I'm pleased to introduce this morning Dan Amos, Chairman and Chief Executive Officer of Aflac. Aflac is a differentiated life insurer with an ROE that's been running more than double its peer group. Although based in Georgia, Aflac generates 75%-80% of its earnings from Japan. Joining Dan today is Kenneth Janke and Robin Wilkey. I'm going to go ahead and turn over the mic to Dan.
Thank you, Seth. Good morning, everyone. It's a pleasure to be at the Bank of America conference. Before we start, let me remind you that some of the statements in this presentation are forward-looking in the meaning of the federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Please look at our annual report on Form 10-K for some of the risk factors that could cause the actual results to differ from what we're going to discuss today. Let me begin. Aflac offers voluntary insurance products in the two largest insurance markets in the world, Japan and the United States. Our policies cover more than 50 million people worldwide.
Aflac's products provide a layer of financial protection against the loss of income and assets by paying fixed cash directly to the insured, primarily upon a specific health event or life situation. Our strategy for growth in Japan and the United States has remained straightforward, and we believe effective. Aflac develops relevant products and sells them through expanded distribution channels, which yield new accounts and customers. Aflac's operations in Japan account for about three-quarters of our pre-tax insurance earnings. Today, we insure one out of four households in Japan. We are the number one life insurance company in Japan in terms of policies in force, passing Nippon Life, who held that title for almost 100 years. Our third sector, cancer and medical products, have been and continue to be the pillar of products and the foundation of our product portfolio.
In 2012, we continued to maintain our position as the number one seller of third sector medical and cancer products in Japan. In 2012, we strengthened our medical portfolio by revising our standard and non-standard medical products. We revised our base cancer in 2011, enhancing it with outpatient treatments. Our product portfolio in Japan has expanded beyond traditional health-related products to better serve Japanese consumers and the growing distribution channel, primarily the banks. Aflac Japan's ability to adapt its product portfolio to better meet the evolving needs of the banks has significantly benefited our sales. WAYS, our top-selling product, which is a hybrid life product through the banks, is the primary driver of Aflac Japan's remarkable sales growth in both 2011 and 2012. From a premium perspective, WAYS continued as the top seller in 2012, accounting for 45% of the premium sales for the year.
WAYS product runs nine times more than our medical or our cancer product, to put it in perspective. On a premium basis, whereas 45% was WAYS, cancer and medical and premium was 13% and 18%, respectively. However, on a policy basis, WAYS accounted for just 13% of the total number of policies in force, while cancer and medical accounted for 37% and 34% of the policies, respectively. I'd point out that while cancer and medical have a lower average premium per policy, our Third Sector cancer and medical products have a higher profit margin than the First Sector products. Aflac Japan was represented by more than 18,000 sales agencies at the end of 2012, equating to 125,000 licensed associates employed by those agencies. The number of agencies has decreased since the end of 2011, in part due to the merging of some of the agencies.
I'd point out the number of licensed sales associates has actually increased. Our sales results, which have been significantly influenced over the past several years by the expansion of the bank channel. The bank channel generated JPY 95.9 billion in sales in 2012, which represented an increase of 106.4% over 2011. The bank channel accounted for 45.6% of Aflac Japan's total new sales. As I said before, we've already cycled through the first major pass at selling WAYS to a large portion of our banks.
As many of you have heard me say before, when we introduce a new product, or as far as any life insurance company introduces a new product to the distribution channel, you're going to see a spike in sales, then that spike will fall off, then it will level off at some number because you go back to all of your existing policyholders and make this big pass. That decline can vary. Last year, that spike in production for the bank channel, basically now we are at a point to where the spike is over, we have seen a decline. More recently, we have responded to the evolving consumer environment through the launching of Aflac Consultants, a direct, face-to-face channel specializing in consulting individuals in the age of 20 to 40 years old.
I believe this progression to our distribution expansion is an opportunity to capture a segment of the market which we previously under-penetrated. We continue to believe that Aflac's distribution system remains one of the most effective in Japan and represents a competitive advantage for us. We are continuing our efforts to develop even more avenues to reach consumers. Looking to 2013, we will intensify our focus on recruiting and training of the traditional sales associates, while at the same time responding to the needs of the banks. Aflac Japan performed very well in 2012. For the third consecutive year, Aflac generated record sales results. Our full year sales rose 30.8% to JPY 210 billion. Premium income increased to 9.9% for the year, benefiting from strong sales of the WAYS product. Aflac Japan's revenues in JPY grew 9.4% for the year. Pre-tax earnings were JPY 312 billion, up 2%.
For 2013, we expect Aflac Japan sales for the third sector, cancer and medical products, to be flat to up 5%. I will say the first quarter will be our most difficult quarter in terms of third sector, because we had strong sales in the first quarter of 2012. Remaining the leader in the third sector products has been and will continue to be a priority. Achieving this target is the top priority for me and our management team, and we expect to achieve it. For 2012, the low interest rate environment constrained competition at the banks for investment type products. To address declining interest rates, we lowered our DAP from 1% to a half a percent in October, which increased our profitability 2%-3%. In December and January, we saw investment yields improve and the competition intensify in regard to the WAYS type products.
This is seen through press releases and competitors announcing variations in new pricing of life products for April. To ensure a balance between profitability and competitiveness, Aflac announced repricing of the WAYS product as a way that we could increase the DAP from the current level back up to the 1%, effective April the 1st. Conservatively, with these changes, we estimate that the profitability for our WAYS product will be in the range of 15%-20%, which is an acceptable margin to us. Keep in mind, we won't gain any insight into the bank strategies for 2013 offering until the close of Japan's fiscal year, which is on April the 1st. Hopefully by that time we release first quarter results, we'll be able to provide you with an update on what we've learned about the bank plans to sell products.
After the phenomenal sales increase of over 105% last year in the bank channels, and the pending premium rate increase that will go into effect on April the 1st, it's clear that sales from the bank channels will be down significantly in 2013. We've had a tremendous amount of success leveraging our strong brand and our efforts to drive sales. As part of these efforts, Aflac Japan has honed its ability to take the Aflac Duck and create separate and unique characters to market specific products. More recently, we launched a campaign featuring Tama, the actual cat that's famous throughout Japan, to market our general level, which is our non-standard medical product. By capitalizing on the popularity of the Aflac Duck and the more recent characters, we've achieved a brand recognition of 97%.
We will continue to look for new ways to connect with consumers through innovative marketing campaigns for our product line. Japan's population is covered by a universal healthcare system, but citizens still have significant out-of-pocket expenses that are associated with their healthcare. As such, we believe the need for the products will continue to grow. Given Japan's aging population and declining birth rate, this national healthcare system has been under great financial strain, and the co-payments for salaried workers under 70 has grown to 30%. As fiscal resources are tight in all areas, including medical, nursing care, and pension benefits, it's clear that difficult fiscal situation will persist going forward. According to Japanese government's estimates, the national medical expenses will increase by JPY 6 trillion by 2015 and JPY 21 trillion by 2025. As you can see, the growth of the medical expenses is significantly outpacing the GNP.
Because of the rapidly aging population and the higher co-pays for medical expenses, the market for medical products has been steadily expanding, and this trend is expected to continue. We believe that we can expand our leading position in the medical market continues to grow in the future. Now let me turn to our U.S. operation. 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 the policyholder when a serious medical event presents financial challenges. These payments are made regardless of any other insurance the policyholder may have. Our individual products are guaranteed renewable and portable even if the policyholder changes jobs.
Our group products align with individual product line and gives us the ability to customize offerings for brokers who typically sell to larger accounts. It's important to leverage the brand and offer a choice to accounts of all sizes. This is especially relevant because now more than half the voluntary insurance products sales in the United States come from group policies. Our strong brand and leading status only serves to broaden the appeal of our products to consumers throughout the United States. We have built a diverse yet focused product line that is 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 relationships with larger national brokers to access larger case markets. Our ability to give consumers a choice of individual or group products only serves to enhance the appeal to the traditional and broker channel.
We believe the 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 valued products to the consumers. For the year, total annualized premium sales were roughly flat, up 1%. Premium income increased 5.4%, reflecting improved policy persistency, and total revenues grew 5.4%, and most importantly, pre-tax earnings increased 10.1%. Aflac U.S. has experienced better than expected top line and bottom line growth for the year, but sales remain challenging. While we can't control the challenging economic climate in the United States, we certainly can position our business to maximize the potential for success in the current market. We have continued to improve the structure of our marketing and sales area to maximize future growth.
Taking this into account, we expect Aflac U.S. sales for 2013 through the traditional and broker channels to be flat to up 5%. I'll point out that for the first quarter, we won't be surprised if sales are down slightly, considering that the first quarter of 2012 was the biggest percentage increase of the year. With our strong brand, consumers are more receptive to hear about Aflac's products and how they can help them. This opens up for greater possibilities for the traditional sales force and the broker channel.
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 workers, and that small businesses employs 56 million people in the U.S. You can also see that there are 18,000 businesses of workers of more than 500 employing 58 million people. We are expanding our reach from connecting with the primarily small businesses to reaching businesses of all sizes. Our portfolio of group and individual products provide consumers with outstanding values while giving employers the choice they demand. As a result, the Aflac brand outshines those of the competitors in both the individual and group voluntary markets. Beyond just name recognition, it's important that consumers associate the Aflac brand with paying claims and not denying claims.
Given the importance of PPACA, our Affordable Care Act, we believe that 2013 will be the year of uncertainty and transition. This is because businesses and employees will try to understand how PPACA will affect them and what their options are. With the strong brand recognition that we have, we believe that we can be there to protect those who need to ensure against income and asset loss when a health event or financial event challenges them. Now let me discuss the general investment philosophy. How we're adapting to the changing global economic environment, the composition of the portfolio, and our approach to managing potential financial risk. As we've stated for many years, our greatest asset challenge has been to invest Japan's significant cash flows at reasonable investment yields. First and foremost, we consider the nature and duration of the liabilities and the investment support.
This means we primarily invest for the long term, and the strong cash flows from our persistent book of business gives us the ability to continue to invest with this perspective. Following the 2008 financial crisis, our primary focus had been on investment risk management while investing our significant cash flows and assets of relatively high quality and liquidity. We have made significant progress in proactively de-risking our portfolio over the last four years to enhance the strength of the balance sheet. In the process, we've been reducing our exposure to riskier asset classes, including perpetuals, PIIGS, 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, and if we determine they are no longer suitable for our investment portfolio, we will evaluate the options and take the appropriate measures.
At quarter end, more than 95% of our portfolio was investment-grade. The percentage of our senior debt holdings increased from 86% at the end of 2011 to 92% at the end of 2012. We remain focused on increasing the overall credit quality of the portfolio. Our objective is to diversify our large fixed income portfolio by geography and industry. The vast majority of investments in Japan are JGBs. We have significantly reduced our exposure to perpetual securities, peripheral European sovereign debt, and financials, especially in Europe. I am convinced we are much better positioned to accommodate volatility as a result of our de-risking efforts. Now let me discuss how much we've substantially enhanced our investment portfolio over the last few years.
From January of 2008 to the end of 2012, we have dramatically cut our holdings of sovereign and financial investments in the PIIGS countries from 5.9% to 1% of the total investments in cash. We've also lowered our investments in perpetual securities from 14.7% of the total investments in cash to 3.7%. I'd also like to point out that none of the perpetual securities we currently own are in those PIIGS countries. The U.S. corporate bond portfolio that we initiated in the third quarter of 2012 continues to be an effective means for enhancing our new money yields in Japan. You'll recall that in the second half of 2012, our objective was to invest roughly two-thirds of our invested cash flow in U.S. dollar denominated publicly traded corporate bonds and hedge the currency. This successful investment program enables us to surpass our budget of new money yield for 2012.
It has also provided greater liquidity, enhanced the flexibility of the portfolio, and increased the opportunity to diversify beyond JGBs. At December 31st, the program represented 6.2% of our total portfolio. In light of the success of the corporate bond programs and the strong credit fundamentals of the investment-grade corporate credit, we intend to continue the program in 2013. Consistent with our asset allocation program, we will balance these investments with JGBs for diversification and liquidity as well as other investment opportunities as they may arise. Our ability to continue to implement new strategies is based on our evolving capacities of the Aflac Global Investments Division. As you know, we've been building out our investment infrastructure, including our people, technology, and processes.
Then move forward accordingly as we update you on the progress at the analyst meeting coming up. We have defined our investment objectives of maximizing risk-adjusted performance subject to the liability profiles and the capital requirements. Our enhanced investment strategies provide the benefit of liquidity, portfolio flexibility, and diversification. We've already seen an increase in our new money yield as a result of the enhanced investment strategies, and we expect the new money yields to continue to benefit. It's important to note that all of our strategies have been back-tested against our capital ratios and the ratios that we are trying to achieve. I'll spend the last portion of my discussion updating you on our consolidated financial performance and capital management.
We've delivered consistently strong operating performance, achieving a 14.7% compound annual growth rate in operating earnings per share from 2002 through 2012. This achievement demonstrates our ability to generate significant cash flows and organic growth in our capital basis through various market cycles. The average yen-dollar exchange rate in 2012 was JPY 79.81, which is essentially unchanged from JPY 79.75 in 2011. We still believe that viewing our results, excluding the impact from foreign currency, is the most meaningful way to evaluate our financial performance. On that basis, we are pleased with the results this year from a financial perspective. I'm also very pleased with the strength of our capital ratios, which demonstrates our commitment to maintaining financial strength, flexibility on behalf of the policyholders, the shareholders, and the bondholders. Through strong surplus growth and improved portfolio risk profile and a weaker yen, our capital improved significantly in 2012.
As we have communicated over the past several years, maintaining a strong risk-based capital, or RBC ratio, remains a top priority for us. As you will recall, our goal was to end 2012 with an RBC in the range of 400-500. While we have not yet completed our statutory financial statements, we believe our RBC ratio at the end of the year will range in the 600-640, which is up significantly from 2011, when it ended at 493. As indicated in the Japan's filed financial results, Aflac Japan's capital strength, as measured by solvency margin ratios at December 31, 2012, was 669%. This result was well above our target range of 500%-600%, an improvement over the solvency margin as of September 30 of 628%. As we have said before, given our capital structure, our ability to repurchase shares is largely tied to profit repatriation.
In contemplating profit repatriation, our first consideration is the protection of our policyholders as measured by the SMR. Next, we consider the needs of a parent company and consult with Japan's management in making the determination. We now expect profit repatriation to be in the range of JPY 50 billion in 2013, which is a reasonable estimate, assuming that we have no additional investment losses that would reduce Aflac Japan's net income. Our profit repatriation for 2013 could provide us with a significant amount of capital that could deploy for share repurchase. Our capital strength enables us to increase our cash flow dividend to shareholders in the fourth quarter for the 30th consecutive year. Our objective is to grow that dividend at a rate that is in line with our growth and earnings per share before the impact of the yen.
Given the strength of the capital ratios and the parent company's liquidity, we resumed our share repurchase program activity, buying approximately $100 million of shares in the fourth quarter of 2012. It is our current plan to repurchase $400 million-$600 million worth of our shares in 2013. Understand, unless there is an extraordinary circumstance or event that occurs, we intend to purchase at least $400 million of our shares, which we are doing now. We are proud the rating agencies have recognized our financial strength in our balance sheet. Our financial strength is rated A+ Superior by AM Best, Aa3 with Moody's, and AA- with S&P. We believe that an analysis of operating earnings, a non-GAAP financial measure, is important to an understanding of Aflac's underlying profitability drivers.
Aflac defines operating earnings as the profits derived from the operations before realized investment gains and losses from security transactions, the impact from derivative activities and hedging, as well as non-recurring items. On an operating basis, we have had a long history of producing strong earnings growth. We continue to believe that the operating earnings, excluding currency, is the best way to measure the success at growing our business. Excluding currency, operating earnings per diluted share rose 5.1% in 2012, which was toward the high end of the 2012 objective. We continue to focus on maintaining the strong fundamentals in our core business and building on a record of strong earnings growth. I want to reiterate that our objective for 2013 has not changed to increase operating earnings per diluted share 4%-7%.
This range reflects the impact of the portfolio's de-risking and the investing significant cash flows at the lower interest rate environment. I would also point out that we had a better year in 2012 than we expected, in large part due to the receipt of a deferred coupon in the first quarter and lower annual effective tax rates. This will make it a more challenging comparison in 2013, but we're in a strong position, and we will achieve it. This slide shows how 2013 earnings might look with and without the impact of currency. Again, a constant currency basis, our 4%-7% objective equates to $6.86 or $7.06 in operating earnings per diluted share. We estimate that one JPY change on an annual average exchange rate will equate to $0.042 per share in earnings in 2013.
Operating earnings growth will also focus on producing industry-leading returns on equity. On an operating basis, our 2012 ROE was 24.6%. Keep in mind that our ROE is sensitive to currency fluctuations because we've hedged equity but not earnings. That means that when the JPY weakens, our ROE declines, although our debt to total capital will also come down a bit as long as we have JPY debt on the books. Therefore, if the JPY remains in the range that it's been for the past couple of weeks, around 93, 94, I think it's reasonable to expect the ROE to be in the range of 20%-25% for 2013. 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 and the fundamental need for our products, and most importantly, our future success of Aflac. Thank you, and I'll be glad to take any questions.
Hi, I was wondering if you could discuss the Bank of Japan's stated inflation target of 2% and its likely impact on demand for annuity products.
Well, let me just say this. I want to go back to the pillars of our business. We, as a company, saw somewhat of an anomaly with what took place in the bank channel, and our focus is never going to be life insurance or annuity products or any in that area. Our focus is the medical business. Number one, it has a higher profit margin. Number two is when we got into the WAYS product, the bank channels wanted a product to sell. It had a higher profit margin for us than single premium whole life. When rates went down, it even hurt them worse than it hurt us. We were able to pick that business up. Going forward, I see it as a one-time deal for us to a great degree.
We will write some, but we wanted to control the bank channel, and we have from the third sector. In fact, the bank channel, we expect sales of medical and cancer to be up or third sector sales to be up for the bank, but it's the other. Now, going back to your question on the 2% and what we see, it's going to be a strain because there is a requirement on April 1st that we basically change our rates and bring them down. In actuality, when we had the big fall off in rates last year at this time, that's when we should have had the rate increase or the interest rate assumption change. They run behind with the FSA sometimes to catch up. We're just having a rate decrease at a time when interest rates are moving up.
I think everyone is going to be affected by that. Now, our rates were higher. Some of the other companies could move much faster and lower their rates than we could because they specialized in these life products, and we didn't. Our systems took us a little bit longer, which hurt us in profit margin to a small degree, but gave us volumes of business to offset that. I think you're going to see that this change will actually hurt sales for everyone unless they're able to change the rates in the second half of the year. Second half of the year, we'll look at that and see. Again, that's not going to be our focus. Our bonuses are based on medical sales or third sector products, and that's what we'll do going forward. Thank you. Any others?
I think we're going to have to leave it there. Thank you very much