitivity testing assumptions. In terms of new money yields, we've assumed we'll be in the 3%-4% range for both years. Our new money yield assumptions in 2012 reflect the shorter duration, higher quality purchases in sectors other than financials that Eric discussed. We anticipate persistency will remain fairly stable in 2012 and 2013. This next slide shows the anticipated two-year average ratios over the period 2012-2013 for Aflac U.S.
For Aflac U.S., we didn't break out the product categories as most of our U.S. products, including those sold through Aflac Group, have similar characteristics from a financial perspective. In setting our corporate objectives, our modeling assumes no share repurchase for the remainder of 2012. We believe this is conservative. While you heard from Ken that our profit repatriation this year has been impacted by de-risking activities in 2011, it's important to note that we have been exploring additional opportunities to mitigate the cash flow constraints associated with those activities. We believe that the implementation of these strategies, coupled with no material investment losses, will enable us to restart share repurchase at least in the fourth quarter of this year and allow up to $900 million to be applied to share repurchase in 2013.
We continue to view share repurchase as a preferred means of deploying capital to our shareholders. Historically, it's been our policy to increase cash dividends to shareholders generally in line with the growth rate of operating earnings per diluted share before the effect of foreign currency. Although we were cautious about increasing the dividend during the financial crisis, we believe it's appropriate to return to our historic dividend policy. Therefore, we have assumed that we'll be able to increase cash dividends by in the range of 1%-10% for 2012 and 2013. In November 2011, a corporate tax rate reduction was passed by the Japan Diet. The first phase of that rate reduction occurred in April of this year, and the rate will drop again in April 2015. Although there have been discussions of a possible corporate tax cut in the U.S.
Election year politics here make a corporate tax rate reduction unlikely in our view in the short run. As such, we've assumed that 2011 corporate operating tax rate of 34.6% will remain in effect for both 2012 and 2013. In addition, we're assuming no significant change to our capital structure compared with year-end 2011. As Ken mentioned, we continue to view 25%, that the capital ratio is a target and in all, probably a ceiling. All of these assumptions reflect our best estimate of factors that can impact future financial results. We believe they're reasonable, if not conservative. I want to remind you again that there are risks that can affect our future financial performance. We regularly assess those risks and describe them in our SEC filings. We'd encourage you to review them as well.
The highlighted line on this chart represents our 2012 objective for operating earnings per diluted share before the impact of currency. If we produce earnings growth of 3% this year before the effect of the yen, we would report $6.46 in operating earnings per diluted share. If the yen averages 80-85 for the full year, the reported operating earnings should come in between $6.21 and $6.45 per diluted share. Based on the mix of earnings between Aflac Japan and Aflac U.S., we expect that this year, a one JPY change in the foreign exchange rate should equal approximately $0.05 per share in annual earnings. As we approach mid-2012, there are several priorities we are managing toward. Our first priority is to complete the enhancement of our investment function and to optimize our consolidated portfolio using more asset classes to provide for better aggregate returns.
As you heard from Eric, we've spent a significant amount of time assessing the current state of the investment area, and we have a roadmap to help guide us to a better future state. We're committed to transforming the investment department and are putting significant managerial and financial resources at work to see that we build a best-in-class investment organization. As Ken discussed, we'll continue to seek to enhance our capital management function as well. We've been proactive in our recent capital management initiatives, and we'll continue to evaluate options to optimize how we manage and deploy capital. As is always the case, we're committed to achieving our targets for operating earnings growth. We believe our targets for 2012 and 2013 are reasonable given the negative impact on investment income from de-risking as well as the low interest rate environment.
At the same time, we believe they're achievable, and we will continue to look for opportunities to enhance our future rates of earnings per share growth. We're also focused on maintaining our industry-leading returns on shareholders' equity. Our top financial priority remains to ensure that we meet the financial obligations we have to tens of millions of individuals who are covered by our policies in the U.S. and Japan. As such, we want to produce risk-based capital and solvency margin ratios that are consistent with the management objectives that we've set. Additionally, we plan to continue our consistent track record of growing our cash dividends. Finally, we want to strive to resume our track record of providing consistent capital returns to shareholders through share repurchase activity.
I hope that today's discussions of Aflac operations in Japan and the U.S. has given you an increased understanding about the opportunities we see and how we approach our business. I also hope that you have a strong sense of our commitment to thorough and transparent disclosure. We believe it's important to present information to investors in the same manner in which we actually manage our operations. I want to assure you that we, as we always have, will maintain the highest degree of integrity in the way we manage Aflac and report our financial results. That's the end of my presentation. Now I think Robin will tell you about the next part of the program.
Okay. We're going to take a quick little break while our speakers set up here and get ready for Q&A. We're also going to have Charles Lake, Chairman of Aflac Japan, and Sue Blanck, Executive Vice President, join us up here on stage. If you could make the break a quick 10 minutes, maybe more like five, you'll have more of a chance to ask questions.
Let me come down here.
Turn it on.
Did I do a tip between?
On.
Okay.
Michael, who is that? Hey, Kr iss, I need to talk to you about that. Hot mic. She said it gets closer to large. Nine versus four just doesn't pass the smell test for an old communist like me.
I'll follow up with you.
I was getting closer.
No, I'm not.
Yeah, I know. It's not a straight line, Lee. It's like you're going to zero, you're up here.
I got that. I'm just saying, I'd want to know the next one, if it's four and then nine.
Right there, that's you two. You're almost in zero spread. If you were, you'd be over in the worst spread, but you're out in the spread. You're not negative, maximum.
Price of 185, like 15 basis points.
Okay.
Difference than at two and a half or 65 basis points.
So-
It's not linear.
Okay.
That way.
What's the next one?
We've got five.
How much? Okay. My other question was, is what you look at
Okay, we need everybody to take your seats, please. Before we begin with Q&A, let me just remind you quickly of three rules. First, please state your name and firm, as this is being webcast. Second, please wait for the microphone before you ask your question. Third, we'd like you to limit yourself to one question and one follow-up so that everybody has a turn. Okay. Tom?
Thanks. Thomas Gallagher, Credit Suisse. Kriss, first question on the Japan earnings guidance, or rather, at least some of the assumptions that you gave behind it. I guess the margins were a little under 21% in 2011. Your guide for 2012 and 2013 is a fairly broad range, 18.5%-20.5%. I think your qualitative comment was potential very small margin degradation. If I took the bottom end of the range, that would seem like pretty high margin contraction. Can you give a little color in terms of how you see that practically playing out? My follow-up is, can you talk a little bit about what's your top-line expectation in Japan? What kind of revenue growth is embedded in that assumption?
How much do you expect earnings will grow in Japan over the next few years, just in terms of absolute dollars? Thanks.
All right. We all have to remember to press these little deals so our microphone comes on. That's the first challenge. Tom, the business mix is the reason we put the range of ratios in there. I have a profit margin by segment. This is the first time we've given you segment guidance. For CoreHealth, I would say 21%-23% profit margin. That is based on about a 1% spread in benefit ratios, et cetera, 1% spread on expense ratios. The overall 18.5%-20.5%, that'll depend on the mix between ordinary and health. As I kind of alluded to in the speech, boy, it's been hard for me to realistically predict what the mix of business is going to be for new business.
The overall message I tried to give last year and the one I'll continue to give to some extent this year for my own part, perhaps Japan management would like to comment on it a little more, is the ordinary products are going to generate the higher revenue growth at lower margins, the total profits are going to grow pretty well. The core health products probably have more predictable revenue growth, which I'd say is I'd hope it'd be 3%-5% revenue growth. That's kind of what I'm used to in the core health segment. The ordinary growth's going to benefit from the business we've sold recently. As you sell a product, you don't recognize all the premiums immediately. Our first-year premium is going to grow next year based on what we sold this year.
That's going to contribute to the revenue growth in that segment. Our overall guidance for the corporation assumes revenue growth based on these kind of sales results. I think the overall revenue growth is going to be in the 7%-8% for Japan, maybe 7%-9% if sales continue strong for the rest of this year, which at least for the next quarter or so, we anticipate they would be. Let me stop there and see if other people have comments. I just want to emphasize that I've given you these segments, and you're going to have to apply some of your own judgment to get to where the aggregate numbers are.
Sure. Just a quick follow-up, Kriss. What kind of earnings growth are you expecting in the Japan segment then for 2012 and then 2013?
The Japan segment earnings growth is relatively modest. I think it's more in the 3%-5% range. With the low interest rates continuing, say at the 2% level, which is kind of my core assumption, I think there's still some impact of investing at low interest rates. It's got to work its way through the comparison, and that keeps the earnings growth depressed for some period of time after you get these significant cash flows. If I'm trying to recall correctly from our modeling, I think it's more in the, I'd say, 2%-5% range for Japan segment taken as a whole.
Thanks.
Randy?
Thanks. Randy Benner with FBR Capital Markets. I guess this is probably for Ken, but wanted to just clarify the comments on repatriation. You said JPY 30 billion-JPY 40 billion, and that's up from JPY 25 billion, but that would really assume no material credit loss in the second quarter. Asking if that's the case, and I guess by extension, that would mean that the disposals you noted in a lot of Kriss' comments did not generate incremental credit loss. Is that the takeaway?
Yeah. First, my comment, I hope I didn't misspeak. My comment was JPY 30 billion to JPY 34 billion, which was up from JPY 25 billion as our previous estimate. That does assume everything that we know right now as far as what would impact FSA-based financials. We expect to file those financials roughly mid-June. If you're looking at the risk to the repatriation of JPY 30 billion to JPY 34 billion, there are more losses that would emerge between now and, say, mid-June when we actually file our financials. Any losses subsequent to that would eat into next year's repatriation.
Yeah. Understood on that. We would plan credit losses against the buyback. I guess the follow-up would be, if we think about the kind of $2 billion or so of PIIGS related credit that's remaining, what would need to change? I think the commentary was that Aflac's okay with that as long as the credit environment doesn't change. When we're watching this from the outside, what would make the credit environment change? Would we need to see spreads go to levels that we saw last summer and fall? Is it changing now? Kind of understanding what would change that mindset would be helpful.
I think given our remaining exposures that we have, and particularly in the PIIGS, we've eliminated the perpetuals, but there's still some financial exposures. I think it would take, frankly, a complete collapse of the financial system and a systemic change in Europe with no funding for liquidity, a bank failure, a Lehman type event or two for us to have to impair or start to try to dispose of more assets. Absent that, clearly, we're going to go through some volatility in Europe, but I think the portfolio can withstand that, and anything that should arise should be less impactful than you've seen in prior years.
The $2 billion that's left of PIIGS, you feel like that's small enough that you can ride that out relative to the rest of the portfolio? Is that fair?
In essence. If there's one or two credits, perhaps, where we say, "Gee, we might make a relative value decision here," given the volatility and eliminate, yeah, you could see a loss or an impairment, but nothing of the magnitude that you saw in 2011, 2009, or 2010.
Okay, thank you.
Mark?
Sure. Question on FSA earnings. If you look at FSA earnings as a ratio to statutory, U.S. statutory earnings or GAAP earnings, they're at a substantial discount. They've been that way for a long period of time. That obviously drives repatriation potential. Question is, at some point, you should hit a level where that starts to compress. What I'm asking is, if you took a normalized sales environment over the next few years, I don't know, pick a number, zero to 5% or what have you, how would that FSA earnings compare to statutory or U.S. GAAP over time? Theoretically, that's kind of what's driving repatriation.
The main difference between the FSA and stat earnings are associated with the low standard interest rate in Japan. The 1.5% requirement for reserves produces significantly stronger reserves than what we're required to use for U.S. statutory. Particularly when you get large amounts of new business that are reserved at those lower interest rates, it's going to create a lower FSA earnings. As you point out, though, it's got to reverse at some point in time. When does it start reversing? Well, it takes a while, but it ultimately does start to reverse. Profits ultimately come back to cash, that's what you ultimately get. I would say it's not going to happen really quickly necessarily. Those FSA earnings are running about 60% of stat right now.
As I've thought about it in the context of repatriation and payout ratios and the like, I'd just like to say that historically, we've paid out, in a sense that we've repatriated 80% of our FSA earnings. If you look at a payout ratio relative to another metric, that reduces the so-called payout ratio. Just in terms of our go-forward position on share repurchase, I think we would like to get back to the point where we're repatriating at least 80% of our Japan FSA earnings. Japan FSA earnings are the first thing we look at for repatriation. I will say that for the purpose of measuring solvency margin, there's another little wrinkle there in the sense that we're allowed to count as capital a portion of the excess of our policy reserves over our cash values.
This is getting a little more in depth, and it may not be exactly part of your question, but I wanted to get it out there as part of this analyst meeting. If you're allowed to recognize as capital some amounts that you're not allowed to recognize through earnings, there may come a point when FSA earnings are the first thing we look at. If we look at solvency margin ratio in Japan as being the primary controlling factor for what we can repatriate, then there are some other things that get involved with some of these things that count as FSA capital that aren't directly related to FSA earnings. I'll say that that is becoming more and more likely as we build the solvency margin.
I think Ken mentioned the notion of us being under a self-regulation concept, and our first priority is to maintain an appropriate SMR ratio. The FSA earnings aren't the controlling thing in repatriation, in my view. Solvency margin is the number one priority. We've got a lot of moving pieces that ultimately impact what we have available as repatriation there.
Great. Eric, you talked about 10 bps as the incremental expense related to the build-out of the investment. Was that on the whole portfolio or was that just on kind of new money?
Sorry. That would be on the whole portfolio.
Okay, thanks.
James?
Jay Gelb from Barclays Capital. I had two questions on the new sales growth guidance. The first for Japan is what type of quarterly wave sales are now embedded in your Japan sales growth guidance after the cap is in place for new sales?
Koji Akutoru, you want to answer that?
Right now, percentage year-over-year on a quarterly basis, we have done in the first quarter, 281.1%. In the second quarter, we are assuming 160%, and in the third quarter, we are assuming down 0.8%, and in the fourth quarter, down 4.7%.
Thank you. Then for Paul, if the economy is improving in the U.S., why is the range of sales growth in 2013 for the U.S. less than it is in 2012?
As Kriss mentioned, the 0%-5% is really more of a modeling assumption than it is anything else. It's the same modeling assumption that was placed in, you saw the previous year where we came out with a 3%-8% target for this year. At this point, I would not say that's future sales guidance. I'd say that's a conservative look at what's going to happen going forward. The reality is there are some things in the business that we want to be mindful of, including the economy. I don't think the economy at this point, especially for small business, has turned. I am more optimistic that we've hedged ourselves better as a result of the upper-end broker market strategy and the things that we're doing to go after America's largest businesses. At this point, I don't think 0%-5% is any direct indication.
I think it's more of a conservative approach.
Ed.
Thank you. Ed Spehar from BofA Merrill. I want to ask about interest rate risk, rising rates. I think, Eric, you said that you were comfortable that the portfolio shift from available for sale to held maturity was sufficient at this point to manage that risk. I want to go to the chart that Ken has that shows the solvency margin going from, I think it's 547 to 265 if the 10-year JGB went up by 150 basis points. I guess the question is, how is that an acceptable risk? If we went to another company's presentation in the U.S., they told us that their RBC ratio would go from 450 to 200 if the 10-year treasury went up by 150 basis points, I think a lot of us would flip out.
I don't know what's going to make rates rise in Japan, I think anytime you have a 10-year asset that yields 1%, I don't think we can talk about 150 basis points up as an out-of-hand ridiculous possibility.
I'll start the answer, Ken may add some comments. We've made significant improvement by doing the actions we took over the last year. On a relative basis, if we'd shown you that same chart a year ago, the SMR ratios would have been at unacceptable levels, entirely unacceptable. By implementing those strategies, we've actually embedded great protection versus where we were. It is relevant to JPY interest rates rising in Japan. U.S. rates rising do not impact us. From an RBC standpoint, rates rising really don't affect, in any great way, the RBC because that's more affected by credit ratings. Secondly, despite the work that we've done over the last year, we continue to evaluate other strategies. Our focus was let's get this under our belt, but let's continue to stress test the portfolio.
At this point, any additional interest rate mitigation strategies would not be more into HTM, maybe a little bit at the margin, but rather, is there some sort of interest rate hedging strategy we need to put on the portfolio as an overlay? With the work we've done over the last year, I have the flexibility not to worry about the first rise of 100 basis points because I've got that protection built in. If I'm going to buy some options to protect, I can really buy them out of the money now. That's the analysis we're doing to see if that additional protection is worth it, the cost benefit for us. That's something we're working on.
Did you want to say something else there?
Yeah, I was just going to say that I thought though that 100 basis points up would still bring the SMR well below your 500 to 600 target. Maybe I'm misunderstanding.
No, you're right. Using this sensitivity, if you assume we haven't finalized, as I mentioned, our FSA numbers within the 500 to 600 range. We currently think that the March 31 SMR will be toward the high end of our 500 to 600 range. The sensitivity based on last year's number would have shown a 190-point move for 100 basis point rise. If you assume 600, it takes down to 410. This chart, I think the way you're looking at it is really consistent with what I had described as not a terribly probable scenario of a huge spike in rates in a fairly short period of time. We do want to make sure that we have tools at our disposal to accommodate that risk if it emerges. Some of which we'd already deployed, as I suggested, moving assets to HTM, selling the strips, the surplus relief transaction.
The surplus relief transaction is one in future periods we can dial up or dial down. We also have the line of credit that's really more or less for an emergency
We could also, with a much higher RBC ratio in the United States where we're not subject to rate risk, we could push capital from the U.S. to Japan if needed to support the solvency margin ratio.
Don't the tools that you have at your disposal today to handle this risk, don't those tools potentially go away if the risk emerges? Isn't that something that we sort of learned from the crisis, that when the risk emerges, you don't have the ability to do the things that you have today?
Well, you may have less flexibility, I think that speaks to one of the reasons why we've taken action throughout last year to effectively create a buffer against some of this risk. Remember, you're looking at an SMR that was in the 540 area at year-end that we think will be closer to 600 in just three months' time. Part of that is by the way that we've proactively managed up that ratio to accommodate risks that could emerge, be it from a much stronger yen, significant defaults that reside in our portfolio, or from a widening of spread or underlying rates.
I've got one or two other comments about that is that you've got to look at the nature of the liabilities for the companies, too. Our products are protection-oriented products. Cash values tend to be an ancillary feature of the contract. They're not a driving feature of the contract. We're not selling hot money products, so to speak, where you'd expect a lot of surrenders in response to a spike in interest rates. I think that's got to be considered when you compare Aflac with other companies. I think what my concern is that you've got an accounting situation where you mark a portion of your balance sheet, your assets to market based on changes in interest rates. Your liabilities are untouched in terms of valuation and the like. The real economic question is what's going to happen to those liabilities.
Are customers going to walk up and ask for their money because interest rates are 2.5% instead of 1.5% or 3% instead of 2%? In our case, I don't think you're going to get that much. You might get a lot more in a company that sells a lot of annuities and the like. I think part of our situation might be going to talk to regulators about why they're concerned about a company that's making $4 billion a year and has substantial positive cash flows, yet from an accounting perspective, we've had a reduced solvency margin. I don't think it's an economics event. I think it's more of an accounting event, and that's my $0.02 on the deal.
Jeff?
Thanks, Robin. Jeff Schuman from KBW. I want to start with an observation, I guess. Dan, you talked last night about your frustration about stock price. In the past, you've talked about your goal of getting back to compound double-digit EPS growth. Obviously, the two are linked, right? The surest way to revalue your stocks would be to give us visibility back to 10% EPS growth. I think the challenge maybe we're having a little bit right now is I think we've all thought that once we kind of got over the hump on the investment issues, we kind of get back towards 10% EPS growth fairly quickly.
It seems like the thing that's confusing now is that it seems like the Japan growth combined with the conservative FSA accounting is causing all this reserve strain that Kriss just talked about, and he alluded to a lot of moving parts. I guess the question is 10% EPS growth and higher levels of share repurchase a little further out than we thought because of the complications of managing the FSA growth through the Japan growth through the FSA accounting?
Yes, it's further out than what we thought a year or so ago. I still think we'll have, as I said, the latter part of this year, there's a potential of us buying stock back, we expect to be able to buy a large amount of stock back next year, depending on what happens. Of course, the other part of that formula that we talked about that's happened since then is the low interest rate environment that's fallen in, that's made it harder. As I told you, we expect 2014 to be better than 2013. Whereas our range is there, we're moving in the right direction. The one thing that's much harder today is we could give you a much better view on what we think will happen in 2013 if we had this meeting in November or December.
In today's world, to go out 18 months and predict is just a much harder thing for us to do. You get crucified if you miss your number. We tend to be more conservative in all of these aspects to give us some lead way to find out what will happen. Whereas you can remember when we used to tell you two and a half years in ahead instead of a year and a half, then we cut it back to a year and a half. Frankly, it's just much harder now to tell what's going to happen because the volatility of the world and what's taking place, from interest rates to other issues that are out there.
I do believe we'll have, assuming there's no cataclysmic event in Europe, I think that you're going to see us bring a lot of money out next year. With that, I think we're going to be able to increase the dividend and have a sizable share repurchase, which will ultimately drive earnings per share growth.
Thank you.
Andrew?
On Japan, the five-year lump product, I thought I heard at the beginning of the presentations that there's going to be a cap on the amount of sales for that five-year product. Can you clarify exactly how much was sold last year, then what the cap will be for this year? Along with that, the repricing, can you clarify what features are going to be repriced, and by how much?
Andrew, first of all, I would remind you that they just started selling the five-pay WAYS last year, mid-year. When you're talking about this year, remember that. Is that correct? While they look for those numbers, I'm going to speak to the repricing a little bit. First, there's really two components to the repricing. The first is the FSA standard interest rate. As Kriss mentioned in his speech, it's looking more and more likely that the standard interest rate will go to 1% this year. That's going to be dependent on the 10-year JGB from June to September. If that happens, we will definitely be repricing several products that are sensitive to that rate in order to accommodate the lower interest rate requirement for reserving. More than likely, most companies will reprice because of that.
Even if the standard interest rate doesn't fall, we are looking at repricing the WAYS product, just because the low interest rate environment we're currently seeing may continue for some time. That's more something we're going to do in response to the low interest rate environment.
What would you precisely reprice, though? It doesn't look like you're crediting much more than a few tens of basis points on the product. What would you reprice based on this 1% rate?
Currently, the plan is priced at 1.85%. We would be dropping that rate. In effect, we would be raising the premium rates for the product. I think the 1% you're mentioning is the discount advance premium rate, and that's also being looked at to be reduced somewhat.
I thought the 1.85 was what your break-even point was, right?
No, that's actually the pricing rate.
You actually credit 1.85%? Is that what you're saying?
It's not quite as simple as that because you also have insurance benefits.
Exactly.
It's not a product where you actually credit an interest rate. The product is priced at 1.85%.
What would I be thinking it's at in this environment? One? One and change?
We can't talk a lot about that because we haven't had discussions with the FSA, but it will be certainly lower to reflect the lower interest rate environment we're seeing. Kriss, I don't know if you want to throw any more on that.
No, I think that was a pretty comprehensive answer.
The way we are controlling the sales of the five-pay WAYS this year is different between the banks and the traditional channel.
This is the lump product I'm talking about, right? The five-pay WAYS, which you get the one premium upfront, not the five period payments.
Oh, not the five-year.
Yeah. After five years, you're all paid up, and you give an initial premium on day one. That's the product you want to cap, correct?
Right. Realize that the product itself is a five-pay product.
Right.
What we do is we allow you to pay premium in advance.
Right.
That's why they're giving us the money upfront. The product is still a five-pay product.
It's still the five-pay product. All right. Just want to make sure.
That is what he's referencing.
Sorry.
I'm sorry. We are going to treat that product differently between the banks and the traditional channels. The banks, we already put a cap on the amount of the sale of that product for each bank. They are still selling most of all. As soon as they reach at the capped level, they stop selling.
Right. What would that be? Relative to last year, is it how much % lower? Do you have a JPY amount or anything?
Actually, through the bank channel, the sales for the five-year pay really started from the end of June this year. We had JPY 7.5 billion production of the five-year pay for last year. First quarter of this year, three months, first quarter, we had JPY 8 billion five-year pay. It sharply increased for three months. That's why we started a cap, setting cap from the April. Amount-wise, I think maybe double of this last year's production. That means JPY 14 billion or something like that. That's the cap we are expecting for bank channel.
JPY 14 billion for the year.
Yeah.
Okay.
That's for the banks. For the traditional channel, the sale of that product was relatively smaller than the banks. Last year, I recollect that the sale of this product through the traditional channel was about JPY 3 billion. We are planning to terminate the sales of this product through the traditional channel during the summer this year. We expect that sale for the whole year would stay probably about the same level as last year.
Just lastly, Ken, the restricted stock awards for the RBC, that's a really interesting data point. Can you give any color around that?
As far as what the levels are?
Yes.
No, I really can't. I don't know them offhand. I'm not opposed to this. Yeah, I guess they are. The performance measures disclosed in the proxy. We've done that the last couple of years now.
If I could find that?
Yeah.
Yeah. Okay, great. Thanks.
I just want to add one more thing to be sure you understand what we've said about the cap on the 5Pay WAYS. With the bank channel, when we negotiated the cap, the cap is actually for the period of sales from April to September. What's going to happen is, and Toru mentioned this, they're going to sell up to their cap, then they're going to stop selling, because once they discontinue or once they have reached their cap, they can't sell that product anymore. They're going to reprint brochures and that sort of thing. What you're going to see, in essence, is after second quarter, you're not going to really see 5Pay sales happening anymore, because they're basically going to sell up to the cap and then stop selling. I just want to make sure you understand that.
Hi, Jimmy Bhullar, J.P. Morgan. Dan, you mentioned exploring transactions with KPMG that would allow you to use more of the tax loss carry forwards. How much progress have you made on that, and what type of capital release I think you mentioned large or very high or something. What would be the use of the proceeds if you were able to free up capital? A question for Charles. If you look at the-
Let's take that. We'll go. As you know, I don't know all the details of that. Ken's the one that's been working on it. Obviously, it's come far enough that it got to my attention that it looks good. I'll let Ken carry that for you.
Yeah. First, as a way of background, Dan mentioned last night that we had about, of the $1 billion or so of non-admitted assets, a significant portion, about $703 million of the non-admit at the end of December was related to the DTAs. With the change in the statutory accounting standard related to DTAs, we moved the threshold from 10% up to 15%. The balance at the end of March was about $300 million. We're approaching this really more from an economic standpoint than just an accounting standpoint, meaning we would like to be able to use as much of the tax loss carry forwards as we can, regardless of which portion is non-admitted. Yeah, it'd be great to get more capital relief from an RBC standpoint by eliminating all of the non-admitted DTAs.
There's economic value in those tax loss carry forwards that expires after five years. We don't want to lose that value. That's really what's driven us to look at a solution that would allow us to hopefully address this in a much larger way, a bit more of a big bang approach, as opposed to some incremental things that we've done over the last couple of years. As Dan suggested last night, we've been working with our independent auditor on this. They brought us a solution that we're investigating right now. It's premature to talk about it in detail about what the outcome might be. It's going to involve extensive work with our accounting department's financial reporting, our tax area, and our legal staff.
Our team in Japan, Charles, Tohru, and others are helping us work on it from a Japan standpoint, and we're looking at it here as well. June Howard, our Chief Accounting Officer, has been instrumental in driving this forward. I would hope that in the next couple of months, perhaps when we have our second quarter release, we'll have a lot more color and hopefully a probability of success in doing this and be able to give you some sense for how much we might be able to address in tax loss carry forward. It's a bit too early right now. That said, I think it's the most promising idea that's been brought to us at this point. As a result, as Dan said last night, it's a very top priority for us this year. We'd hope we'd have it resolved by the end of this year.
Anything on the use of the proceeds?
Not at this point. Immediately, if it frees up capital, will it enhance our RBC? Again, we do pay some attention to the balance in capital between the two segments. This obviously helps that out quite a bit. It will depend not only on the extent of the program, but if we generate gains, how these gains are not only treated from U.S. taxing authorities but also Japanese taxing authorities. That's something that still has to be worked through.
Charles, if you look at the Japanese budget situation, it seems like co-payments over time should go up. Politically, obviously, it's not a popular decision. What's your view on potential changes in co-payments rates over the next two to three years?
Two to three years, it's not, again, still clear. The current battle is over the consumption tax increase and integrated Social Security reform. Many issues are being suggested to be addressed in the upcoming process of reforming. Obviously, that debate will continue to be viewed by consumer that's potentially needing for them to be protected through private insurance rather than national healthcare system. That's positive for our business, I suppose. No one has yet to come out, the government that is, or even the opposition party, for legislative change this year or even into next year that will raise the co-payment. I think the debate continues what Tohru talked about, we all have talked about, the structure, low birth rate
aging society, the debt situation all means that they will have to continue to look for efficiency in the national healthcare system. Therefore, I think the private sector is going to be counted on to do more. The debate over the consumption tax will tell us whether or not that side of the revenue will be generated. Just to give you the sense of where things are, that's where we are.
Okay. Eric Berg.
Right. Thanks very much. Eric Berg from RBC Capital Markets. Actually, I have two questions for Kriss, both margin related. You have one slide showing that the pre-tax profit margins on the ordinary product actually were a little bit higher last year, meaning in 2011, than they were in 2010. Yet, you have another slide that shows that as interest rates go down, the IRR on these products basically is cut in half. Those two ideas would seem to be inconsistent. Interest rates fell last year, therefore the IRR goes down, yet you have a slide showing that margins were stable. Can you help me reconcile those two?
One of the slides is actual financial results for the period. That would be based on all the things that actually happened. The other slide I think you're referring to on the profit margin itself would be an anticipated lifetime return type thing, not exactly what's happening in this accounting period, but for a particular block of and a particular product, what's expected over the life of the product. The actual margin slide compared year-over-year is based on what the actual mix of business is, the actual investment income flowing through the period, whereas the anticipated margin would be if we get 2% from now on or at issue from forever, then that's what the margin is. One of them is an anticipated lifetime activity, one of them is a current accounting period activity.
That was helpful. My second question, either to you or to Sue. If you are anticipating an increase in prices, increase in premiums on your ordinary product, why are you assuming a further decline in margins on your ordinary product? You're going to be charging more. Why are you assuming they'll be even less profitable next year than they are this year?
Let me just start and say that these slides on future activity don't anticipate repricing. I think that's correct. Isn't it, Sue? Then I'll let you add anything you want to.
It is, Part of the reason for that is we are looking at repricing and really determining what the best course is for repricing because we are seeing a very low interest rate environment right now that's been in place really since the fourth quarter last year. Do we anticipate that environment to stay around forever? Probably not. We want to be prepared for if it does. We're in the process right now of looking at various interest rates to reprice at, We really aren't going to know what rate we'll go to until we know if the standard interest rate changes and until we see what the interest rate environment is later this year.
We're getting the information together to be prepared to act if the standard interest rate changes, and then we'll have to determine what to do if rates actually go up between now and then.
Thanks, John.
Thank you. John Nadel from Sterne Agee. I've got a couple. The JPY 5 billion of new money invested in 1Q in Japan, is that a level that we should expect? I mean, that's the highest level we've seen, I think, in a very long time. If not ever. How long do we stay up around those levels? Because I think that's pretty important to the outlook for investment income, almost regardless of what your new money yield is.
Let me make one comment on that. The last estimate that I can recall for this year's cash flow, and this has been upwardly revised, is about JPY 1.1 trillion for the full year. That would consider cash flow from operations, investment income, and anticipated redemptions or maturities. I think we came into the year assuming something closer to JPY 970 billion or JPY 980 billion. Last year, we started the year with a cash flow estimate of about JPY 760 billion. I recall it made its way up to JPY 1.1 trillion as well. The upward revisions are largely attributable to the success of WAYS and those massive premiums that we collect. Knowing that WAYS is going to be capped a bit, we'd expect to not see the significant kind of increases in the second half of the year.
I would assume we'll see lower cash flows in 2013 and 2014 than we've seen these last couple of years.
Okay. That's helpful. I'm just looking, I guess, a question for Eric maybe. I'm looking at the available-for-sale JGB portfolio that was about $9.4 billion as of the end of the quarter. I'm wondering, as you think about over time shifting the portfolio allocations, whether that portion of the existing portfolio, setting aside the held maturity, whether that portion of the portfolio is something you would identify as perhaps being sold or worked down and reallocated away. It feels like that could be a modest solution to the in-force
Margin drag from WAYS over the last couple of quarters.
You were referring specifically to the JGBs and AFS?
I assume that the significant allocation to JGBs over the last couple of quarters, right, 70%, 80% of new money?
That's right.
It's the reason why your new money yield is so low now relative to a year ago.
That's correct. That's right.
I was wondering if this is a partial solution.
Yep. To give you the thought process around that, it really starts with the GSAM project that I've talked so much about because that is going to set out our new asset allocation policy. Yes, given the nature of most of our assets, that really means once we're comfortable with that asset allocation policy, which will hopefully provide us with new investment opportunities, it'll be primarily from new cash flow, with whatever amount that is. We absolutely would look at the current assets from a relative value standpoint and say, are there assets that make sense to trade out of to go into those new asset classes? Clearly, the JGBs have liquidity if they're in AFS, so they would certainly be in our thought process. There'd be many considerations from diversification, duration.
Certainly, it would be in the bucket of an opportunity to look at those, versus say, some of the privates that might be in AFS where we most likely wouldn't see the relative value of trying to get out of those, given that we believe the credits are good. Yes, is the short answer to your question.
Steven.
Hi. Steven Schwartz, Raymond James. Just as a follow-up to both of these. I guess, Dan, in your guidance you gave last night, my question as a follow-up would be, is the pricing increase for WAYS, is that contemplated in those numbers? Is any changes coming out of the GSAM study, is that contemplated in those numbers?
No, there is none in the pricing. The GSAM, we figured 10 basis points. What did we do, Kriss?
I don't know. It's not that it's pushed, because it's going to be offset in the short term by some of the scans. We have some points.
Yeah. It's not included.
Okay. If I can move on to my own. Charles, is there anything new, I was wondering this, it wasn't mentioned, is there anything new with small banks and how much product they could sell these days? Wasn't that always a consideration?
Thank you for asking me to comment on this. This is probably something Toto should comment on, or Shinkai-san.
I'm sorry. Could you repeat your question about what are small banks?
Yeah. Wasn't there some type of restriction on the, maybe it was on child endowment or something, but a restriction with regards to the size of policies that small banks can sell?
You're talking about the market conduct rules that
Yes.
Was supposed to have been Okay.
Yeah. I think it's the restriction for the prevention of the pushing sales by Japanese banks. Yes, it is still.
It still are?
It is still. It's the same situation. The rule is very complex, but it still remains the same situation. For a small corporation, through the prospect of the banks, if the corporation is a borrower from the financial institutions, and it's a small corporation, employees, 20 or less at the moment, there's a limitation. Banks are able to sell the third sector products.
Okay, that still exists.
That still exists, yes.
Okay, if I could, an accounting question for Kriss. Kriss, as you look to hedging, as you look to other assets and hedging those into JPY, what are the GAAP implications?
Well, the change in the fair value of hedges normally has to be reported through current period P&L. The volatility associated with that is not terribly attractive to us. We have to consider that as an accounting result that we're exposed to, compared to the perceived value of the hedging activity. Is that what you're after?
Yes. Okay. That's something that's going to have to be backed out, I guess, to get to some type of operating number.
Our Chief Accounting Officer, June, is in the back of the room. I believe when we looked at these, June, don't they qualify if we hedge at inception and matching all the cash flows, don't we get hedge accounting for that and have them run through equity?
Well, these would be swapping back to yen.
Right.
You're actually increasing the risk, so they wouldn't qualify.
They would not. Okay.
As Kriss mentioned, they would go through the P&L.
Okay.
They would go through realized gains and losses.
Okay. Thank you.
Hi. Ryan Krueger with Dowling. Given all the challenges you guys have discussed regarding FSA reserve requirements in Japan, what's your appetite for doing additional surplus relief transactions? I believe the cost is pretty modest. Are you actively looking to do more of these?
I think our motivation in doing this first one was to put the blueprint in place in case we needed to take advantage of it in the event of something like a sharp increase in interest rates. I don't view this as an activity we're going to have to use year after year to manage our solvency margin position. Even though the cost is relatively small, it's still a cost. The question is whether or not it's worth the cost. A relatively short-term agreement, six or seven years, it's almost like getting a loan and paying it back over a seven-year period. Is it worth it? I think as a routine thing, we aren't going to be dependent upon that. Our financial strength is such that we aren't dependent upon surplus relief reinsurance as a routine thing.
We've got substantial earnings, spikes in interest rates might precipitate some desire to maintain some level of solvency margin, but I don't see us doing that routinely.
Okay, for Ken. Your RBC ratio is now well above your target, and it will probably continue to increase as the year goes on. You also have, I think, around $600 million of dividend capacity for the holding company, but you said you're not planning on sending any dividends up this year. Is just the amount of capital that's in Aflac U.S., is that the main reason for that, or is there something else that we should be aware of?
As far as why we're not dividending?
Yeah.
Well, again, as I mentioned in my prepared comments, it was largely a matter of us having all of the cash resources available to the parent to meet anticipated cash needs for this year under the assumption that we don't repurchase any shares through internally generated funds. That can change as the year progresses, depending on our outlook, how repatriation comes in the outlook for the RBC. Again, we do pay attention to a capital balance between the U.S. and Japanese segments, even though those legal entities really don't exist. It is something that we're mindful of. I will say that the benefit from the change in the statutory accounting for deferred tax assets went a long way to improving the balance between those two segments. If we elect to not dividend for the balance of the year, it'll improve it further.
We'll have to monitor that closely as the year progresses. Again, I would say, as we prepared for this meeting yesterday, and understand the final print on our first quarter estimate for RBC literally came on Monday when we finished the tax work and got the filings out of our building. I think all of us feel more optimistic about the possibilities of repurchasing shares later this year that would really kind of jumpstart us toward 2013 and achieving our earnings objectives. Then we'd have much more flexibility when that large repatriation comes to us in mid-year 2013. Now, the caveat of course is we'll be very mindful of portfolio risks, especially with the volatility in Europe. Again, all that being said, I think that we all feel much better about deploying some capital in the form of share repurchase later this year.
Joanne?
Yes. Joanne Smith, Scotia Capital. I just want to clarify something. You said that the cap is on the five-pay WAYS only. Is that correct?
That's correct.
When they reach the cap and they don't sell anymore, will they switch to the other WAYS options at that point, or will they just stop selling altogether?
During my presentation, the cap is hitting not only for our five-pay WAYS but also child endowment as well. Regarding our five-pay WAYS plans, the total amount of sales reaches to the cap. The sales, we will stop the sales of the five-pay WAYS only, not other WAYS products. Other products of the WAYS will be continued as set.
Joanne, they'll move to the other WAYS products, is what they're trying to say. Okay.
Sorry. To make sure. I mentioned about the total cap amount for five-pay for the banks. I told you JPY 14 billion or JPY 15 billion, but that's total amount for this year, not after April. Just I'd like to make sure about it.
Let me mention that what Shinkai-san talked about is the capping on the bank sales of the five-pay WAYS. As I told you before, we are going to limit the sale of the five-pay WAYS through the traditional channel starting this summer. Same thing. If the time comes, the traditional agents will have an option to sell other type of WAYS after that. They will continue to sell WAYS, but not five-pay.
I think the point to get out of all of this when it comes to these products is we're adjusting. We understand that we don't like this low interest rate environment. We're going to move for lower assumed interest rates that will raise the profit margin. We're going to cut back on other things, but you can't do it abruptly. If you go back to 1988 or 1987 when I had that issue with the banks, it took us years to get back with them after that because it wasn't their fault that the interest rates dropped. It just happened in the economy. They've got programs and issues out there that if they're all of a sudden the rug pulled out from under them, they resent it, and they don't want to ever do business with you.
I think what you should see from all this as we talk about it is, we would like to stop five-pay WAYS today, but we're adjusting in a way to move that direction. As you hear all this, it's just a way of keeping this enormous sales force of banks, where we ultimately are dominating every aspect of it, happy to where we can take another product, another idea. Because look at the numbers. It's because WAYS is 10 times more expensive. If you look at policy count, cancer and medical are doing very well for us there, we want to continue to build on that. We're working through that. It is not a perfect scenario for us, but it is a profitable scenario and one that we long-term believe we'll be well-positioned in.
Just to add one thing to that, we have the luxury of being able to do it in a way that doesn't disrupt that channel too much because, as Dan mentioned, WAYS is profitable at 2%. It's just not as profitable as what we might like. It is still profitable, so we don't feel that we have to just cut sales off immediately.
It's 1:15 P.M. now. Before we adjourn, I'd like to remind you that we will be assembling a book with the presentations and slides all together, and those should be out in about two weeks. I also want to remind you that we're having lunch next door, so if you would like to have lunch and continue to ask some more questions, please do so.