We're going to kick things off. We're pleased to have with us today, Kriss Cloninger, representing Aflac. He's the President and CFO. Chris joined Aflac in 1992 as the CFO. Since then, he's been recognized on numerous occasions by institutional investors, the top CFO within the space. With that, I'm happy to turn things over to Kriss.
Okay. Thank you, Chris, and good morning. Nice to see a few familiar faces out there, and welcome to those of you who don't know Aflac. It's a pleasure to join you at this year's Goldman Sachs conference. I'll begin today by providing an overview of our business operations. Before we start, let me remind you that some of the statements in this presentation are forward-looking within the meaning of federal securities laws. Although we believe that our statements are reasonable, we can give no assurance that they'll prove to be accurate because they are prospective in nature. Please look at our annual report on Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss today. Aflac offers voluntary insurance products in both Japan and the United States. Our policies cover more than 50 million people worldwide.
Aflac products provide a layer of financial protection against loss of income and assets by paying fixed cash benefits directly to the insured upon a specified health event or life situation. We continually update our products to better reflect changes in current medical treatments and to further identify opportunities to respond to the needs of consumers. Our strategy for growth in Japan and the U.S. has remained straightforward, consistent, and effective for many years. Aflac develops relevant products and sells them through expanded distribution channels, which yields new accounts and customers. In remaining focused and disciplined with this strategy, we have gained greater access to potential consumers. Aflac's operations in Japan account for about three-fourths of our pre-tax insurance earnings. Today, we insure about one out of four households in Japan. We're the number one life insurance company in Japan in terms of individual policies in force.
Our cancer and medical products are the foundation of our product portfolio in Japan. Aflac Japan's product development team continually researches specific financial burdens that Japanese consumers face and develops products that provide solutions to the potential policyholders. This allows us to leverage our competitive advantages, such as branding and distribution, to grow our product offerings and to meet the evolving needs of consumers. Since the introduction of EVER, our standalone medical policy in 2002, Aflac Japan has been number one in the medical market. This January, we further strengthened our medical portfolio and upgraded our new EVER product, improving it to include even more advanced medical treatment options. Additionally, in July this year, we introduced a revised non-standard medical product that has benefited medical sales. Last year, in 2011, we introduced DAYS, which was our revised base cancer policy, and DAYS PLUS, which upgrades our older cancer policies.
Most notably, these revisions to our cancer policy enhance outpatient and anti-cancer medication benefits. Our product portfolio in Japan has expanded beyond traditional health-related products to better serve Japanese consumers and our growing distribution channels. Aflac Japan's ability to adapt its product portfolio to better meet the evolving needs of banks has significantly benefited sales. One example is WAYS, our top-selling product through banks. WAYS is our unique hybrid whole life product that gives the policyholder the option to convert some or all of the coverage to different benefits at a designated retirement age. This product was a primary driver of Aflac Japan's remarkable sales growth in 2011, continuing on through the third quarter of 2012.
From a product perspective, WAYS continued as our top seller in the first nine months of 2012, generating an increase of 187% over the comparable period in 2011 and accounting for 47% of our total sales during that period. Our cancer and medical insurance accounted for about 13% and 17% of total sales for the first nine months, respectively. As a result of both our product and channel diversification, we had an enormous sales increase during the first nine months of 2012. Aflac Japan was represented by about 19,700 sales agencies at the end of the third quarter. Equating to more than 125,000 licensed sales associates employed by those agencies. The strength of individual sales agents reflects consumers' desire for face-to-face sales to help them select the coverage that best suits their needs.
Our sales results have been significantly influenced by the expansion of our distribution channels, most recently the bank channel. The bank channel generated JPY 26.9 billion in sales during the third quarter of 2012, which represented an increase of over 85% from the period in 2011. The bank channel accounted for 48.4% of Aflac Japan's total new sales, with our traditional channels accounting for the balance of about 52%. Over the past several years, we've made significant efforts in developing relationships with banks. In fact, we've secured agreements with more than 90% of the banks in Japan, a number we believe is significantly greater than any of our competitors. Selling WAYS appeals to banks because this product's significantly higher premium generates attractive commissions. Consumers like the WAYS product because it provides a safe and more appealing alternative to a bank account that pays less than 10 basis points to them.
WAYS gave us the opportunity to generate about a 10% profit margin for life insurance while providing a new distribution channel. More recently, we're responding to the evolving consumer environment by using a sales agency called Aflac Consultants, which is a direct face-to-face channel specializing in consultative sales, targeting people, consumers in the mid-20s to 30s. I believe this progression of our distribution expansion is an opportunity to capture a segment of the market in which we were previously under-penetrated. We continue to believe that Aflac's distribution system remains one of the most efficient in Japan and represents a competitive advantage. We're continuing our efforts to develop even more avenues to reach consumers. From top to bottom, Aflac Japan performed extremely well in the first nine months of this year, significantly exceeding our expectations.
Total new annualized premium sales in yen generated a tremendous 43%+ increase year to date and marked five straight quarters of record sales production. Record sales growth combined with continued strong policy persistency contributed to Aflac Japan's double-digit increase in premium income for the third quarter. Aflac Japan's revenues in yen grew by 9% for the first nine months, pre-tax earnings were JPY 238 billion, which was up 1.4%. Premium income increased 9.4% for the first nine months, which benefited from the strong sales of the WAYS product. As we told you in the third quarter, while we had strong sales results for the first nine months, we anticipate fourth quarter sales to be somewhat suppressed due to the reduction in the so-called discounted advance premium rate or DAP. We expect sales to be in the range of flat to up 15% in the fourth quarter.
Taking all this into account, we now expect our 2012 Japan annual sales to rise by 30%-35% over the prior year. As you may be aware, the standard interest rate for policy reserving in Japan will be changing effective April 2013. The Japan standard interest rate is the rate required for determining policy reserve values. Due to the continued low investment yield rates available in Japan, primarily related to 10-year JGBs, the Japan standard interest rate will fall from 1.5%-1%, effective for business issued on or after April 1, 2013. Based on our previous industry experience, we believe this event will likely prompt the repricing of most products in the Japanese life market, and that's to avoid potential capital strain associated with the higher policy reserves that are required when you use a lower assumed interest rate in reserving.
It's important to note that Aflac is repricing some of our products, particularly WAYS and Child Endowment. This product repricing will have some impact on the anticipated profitability of our new business, generally positive. Let me review the expected product profitability of our core health products and WAYS under various investment yield assumptions using current premium rates. As we discussed at our analyst meeting in May, when WAYS became a larger part of our new business, new money rates in Japan were higher than the rates we were seeing today. I'd like to point out that WAYS profitability is more sensitive to investment yields than our core health products. The profit margin for the WAYS product was about 20% of premium when investing WAYS cash flows at 2.5% new money, and that dropped to about 15% if new money rates fell to two and a quarter.
At 2.27%, which is the new money yield we actually experienced during the first 12 months of 2012, WAYS profit margins are somewhat lower than our core health profit margins. With the product repricing, we expect to restore the profit margin of WAYS and Child Endowment to a level similar to what we experienced when we first introduced those products. WAYS profitability is anticipated to be in the mid-teens to low 20s at 2% new money yield. We anticipate the repricing will have a modest impact on the overall profitability of our business. Following the repricing, we do not expect the surplus or capital strain related to new business to be any greater under the revised standard interest rate than under the current standard interest rate. The revised premium rates will be in place for our ordinary life products sold in April 2013 and later.
The repricing of our product portfolio to address the continued low interest rate environment is the most important step in improving profit margins. However, as we previously discussed, we've taken other actions to combat the challenging investment yield environment. Most recently, we lowered the interest rate credit for discounted advance premium from 1% to one half of 1%, which was effective for business written October 22nd, 2012 and later. In addition, as we have discussed, our investment division is aggressively moving forward with plans to implement investment asset allocations that are product specific and are designed to generate better investment returns on our strong cash flows. We've had a tremendous amount of success leveraging our strong brand in our efforts to drive sales. As part of these efforts, Aflac Japan has honed its ability to take the Aflac duck and to create separate and unique characters to market specific products.
Most recently, we launched a campaign featuring Tama, an actual cat that's famous throughout Japan, to market our recently introduced product we call Gentle EVER. By capitalizing on the popularity of the Aflac duck and our more recent characters, we've achieved brand awareness in Japan around 97%. We'll continue to look for new ways to connect with consumers through innovative marketing campaigns for our product line. With an aging population, Japanese consumers increasingly understand the need for insurance products to protect their income and assets. As we look ahead, we believe the need for our products will only continue to grow despite a compulsory and universal national healthcare system that covers all Japanese citizens. Given Japan's aging population and its declining birth rate, their national healthcare system has been under great financial strain, and co-payments for salaried workers under 70 have increased to 30% of total cost.
However, as fiscal resources are tight in all areas, including medical, nursing care, and pension benefits, it's clear that the difficult financial situation will persist going forward. According to the Japanese government's estimates, the nation's medical expenses will increase by JPY six trillion by 2015 and by 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 the higher co-payments for medical expenses, the market for medical products has been steadily expanding, and this trend is expected to continue. We believe we can expand our leading position as the medical market continues its growth in the future. Now let me turn to our Aflac U.S. operations. As you may know, in the United States, we primarily distribute our voluntary insurance products at the work site on a payroll deduction basis.
Our Aflac U.S. product portfolio includes a variety of voluntary insurance products designed to pay cash directly to policyholders when a serious medical event presents financial challenges. These payments are made regardless of any other insurance policyholders may have. Our individual products are guaranteed renewable and portable even if the policyholder changes employers. With the addition of Aflac Group Insurance in 2009, we now offer group products that align well with our individual product line. We also customize group products for the larger employer case market and the brokers who typically sell to the larger accounts. It's really about leveraging the brand and offering a choice to accounts of all sizes. This is especially important because now more than half of voluntary insurance product sales in the United States come from group policies.
Our strong brand and market-leading status only serves to broaden the appeal of our products to consumers throughout the U.S. In terms of our U.S. distribution system, we've built a diverse yet focused product line that's sold through a broad distribution network of over 76,000 commissioned sales associates. Additionally, although it's in the early stages, we're expanding our relationship with large national brokers to access the larger case market through the sale of group products. Our ability to give consumers a choice of individual and group products only serves to enhance our appeal to our traditional and broker channels. We believe our distribution network is a competitive strength that no other company has been able to duplicate. Our strategy and competitive strengths are all designed to leverage the brand while providing valuable products to consumers.
For the first nine months of the year, total new annualized premium sales rose 1.5%. Aflac U.S. revenues grew by 5.2%, and pre-tax earnings were up 11.5%. Premium income increased 5.3%, and additionally, policy persistency remained very strong, which enhanced our earnings results. As we've communicated, while Aflac U.S. has experienced better than expected top and bottom-line growth for the first nine months, the sales environment remains challenging. With more than 90% of our accounts coming from the small business market, we continue to see that segment as particularly vulnerable to economic uncertainty. While we can't control the challenging economic climate in the U.S., we certainly can position our business to maximize the potential for success in the current environment. We've continued to make structural changes to our marketing and sales teams to maximize our future growth.
While these changes have been somewhat disruptive in the short term, more than we originally anticipated, we believe they'll enhance our long-term results. Given this backdrop, and with three quarters of the year completed, we believe it's likely that U.S. sales for 2012 will be roughly flat for the year. With our strong brand, we believe that consumers will be more receptive to hearing how Aflac products can help them. This opens up greater possibilities for our traditional sales force and broker channel alike. We continue to believe that the U.S. represents a vast opportunity for growth, and we're building our business with that potential in mind. Historically, Aflac's success in selling individual policies has been our bread and butter, and we still regard our success in this market as core to our operating model.
The most recent data from the U.S. Small Business Administration shows that the U.S. has more than 5.7 million businesses with fewer than 500 employees, and that these small businesses employ more than 56 million people. That's nearly half of the total workforce and is a large universe of potential customers. When you look at the potential market for Aflac after the addition of group products, you'll see there are more than 18,000 businesses with 500 or more workers employing 58 million additional employees. We're expanding our target market from just small business to businesses of all sizes. Our portfolio of group and individual products provides customers with outstanding value while giving the employers the choices that they demand. As a result, the Aflac brand outshines those of our competitors in both the individual and the group voluntary markets.
To put the growth potential in perspective, the U.S. Census Bureau data showed that there are 114 million full-time employees in the U.S., and over 92% of Americans are aware of the Aflac brand, which translates into 105 million U.S. workers. Based on a survey from an independent consultant called Hall & Partners, 94% of those 105 million workers or 99 million people do not currently have access to Aflac products at their work site. With healthcare in the forefront of so many consumers' minds, our strong brand, we believe, will accelerate our potential to grow that business. Let me discuss our general investment philosophy, how we're adapting to changing global economic environment, the composition of our portfolio, and our approach to managing potential financial risks.
We primarily invest for the long term. The strong cash flows from our persistent book of business gives us the ability to continue to invest from this perspective. Our product needs and liability profile have been key drivers to our investment strategy. Our goal is to have a portfolio matched by duration and currency with our liabilities. In Japan, our products are yen-denominated and have high persistency, thus yielding long-duration liabilities. Our U.S. policy liabilities have somewhat shorter durations than those in Japan, and our investment approach can be tailored accordingly. For the last several years, our primary focus has been on investment risk management, while investing our significant cash flows in assets of relatively higher quality and liquidity. We have made significant progress in proactively de-risking our portfolio over the last four years to enhance the strength of our balance sheet.
In the process, we've been reducing our exposure to the riskier asset classes, including perpetuals, PIGS, and financials, especially in Europe. Credit quality remains a central aspect of our investment approach. We remain focused on performing thorough credit analysis of the securities we hold. If we determine they're no longer suitable to our investment portfolio, we'll evaluate our options and take appropriate measures. At quarter end, about 94% of our portfolio was investment-grade. We remain focused on increasing the overall credit quality of our portfolio. Our portfolio is dominated by fixed maturity securities. We have very limited exposure to residential, commercial, and asset-based securities. The vast majority of our total investments in debt and perpetual securities falls into the senior debt category. The percent of our senior debt holdings increased from 86% at year-end 2011 to 91% at the end of the third quarter this year.
Through effective de-risking, the percent of subordinated securities, both perpetual and fixed, declined significantly over the last three years. Our objective is to diversify our large fixed income portfolio, both by geography and by industry. The vast majority of our investments in Japan are in JGBs. We significantly reduced our exposure to perpetual securities, peripheral European sovereign debt, and financials, especially in Europe. In fact, we reduced our exposure in these three categories by $1.4 billion during the last quarter and by $3.8 billion year to date, which further improved the overall quality of our portfolio. While volatility in Europe has continued to increase throughout 2012, impairments were relatively small for the quarter. However, the European markets still represent an area of potential risk, and we remain cautious, even though we're much better positioned to accommodate that volatility as a result of our de-risking efforts.
Now let me touch on how we've substantially enhanced our investment portfolio over the last few years. From January 2008 to the end of the third quarter of 2012, we dramatically cut our holdings of sovereign and financial investments in the PIGS countries from 5.9% to 1.5% of total investments in cash. We've also lowered our investments in perpetual securities to JPY 4.8 billion, going from 14.7% of total investments in cash down to 3.9%. I'd also like to point out that none of the perpetual securities we currently own are in the PIGS countries, and as we pursue opportunistic investment transactions, we'll continue to look for ways to reduce our exposure to the European debt. Last quarter, we began investing in dollar-denominated public fixed income securities diversified by sector and geography, and purchased currency hedges to JPY. This strategy provides us with greater liquidity and overall flexibility for our portfolio.
Further, it gives us opportunities to diversify the investment of our significant cash flows way beyond JGBs, with the objective of enhancing investment yields. Our strategic asset allocation will be reviewed on an annual basis, and we'll make tactical asset allocations continually to reflect current market and business conditions. We've defined our investment objectives as maximizing risk-adjusted performance subject to our liability profile and capital requirements. We're moving forward into a more sophisticated economic-based world with respect to managing the balance sheet of Aflac. We're also working on putting risk controls and processes in place as we move ahead. Our new investment strategies provide the benefit of liquidity, portfolio flexibility and diversification. Unlike our previous strategy that focused more on private placements, our strategy going forward involves publicly traded bonds that allow us to underweight or sell positions if or when our credit views change.
From the standpoint of risk and return, we can expect higher returns than our current investment strategies. Our new money yield will substantially increase versus the previous strategies of primarily JGBs, and our surplus risk will decrease. It's important to note that all of our new strategies have been back-tested against our capital ratios and the ratios we are targeting. In regard to expanding our investable universe going forward, most of our new investments will be focused on publicly traded global corporate assets, but hedged back to JPY. We also expect to invest in alternative types of assets beyond investment-grade fixed income, such as public equity alternatives. Additionally, we anticipate increasing our allocation to bank loans as well as emerging market debt. Not only do these new strategies meet our stress tests, but they also meet key regulatory tests from both Aflac Japan regulatory perspective and the U.S. regulatory perspective.
regulatory perspective. I'll spend the last portion of my discussion updating you on the consolidated financial performance of Aflac and its capital management position. We've delivered consistently strong operating performance, achieving a 15.2 compound annual growth rate in operating earnings per share from 2001 through 2011. This achievement demonstrates our ability to generate significant cash flows and organic growth in our capital bases through various market cycles. For the first nine months of 2012, the average JPY-USD exchange rate was 1.3% stronger than 2011, which somewhat magnified our reported results in USD terms. However, we still believe that viewing our results excluding the impact of foreign currency is the most meaningful way to evaluate our financial performance. On that basis, we're pleased with our results this year from a financial perspective.
As we have communicated over the last several years, maintaining a strong risk-based capital or RBC position remains a top priority for us. The strength of our capital position allowed us to pursue our proactive investment de-risking program to further strengthen our balance sheet and enhance shareholder value for the long term. We strive to maintain a strong balance sheet with a prudent amount of financial leverage. Our capital ratios demonstrate our commitment to maintaining financial strength on behalf of our policyholders, bondholders, and all of our stakeholders. Our strong RBC ratios over the last several years are even more notable when you consider the significant realized investment losses we incurred, resulting from the substantial investment portfolio de-risking we undertook. Our capital strength is driven by large, steady cash flows from operations, especially in Japan, and the strength of our balance sheet.
Our RBC ratio at the end of September actually exceeded the 575%-600% range that we originally communicated in our third quarter release, that's up from our 2011 year-end ratio of 493%. As you know, our capital adequacy in Japan is principally measured by our solvency margin ratio. As indicated in Japan's filed financial results as of September 30th, Aflac Japan's solvency margin was 628%, which exceeded the high end of the 500%-600% target range we've established. Given the strength of our capital ratios and our parent company liquidity, we have communicated our plan to allocate up to $100 million toward share repurchase in the fourth quarter of this year. While purchasing shares late during 2012 won't have much of an impact on 2012 earnings per share growth, it will benefit our 2013 results.
I'll also stress that we'll be prudent, the decisions we make will certainly take into account challenges within the macroeconomic environment, especially as it relates to Europe. As we have frequently discussed, profit repatriation remains the primary source for funding share repurchase. You may remember from our second quarter call and the Tokyo analyst meeting that we expect profit repatriation to be around JPY 65 billion in 2013. We still believe that's a reasonable estimate, assuming that we have no additional investment losses that would reduce Aflac Japan's operating income. Next year's profit repatriation could provide us with a significant amount of capital that could be deployed for share repurchase. Our objective is to grow our shareholder dividend at a rate that's in line with earnings per share growth. The dividends are an important component of the value we provide to our investors.
We're very pleased that the board of directors approved the 6.1% increase in the cash dividend, effective with the fourth quarter payment this year. This marks the 30th consecutive year that we have increased cash dividends to shareholders. We're also proud that the rating agencies have recognized our financial strength and balance sheet capacity. Our financial strength is rated A+, Superior by A.M. Best, Aa3 by Moody's, and Aa- by S&P. We believe that an analysis of operating earnings, which is a non-GAAP financial measure, is important to an understanding of Aflac's profitability drivers. Aflac defines operating earnings as the profits derived from operations before realized investment gains and losses from securities translation, the impact from derivative activities and hedging, as well as non-recurring items. On this operating basis, we have a long history of producing strong earnings growth.
In fact, 2011 marked the 22nd consecutive year in which we met or exceeded our operating earnings per share objective. We continue to believe that operating earnings, excluding currency, is the best measure of our success at growing our business. Excluding the benefit from the stronger yen, operating earnings per diluted share rose 5% for the first nine months of 2012, which is in line with our 2012 earnings growth objective. We continue to focus on maintaining strong fundamentals in our core business and building on our record of earnings growth. Even with the historically low investment rates, we continue to believe we're well-positioned to achieve our 2012 operating earnings per share objective of a 3%-6% increase, excluding currency.
In the second quarter, we guided toward the low end of the range. As you'll recall, reflecting the lower annual effective tax rate we communicated in the third quarter, we now expect operating earnings per share for the full year 2012 to be better than that original guidance. If the yen averages JPY 80 to the dollar for the last three months of this year, we expect reported operating earnings for the fourth quarter to be in the range of $1.46-$1.51 per diluted share. Under that same exchange rate assumption, we would expect full year operating earnings to be in the range of $6.58-$6.63 per diluted share, which computes out to roughly a 4%-5% increase on a currency neutral basis. We believe that that's both reasonable and achievable.
Looking ahead, we want to continue to reaffirm our 2013 target. We've communicated we expect to increase operating EPS by 4%-7% in 2013 before the currency effect. This earnings objective assumes no significant impact on investment income from additional realized investment losses and no further meaningful decline in investment yield rates. This final slide shows how 2012 earnings might look with and without the impact of the currency. Again, on a constant currency basis, our 3%-6% objective equates to $6.46-$6.65 in operating earnings per diluted share. We estimate that a one yen change in the average exchange rate we use to convert to P&L will have an effect of about $0.052 per share in 2012.
We remain focused on our vision to be the leading provider of voluntary insurance in the U.S. and the number one provider of supplemental insurance in Japan. We have confidence in our business model, the fundamental need for our products, and most importantly, the future success of Aflac. Thank you. That concludes our formal presentation. Chris, I don't know if we've got any time for questions, but I'll entertain one if you think we have time.
Sure. We're running over, maybe I'll ask one quick one. I guess there's recently been a decision for the Japan Post to introduce a Child Endowment product. I'm just curious how that could potentially impact your product and, you know, your ability to cross-sell to additional Aflac products.
Yeah. We continue to monitor the ability of Japan Post to compete with both the domestic and the foreign companies in Japan. It's a big political issue related to, you know, the conversion of Japan Post to a potentially a quasi-public entity. The foreign companies and the domestic companies continue to push the political powers that be, to put forth a level playing field between Japan Post and its potential domestic and foreign competitors in the event they decide to come to product with the market. Assuming we have a level playing field, we believe we'll be able to compete. That would be my comment on that.
Okay. Thank you for the time.
Thank you