Good morning, everybody.
Good morning.
Thank you for joining us this morning. If there's anyone in the room that doesn't know me, I'm Robin Wilkey, Senior Vice President of Investor and Rating Agency Relations. I'd like to welcome everybody here. Thank you for getting up early and coming. You'll hear from our speaker shortly, but in the meantime, I would like to introduce you to some of the other officers that are with us today. If I call your name, please stand. From the U.S., we are joined by Tom Giddens, Executive Vice President and Director of Sales. Audrey Tillman, Executive Vice President, Corporate Services and HR. Teresa White, Executive Vice President, Internal Operations and Chief Operating Officer. June Howard, Senior Vice President and Chief Accounting Officer. Todd Daniels, Senior Vice President, Deputy Corporate Actuary. Tom McDaniel, my colleague in Investor Relations, Second Vice President.
Joining us from Japan, Sue Blanck, Executive Vice President of Aflac and Aflac Japan and Corporate Actuary. Charles Lake, Chairman of Aflac Japan. Issei Sakisaka, Senior Vice President and Chief Investment Officer of Global Investment Management. Also today, we're joined by two of our board members, Mr. Doug Johnson and also Mr. Gary Thompson. Thank you for being with us. Before we begin today, let me first remind you that some of the statements you will hear today are forward within the meaning of federal securities laws. Although we believe these statements will prove to be accurate because they are prospective in nature, our actual results could differ materially from those we discuss. Please look at our latest 10-Q filing for some of the various risk factors that could materially impact our results.
You'll find copies of your slides at your seat, so if you want to follow along and make notes, please do so. Following all of the presentations, we will have one Q&A session before lunch, which should provide plenty of time for you to ask questions. Please hold your questions until that time. Please remember, the presentation is being webcast, so as a courtesy, take a few moments and ensure your cell phones, iPhones, BlackBerry, Droids, and other electronic devices are turned off. Now I'd like to introduce our first speaker. Dan Amos graduated from the University of Georgia with a degree in insurance and risk management. He's been with the company on a full-time basis since 1973. He started in sales and quickly became one of our most successful state sales coordinators ever. In 1983, he was appointed president of Aflac.
In 1990, he became CEO of Aflac, and Aflac Incorporated, and in 2001, he was also named chairman. Aflac has received many awards and accolades since Dan has been at the helm. Earlier this year, Fortune magazine again recognized Aflac as one of the best places to work for the 15th consecutive year. Dan's been named the top CEO in the insurance industry by Institutional Investor magazine more than four times. I suspect that one reason Dan has earned this recognition is that he listens to his shareholders, like you today, and that he is the right man to navigate us through some challenging environment that we've seen over the last couple of years. Dan has said on many occasions that he would not trade places with any other CEO. I can safely speak for all the management team, and we wouldn't trade him either.
I could keep going, I'm sure you would rather him come up here and speak to you. Without further ado, Dan.
Good morning, everyone. Thank you for being here. It is amazing to me that this year marks my 24th year that I have attended the analyst meeting as CEO. I believe that our company that started nearly 60 years ago remains well-positioned in the two best insurance markets in the world today. More importantly, given the opportunities that lie before us, I believe the best is yet to come for Aflac. Let me start off the presentation today by sharing my long-term vision for Aflac as well as my priorities for our company going forward. Before I do it, let me bring you back for just a moment through a brief journey of Aflac's history. In the '50s, Aflac pioneered cancer insurance market in the United States. Even back then, Aflac's founders identified the need for a product to lift the financial burden of cancer victims and their family.
With this simple concept, Aflac started out with one country, with one product, 16 employees, and 60 sales agents selling through one distribution channel. Today, with name recognition of 94% in the U.S., Aflac is the number one provider of guaranteed renewable insurance, offering eight lines of business that include more than 20 different products. We sell these through three distribution channels, including medium and large brokers, as well as our career agents, where 41,000 agents offer our products on a monthly basis. Taking note of Aflac's success, many other companies have entered the supplemental insurance market, but none have been able to duplicate the kind of success Aflac has. In the mid-'70s, we exported the cancer insurance to Japan, and we started out with one product, seven employees, and one distribution channel.
Today in Japan, we're the number one life insurance company in terms of individual policies in force, offering six lines of business that include 13 different products sold through several distribution channels with more than 100,000 agents selling our products. You probably heard the story about the student who submitted a term paper about the probability of hub and spokes delivery model to the undergraduate class at Yale. I think he got a C, some type of mediocre grade on it anyway. That student was Fred Smith, who later founded Federal Express and became the CEO. No one, not even a Yale professor, could've imagined that a company in Columbus, Georgia, would establish the third sector for life insurance in Japan, then become the number one seller in terms of policies in force, and yet that's exactly what happened with us.
I'm sure that if John Amos had submitted a college paper on Aflac, he probably would've gotten an F because of the low probability of success. I want to reiterate what I said last year at this meeting, and that is, don't underestimate Aflac or its management, as we have always found a way to be successful. That is true in Japan, where we're halfway around the world. One huge common denominator that prompted Japanese consumers to embrace our products is the same way the U.S. consumer did, that the need for broader insurance coverage related to medical events. Ultimately, with a little bit of knowledge, a lot of good people, and some good fortune, we established the cancer insurance market in Japan. It's not hard to look at the past once in a while and marvel at how far we've come.
My mind is always focused on the future and the many opportunities that I see out there. Today, Aflac has the privilege of providing protection to more than 50 million people worldwide who count on us to protect them in terms of their financial wellbeing if a medical event situation occurs. My long-term vision for Aflac is to remain the distinction of being the market leader in both the U.S. and in Japan. I continue to believe the market opportunities in both countries are vast and in some instances are even growing. We have proven that we have the ability to adapt to change. In fact, through the years, I believe the strength, resilience, and adaptability are fitting words to describe both Aflac U.S. and Aflac Japan's operations. That's because we face many challenges, in fact, some multiple times over.
Using Aflac Japan as an example, we've shown repeatedly the strength of our brand, our product, and our distribution. I believe there is no better demonstration of our drive and determination to grow our business than in Japan, where we have successfully expanded our distribution from one model to several distribution channels, including bank distribution system that now includes more banks than any other company doing business in Japan. I think back on the eve of 2001, when Japan insurance market was posed to deregulate, market liberalization meant that many large insurance companies, domestic specifically, would be able to sell third sector products for the first time. There were those who thought that deregulation would be devastating to Aflac. Not only did we maintain our number one position in cancer sales, we emerged a year later as the number one seller of medical insurance, too.
The last two years for Aflac Japan have been the years of the bank channel. We sold a tremendous amount of first sector products, including WAYS. We are focusing more on our third sector products, particularly now that the first sector rerating has been completed. We mentioned that we are currently under-penetrated with consumers who in their 20s to 30s. We expect to write a lot of business in that area. You may also recall that we've been working to get approval for a new medical product with the FSA. As such, we anticipate very strong second half sales of third sector products. Looking ahead for Aflac U.S., we are facing challenging market conditions in the United States due to the implementation of the Affordable Care Act.
In the same way that we utilized a consultant to ensure our analysis didn't miss anything in preparation for 2001 deregulation in Japan, we opted to do the same here in the United States. As the market leader, it's our plan to work with our U.S. segment to ensure that we're flexible and proactive enough to address those changes and maintain our market leading position. Just as we came out ahead in Japan I believe here in the United States, we have the opportunity to emerge from an evolving healthcare market even stronger than we did when it started. That's because just like the national healthcare did in Japan, clarity will instill a better understanding and appreciation for the types of products that we sell. We expect that more consumers will be covered by major medical insurance purchased either at the work site or through exchanges.
We believe this will mean that insurance coverage and benefits will be more consistent across the board. However, it will also probably mean that those insurance benefits will be less rich. As an example, if you think of coverage in terms of platinum, gold, bronze, and silver, I believe that due to the cost, many employers are going to be offering the minimum benefit packages or the bronze tier. There's just not going to be a huge incentive for employers to offer better insurance. We believe this will further highlight the need for the types of products that we sell here in the United States. Some have said that this means the U.S. market will be coming to us. I certainly agree there is vast opportunities heading our way. At the same time, success does breed competition.
In that regard, we have seen many entrants in the market, just as we've seen in Japan over the last decade. We will be competing for customers, accounts, consumers, products, distribution, and shelf space. We are and need to continue to maintain our position as the low-cost producer. Make no mistake, we have to be on our game, ready and willing, and be able to execute by leveraging our strengths. I know we have the talent and the ability and experience to make it happen. I shared earlier the growth of our products and our distribution in Japan and the U.S., no matter how many distribution channels we have or how many products we sell, it's really all about the people, those who serve and those who manage the company. I am 61 years old and have been in the business now for 40 years.
It's my intention to remain as CEO till I'm at least 70. Believe me, I am not going to be a very good retiree. Chris, who turned 66 this year, has also committed to working until he is at least 70 years old. The common thread that keeps Chris and me at Aflac and fully engaged in our role is the belief that the future of Aflac and the desire to grow our business for the benefit of our shareholders. One lesson of the financial crisis is that you never stop learning. Challenges can come from unexpected areas of the company, and you have to plan for the unexpected. That makes it very important to Chris and me that we continue to build and enhance our management bench.
In that same way Aflac broadens its product line and distribution channels, we are building and broadening the management experience of those who are younger with us. In fact, for many years now, one of the requirements by the board of directors is for Chris and me to make an annual assessment of Aflac's current and potential management team. Consistent with that line of thinking, we have decided to ensure that we're giving management broader experience and more in-depth knowledge that can provide management continuity. Having received the board's unanimous approval, several members of the senior management will be taking additional roles and responsibilities. As you know, Paul has been running the U.S. for more than eight years. During that time, Aflac U.S. produced a record of strong profit growth, with pre-tax operating earnings compounding at 9.1% annually.
I think this is particularly notable during a period where small business, which represents 90% of the accounts, has struggled in a weak economy. Paul will also be working with Aflac Japan for four years and will now assume reporting responsibilities for Aflac Japan in addition to Aflac's global investment division. Although he will not be moving to Japan, Paul will be spending much more of his management time on Aflac Japan's business. As such, he will work closely with Tohru Tonoike, President of Aflac Japan, and the management team to continue its position as the number one insurance company in terms of individual policies. Paul will continue to report to Chris, who will work closely with Eric Kirsch, Executive Vice President of Global Investments, to build and manage the best-in-class investment division.
One of the reasons this works so well is that Eric has done a tremendous job building strong momentum with the transformation and build-out of the global investment division. Ken Janke has been named President of Aflac U.S., and in that role, will report to me. Ken will also continue to serve as Executive Vice President and Deputy Chief Financial Officer of Aflac Incorporated and will remain focused on the capital-related topics he will be discussing today. Ken has done a tremendous job as Deputy Chief Financial Officer, collaborating with Chris over the last few years. I think his new responsibilities will provide greater opportunity for him to gain more direct business exposure to the operational side of the business, which will help him become an even better Chief Financial Officer. Teresa White, Executive Vice President, Chief Service Officer, has been named Chief Operating Officer of Aflac Columbus Operations.
Teresa is an outstanding leader who has excelled in enhancing the customer service experience at Aflac. She is extremely well respected by everyone, including our field force and employees alike. Additionally, we are in the final stages of selecting a Chief Operating Officer for Aflac Group in Columbia, South Carolina. These changes in responsibilities for Paul, Ken, and Teresa will be effective July the 1st. Tom Giddens, Executive Vice President, will continue to lead our sales force, leveraging his more than 30 years of experience with Aflac. Tom is a recognized mainstay of the field force and one of the most admired leaders we've ever had. Michael Zuna will continue to lead our marketing efforts as Executive Vice President and Chief Marketing Officer. You'll hear more from him later today. These changes will further expand the knowledge base of the management team, ultimately benefiting the future of our company.
I think it also reflects good and effective corporate governance. As has been the case since the day Aflac was founded, the reason we're in business is to fill the promises that we've made to our policy holders, and that has been our highest priority. We strive each day to do it in a way that provides attractive returns and benefits for our shareholders. You've heard about the people changes, but I'm sure that our plans for profit repatriation and share repurchase are top of mind. As we have communicated, given the capital structure and our ability to repurchase shares in largely tied to profit repatriation. You'll recall that our first quarter release, we had expected 2013 profit repatriation to be a bit higher than the JPY 50 billion we had last communicated.
For 2013, we now estimate that profit repatriation will be in the range of JPY 70 billion-JPY 75 billion, which is a 40% increase over what we had anticipated. As always, this estimate assumes that we have no additional material investment losses between now and mid-June, when we file Aflac Japan's FSA-based financial statements. As we have said for many years, when it comes to deploying excess capital, we still believe that growing the cash dividend and repurchasing our shares are the most attractive means, and those are the avenues we will continue to pursue. We have a lot of flexibility at the parent company in terms of liquidity. Given the flexibility and strength of our capital ratios, we've stated our plan to repurchase $400 million-$600 million of shares in 2013. Following a great start in the first quarter, we repurchased $150 million.
We now expect to be at the high end of the range by repurchasing $600 million shares this year. Additionally, we anticipate accelerating our share repurchase in 2014. We estimate share repurchase for 2014 could be in the range of $600 million-$900 million. Those repurchases will help support our earnings target growth. I want to reaffirm our 2013 guidance of a 4%-7% increase in operating earnings per share, excluding the impact of currency. This range reflects the impact of our investing significant cash flows at historically low interest rates. I would also remind you that the 2012 earnings were better than we had expected when we had this meeting last year. Although the yen is significantly weaker to the dollar, the fundamentals of our business strategy and operations are strong.
Overall, I am pleased with Aflac's position in Japan and the U.S., the two largest insurance markets in the world. We will 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. As Robin said, I just want to tell you, it's an honor to be the CEO of this company, and I wouldn't change places with anyone. Robin?
Thank you, Dan. Our next speaker is Tohru Tonoike. Tonoike-san is a former Aflac Incorporated board member and joined our management team in 2007. He is President and Chief Operating Officer of Aflac Japan, and this morning, he will offer us an overview of Aflac Japan and the market.
Good morning. Today, I would like to outline the insurance market in Japan and Aflac Japan's business management. After my presentation, Ariyoshi-san and Shinkai-san will cover marketing and sales in more detail. First, I would like to update you on the life insurance market in Japan. The number of life insurance policies in force in Japan increased last year due to strong bank sales and a growth in 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 2012 was 133.7 million, up 6.5 million from the end of March 2012. Of that 133.7 million, third sector products accounted for 51 million policies. I want to mention that many of the numbers we use in our presentations refer to numbers on an FSA basis.
Let me remind you that the FSA operates on a fiscal year of April 1st through March 31st. Aflac Japan's number of policies in force has been steadily increasing over the past 38 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 2012 was 22.4 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 for several years leading up to fiscal year 2006.
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 around 40% of the 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 results of the National Census, which is carried out every five years, Japan's population peaked in 2010.
Currently, the number of deaths has been exceeding the number of births, resulting in a population decline. Japan's population was 127.5 million as of October 2012 and is anticipated to drop below 100 million by 2048. To support this forecast, let me share with you some results of population estimate conducted by Japan's Ministry of Internal Affairs and Communications as of October 2012. According to this estimate, 40 out of Japan's 47 prefectures saw a decline in population. Additionally, as a large portion of the baby boomers began reaching retirement age, the population aged 65 and older surpassed 30 million, accounting for more than 24% of the Japanese population as of October 2012. What's more, the primary reason for Japan's shrinking population is its low birth rate. The birth rate 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 birth rate remains very low. As shown in the graph, national medical expenses are rising every year with the rapid aging of the Japanese population. Japan has a national healthcare system that covers all Japanese citizens. 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's estimate, 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.
Under these circumstances, the government has been pursuing a comprehensive reform of the Social Security and tax systems to ensure a sustainable Social Security system, taking into consideration an aging society and a low birth rate. The related reform bills were passed by the Diet on August 10, 2012, but there are still many issues to be discussed with respect to the specifics of the Social Security system. Therefore, Japanese citizens must continue to take individual responsibility in preparing for their life after retirement. Against this backdrop, the market for third-sector products has been steadily expanding, and this trend is expected to continue. 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 March 2013, Japan had a total of 39 competitors selling standalone medical products and 27 selling standalone cancer products, including both life and non-life companies. This represents a slight decline from the previous years, resulting from the merger of some non-life insurers with their subsidiary life insurers. Given the new product launches and the product revisions we have seen from our competitors, we believe the market for third-sector products will remain very competitive. Now, I'd like to show you some data that demonstrates the changes in sales mix that have taken place over the past few years. As you can see on the left chart, Aflac Japan's new AP steadily increased from 2008 to 2012. In 2012, the figure topped JPY 200 billion, a sales record for Aflac Japan.
If you look at sales results by channel, you can see that the increase was driven by the bank channel, while the non-bank channel remained relatively flat. However, let me point out that sales through the non-bank channels have been hurt significantly by declining production in the last several years from Dai-ichi Life, Japan Post Office, and certain mass marketing agencies that mainly conduct telemarketing or mail order sales. The more traditional agents increased their sales efforts to help offset this decline. Later, you will hear more from Ariyoshi-san and Shinkai-san about the sales growth opportunities in 2013 and beyond. Amid this competitive market, for the first time in 12 years, in April 2013, the Financial Services Agency lowered the assumed interest rate of standard reserves or the standard interest rate from 1.5% to 1%.
Each company has the ability to decide whether to change the assumed interest rates for products. Aflac decided to keep premiums for its third-sector products unchanged but raised the premiums for the first-sector products, which are much more interest sensitive. Many of our competitors also kept the premiums for their third-sector products unchanged, but raised premiums for saving-type products. Since Prime Minister Shinzo Abe formed his cabinet in December 2012, Japanese stock prices have been rising and interest rates have declined. As of March 6, 2013, stock prices had recovered to the level before the Lehman shock of September 2008. This demonstrates that the markets have welcomed Abe administration's three-arrow Abenomics strategy to revitalize the Japanese economy and achieve sustainable economic growth. The three arrows are the bold monetary policy, large and targeted fiscal policy, and growth strategy.
The first arrow, bold monetary policy, entails real policy coordination between the government and the Bank of Japan to overcome Japan's chronic deflation and achieve economic growth. The central bank has changed its inflation benchmark from 1% to a real target of 2% and is embarking on open-ended monetary easing in order to achieve this goal. Large and targeted fiscal policy, which is the second arrow, includes fiscal stimulus targeting potential high-growth areas and reconstruction after the Great East Japan Earthquake and the tsunami of March 2011. The LDP expects these stimulus measures will boost the real GDP growth rate to 2%. The third arrow, growth strategy, is currently being drawn up to be released in June and will consist of policies to promote sustainable economic growth.
Specifically, these policies are being designed to create a better business environment, facilitate expansion of Japanese business in overseas markets, and initiate bold regulatory and institutional reform in high-growth areas. Market sentiment in general has been positive to Abenomics. The Nikkei has risen significantly over the last several months, retail money flow is shifting from insurance products to products such as investment trusts. Therefore, savings-type products for all insurers in Japan face a decline in sales. Cancer became the leading cause of death in 1981, and the number of Japanese diagnosed with cancer continues to rise. In 2011, one out of every three deaths in Japan was related to cancer. Deaths due to cancer exceed the number of those who died from heart attacks and strokes combined, which are the second and third cause of death.
Next, I'd like to show you some data related to Aflac Japan's core lines of business, cancer and medical products. These slides include products sold only by life insurers. The data reflects the latest figure based on each life insurer's financial statements as of December 2012. Please note that although some non-life insurers also sell medical insurance products, the statistics related to those sales are not disclosed by non-life companies. 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 remained the market leader with a market share of 72.1% of in-force cancer business as of December 31, 2012.
As shown in the graph on the right side, Aflac's share of new business for cancer insurance remains high at 46.3%, based on the actual figures as of the end of December 2012. Aflac's share of new business in the cancer insurance market rose in the fiscal year that ended in March 2012, thanks to the strong sales of Days. This enhanced product has benefits that provide extensive coverage for outpatient treatments in light of the latest advances in cancer treatments and the changing demand of cancer patients. Days attracted many new customers and further solidified our presence in the market. Following the sales push of Days in 2011, the focus of our agents turned more towards medical product sales, especially the new Gentle Ever product, thus causing a drop in cancer sales in 2012. We remain committed to partnering with local governments in cancer prevention awareness and education.
We have partnership agreements with all of the 47 prefectures in Japan. Because Aflac is the pioneer of cancer insurance, consumers have placed their trust in our company and our products. This slide illustrates the growth of policies in force for standalone medical insurance and Aflac Japan's share of that market. Aflac had an 18.7% share of in-force business at the end of December 2012. Although we were not the first insurer to enter the medical insurance market in Japan, we quickly became a leader in that market when we launched EVER in 2002, and we remain a leader today. Aflac Japan's share of new business for standalone medical insurance was 16.1% at the end of December 2012. As we have previously discussed, competition in this market has been intense for several years, which explains variations in our market share of new sales year-to-year.
In 2009, we revised our EVER medical product to include enhanced surgical benefits and gender-specific premium rates. Most recently, in July 2012, we released More Gentle Ever, a revision to the existing non-standard medical product. This product provides advanced medical treatment options and reasonable premiums to support more customers than its predecessors. We will continue to offer products to meet the needs of a broad customer base and maintain the position as a leader in the medical insurance market. Aflac Japan has five key competitive strengths that help us stand out within the industry. These competitive strengths include products, distribution, internal controls, financial strength, and administrative accuracy and efficiency. We have consistently maintained our competitive edge in these areas and anticipate that strength to continue.
Ariyoshi-san and Shinkai-san will offer some information about products and distribution later in their presentations, but I want to emphasize that we are focusing on remaining the leading provider in the third sector market and are committed to providing competitive products that match the needs of our customers. 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, by adopting comprehensive integrated risk management processes. At the same time, as we strive to improve our administrative accuracy and efficiency, we will aggressively pursue business process improvements and IT infrastructure enhancements to reinforce accurate and efficient policy administration. I believe that this will enable us to continue to provide customers with quality services and build upon our strength in this increasingly competitive health sector market. Thank you for your attention.
Next, we'll hear from Koji Hayashi. Hayashi-san 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. Hayashi-san.
Good morning. Today, I will be talking about Aflac Japan's marketing and sales strategies and activities for executing these strategies. Let me start off with a discussion about Aflac Japan's new annualized premium sales. Following two years of record-breaking sales and strong growth, 2012 was another all-time record year for Aflac Japan, with new annualized premium sales exceeding JPY 200 billion. Significant growth in the bank channel drove this strong growth, with sales through non-bank channels remaining relatively flat. In December 2007, banks were permitted to sell all insurance products, including those in the third sector. During the last several years, bank channel sales grew dramatically with our WAYS product as a primary driver. Additionally, we allocated a great deal of resources, including staff, to the bank channel.
In the fourth quarter of 2012, sales of WAYS began to decline, in great part due to our lowering the discounted advanced premium, or DAP rate. Additionally, we saw competitors re-enter the market selling products that compete directly with WAYS in the bank channel, including single premium whole life policies. Banks also focus on selling investment trust products. Further declines were seen in the first quarter of sales of WAYS through banks, resulting in a 13.2% decrease in all product sales year-over-year. The standard reserving rate change and increased premiums for our first sector products went into effect April 2nd, and will further dampen consumer demand for our first sector products. As a result of the repricing, the premium for Child Endowment increased about 5%, and WAYS increased around 20%. This slide shows the sales results for non-bank distribution channels.
Through the first quarter of 2013, sales through our non-bank channels accounted for 60.8% of our total new sales. As you can see from this slide, cancer and medical insurance sales make up the majority of our non-bank channel sales. This slide shows a competitive environment in the cancer insurance market. With an overwhelming competitive advantage, Aflac has established an unchanged number one position in the cancer insurance market, which affirms our reputation as a strong product innovator and trusted brand. Our cancer product remains an important part of our overall product portfolio. We remain committed to maintaining our status as the number one seller of cancer insurance. I would like to discuss the medical insurance market. Competition in this already competitive market is intensifying, especially on a pricing basis. Even amid this backdrop, Aflac has maintained its leading position in the medical insurance market.
Our standalone medical product, EVER, remains one of our two pillar products, and we continue to enhance EVER products to increase competitiveness and achieve greater market penetration. I would like to discuss how we will continue to grow our business and the key initiatives we are undertaking to position us for growth in 2013 and beyond. We believe that a key component to our future growth is leveraging and expanding our strong position with the third sector. We will do this by strengthening our product offerings, our promotion strategies, and our distribution networks. A key aspect of our product strategy is to ensure that we meet and stay ahead of the evolving needs of consumers. This includes creating new products and enhancing our existing products. For example, recently, our product upgrades have included benefits for advancements in medical treatment.
The number of days of average hospitalization between 1999 and 2010 declined by more than 30%, and more than 80% of patients now receive some type of outpatient treatment. Accordingly, many of our product revisions in recent years have enhanced outpatient benefits. Furthermore, it is equally important to analyze data and understand what demographics provide the most market potential, and accordingly, where we could strive to have greater presence. As I covered last year at our Tokyo analyst meeting, the segment of consumers in their 20s to 40s represents an area where we are under-penetrated. To further permeate that market, we believe it is important to enhance and develop products that appeal to this particular age group. Through our research, we know that competitive premiums are key decision points for this group for consumers, particularly for women.
We are planning to launch medical products in the second half of 2013 that not only have the best features but are also highly competitive in terms of pricing. Expanding distribution channels is another key to our future growth. As we look to 2013 and beyond, we believe that energizing our existing channels and growing new channels, such as Aflac Consultants, is how we will build our success. We have strengthened our distribution network to better enable our customers to purchase insurance products where they prefer to buy them. Staying true to this simple philosophy has yielded great success. In doing so, we have learned how to adapt to changes in customers' purchasing preferences. It is this adaptability and expansion that is another key component to our success. Energizing and revitalizing our existing distribution channel is a core initiative for the growth of our distribution networks.
For the corporate agencies, we will support their efforts in setting up their own dedicated call centers designed to establish contact points with consumers, and also assist them in recruiting and training their sales agents. For the individual agencies, we will provide sales skills enhancement training for service sector products and implement our new consultative training program. Within the bank channel, we will continue to promote and support the cross-selling of multiple products. Shinkai-san will discuss the bank channels in more detail in his presentation next. Building new distribution channels is another key component to achieving growth for Aflac Japan. It is especially important for Aflac Japan to establish more of a presence with the under-penetrated demographics of consumers in their 20s to 40s. About 60% of this age group prefers to purchase insurance through face-to-face solicitation.
We firmly believe that understanding the purchase behavior of consumers and rolling out a tailored channel strategy are essential to acquiring new customers. Starting in October 2012, we began developing large walk-in retail shops in the major metropolitan areas in Japan. As of March, we had created 10 shops under the brand of Yoku Wakaru Hoken Annai, or Easy to Understand Insurance Navigation, and we are planning to further expand by opening more shops this year. These will be enhanced shops that must meet specific requirements in order to qualify to use this new retail shop designation. These shops are required to have salespeople who are designated financial planners or have successfully completed an Aflac training program that focuses on building consultative sales skills.
A similar sales training program is also utilized by existing Aflac service shops and ensures that we have consistency and high-quality sales techniques being employed by both retail shops and existing service shops. Later, we will show you a commercial that promotes retail shops as a valuable tool for consumers to use in making their insurance choice. In addition, we continue to expand our more recent channels called Aflac Consultants, or ACs, that was introduced in January 2011. The Aflac Consultant channels were created to deliver comprehensive face-to-face consulting service primarily to consumers in their 20s to 40s. The AC channel is focused on the three major metropolitan areas where this demographic is concentrated. This channel has steadily generated positive results since its introduction. As of the end of March, more than 200 Aflac consultants are selling Aflac insurance.
By effectively allocating leads acquired by Aflac to our ACs, we have succeeded in producing great results. Going forward, we believe the AC channel will play an important role for the company, and therefore, we plan to increase the number of ACs to 600 by 2015. We will also focus the efforts of the AC more on cross-selling to existing Aflac customers. I believe this progression of our distribution expansion shows that we have developed the adaptability and distribution network to better serve potential customers where they want to purchase our products. Distribution is an important aspect of our accomplishments, and our trusted brand is another aspect. Aflac's success in creating and maintaining a strong brand is largely attributable to our promotion strategy. Our connection with consumers through effective product promotion is a vital competitive strength for Aflac, and we will continue to focus our efforts on our marketing strategies.
Our brand recognition in Japan is extremely strong. We will continue to implement promotional activities that enhance our strong brand and appeal to consumers. We will also continue to launch promotional strategies that highlight the benefits that set our products apart. Additionally, we will expand our promotional activities by developing marketing strategies that encourage consumers to visit retail shops. Now, I would like to show you one of our latest commercials that highlights our new retail shops. The following commercial shows you the power of the housewife in making insurance decisions. Enjoy. By executing the product promotion and distribution channel strategies I covered today, I am confident we will achieve our goal in 2013. We expect to produce third sector sales growth of flat to up 5%.
As we design our products and designation initiatives with an eye for the future, we believe the competitive strengths that have driven Aflac Japan's success over the years will continue to benefit us going forward. 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 First Senior Vice President in 2006. Prior to joining Aflac, he worked for the Long-Term Credit Bank of Japan. He is responsible for all departments related to bank sales, and this morning, he's going to discuss Aflac Japan's bank channel sales for this year. Shinkai-san.
Thank you. Today, I'd like to update you on some recent development and sales trends in the bank channel, as well as our strategy for 2013 and beyond. Let me first cover recent developments. In Japan, there are 401 banks of various types and sizes, and we have agreements with 373 of them. This equates to more than 90% of all banks in Japan selling our products. We believe this number is significantly greater than any of our competitors and reflects the solid relationships we have developed with the banks. As shown on this slide, the majority of banks are selling multiple Aflac products. In particular, the number of banks that have adopted our third sector products, such as cancer and medical, is far greater than that of our competitors. WAYS has the highest average annual premium per policy among our product lines.
The average premium for our WAYS product is more than 10 times that of our third sector products, such as cancer and medical insurance. Although the commission percentage paid per JPY premium on WAYS is less than that of our traditional third sector products, the higher total premium per policy on WAYS provides banks with very attractive commissions overall. This slide shows the trend of bank sales since 2009 on a semi-annual basis. As you can see, the sales of WAYS have grown significantly, driving more than JPY 80 billion on sales in 2012. Even after all banks stopped selling five-pay WAYS by the end of September 2012, WAYS still represented more than 80% of total bank sales last year.
Although the third sector sales as a percentage of total bank sales declined year-over-year, on an absolute basis, third sector sales in 2012 grew 13% over the prior year. This slide shows the trend in the number of policies sold by product through banks. In terms of the number of policies, WAYS only accounted for approximately 50%, while third sector products represented about 30% of policies sold through banks. We believe this demonstrates that banks and their customers find our third sector products to be attractive as well. As you may recall, when the ban on sales of insurance products by banks was lifted in December 2007, we diligently worked to establish agreements with as many banks as possible to sell our third sector products.
We executed on this well in advance of our competitors. As a result, former banks sell our third sector products than the competitors. In addition, we have consistently supported the banks with intensive training programs for their employees to help improve their presentation and sales skills. Our efforts have resulted in Aflac having the largest share of the third sector market sales through banks in terms of the policies sold. In the second half of 2012, nearly 90% of cancer product sales and more than 50% of medical product sales in the bank channel came from Aflac policies, surpassing all competitors within this channel. I'd now like to discuss recent activities and events, both internal and external, that have impacted our sales through the bank channel. As you will recall, following the introduction of a five-pay WAYS in August 2011, this product sold extremely well.
In April 2012, we implemented a cap on sales of five-pay WAYS, and by September, sales of this product were discontinued. We stopped sales of five-pay WAYS to avoid disintermediation risk. Additionally, we capped the sale of Child Endowment products from April 2012 through March 2013 this year. In April of this year, we repriced our first sector products, including WAYS and Child Endowment. We also reduced the discount rate for DAP from 1% to 0.5% in late October 2012 in order to further improve profitability of WAYS and Child Endowment. Toward the end of the year, we saw a strong increase in consumers who are expanding their search for various saving-type products, especially as the economic policy of the new government took hold. As a result, sales in the fourth quarter of 2012 declined by about 25% compared to the previous quarter.
The Japanese financial market has experienced significant change in the wake of the Abenomics. Net cash inflow to investment trust has grown significantly as consumers see a sharp rise in the Nikkei index. Recent data from the Investment Trust Association showed that net cash inflow in March of this year marked a roughly six-year high. As more than half of the investment trusts are sold by banks, they represent a sizable amount of cash flow that is being shifted away from the sale of insurance products. On April 2nd this year, we revised the assumed interest rate used for first sector products based on the change in the standard reserving rate mandated by FSA.
As you can see on this slide, in looking at the impact of the premium revisions for WAYS, the premium level for a 40-year-old purchasing a 10-pay WAYS policy increased by almost 19% for males and 22% for females. These figures also reflect an increase in the DAP rate from 0.5% to 1.0%. With respect to third sector products, we did not change the rates, and we are maintaining our competitiveness in that market. Reflecting recent changes in the market environment and the premium revisions made in April, sales of WAYS are expected to decline significantly this year. Therefore, we have implemented two key strategies. One strategy is to extend cross-selling efforts, which involves product enhancement, the enforcement of trainings, use of packaged cross-selling tools, direct mailing, and telephone marketing. Another key strategy is to increase consumer awareness of banks as a distributor of our products.
Of the customers who bought our products through banks, 70% of them are new to Aflac. WAYS and the Child Endowment products have been attracting new customers we could not effectively approach before, enabling us to build a new customer base. Since last year, we have been focusing on leveraging the sale of WAYS and Child Endowment to promote the sale of third sector products. As I explained earlier, third sector sales through banks have steadily grown since last year. We will continue to further strengthen our cross-selling activities this year. In the second half of this year, we plan to enhance some features of WAYS to make this product easier for banks to sell. For example, we will reduce the minimum coverage on DAP payment selections from JPY 2 million to approximately JPY 1 million.
In response to banks' requests, we will add new level payment plans that allow policyholders to pay monthly premium in rounded amount, such as JPY 10,000 or JPY 20,000. This is more consistent with amounts consumers are accustomed to paying for saving-type products with funds collected by banks on a monthly basis. We also believe these revisions to WAYS will be appealing to the asset-building class of customers. The asset-building class is a relatively younger subset of customers who are in their 30s to 40s, and who are focused on accumulating financial assets for education of children as well as home purchases. We expect to expand our customer base through those product enhancements.
As Ariyoshi-san mentioned earlier, we plan to introduce a medical product in the second half of this year, which will present more competitive premium schedules that appeal especially to our under-penetrated customer age demographic of 20s to 40s. In order to secure success of this new product through cross-selling, our revision of WAYS at this time is very important. In addition, we will introduce a product called GIFT to the bank channel later this year. Typically, a life insurance policy pays a death benefit in a lump sum. By contrast, GIFT provides beneficiaries, typically family members, with a monthly annuity until the insured would have turned 60. For example, a male who purchases a product at age 30 pays a monthly premium of JPY 6,740.
If he dies at age 40 or 50, the beneficiary of the plan will receive JPY 200,000 every month for 240 months or 120 months respectively. Because of the affordability of GIFT compared with the other life insurance products, we believe it will appeal to younger consumers. These features are also appealing to banks who seek to make their product line more comprehensive to facilitate consultative sales. With the introduction of this product, our portfolio of products available through banks is complete with the genuine death coverage product, a saving-oriented product, WAYS, and third sector products such as cancer and medical. We are dealing with approximately 19,000 branches of more than 350 banks. In 2012, we provided them with 23,000 training sessions, an average of 1.2 sessions per branch.
This year, we selected 7,300 branches from 19,000 that we think have the most potential to cross-sell. We will provide them with the focus training sessions about three times as often as we did last year. We are also focusing on enhancing tools for cross-selling. In the past, we used different sales materials for different products. Now we are using packaged brochures and other sales materials for cross-selling products such as Child Endowment and medical for children. This summer, we will introduce a package features WAYS, cancer, and medical. We are aiming at providing relevant sales materials based on the character of demography of customers. In addition, we have developed systems that will enable us to simulate premiums for multiple products at the same time.
For instance, when the customer considers buying WAYS, we will also discuss information on the total premium on cancer and medical to present a catalyst for cross-selling. Our new simulator will efficiently present the results of simulation. This will facilitate cross-selling. We will also reinforce the use of the direct mailings. Periodically, we are sending our policyholders Aflac mail, which is an annual reminder of the policies they have. Immediately after this Aflac mail, we will send additional direct mails related to third sector products to a customer pool consisting mainly of WAYS and Child Endowment policyholders. In addition, banks will make follow-up phone calls to solicit third sector sales. We will implement these initiatives prior to the launch of the new medical product in the second half of this year.
We will launch a telephone marketing to extend sales activities not only to our policyholders but also to additional bank customers. There are two reasons for the outreach method. One is to invite customers to the bank branches for a face-to-face solicitation. The other is to solicit sales through mail orders. We plan to start first project in August with a regional bank. As I mentioned earlier, it is very important for us to increase consumers' awareness that banks are selling insurance product. A survey we conducted last month showed that 32.6% of consumers surveyed knew that banks were selling insurance products. Additionally, less than 10% of those who visit the banks for non-insurance purposes were actually solicited by bank employees for the purchase of insurance products.
Importantly, 72% of those who actually bought insurance products at banks were satisfied with the service they received and indicated they would buy insurance products at banks in the future. Therefore, we believe there is significant potential to enhance consumer awareness of insurance sales through banks and leverage the consumer's positive experience with the bank to improve sales within this channel. Another survey conducted by Japan Institute of Life Insurance in 2009 showed that 2.6% of policyholders bought insurance products through banks. This percentage grew to 4.2% in their 2012 survey. There's clearly room to improve further. We'll use newspapers, advertisement, posters at bank branches, and training of bank sales personnel to support the banks in achieving their goals of providing customers with a broad range of quality products and services.
We have worked hard to build a bank channel for the past five years, and we feel good about the state of our relationships with the banks today. Going forward, we strongly believe the bank channel is an important part of our future in Japan. In thinking about our sales outlook for 2013, we have taken into account April sales result, the impact of the premium increases for first sector products, and the shift of retail funds from insurance products to more market-driven products, such as investment trust. Taking those factors into consideration, we expected to see a decline of 40%-60% in overall bank sales in the second and third quarter of this year. However, beginning in the fourth quarter, we expect sales to recover somewhat, mainly due to the revision of rates scheduled later in the second half of this year.
We also expect to return to the sales growth in 2014 and believe our strong relationships and ongoing efforts with the banks will yield sustainable opportunities in the future. Thank you very much.
We will now turn to Aflac U.S. with a presentation by Paul Amos. Paul moved from our sales force to the headquarters in 2005. He is President of Aflac and Chief Operating Officer of Aflac U.S. As Dan said, he will be taking on reporting responsibilities for Aflac Japan and the global investment area as of July the 1st. Today, Paul will be giving an overview for our U.S. operations. Paul?
Good morning, and thank you. My presentation will cover our business operations in the U.S., the changing U.S. healthcare environment, and the current economic factors affecting our business. In that regard, the best place to start our discussion on Aflac's U.S. business is with some comments surrounding today's healthcare environment. Since 1955, one attribute that has contributed to our success is our ability to adapt to a changing environment. The need for flexibility is as relevant today as it was 58 years ago, and in fact, one could argue that it's even more so in the midst of a regulatory change. These regulatory changes stem from the Patient Protection and Affordable Care Act, or PPACA, which was signed into law in March 2010 and upheld by the U.S. Supreme Court in June 2012.
PPACA is aimed at increasing the rate of health insurance coverage for Americans and reducing the overall cost of healthcare. Its regulations are intended to address major medical insurance carriers and therefore have a minimal impact on the type of insurance that Aflac offers. With a law with such complexity and far-reaching regulations, indirect impacts toward Aflac can create many unknowns. As you heard earlier this morning about the tremendous success that we've had as a company in Japan, where we've successfully operated in an environment with national healthcare for nearly four decades. Japanese citizens are covered by a nationally sponsored healthcare plan, yet they are greatly benefit from the financial protection that Aflac products help provide. I think part of the success can be attributed to understanding and clarity.
Japanese citizens understand that although the government provides for their healthcare, most citizens are still responsible for a 30% copay for medical services that they receive. We would like U.S. citizens to have the same type of clarity that Japanese citizens have about their healthcare. Even as we speak, the regulations are changing and evolving. The information I'll discuss is based on the most recent information. PPACA contains numerous rules, which vary by different business characteristics. One primary factor is the size of the employer. More specifically, different regulations come into play for an employer who has 50 or more employees versus an employer who has 50 or less employees. Many businesses, large and small, are putting together various healthcare strategies, including continuing comprehensive major medical coverage Self-insurance, HMOs, and PPOs.
The good news is that for just about every scenario, Aflac products are poised to add value, and our distribution channels are poised to provide solutions. With respect to PPACA, it was just announced last month that smaller businesses will have to wait till at least 2015 before they can choose medical plans from their employees through the SHOP exchange. Regardless of the implementation date of PPACA, national healthcare represents a great opportunity for us. The law requires each state to create a public healthcare exchange for consumers, whether state or federally administered. An exchange is an online marketplace where individuals may shop for healthcare insurance, compare benefits and prices, and enroll in a plan. Because our type of insurance is largely excluded from PPACA, we determined at this time it would be most advantageous for Aflac to create and run our own private exchange.
During our first quarter conference call, I mentioned that we are looking at other proven methods, such as iframes, that will allow Aflac's platform to integrate with many other public and private platforms to make the enrollment process smoother for the end consumer. We believe this overall approach will allow us to expand our reach as we adapt to the new environment, and we are looking to put to a planned launch of our exchange in 2014. Only time will tell how widely exchanges will be used as a means for distribution. By creating our own private exchange, we know we are well prepared and that we are taking a proactive approach relative to the implementation of PPACA. Aflac has the strongest insurance brand, and we believe we will be able to extend our reach to more businesses and consumers.
Although the implementation of PPACA has been pushed further into the future, we believe that it's impacting the behavior and optimism levels now. Some aspects of the U.S. economy have shown slight improvement in 2012, but we continue to see the landscape in the U.S. as challenging. That's especially true for the small business segment, where we write 90% of our products being sold. We know that small employers are still guarded with respect to their business outlook. In addition, some employers have been reluctant to make changes in their benefit offerings in advance of healthcare reform implementation. In terms of relief for small businesses, if there is any recovery at all, it seems to have been a jobless recovery. We believe this has hurt our re-enrollment activities at existing payroll accounts.
In a report dated March 2013, the National Federation of Independent Business chief economist, Bill Dunkelberg, cited uncertainty as the main cause for a recent drop in small business optimism. He put it like this: "Virtually no owners think that the current period is a good time to expand because they simply don't know what the future holds." This underscores the fact that small employers are still very guarded with respect to their business outlook, including their hiring plans. Gains and losses in employment impact our universe of potential policyholders. This means our sales opportunities are negatively impacted until smaller businesses have more optimism regarding the economy. Businesses and their employees are also impacted by rising healthcare costs, illustrated by a steady annual increase in the average premium contributions. Workers are spending increasingly more on healthcare, and so are their employers, which in turn impacts their business' bottom line.
Rising healthcare costs are creating a tipping point that has prompted businesses to seek solutions and create strategies to limit the amount of money they're going to have to allocate to major medical for their employees, including offering less rich benefit options or employ various other strategies. We are already seeing that some employers are changing their benefit offering from a defined benefit approach to a defined contribution approach, similar to what many employers did in the 1980s and the 1990s when they allocated a specific amount of money for each employee toward their pension plans. We also know that the implementation of PPACA is going to mean that many businesses are going to send some of their employees to public or private exchanges.
Regardless of which approach businesses take, our job is to be multifaceted in our distribution and to make sure that we have a presence where the consumer wants to purchase our products, and we're going to make progress in that regard. We are striving to become a hub such that our distribution system is regarded as a valuable consultative resource that can communicate our employees' major medical options, also voluntary products. In doing so, we believe Aflac will be a valuable component of many business strategies and solutions. For more than five decades, Aflac has developed competitive strengths that have propelled us to our market-leading position in the individual voluntary market. This graph illustrates Aflac's domination of the market in comparison to many other companies in the voluntary worksite industry. Our market share is greater than our next four competitors combined.
The clear need for voluntary products, combined with the evolving healthcare landscape, has caused many new companies, especially major medical carriers, entering the voluntary worksite market. I would point out these new entrants are making forays into our market as a contingency plan. Remember, Aflac's focus has been and remains only on the voluntary worksite market. As competition increases and the market evolves, we must create and execute a product and distribution strategy that fits the needs of businesses and consumers. One that provides a competitive edge with respect to our product benefits and how these products are marketed. We are focused on providing our distribution system with voluntary products that respond to and anticipate consumers' needs and wants. Our portfolio of group products and individual products provides consumers with outstanding value while offering businesses the opportunity to give their employees a more comprehensive selection of benefit options.
It's more important than ever for us to leverage our brand and offer accounts a choice between group and individually issued products. Doing so is especially relevant because in 2012, group policy sales accounted for 56% of the total worksite sales, eclipsing sales of individually underwritten products. This milestone further affirms our decision to expand into the group insurance arena, and we're confident that our strong brand, market-leading status, superior service, and comprehensive product portfolio will broaden the appeal of our products to consumers throughout the United States. Michael Zuna will cover the specifics about the products that we offer and the marketing strategy. I will focus on the distribution side of our strategy and how we will work to provide consumers with a positive, seamless experience.
You've heard us say before that our distribution system is a competitive strength that no other company has been able to duplicate, although many have tried over the years. Since 1955, Aflac has sold individually issued products primarily to smaller businesses through our career sales associates, which comprises a network of commission-based independent agents. Our career associate channel is a team of more than 76,000 sales associates who are the driving force behind our 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 many cases even buy a distribution channel like ours. We regard our success in the small business market as essential to our operating model.
With our career associates driving this success, we're going to continue to protect, enhance, and empower them to adapt to the difficult sales environment that they've faced in the last several years. Recruiting the right candidates and the right number of candidates is an important driver to sales. To support and maintain robust recruiting levels, we focused the last few years on expanding our coordinator base to better meet the management and development needs of our new recruits. Accomplishing this will strengthen our sales management capabilities and empower us to increase the number of successful producers with the ultimate goal of extending our reach to further customers. A cornerstone of empowering our field force is the Aflac Sales Academy. This training system is designed to develop key organizational capabilities and create value for the field force and for our customers.
Learning and development provided by the Aflac Sales Academy is an important part of the sales process and serves as the supporting foundation for many of the strategies that I have discussed thus far. We expect our Aflac Sales Academy to better equip all levels of our field force with success. This year, we're focusing our attention on training around three main components. First, we are implementing the associate curriculum. This training covers the consultative sales approach designed to equip new agents to sell to smaller employers. It provides veteran agents with complex sales methodologies to help them sell to larger employers directly or through brokers. Second, we are in the early stages of implementing commercial and people programs designed to enhance the management and leadership capabilities of our coordinators, as I referred to earlier.
Third, we recently introduced a healthcare reform curriculum designed to help all levels of the Aflac field force with strategies to advise employers and providing solutions to employees that are responsive to healthcare reform changes. We believe the academy will drive greater quality and consistency in the way our entire sales force consults and sells to employers and to employees. Several years ago, we began reaching out to small and medium regional insurance brokers to determine how we could best enhance our appeal. These small and medium brokers' primary focus is typically on selling insurance to businesses with fewer than 500 employees but can range up above 1,000 employees. That confirmed that our lack of group products was a major reason that brokers did not offer Aflac products at that time.
The acquisition of CAIC, branded as Aflac Group, gave us immediate access to many of the products, and this was a critical step in securing relationships with small and medium brokers. While Aflac has generated great success for five decades, it became clear several years ago that the infrastructure that we had built nurtured at Aflac US over five decades was better at serving the needs of our career associate channel and some small and medium brokers. Our one-size-fits-all approach did not apply to the large insurance brokers. To help us resolve this issue, we look to our colleagues in Japan. 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 businesses.
As such, we determined it would be beneficial to create a separate and distinct channel in the U.S. devoted to the large broker market, whose primary focus is selling to businesses of at least 500 employees. This allows us to pursue our mission of ensuring that each of the top 50 national brokerage firms has a formal and effective voluntary benefit strategy to grow their client base and improve their client overall benefit offerings. Keep in mind that while we are in the early stages of building a meaningful presence in the larger case market, the potential for Aflac is huge, particularly given the backdrop of national healthcare reform, as I mentioned earlier. As we continue to develop innovative products and expand our distribution channels, we are acquiring new accounts and customers.
In order to meet the overall corporate objectives, it is imperative that we balance enhancing the customer experience with expense control and operational efficiency. Our goal is to provide quality service at a low cost. By focusing on the aspects of service that our customers care about most, such as quick claims processing and effective customer service, we are able to keep operational costs low while providing a level of service that meets the needs of our customers. We continue to enlist alternative solutions, such as utilization of a non-traditional workforce, resource sharing, reallocation of staff, and elimination of non-essential processes to make our operations more efficient and effective. We want to improve our customer experience at every step of the process. Enhancing customer service epitomizes what we call the Aflac way. We know that persistent business is more profitable business for us than new business that lapses.
Therefore, it makes sense for us to work hard to maintain our accounts. In fact, I am pleased that the persistency in the U.S. has shown steady improvement for several years. We know that persistency has benefited over the last several years because people are not changing jobs as much and therefore are more likely to keep their current benefits. We believe another reason for this improvement is that we have enhanced our customer service at crucial touchpoints, which we believe has been a factor in better payroll account retention. Additionally, we use surveys of accounts in their first few years as an Aflac account to gain insight into initiatives that will help decrease account defections. When you look at the potential market for Aflac after the addition of group products, you'll see that there are 17,000 businesses with more than 500 workers employing 57 million additional employees.
The key word here is additional, because as I mentioned, our efforts are designed to expand our reach, not shift our focus. In other words, we are 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 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 into perspective, the U.S. Census Bureau data says that there are 111 million full-time employees in the United States. Based on a study from Hall & Partners, 92% of Americans are aware of the Aflac brand, which translates into 105 million U.S. workers, and 94% of that 105 million workers, or 99 million people, do not currently have access to our product at their work site.
With healthcare reform in the forefront of many consumers' minds, our strong brand is accelerating our potential to grow the business. This map represents the penetration by county throughout the country. As you can see, although we are the market leader, there is a tremendous opportunity for growth. While about 6% of the people in this country have access to our products, more than 20% of people say that they would like to buy our products if they had access. This tells us that we have a great opportunity and much more work to do in getting our products into the hands of businesses and consumers alike. I spoke earlier about the state of healthcare reform in the U.S., we believe there will be greater opportunities in the future to loosen the paralysis by analysis grip that has immobilized many consumers and businesses.
To take full advantage of this opportunity, we're leveraging our strong brand to connect with employers. Additionally, we are pursuing avenues of communication with employers at a critical time in history when they need education and better understanding. We are finding that this has become a beneficial door opener for every Aflac agent. Every owner asks the same question: what does healthcare reform mean to me, and what do I need to do? We are making significant investments in training, sales tools, and thought leadership that helps our agents meet the needs of business owners at this time, where providing information turns into a way to open doors and ultimately close the sale.
Whether it's peace of mind or financial protection, we want to educate and reassure consumers, businesses, sales associates, and brokers alike that our products are a valuable asset, we will be able to provide our products that they need when PPACA is implemented. I have spent much of my presentation today elaborating on the sales strategies that we are implementing to accomplish that vision in 2013 and beyond. Let me end by discussing it and by showing you how that we've performed in terms of new sales premium and provide some insight into our sales outlook for 2013. As I mentioned, we continue to invest in initiatives and incentives to grow our sales. Last year, sales growth was positive, I believe 2013 can be even better. The initiatives that I've talked about today will help us gain traction over the next several months.
As we execute our strategies, I believe sales results will improve for the remainder of the year and in the future. Looking ahead to the remainder of 2013, we believe it is reasonable to expect Aflac U.S. sales to be flat to up 5%. While economic conditions have improved, we look cautiously ahead. We believe we have the right people and processes in place to grow sales further this year and further penetrate the market. It has been and continues to be our longstanding goal and vision to be the leading provider of voluntary insurance in the U.S. As we look to the future, we will maintain our leading position and work even harder to enhance our position.
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 businesses of all sizes, from the smallest of sales associates to the largest of national brokers, from the humblest of mom-and-pop stores to the biggest retailers and corporations. 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 the changes of the U.S. workplace demographics, by being mindful and tactical in the evolving healthcare environment, by leveraging our strong brand in each of these endeavors. We will continue to explore additional opportunities to expand our distribution presence while taking into account the needs of various consumer demographic segments.
As consumers' preferences change with respect to how they will want to buy insurance, we will explore additional distribution channels. We will be where American workers want to purchase voluntary insurance, we will continue to look at the wants and needs of those consumers to identify those opportunities and fulfill their needs. As we consider new avenues, we will closely evaluate the propositions for risk and reward, cost, and economies of scale. With our competitive strengths and long-term focus, I believe the best is yet to come for Aflac U.S. Thank you very much.
Before we go to break, we have one more presentation, That's going to be with Michael Zuna. Michael joined Aflac in 2009 as vice president of marketing. He was promoted to Senior Vice President Chief Marketing Officer in 2010, and last year to Executive Vice President. Michael is responsible for all marketing strategies. Prior to joining Aflac, he served as managing director of Saatchi & Saatchi of N.Y., Michael today will share with you details about Aflac's marketing strategy. Michael.
Good morning. As Paul mentioned, Aflac remains the leader in the voluntary insurance market. However, we continue to see increased competition. We expect this competition to intensify as the implementation of healthcare reform moves forward. As the pioneer and market leader in this segment, we intend to grow our share by leveraging what sets us apart. This presentation will provide you with an overall picture of our product and marketing strategies in the U.S. I will update you on some of the things we've accomplished this past year and discuss the vast opportunities in the future. My team's overriding goal is to drive sales by developing relevant products coupled with targeted marketing strategies to help our agents and brokers reach prospective customers, decision-makers, and policyholders at the moments and locations that most influence their purchase decisions.
We've significantly increased our competitiveness by adding group products, and we've focused on developing marketing campaigns that integrate both individual and group offerings. Our Aflac U.S. product portfolio includes a variety of voluntary insurance products designed to pay cash directly to insured when a serious medical event presents a financial challenge. These payments are made regardless of any other insurance they may have. Particularly in an environment where healthcare costs are being shifted to consumers, our products provide value that is both real, and especially in the wake of major medical events, can be life-changing. As Paul shared earlier, healthcare costs have risen for employees and employers. Additionally, 62% of all personal bankruptcies are caused by medical expense impacts, and 43% of consumers don't feel equipped to handle large out-of-pocket medical expenses. Keep in mind, 26% of Americans have less than $500 for emergency expenses.
Aflac helps protect policyholders from rising out-of-pocket healthcare costs and at the same time supports employers by providing insurance plans that improve their workers' benefits packages at little or no cost to their businesses. Our products do not replace major medical coverage, rather they supplement it. Ultimately, our products are designed to provide customers peace of mind for the real cost of unexpected events that will ultimately impact their financial well-being. Based on our desire to respond to the evolving needs of consumers, employers, and producers, we expect our offerings to evolve over time. This is a snapshot of our current product offerings and the availability of each by platform type. Aflac's strong brand and market leading status only serve to broaden the appeal of our products to consumers throughout the United States. Our product strategy has three core tenets.
First, we will continue to lead the market in innovation around our core products where we lead that market: accident, critical illness, cancer, disability, and hospital indemnity plans. One example seeing particular market traction is our Aflac Hospital Advantage product, which was specifically designed to address the changing healthcare environment. The plan has 4 levels of coverage and 6 benefit levels to provide a range of benefits from initial hospital confinement, emergency room treatment, a surgical schedule, and daily hospitalization benefits, to name a few. Second, we will continue to fill any competitive gaps in our group product portfolio. One example of this is the recent launch of our new group disability product, which now provides our consumers a best-in-class disability product.
Third, we are investing heavily in capabilities and products that respond to emerging employers' needs that they will have with respect to healthcare reform, tailoring the design of products to meet consumers at their anticipated point of need. Effective marketing plays an important role in driving revenue and earnings. We've developed a clear and focused strategy centered around consumers, businesses, brokers, and agents to provide a customized experience and products specific to the needs of each constituent. It starts with catalyzing demand from new and expanded distribution, namely our brokers and agents. We ensure those distribution channels fully understand Aflac's value proposition and how we can equip them to drive their businesses with valuable products and solutions. We must also ensure that our business clients are aware of Aflac, understand our offerings and value, and increasingly consider us in their benefit offerings.
Lastly, and perhaps most importantly, we must help consumers understand and gain better access to Aflac's products. Worksite marketing, the core of our business, necessitates a multifaceted marketing approach. It involves social engagement, which we're using to leverage the voice of the consumer. Our model also involves thought leadership, through which we're engaging in dialogue about benefits with the nation's large, medium, and small employers and brokers. For example, to address the need for information prompted by the rapid changes taking in the healthcare environment and the benefit landscape as a whole, we created the Aflac WorkForces Report. Conducted by a third-party research firm, we prepare this report annually for use by brokers and employers. It provides a snapshot of how employers and employees utilize and feel about employer-sponsored benefit plans.
This information is invaluable to help employers understand the holes in their benefit offerings, as well as the value Aflac products can provide. Lastly, our model continually strives for innovation in sales enablement technology to improve efficiency, as well as enhance the customer experience. These efforts require our sales and marketing teams to work very closely with our IT department. The goal is to develop relevant tools that significantly and positively impact our sales and marketing efforts. One example of the partnership is the creation of our Real Cost Calculator, an innovative online tool which helps consumers and businesses calculate the actual costs of common injuries and illnesses and see how Aflac's policies can help them cover those costs not covered by their major medical insurance. We have also created other web-based tools that help brokers, businesses, and consumers make the most informed choices about their benefits.
Our integrated marketing approach across all of our target markets is designed to drive awareness, consideration, and understanding with potential new customers and distribution. For existing customers, our marketing efforts are geared to drive greater adoption and penetration of our products, with a particular emphasis on driving retention of accounts, where we've experienced particular success over the last few years. Our current Duck Out of Work campaign demonstrate the challenges that Americans often face when an unexpected accident or illness causes them to miss work. Only this time, it is our icon who provides a first-hand perspective as a policyholder while shedding light on how Aflac's insurance policies can help protect families against common setbacks. This campaign walks viewers through the recovery of the Aflac duck to help draw the connection to how an accident may impact their own lives.
This fully integrated campaign also includes substantial online and print advertising, featuring an innovative social media component, posting strong results. Our latest ad in this story, which we'll launch soon, focuses on how the duck's policies have helped enable him to focus on recovering, knowing that he is protected from financial pain. Let's take a look.
La, la, lac.
He's an actor who's known for his voice, but his accident took that away. Thankfully, he's got Aflac. They're going to give him cash to help pay his bills so he could just focus on getting better. We're taking it one day at a time. One day at a time.
See how the duck's lessons are going at aflac.com. Underpinning all of our efforts is our understanding that insurance is an emotionally driven purchase. Therefore, our product and marketing strategies are rooted in facts, research, and accountability. Data and analysis is critical to the development of effective marketing initiatives. 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, one of our competitive advantages is to successfully navigate through the wealth of information and use it in a way that drives results. In 2013, we will expand our efforts to not only reach new customers, but also to retain existing accounts and policyholders alike. As you may have heard me say before, our marketing strategy is centered upon accountable marketing that is driven by strategic objectives, integrated programs, and clear metrics.
For those of you who have followed Aflac for a long time, you know that improving our product line and distribution has been a central part of our growth strategy for decades. We believe that the refinement, improvement, and innovation is the hallmark of a market leader like Aflac. We are excited about the opportunities ahead of us and are focusing on leveraging our strengths to deliver value to the millions of policyholders, shareholders, and many others who count on us. We believe we have the right products and strategies to differentiate Aflac and drive our future success. Thank you.
Thank you, Michael. We're running pretty much on schedule. We're now going to take a quick 10-minute break. We have refreshments outside. 10 minutes. We'll come back in. We will start off with Eric when we come back. Thank you. Okay, welcome back everyone. If you'll please take your seats, we're ready to start the next session. The next session will be from Eric Kirsch. Eric joined Aflac in 2011 as Senior Vice President and Chief Investment Officer and was promoted to Executive Vice President last year. 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 Asset Management. He also spent nearly three decades altogether at Deutsche Asset Management and Bankers Trust.
Today, he will review our portfolio investment activities and the transformation of our investment function. Eric?
Good morning. It is a pleasure to be with you again. As you will recall, last year I presented at my first Aflac financial analyst briefing meeting. It was an incredibly challenging time for our investment portfolio, given the heightened volatility of European financial markets, limited new investment opportunities, and the responsibility given to me to build a world-class investment organization. I am here today to share with you the success we have had in meeting all of these challenges. During the past year, we did a great job of further de-risking our portfolio and improving its quality while also reducing risk levels to European and financial securities. We launched new investment strategies that allowed us to improve our new money yields and the overall diversification of the portfolio. Finally, we made significant progress transforming our global investment organization.
I'm extremely proud of how our staff has dedicated themselves to accomplishing our goals that benefit our policyholders and shareholders. Today, I will cover our investment goals and objectives and provide a brief overview of the market's performance during the past year related to existing assets and new investments. I will conclude with a progress report on our transformation program. Historically, we have been focused on net investment income with appropriate objectives for diversification and risk control. Our mission today is to enhance our risk-adjusted performance with a focus on maximizing economic returns against our liabilities and minimizing risk to our capital. Our transformation is allowing us to evolve in step with financial markets and regulations. Of course, this will be a multi-year process. We will continue to focus on net investment income blended with economic returns designed to achieve superior long-term results.
This approach will better prepare the organization for future regulatory and accounting changes. Our investment objectives are primarily driven by careful consideration of our liabilities and capital requirements. As you recall, during 2012, we conducted a comprehensive asset liability management and asset allocation study, which redefined our investment strategy. In Japan, our liabilities are yen-denominated, have long durations, and are generally not very interest sensitive. Our investments are primarily focused on longer duration, yen-denominated fixed income securities. These include both government securities such as JGBs as well as credit investments, which are now a combination of privately issued securities and, more recently, publicly issued corporate debt hedged back to yen. While our first sector products such as WAYS are more interest rate sensitive than our traditional products, they still have long durations.
In the U.S., liabilities tend to be shorter than in Japan, and our investment strategy is primarily focused on U.S. corporate publicly traded fixed income securities. Our investment strategies are also focused on prudent management of our credit, interest rate, and currency risk. We seek out attractive risk-adjusted returns beyond risk-free investments, primarily through credit markets, and have built a global credit research team to support these objectives. We carefully manage our interest rate risk, which may be a function of ALM, but also protect our asset values in times of rising interest rates. Finally, we have added currency management to our investment program. We have designed our investment process to take into account proactive management around the amount of currency exposure, hedging strategies, and impacts on return and capital. Our investment strategies are carefully integrated with a robust risk management process.
This ensures appropriate risk controls along with consideration to the appropriate risk level given the expected returns we seek to achieve. Our investment risk process involves calibrating our strategies to our capital and performing multiple stress testing scenarios to ensure the safety of our assets through various market cycles. We spend significant amount of time focused on analyzing market conditions from three very important regions of the world, the United States, Japan, and Europe. As a global investor with a base of operations in Japan and the U.S. and a legacy portfolio of exposure to European investments, we have a vested interest in these three markets. Despite fiscal challenges in the United States, we see accommodative monetary policy driving the markets. Overall, during the last year, we saw declining interest rates.
Over the next year, we believe we'll see growth, and as a result, we'll be more likely to see modest interest rate increases. My colleagues from Japan have already covered Abenomics, I'll focus my discussion on its impact on the investment environment. The most immediate impact was the extreme weakening of the yen. Most recently, the Bank of Japan instituted significant changes to Japan's monetary policies with announcements of their programs designed to keep interest rates low and target a 2% inflation rate while buying back significant amounts of JGBs. JGB yields substantially declined and were at historically low levels immediately after the BOJ announcements. We will continue to closely monitor this story as it has a significant impact on Japan's financial markets. If these policies are successful, we would expect higher interest rates and potential inflation in the future.
We faced a different set of issues in Europe, where the fiscal situation continues to be challenging. On the monetary side, we saw the ECB commit to providing ample liquidity and lending to the European Union countries and their financial institutions, with the goal of ensuring markets operated normally and avoiding a collapse of the financial system. We saw significant declines in yields and spreads on European investment-grade debt. While we ceased making new investments in European markets, our portfolio benefited through higher valuations of our existing holdings in the region. These higher valuations also provided a better investment environment for de-risking. As you can see on this chart, spreads on corporate debt and yields declined dramatically during this period. Looking ahead, the ECB will continue to be accommodative. We anticipate that fiscal policy will be an issue.
While we may experience some volatility, we do not believe it will reach the levels we saw in 2011. Keeping the economic backdrop in mind, I will now review our investment portfolios. As you can see, we have two main entities, Japan and the U.S., that comprise the majority of our assets. On a consolidated book value basis, our invested assets total more than $100 billion. Approximately 90% of our invested assets are associated with liabilities from the Japan business segment. The U.S. segment 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. I would now like to spend a few moments looking at the composition of our portfolios below the segment level.
As you know, our investment strategies have evolved, and we manage each portfolio with specific objectives. This provides diversification, liquidity, and sources of excess return. JGBs play an important role in our portfolio, specifically to back our long-dated liabilities. We typically expect JGBs to be in the 30%-40% range. At March 31st, 2013, we had 35.6% in JGBs. We have about 6% in unhedged U.S. dollar investments. For more than 20 years, Aflac Japan has maintained a portfolio of U.S. dollar-denominated investments. The rationale behind this portfolio is twofold. First, we're able to take advantage of diversification that comes from having investments in U.S. markets and to seek more attractive yields. Second, by investing a portion of Aflac Japan's equity in U.S. dollars, we have helped mitigate the currency impact on Aflac's consolidated GAAP equity. The remaining allocation to U.S. dollar bonds backs Aflac's U.S. business.
Historically, Aflac has placed its credit investments for the Japan balance sheet in privately placed securities. At March 31st, 2013, yen-denominated privates, including reverse dual currency bonds, represented 34.9% of the portfolio, which is a significant reduction from 46.6% since March of 2012. In November of 2011, we ceased making new investments in European private placements. We will continue to let the asset class decline over time. It's important to note that we have solid credits, many with financial covenants or below investment-grade puts, making them strong holdings for the long term. Despite the inherent liquidity challenges, we are proactively managing this allocation to obtain the optimal balance between risk and return. Hedged corporate bonds, a new asset class we launched in July of 2012, represent 8.7% of our portfolio. Investing in this asset class matches the currency of our liabilities in Japan.
It allows us to achieve significant diversification while improving the quality and liquidity of our investments. Through this conservative investment strategy, we were able to outperform our targeted new money yields for 2012. As you can see, our investment strategies continue to evolve. Overall, I'm pleased that the balance sheet is improving and its quality, liquidity, return profile, and diversification. As seen on this slide, the credit quality of our portfolio remains very high, with an average portfolio rating of single A. Some shifts occurred over the past year. Specifically worth noting is the single A category declining from 28.3% to 25.1%, and our triple Bs increasing from 22.9% to 26.1%. That shift primarily reflects some downgrades that occurred during this past year, as well as some of our purchases of the public bond program. Our focus will continue to be maintaining a single A average rating.
Our sector allocations saw significant change and improvement as well, reflecting our investment priorities. As you can see, our JGB allocation increased to 35.6%. This primarily reflects the majority of our cash flows going to JGBs in the first half of 2012. Of significant note is the decline of our financial exposure to 18.2%. Also note that our industrial exposure increased to 27.2%. This reflects the new investments related to our hedged corporate bond program, where we have ample capacity to add high-quality industrial companies to our portfolio.
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As well as seeking out attractive investment growth opportunities in world markets. Given that almost 90% of our liabilities are in Japan, we expect the country to remain a key part of our investment activities. I believe we have done a very effective job of reducing our European exposure through this volatile environment. Our European exposure has decreased from 27.6% to 20.3%, reflecting our de-risking activities and desire to reduce our exposure to the region. Our investments in the U.S. increased from 15.7% to 23.4%. This reflects the allocation to our hedged corporate bond program, which is primarily focused on investing in U.S. companies today. We believe this allocation to one of the strongest credit markets in the world is a strategic priority to enhance the quality of our balance sheet. From a global risk perspective, we have been carefully managing our bank and sovereign exposures.
This chart excludes JGBs and Treasuries. One of our highest priorities over the past year has been to reduce our risk to these sectors, and in particular, perpetual securities, particularly those based in Europe. I am pleased to report that we made excellent progress. As you can see, we reduced our exposure on a global basis by 23%, with the majority of that impact in our sovereign and subordinated positions. In Europe, our total exposure was reduced by 34%, down to $7.5 billion. Our PIIGS exposure was reduced by 52% and stands at $1 billion. Our subordinated exposure across Europe was reduced by 39% and now stands at $3.6 billion. In addition, when you review institutions where we do have subordinated debt, you will find that the parent companies have, on average, a single A standalone basis credit rating.
We believe our subordinated exposures are to higher quality banks that are less likely to run into financial distress. I would now like to cover our investment exposure to Italy and Spain. Here, you can see a summary of our exposure year-over-year. As of March 31st, 2013, our Spain exposure was significantly reduced by 61% to $957 million compared with the prior year. In addition, 83% of this exposure is invested in infrastructure such as utilities, toll roads, and telecoms, all of which should perform well even under a stressed environment. Although it's not reflected in the numbers on the slides, I am also pleased to report that in early May, we liquidated our position in Bankia for about $58 million, realizing a slight gain. We feel good that even as Spain goes through a tough economic cycle, our credits are better positioned.
In Italy, we reduced our exposure by about 12.5%, and it now stands at $2.1 billion. Importantly, 75% is in infrastructure names that are likely to hold up very well during a tough environment. We feel our exposure is manageable, and we will continue to proactively manage the risk as situations develop in Europe. The market value of our assets has improved throughout the past year. Our unrealized gains and losses went from a gain of $1.8 billion last year to $4.8 billion as of March 31st, 2013. This reflects both the decline of interest rates, which boosted our market values, and improved credit spreads, in particular for our European holdings and financial holdings.
Although most of our financial metrics are measured by book value, the market value of our assets provides us with a good gauge of our performance. In addition, the unrealized gains and losses in AFS impact our solvency margin ratio or SMR. Therefore, this positive trend has contributed to our improving SMR. I would like to conclude the risk portion of my presentation by reviewing our de-risking activities. You can see on the left side of this chart the year-by-year de-risking activity in terms of book value reductions and impairments taken in that period. You will recall that in the fourth quarter of 2011, we declared a change of intent strategy on a number of our risk positions and executed the actual de-risking transactions in the first quarter of 2012. Between those two quarters, we reduced $2.4 billion of exposure with about $1 billion in impairments.
At that time, I also announced that we did not plan any further specific de-risking programs. However, I set out an objective to be opportunistic in managing our credit exposure to further reduce risk when the economics were favorable to us. Since the second quarter of 2012 through the first quarter of 2013, we were able to de-risk $3.9 billion of various positions, the majority across Europe and financials. Over these five quarters, we took about $800 million of impairments, of which roughly $259 million was associated with Tunisia. The main message is that our trends are improving. The amount of our impairments is declining as we continue to reduce our risky positions. Certainly, there could be further impacts from ratings migrations, weaker credit conditions, or European volatility, but we expect any impairments or losses to continue to trend downward.
My global team will proactively manage these risk positions and when required, find the best opportunity to de-risk in a manner that drives value for our policyholders and shareholders alike. I would like to turn to our new investment activities. As you know, Aflac generates large amounts of cash flow. The global investments team is charged with finding the best relative value among the asset classes available, consistent with our risk and return objectives. We had nearly $20 billion to invest in 2012. On the bottom of the chart, you can see our new money yield for 2012 was 4.02% for Aflac U.S. and 2.4% for Aflac Japan. Our new money yield declined from 2011, given the global low yield environment. In the first quarter of this year, our new money yield in the U.S. was 3.67%, and for Aflac Japan, it increased to 3.03%.
Our utilization of new investment strategies produced this increase in yield. Now let me turn to a review of our asset allocation and investment strategies. In the first half of last year, the majority of our cash flow went into JGBs. This was a conservative choice conditioned on the fact we ceased investing in European private placements. In the second half of 2012, we implemented the hedged U.S. corporate bond program, which I will review in more detail shortly. This program made a substantial positive impact on our investment yields, resulting in an increase of about 75 basis points in the third and fourth quarter of 2012. The hedged corporate U.S. bond program represents approximately two-thirds of Aflac Japan's new money cash flow. Our allocation to JGBs is about 30%.
However, given the low yields resulting from the Bank of Japan's easing monetary policy, we are considering to reduce the current allocation. Those options are still under review, and we will report our investment decisions as the year progresses. The hedged U.S. corporate bond program allows Aflac to gain exposure to publicly traded corporate bonds, which is the core allocation for most U.S. life insurance companies. It is also one of the deepest investment markets in the world. This strategy provides enhanced portfolio flexibility, higher average quality, attractive investment yields, and the ability to proactively manage our credit positions. Importantly, this strategy provides security level liquidity, which is a key differentiator to our legacy portfolio of private placements. These assets are designated as available for sale. This strategy also incorporates a hedging program to convert the fair market value exposure to yen as these assets are backing yen liabilities.
Since July of 2012, when we launched the program, we have invested about $8.8 billion and plan to continue to invest about two-thirds of Aflac Japan's new money cash flow to this asset class based on market conditions. You can see on this chart that the portfolio is well diversified by industry. Our focus has been on highly rated names in the single A and triple B ratings categories. Our purpose for the program has been modest. Given that our alternative was to invest in lower yielding JGBs, we took a very conservative approach to portfolio construction. Our goal was to buy benchmark names that were right down the fairway of investment-grade credit risk. At the end of the first quarter, the program represented about 8.7% of our total assets. We currently project it will grow to about 12% by the end of this year.
Relative to our total assets, this is still a modest exposure, but a growing one. Because of our substantial cash flows, we were able to dollar cost average in terms of our purchase yields and spreads. When we evaluate the investment merits of this core program, we compare it to JGBs. Looking at this table, we can see that the economics represented by the net yield advantage over 20-year JGBs have improved even further since the program's inception. Using the market yields at the end of September of 2012, we experienced a 146 basis point yield advantage over JGBs after hedging costs. At March 31st, that yield advantage grew to 198 basis points. This occurred primarily because JGB yields decreased significantly, as did hedge costs, while US corporate yields stayed about the same. This yield differential represents an attractive relative value opportunity for our investment program.
This is subject to change over time. Additionally, I should note that this ignores the opportunity cost of settlements with respect to the counterparties on our forward contracts. As capital market theory suggests, over the long term, those settlement costs should be neutral as the currency appreciates and depreciates. Over the last few quarters, given the large yen depreciation, we estimate that opportunity cost to be between 25 and 30 basis points. Even accounting for that, our net yield advantage is highly attractive. To achieve this excess return, we do assume additional risks. These risks include credit risk, foreign exchange risk on our unhedged coupons, interest rate risk differential between the US and Japanese markets, and opportunity cost with respect to settlements. We believe the spread we earn is adequate compensation when considering the liquidity and diversification benefits of the bonds.
Given the large exposure to yen interest rate movements, our asset allocation study demonstrates that the modest exposure to US interest rates diversifies our interest rate risk for Aflac Japan business. Let me now move into a more complex topic, the hedging portion of the hedged US corporate bond program. When we launched this program, we evaluated different hedging instruments to accomplish our goals of hedging US dollar exposure back to yen. These included the use of currency forward contracts, cross-currency swaps, interest rate swaps, and other alternatives. Each of these has benefits, risks, and cost considerations. We chose to focus on forward contracts as our main tool, given their ample liquidity and low costs. Forward contracts are one of the most liquid hedging instruments for yen-dollar purposes, and the market for forwards has been robust, even during the financial crisis.
When we initiated our program, costs were around 45 basis points. They have since fallen, and today, we pay about 30 basis points. Forwards are short in tenor, typically three to six months, so we roll our forwards often, adjust exposure, monitor counterparties, and ensure we maintain hedge accounting. One of the risks that we monitor closely is the cost of the forwards and how it relates to the return we are achieving as compared to JGB yields. As I covered a few moments ago, the net yield differential varies over time. I am pleased to say the strategy has worked efficiently for us and has performed exactly as we expected. Because both central banks continue to maintain accommodative monetary policies, costs have trended downwards.
We see these monetary policies being in place for the remainder of this year and part of 2014 in the U.S., and perhaps even longer for Japan. At some point, the U.S. Federal Reserve may pull back on easing, but our view is it is highly unlikely to change to a tightening policy during 2014. Therefore, while there is some risk that short-term rates in the U.S. will increase, it is unlikely to be by much. Forward costs may increase, but not in any material amount to cause concern. In fact, we view 100 basis points in cost relative to our existing portfolio as quite reasonable. Over the long term, these costs could be higher, but we would make relative value decisions based on current yields and other investment opportunities at that time.
Cross-currency swaps, on the other hand, are not instruments we have utilized for the hedged U.S. corporate bond program, and we anticipate just a small amount of usage over time. One key benefit is the ability to hedge the currency exposure for the life of the bond, as well as convert dollar interest rate risk to yen interest rate risk. The drawbacks, as you can see from this chart, include small supply and low liquidity. As a result, we expose ourselves to default risk on the bonds as we face high transaction costs to liquidate the swap in the event we need to unwind the transaction. Additionally, the costs are high, almost negating any spread advantage and yield pickup. As this chart shows, forward costs are highly correlated to short-term rate differentials between the U.S. and Japan.
As I've alluded to on our earnings calls, we are exploring new hedging strategies that will minimize our risk through different market cycles. We have a global project team analyzing these strategies now, and I am encouraged by our findings to date. We expect to conclude our research work in the next few months and employ these tools as market conditions warrant. Let me give you an outline of preliminary thoughts and findings. As this chart shows, there are four overall hedging strategies we could pursue, as well as a strategy of being unhedged. Each strategy has its pros and cons. Among the hedging strategies, a collar strategy will work very well along with forwards. A collar would allow us to structure a band around the exchange rate range upon which we are willing to accept the currency risk.
Once the currency moves beyond the bands or the collar, we become hedged and neutralize any further impacts from FX movements. Due to the nature of options markets, we can structure the strike prices such that the net cost to us is virtually zero. Our objective is to minimize currency risk, not to actively bet on the currency markets. In this example, should the yen strengthen significantly, our hedges activate and our capital ratios are preserved. We are developing a robust investment process around hedging to allow us to integrate it into our financial objectives, including income and capital. It's important to note that our strategies will be dynamic based on market conditions. In particular, we will focus on the exchange rate, our views on interest rate markets, the cost of hedging vehicles, the composition of our existing portfolios, and importantly, our risk limits and tolerances.
By having a variety of tools at our disposal, we feel confident we can manage and effectively minimize currency risk over market cycles. Importantly, we have risk limits with respect to target allocations. Based on our strategic asset allocation work through 2014, we would expect this program to be approximately 15%-20% of our portfolio, further placing limits on this exposure. I would like to shift gears now and update you on our transformation program. You recall from last year that our mission is to create a world-class global investment organization. With the support of management, our board, and the terrific staff that I've been able to assemble so far, I am pleased to tell you we are well on our way. Since embarking on the mission, there have been a number of key accomplishments.
These include the strategic business review, asset allocation program, designing a global investment organization, hiring 40 new professionals, reorganizing the geography of our investment offices to New York and Tokyo, launching the U.S. corporate bond program, and finally, designing our future technology roadmap. We're about halfway through the two-year project. Looking ahead, we have much work to do. A large focus for us this year is the build-out of our investment risk team. In addition, we are embarking on a global technology solution that will give us systems that provide the ability to globally manage our trading portfolios and risk. We will finalize our vendor selection and initiate implementation this year. Additionally, we are focused on building out our operations team in Japan and New York to support our organization. Our transformation goes hand-in-hand with our investment aspirations.
As we gain confidence that we can support new strategies, we will move forward with additional investments, outsourcing, and hedging techniques while ensuring that we manage our operational risk to support investment risk. This chart represents Aflac's global investment organization. It is designed around key investment functions such as credit and trading with regional CIO oversight. In addition, the risk management area and chief operating officer support the entire group on a global basis. As you can see, each member of the senior management investment team has 20-plus years of experience in the insurance and asset management fields, bringing to Aflac a wealth of experience to support our efforts. Their experience and leadership will help transform the organization while allowing us to implement new investment strategies. Finally, I would like to comment on the progress of investing in new asset classes identified in our asset allocation program.
You can see from this chart that we intend to have allocations in asset classes such as high yield, emerging markets, equities, and alternatives. These would start small and over time will likely be in the range of 5%-7% of our consolidated assets. In addition, the management of these assets would be outsourced to best-in-category external money managers that are a good fit for Aflac. Our ability to effectively utilize third-party money managers is highly dependent on in-house expertise with respect to manager selection, ongoing evaluation, and ability to integrate external information into our accounting and investment systems. As I have said, we will move forward when we believe we have the appropriate capability and controls, which are being developed as part of the transformation. I'm hopeful that we will be able to initiate some of these strategies late this year or early next year.
In closing, I would like to emphasize that our investment results have exceeded expectations across the board. We have effectively managed our risk positions and made strong choices on our new investment strategies. All of this has improved the overall profile of Aflac's global portfolio. Our transformation has created a dynamic and experienced global investment organization. I'm extremely pleased with the results and excited about the future. Importantly, we're proud that our policyholders and shareholders are benefiting from these accomplishments. Thank you.
Ken Janke is our next speaker. I'm sure most of you know him. Ken joined Aflac in 1985 as manager of investor relations and was promoted to senior vice president in 1993. In 2010, he was promoted to Executive Vice President, Deputy Chief Financial Officer. Prior to joining Aflac, he served as director of corporate services for the National Association of Insurance Commissioners, NAIC. As Dan mentioned this morning, he has been named as President of Aflac US, effective July 1st. Today, he's going to be discussing Aflac's capital position and capital management strategy. Ken?
Thank you, Robin. Phil, thank you for fixing the light. Good morning, everybody. In advance, please excuse my lingering cough if I need to grab a drink. I'd like to begin the presentation on 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 US and Aflac Japan. For financial reporting purposes, the Aflac US segment includes Aflac New York, which is a subsidiary of Aflac. Aflac New York is obviously domiciled here and subject to the insurance laws of the state of New York. The Aflac US segment also includes Continental American Insurance Company, or 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. As a branch operation, the insurance laws and regulations of the state of Nebraska also apply to Aflac Japan. The 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 capital and cash flows. Although we 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 appropriately strong risk-based capital or RBC ratios for each regulated entity on a statutory accounting basis. Aflac's RBC comprises our Columbus-based U.S. operations and our branch operation in Japan. Aflac New York and Aflac Group each have to meet their own risk-based capital requirements on a standalone basis. Aflac New York's RBC ratio improved significantly last year due to increased capital resulting from strong statutory net earnings. Following our purchase of Aflac Group, its RBC ratio declined due to very strong sales growth and the related capital strain. Aflac Group's RBC ratio improved dramatically last year, reflecting the benefit of a surplus note, as well as a quota share agreement with Aflac. Aflac's RBC ratio has been strong for many years.
Downward rating migration on certain investments and fairly sizable capital losses restrained improvement of that ratio since the start of the financial crisis. This was especially true in 2011 when we undertook extensive portfolio de-risking. Our RBC ratio improved significantly in 2012, primarily driven by a substantial increase in surplus. In addition to strong operating performance, surplus benefited from a change in statutory accounting last year. SSAP 101 decreased the portion of deferred tax assets that are treated as non-admitted assets, which increased our ratio by 30 points at year-end. The exchange rate, which I'll comment on in more detail in just a moment, did not have a significant impact on our RBC ratio last year. The impact of downward rating migration and slightly higher concentration risk served to modestly offset the benefits of strong capital growth.
At 630%, our RBC ratio significantly exceeded our 2012 corporate target. For many years, we've discussed the relationship of foreign currency translation to our RBC ratio. Aflac's RBC ratio is exposed to currency changes because of the inclusion of Aflac Japan's results as a branch. In prior presentations, we've pointed out that a significant portion of our statutory capital was dollar-denominated. Total adjusted capital did not change significantly with currency fluctuations. The company action level, on the other hand, was proportionately more sensitive to changes in the exchange rate. For example, when the yen strengthened, we applied risk factors to yen-denominated assets that were translated into more dollars. As a result, as the yen strengthened, our RBC ratio would be negatively impacted. The expectation was that the opposite effect would occur when the yen weakened.
However, as illustrated in this slide, the effect of foreign currency on the RBC ratio has changed fairly significantly. This has occurred because of the hedged dollar investment program that Eric spoke of, which we initiated in Japan last year. The dollar assets that we've purchased and hedged into yen are treated as yen-denominated instruments from a Japanese regulatory perspective. By comparison, they are treated as dollars for RBC purposes. That means that required capital is not as sensitive to currency changes as it was in prior periods because we're applying risk factors to dollar assets rather than yen assets that are being translated into dollars. Total adjusted capital is also impacted by the hedged dollar program because it includes the unrealized gain or loss on the derivative contracts we used to hedge the dollar principle of those investments.
At year-end 2012, those contracts were in an unrealized loss position because the yen had weakened. If we continue to purchase hedged dollar assets for Aflac Japan's portfolio, and if the yen continues to weaken, surplus growth will be restrained somewhat. However, if the yen strengthens and all other factors remain constant, capital and surplus would benefit. In addition to U.S. regulatory requirements, we must also meet the capital requirements of Japan's FSA. Japan's solvency margin ratio, or SMR, is similar to the risk-based capital concept but on an FSA accounting basis. Like the RBC ratio, a minimum SMR of 200% is required. As you'll recall, the FSA implemented changes to the SMR calculation that took effect with the fiscal year-ended March 2012. While the formula was basically unchanged, the numerator of the calculation had limits imposed on recognition of policy reserves in excess of cash surrender values.
Additionally, significantly higher capital charges for assumed volatility associated with asset and interest rate risks are also reflected in the denominator. Unlike the RBC ratio, the capital component of Japan's SMR includes unrealized gains and losses on available for sale investments. Because our invested assets tend to be long duration in nature, this is the most volatile component of Aflac Japan's regulatory capital. With interest rates remaining low and the yen weakening to the dollar, we experienced significant improvement in Japan's SMR in 2012. Because investments classified as available for sale are marked to market for FSA reporting purposes, Aflac Japan's regulatory capital is sensitive to changes in interest rates. This graph shows the relationship of our SMR at December 31st to changes in the yield of 10-year JGBs.
Using this data, our 2012 SMR of 669 would change by approximately 200 percentage points for every 100 basis point change in the 10-year JGB. Aflac Japan's SMR is also exposed to foreign currency risk. With respect to the SMR, foreign exchange risk impacts us in two ways. First, assets denominated in any currency other than yen have a greater capital requirement than those that are denominated in yen. Second, the current weakening of the yen to the dollar results in more yen being reported when we translate unhedged dollar-denominated assets. Therefore, a weaker yen produces a greater contribution to capital than if the yen were to strengthen, as it had in recent years. Based on data in this slide, every five yen change in the exchange rate would have impacted our December 31st SMR by an average of about 17 points.
This sensitivity to currency changes is lower than what I reported a year ago. The principal reason is that Aflac Japan's available-for-sale portfolio was in an unrealized gain position at the end of 2012, compared with an unrealized loss position at the end of 2011. In short, the additional capital resulting from the unrealized gains muted the currency impact of the unhedged dollar portfolio. As these sensitivity graphs suggest, we do routinely stress test our SMR by exposing it to various changes in interest rates and exchange rates. We have also applied serious and severe stress scenarios, including a replication of the Lehman shock, accompanied by significant defaults in Europe, as well as 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.
As we've discussed in the past, we do have tools at our disposal to enhance the SMR if it comes under significant stress. Those tools include potential reinsurance agreements, like the one we executed last year. We're also analyzing hedging strategies to mitigate both interest rate and foreign currency risk to the SMR. In addition, we have updated the multicurrency line of credit that we established last year. This five-year, JPY 50 billion line of credit can be used by either Aflac or Aflac Incorporated. If we need to increase our regulatory capital level very quickly, a line of credit would be an effective tool in the short term to employ while we sought a longer-term solution. Before I move on to a discussion of cash flows and capital deployment, let me comment briefly on our GAAP-based capitalization.
In thinking of Aflac Incorporated's debt capacity, we focus on cash flows, ratings, and our debt-to-total capital ratio. As we have said 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 us. At March 31st, 2013, almost half of our outstanding debt was yen-denominated. In February of last year, we issued $750 million of five-year and 10-year senior notes, which we swapped into yen-denominated obligations at very attractive interest rates. In July of last year, we had a follow-on offering of $250 million of the five-year notes, which we did not swap. In September, we issued $500 million of 40-year subordinated debentures, which we subsequently swapped into yen. The proceeds from these offerings were used for debt refinancing and general corporate purposes.
I would note that we have no debt obligations maturing in 2013. Our computation of total capitalization includes long-term debt but excludes unrealized investment gains and losses in shareholders' equity. Because a portion of our outstanding debt is yen-denominated, while all of our equity is dollar-denominated, a weakening yen decreases our reported debt balance in dollar terms. As a result, our debt-to-total capital ratio decreases when the yen weakens, as was the case at March 31st. Our interest coverage ratio remains strong, although it has declined somewhat recently, reflecting higher debt balances. Now let me turn to a discussion of the cash flows that support our operations and those that are available for shareholder-related activities. I'd like to begin the discussion by briefly commenting on the three accounting bases on which we must report.
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 must also report on an FSA basis. As you know, GAAP accounting is accrual-based and reflects the concept of a going concern. By comparison, statutory accounting is a combination of accrual and cash accounting, while FSA accounting is more cash-based. Statutory and FSA methods are more conservative than GAAP accounting, especially in the areas of reserving and expense recognition. Due to changes in reserving requirements, FSA reporting has become the most conservative accounting method over the 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 2012 on all three bases. I'd like to draw your attention to two facts, however, about this data.
First, these numbers are on an operating basis and therefore exclude realized investment gains or losses attributable to Aflac Japan. Second, there is no statutory accounting entity for Aflac Japan. However, for the purpose of this presentation, we have provided a condensed statutory income statement for Aflac Japan. 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 base revenues have been significantly influenced by the strong sale of our WAYS product in recent years, especially those sold with discounted advanced premiums. At the same time, the reserve requirements under FSA reporting are much more stringent than other accounting methods. This is not only true for our first sector products like WAYS, but also our third sector products. The result of greater reserve requirements is lower FSA-based profits in early policy years.
Eventually, the FSA profits become larger than the GAAP-based profits, but this does not usually occur until later in the life of these long duration contracts. Although Aflac Japan experienced solid pre-tax earnings growth on an FSA basis from 2008 to 2012, the absolute amount was noticeably lower than our statutory or GAAP-based earnings. You'll note that last year's FSA-based earnings were essentially flat compared with 2011, which resulted from the extraordinary sales growth we experienced in 2012. This chart shows the relationship of FSA-based earnings to U.S. GAAP. From 1993 through 1997, FSA operating earnings averaged about 74% of U.S. GAAP. That number increased a bit to 83% for the next five-year period. However, due to changes in reserve requirements, the ratio is noticeably lower for the years that followed.
For the last five years, FSA-based earnings were 55% of GAAP earnings, and for the next five years, we anticipate that ratio will increase somewhat to about 56%. In 2001, we were required to begin using the standard reserving interest rate for third sector products on an FSA basis. That change is largely responsible for the significant drop in the ratio of FSA operating earnings to U.S. GAAP. In addition, there are other assumptions such as mortality and lapsation, that contribute somewhat to FSA strain. FSA-based reserves are based on a net level reserve method under which a significant amount of benefit reserve must be accrued starting in the first policy year. In addition, FSA accounting does not allow for deferral of acquisition costs. As such, in periods of strong sales, we experience FSA strain on an FSA profit basis.
However, when sales decline, as we expect to see this year, FSA earnings will benefit in the short run. Although we expect FSA earnings to grow faster than U.S. GAAP, the rate of overall earnings growth will be influenced in part by Aflac Japan sales volumes. Of course, the earnings eventually are equal on all accounting methods as any differences will reverse at policy termination. In Japan, however, with strong policy persistency and a long life expectancy, it takes a very long time for these accounting differences to reverse. Now let me turn to a discussion of Aflac Incorporated's cash flows, which can be influenced significantly by Japan's profitability and capital position. Although Aflac Incorporated can receive cash from borrowings, the principal source of liquidity for the parent company is from the operating units.
Aflac Japan annually remits a portion of its FSA base after-tax net earnings, as well as allocated expenses to Aflac U.S. Aflac Japan also pays a management fee directly to the parent company. Aflac U.S. remits allocated expenses and management fees to the parent and may pay dividends to the parent within limitations of our domicile state. The Nebraska statute references the restriction on dividends without prior approval as the greater of 10% of prior year statutory surplus or the prior year statutory net income from operations, which excludes net realized investment gains. Based on our 2012 statutory financial results, the maximum dividend allowable in 2013 without regulatory approval is $2.3 billion. Let me comment on that in just a bit more detail.
We operate on the principle of self-regulation when determining the appropriate level of repatriation. We are not required to seek prior approval from the FSA before we repatriate, but we do indicate the planned level of repatriation in the financial statements we file for the fiscal year ended March 31st. We have typically discussed profit repatriation in relation to Aflac Japan's net income on an FSA reporting basis. However, our primary consideration when determining the portion of Aflac Japan's profits we will remit to the U.S. is the protection of our policyholders as measured by the level of our solvency margin ratio. Assuming we view our ratio as appropriately strong, we have generally remitted up to 80% of FSA-based net income, although it has varied somewhat from year to year.
Prior to the emergence of the financial crisis in 2008, we repatriated 100% of our net income from Japan to fund share repurchase activities largely in the second half of that year. In the height of the crisis in 2009, we elected to retain more capital in Japan. Although we took out a higher percentage of net income in 2010 and 2011, our FSA net income was suppressed in both years by significant investment losses from de-risking. In 2012, FSA earnings increased sharply, and we remitted JPY 33.1 billion, which represented approximately 58% of net income. As I discussed last year, it is important to remember 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, but not in the United States.
Portfolio de-risking resulted in lower tax payments in Japan, since Aflac Japan is a branch of the U.S. subsidiary, taxes paid in Japan generate foreign tax credits for use on the consolidated U.S. tax return. Investment losses in Japan have resulted in fewer foreign tax credits in the past, in turn, the U.S. segment has been responsible for a greater portion of the cash payment of U.S. taxes during the de-risking period. This increased tax burden on the U.S. segment has impacted how we've managed our cash flows in recent years. However, we believe the most significant realized investment losses are behind us, as a result, we're optimistic that Aflac Japan's SMR should remain strong and present the opportunity for increased capital repatriation in coming years. As you heard from Dan this morning, we're currently estimating this year's repatriation will be significantly higher than our last projection.
We now expect to transfer JPY 70 billion-JPY 75 billion from Aflac Japan to Aflac U.S. in 2013. These amounts represent 80% of FSA estimated net income. Please note that these numbers do assume we have no material investment losses between now and mid-June, when we file our statements with the FSA. We expect the actual capital transfer to occur in late July. We have entered into a series of transactions to hedge a significant portion of this year's anticipated repatriation against the risk of further yen weakening. We've also started to hedge a portion of our expected 2014 repatriation. As we've discussed for the last 20 years, it's not our policy to hedge foreign currency translation for financial reporting purposes. However, we do give serious consideration to hedging economic transactions such as profit repatriation.
We currently estimate that Aflac Japan's net income for the fiscal year ended 2014 will approximate JPY 120 billion-JPY 123 billion, assuming no realized losses. Again, assuming that we remit 80% of Aflac Japan's net income, repatriation could be about JPY 96 billion-JPY 98 billion next year. As this chart shows, we expect the SMR to remain strong and pretty stable under these scenarios. You'll recall that the ratio is influenced by foreign currency, interest rates, credit spreads, in addition to the impact of realized gains or losses. As such, it is possible that the capital we ultimately pull out next year could be significantly different than the estimates I'm showing you today. Excluding net proceeds from financing activities, the largest cash flows to the parent company are dividends from our principal insurance subsidiary.
Typically, we declare a dividend from Aflac to Aflac Incorporated each quarter to fund the shareholder dividend. However, because of available cash to the parent company and our desire to maintain a strong RBC ratio, we dividended less to Aflac Incorporated in 2010 and 2011. In 2012, we did not send any dividends to the parent company. However, for 2013, we are returning to our normalized historical dividend policy to the parent. 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, for debt management. Management fees have risen steadily over the last three years, largely due to the increase in interest expense on our corporate level debt.
In general, all eligible expenses are billed to the insurance company's branch and other legal entities based upon a percentage of revenue contribution. Any expenses that are disallowed in Japan, such as interest expense, are then borne entirely by the Aflac U.S. segment. In 2010, we issued senior notes in the dollar market and samurai notes in 2011. As I noted earlier, last year we issued $1.5 billion of senior notes and subordinated debentures. Aflac Incorporated has additional sources of cash, which are reflected in the other line. Those sources include investment income from a small parent company portfolio, 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 may supply capital support to Aflac Group if needed to fund its growth.
Ultimately, the parent company uses capital that's not needed to support the insurance operations to provide for a cash dividend to our shareholders and for the repurchase of our shares. Aflac Incorporated's cash outflows can vary quite a bit year by year, although operating expenses have remained relatively stable since 2010. As I mentioned, interest expense has increased, largely reflecting our increased borrowings. We made $45 million of capital contributions to operations last year, the vast majority of which went to Aflac Group. Aflac Incorporated's outflows also include capital that we have deployed for the benefit of our shareholders. During the financial crisis, we were cautious about deploying capital, and we suspended our share repurchase activities until the fourth quarter of 2010. In 2011, we increased the quarterly cash dividend payment by 10% and purchased approximately $300 million of our shares in the second half of the year.
Last year, we raised the dividend payment by 6.1% on a quarterly basis and repurchased $100 million of our shares in the fourth quarter. As you can see here, we anticipate sending dividends of $959 million to Aflac Incorporated in 2013. Those dividends are largely funded by profit repatriation as well as capital from the insurance subsidiary. We are not assuming any proceeds from debt borrowings at this point in 2013. However, we will closely monitor capital markets for opportunities to refinance the notes that mature in mid-2014. We expect allocated expenses in 2013 to be little change from 2012, although we are anticipating a fairly large increase in management fees, again, reflecting largely higher interest expense. Operating expenses of the parent company are expected to be little changed from a year ago, and interest expense will increase somewhat.
We again expect to increase the cash dividend in line with earnings 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 that the board of directors would contemplate any increase in the dividend to be effective with the fourth quarter payment. As you'll note, this cash flow estimate here assumes that we repurchase $600 million of our stock in 2013. This chart shows the cash position of Aflac Incorporated over the last several years and an estimate for the end of 2013. Although we expect cash outflows to exceed inflows to the parent this year due to increased share repurchase, we still anticipate having a significant amount of cash at the parent company at the end of this year. Our capital management objectives remain fairly straightforward.
We want to demonstrate a strong financial profile for the benefit of our stakeholders, especially our policyholders. To that end, we've raised the objective for our RBC ratio to be in the area of 450%-600%, which largely reflects the potential for additional yen weakening. We'd like to keep our SMR in a range of 500%-600%. I'd note that we may elect to maintain ratios above those stated ranges, depending on how we assess external risks to our capital levels. As we've said in the past, we are comfortable with a debt to total capital ratio of up to 25%, and we also want to maintain and support our current financial strength and debt ratings. For our shareholders, we want to return excess capital through steadily increasing dividends and the repurchase of our shares.
This slide graphically illustrates our capital flows to shareholders both before and after the onset of the financial crisis. As you can see, we had steady increases in cash dividends and share repurchase from 2004-2007. During that time, we paid out an average of about 53% of U.S. GAAP operating earnings to our shareholders. In 2008, we committed to deploying what we considered to be a significant amount of excess capital at that time. In the first quarter of that year, we entered into an accelerated share repurchase agreement and bought back $798 million of our shares. In the summer of 2008, only about a month before the Lehman Brothers failure, we entered into another agreement for the purchase of our shares for the fourth quarter, which amounted to another $683 million.
The four years following the crisis reflected our conservative posture on capital deployment, with our payout ratio averaging about 25% of operating earnings. However, as investment losses have diminished, our cash flows available to shareholders have been enhanced. As a result, we expect to see a return to normalcy for capital deployment for the benefit of our shareholders. This chart assumes that we again increase the cash dividend in line with earnings growth before the yen, and it also assumes that we repurchase $600 million of our shares. At present, we believe those are realistic assumptions, and we also expect to be in a position to increase capital deployment in 2014. I hope this presentation has given you a better understanding of our capital position, cash flows, and how we are approaching capital management.
Although we're another year removed from the depths of the financial crisis, we do remain aware of potential risks to our capital position and capital adequacy. By continuing to manage our capital in a way, we'll demonstrate strong support for our policyholders and enhance shareholder value. Thank you.
Okay. We'll conclude our meeting this year with a presentation by Kriss Cloninger. Chris joined Aflac in 1992 after 15 years as a member of KPMG's audit team, for which Aflac was an account. He is President of Aflac, Inc., and Chief Financial Officer. Today, Chris is going to discuss Aflac's financial results and the outlook for key financial metrics. Chris?
Okay. Thank you, Robin. I'll conclude this year's meeting with a discussion of Aflac's financial results. Let me start with an overview of each of our segments, then I'll go into more depth into the development of our operating ratios, returns, and modeling assumptions. Aflac Japan remains the primary contributor to our overall operations. In the first quarter of 2013, Aflac Japan represented approximately 78% of our pre-tax insurance earnings. As you know, the main components of total revenues are premium income and investment income. The largest component, which is 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 the balance coming from new sales. Aflac Japan continues to produce increasing revenues in yen terms.
Despite slower investment income growth, primarily due to low new money yields, revenue growth rates have increased since 2008 and continued to improve through the first quarter of 2013, reflecting strong new premium sales growth, particularly in our ordinary life line in Japan. We expect the revenue growth rate to decline somewhat as we experience a drop in the sales of our ordinary life products following price increases that began April 2nd of this year. In addition, revenue growth in future years will be somewhat suppressed because a significant amount of limited pay products we have sold in recent years will reach paid-up status and therefore will no longer contribute premium to our income statement. I'll discuss the effect of this in more detail later in the speech. It's worth noting that the yen-dollar exchange rate can influence the rate of investment income growth as reported in yen.
You'll recall that beginning in the second half of 2012, dollar-denominated investment income accounted for about one-third of Aflac Japan's total investment income. With our hedged corporate bond program, that percentage increased to approximately 40% at the end of the first quarter, and we expect it to remain around that level going forward. As such, when the yen weakens to the dollar, the growth rates of investment income, revenues, and earnings are magnified in yen terms. However, on a consolidated basis, there's no impact since the reporting basis and the investment income from those instruments is in dollars. Japan's benefit ratios steadily declined from 2008 through 2010, due primarily to an improvement in our cancer and medical insurance claims experience. With the significant increase in the production of our Child Endowment and WAYS products, our benefit ratios flattened out and started to increase slightly in 2011.
They increased further in 2012 as WAYS production continued to increase significantly. Total annual operating expenses expressed as a percent of revenues has trended downward in the past few years, in part reflecting lower commission expenses on the Child Endowment and WAYS products. In addition, Japan's low expense ratio reflects efficient operations and a strong persistency rate that has improved modestly over the past several years. While it isn't apparent in this slide, it is worth noting that our pre-tax profit margin steadily increased since 1998, going from 8.9% of revenues in 1998 up to 20.9% in 2011. However, in 2012, the margin declined slightly to 19.5%. In the near term, we expect revenues to grow at a slower pace and the profit margin to stabilize as we return to a more normal mix of first and third sector sales.
A little later, I'll give you more detail on the major product segments and their profitability characteristics. Our pre-tax operating earnings, as measured in JPY, were suppressed beginning in 2010, primarily due to the effects of the financial crisis and JPY weakening on investment income growth, which was essentially flat from 2009 through 2011. While a large sales volume in 2010 through 2012 contributed positively to revenue growth, the impact of non-deferrable acquisition costs from these sales tended to suppress our profits. We estimate our profits were dampened by about JPY 1 billion for every JPY 10 billion of incremental first sector sales. Our other reportable segment, Aflac US, accounted for the remaining 22% of pre-tax insurance earnings in the first quarter of this year. Aflac US revenue growth is largely driven by the rate of premium income growth.
Premium income has grown at single-digit rates for the last five years, reflecting somewhat weak sales associated with the challenging economic environment, offset somewhat by improving persistency. In fact, the persistency of our U.S. business improved by 140 basis points in 2010 and another 260 basis points in 2011. Last year, in 2012, persistency reached its highest level in more than 10 years with an improvement of 90 basis points. Starting in 2010, of course, revenue growth also benefited from our acquisition of Aflac Group. Over an extended period of time, the operating ratios of Aflac US have been very stable. However, 2010 benefit and expense ratios were influenced by lapses associated with the loss of a large payroll account at the end of 2009.
The benefit ratio declined due to the release of benefit reserves, while expense ratio increased due to the amortization of the deferred acquisition costs on those lapsed policies from that account. The net impact of the reserve release and DAC amortization was a sizable benefit to the bottom line in 2010. In 2011, the benefit ratio returned to a more normalized level and improved slightly in 2012. Expenses as a percent of total revenues have been relatively stable to slightly improving over the last five years. Because both the expense and benefit ratios improved slightly in 2012, the profit margin also improved. We expect the operating ratios in the U.S. to remain fairly stable in the near future. Although Aflac Japan is the dominant segment of our total company results, Aflac US remains a significant and important contributor to our growth.
During the period from 2008 through 2012, the profit margin increased on our U.S. business, due primarily to a modest decline in the benefit ratio. Assuming stable benefit and expense ratios in the near future, we expect that the growth in Aflac U.S. profits will primarily reflect the growth rate in future revenues. Interest expense in 2012 was slightly higher than 2011, reflecting our higher debt balances. Parent company and other unallocated expenses in 2012 were fairly consistent with 2011. While our consolidated tax rate has been very stable over the last several years, I will remind you that in the third quarter of 2012, we had to revise our annual effective tax rate downward somewhat for the year, we expect the 2013 annual effective tax rate to be in the range of 34%-34.5%, which we experienced in the latter part of 2012.
This slide illustrates the growth in operating earnings per diluted share, both on an as reported basis and then excluding the impact of currency translation. At the bottom of the slide, you'll note that the per share impact from the changes in the average yen-dollar exchange rate for the last several years. The impact from currency fluctuations have tended to be smoothed over the long run. However, in recent years, our results on a per share basis benefited significantly from the strengthening of the yen. Last year, 2012, there was a minimal yen impact as we had a fairly stable currency. We expect the current weaker yen environment to suppress our 2013 reported operating earnings per share. Our sensitivity to currency changes has increased over the last few years, primarily due to a greater proportion of our consolidated earnings being derived from the yen-denominated sources.
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 investment gains and losses, the impact, if any, from derivatives and hedging, and non-recurring items. We use operating earnings to evaluate our financial performance because realized gains and losses, the impacts of derivatives and hedging, and those non-recurring items tend to be driven by general economic conditions and events. Therefore, may 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 2012 were less than half the level of the prior year, but were still significant.
The impact from derivatives and hedging on net earnings is primarily associated with a change in the fair value of currency swaps on certain investments. This line also reflects the change in the fair value of the yen-dollar swaps associated with our recent bond issuances. Next, I'd like to turn to a more in-depth look at our operations in Japan, trying to give you a better understanding of the benefit, expense, and profit characteristics of the various product categories. As you can see, Aflac Japan's revenue composition has changed over the last several years. In this chart, and many that follow, the core health category includes our cancer and medical products, while the other category includes several products that are not actively marketed, 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 life category includes WAYS, Child Endowment, and our other life products. As a result of our success in selling those products, especially through the bank channel, the contribution of the ordinary life line has grown significantly. In 2010, ordinary insurance was 11.5% of our total revenues. In 2012, that proportion had almost doubled to 21.9% of total revenues. For a number of years, the benefit ratio has been declining for our largest product category, core health. This decline has been driven by improving claims experience, primarily in our cancer line, and a shift within this product category toward products with lower benefit ratios. 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 a higher amount per day for shorter hospital stays, which has had the effect of significantly shortening hospital stays in general. The reduction in days per stay has particularly impacted our cancer insurance business, causing the ratio of actual to historical claims experience for Aflac to fall from 81% in 2006 to 73% in 2011. This decline in the average days occurred at a much faster rate than we had originally expected. That does mean, of course, that there is probably less room for further reductions in average hospital days, although we do expect to see some additional improvement in the years to come. Claims for our medical products have also been lower than our original expectation.
Just as we've seen with our cancer insurance, we expect this favorable experience to continue, yet there's also limited room for significant levels of claims improvement in the medical products and average hospital stays for non-cancer, as the average hospital stays for non-cancer medical events are much shorter than they are for cancer treatments. The other major factor influencing Aflac Japan's total benefit ratio has been the change in the business mix over time. Our efforts at broadening our product line have significantly changed our in-force business. For many years, the product mix tended toward products with lower benefit ratios, including medical products and health insurance riders. More recently, the total benefit ratio has been affected by the sales of our higher benefit products, including Child Endowment and WAYS.
Reflecting the trend of favorable claims experience, the benefit ratio for our core health products, cancer and medical, declined in 2010 and 2011. In 2012, the benefit ratio stabilized for the core health and other product lines as a result of offsetting factors, including some reserve strengthening in response to the low interest rate environment and continuing favorable persistency experience. The benefit ratio for our ordinary life products has increased recently, rising from 76.1% of revenues in 2010 to 80.9% in 2012, due primarily to the higher production of Child Endowment and WAYS. In addition, the ratio in 2012 was impacted by the low interest rate environment as we established reserves for new issues, assuming lower yields, reflective of the decline in the new money interest rates.
Taking all these factors into account, the higher benefit ratios of WAYS and Child Endowment have offset the downward trend in the health benefit ratio over that period. Although the benefit ratios of ordinary life products are higher than those of our health products, the commission expense is lower for these products in relation to revenues. In general, products with higher benefit ratios have lower expense ratios, which can be seen in our ordinary life business over the last two years. The expense ratios for our core health block have been relatively stable over the last several years, as there has been very little change in our product mix within that block. Meanwhile, the expense ratio for the ordinary life category has declined significantly, dropping from 13.6% in 2010 to 9.1% in 2012. That's primarily due to lower commission rates on Child Endowment and WAYS.
Out of the low interest rate environment, we repriced our ordinary life portfolio effective April 2nd of this year. We've also implemented various investment strategies such as the hedged corporate dollar bond program to improve our portfolio yield. We'll continue to monitor market conditions and adjust our offerings to ensure that we are selling products that meet our core profit objectives. After improving in 2011, the pre-tax profit margin for our core health and other product lines declined slightly in 2012, primarily reflecting the reserve strengthening for closed blocks of business that included care and dementia products. The reserve additions, which I had referred to before, were somewhat prompted by the persistent low interest rate environment. The profit margin of our ordinary life business declined from 11.4% in 2011 to 10.1% in 2012, primarily due to the large sales production and the impact of non-deferrable acquisition costs.
In total, the overall profit margin went from 20.9% in 2011 to 19.5% in 2012. At last year's analyst meetings, we provided a detailed review of the WAYS product to further demonstrate the effect of the product on our operating ratios and our financial results. I thought it'd be valuable to refresh that analysis and discuss the recent actions we have taken to manage that product line and its anticipated profitability. In 2012, the new annualized premium sales of WAYS in Japan were JPY 94.5 billion, accounting for almost 45% of our total new sales. This product is a traditional ordinary life product at its core with fixed premiums and benefits. The average premium size for WAYS is about 10 times that of one of our core health products. The average in-force face amount is less than JPY 5 million per policy, roughly $50,000.
As you may recall, what makes this life insurance product unique is that it includes a feature allowing the policyholders 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 that election. If WAYS policies are surrendered prior to reaching paid-up status, they're subject to a 30% surrender charge. The issue age has been primarily around 50 and older for policies that are paid up as specified age such as 60 or 65, and younger than 50 for our 5 and 10-pay WAYS products. We've offered various WAYS premium options, including 5-pay, 10-pay and paid up at a specified age.
In the past, however, in 2012, we did discontinue new sales of the five-pay option to reduce our exposure to disintermediation in the case of rising interest rates. As we've discussed, the customer may elect to pay premiums up front in return for a discount. We refer to this payment method as discounted advanced premiums or DAP, and it's been particularly popular in the bank channel. Prior to lowering our DAP credited interest rate in October 2012, more than 90% of our bank customers elected to use DAP for the WAYS policies. As we discussed last year, WAYS profitability is more sensitive to investment yields than our core health products. The internal rate of return, or IRR, for this product is also sensitive to the lifetime net investment yield.
When WAYS first became a larger portion of our new sales, new money rates in Japan were higher than the rates we are seeing today. As we saw the interest rates fall, we took several steps to mitigate the impact of those lower rates on the profitability of this business. We lowered the DAP interest rate from 1% to 0.5% in October 2012. Additionally, we placed caps on the production of Child Endowment and cut the commission rates in August of 2012. Finally, in April of this year, we repriced our ordinary life portfolio to reflect the change in the standard valuation interest rate in Japan and to improve the profitability of our products in the low interest rate environment. At the same time, we raised the DAP rate from 0.5% back to 1%, and in that way, we hope to balance the profitability and the competitiveness of the product.
While the repricing improved the profitability of ordinary products, the current low interest rate environment remains challenging. As we move forward, we'll carefully monitor economic market conditions and the competitive situation to ensure that we're firmly focused on selling profitable business that's also competitive. We'll use tools such as sales incentives and the DAP interest rate to continue to balance profitability and sales volume. I would add that we expect to be conservative in our product positioning during 2013. As our investment strategies are enhanced and we increase our ability to modify the product characteristics more quickly, we may put more focus on WAYS. Following three years of record sales, we do not expect a significant decline in sales of WAYS this year. Now I'd like to comment on 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 % of premium. Our definition of profit is the excess of the present value of revenues, including both premium and investment income over the present value of policy benefits and expenses over the full life of the contract. Now, that's a cash viewpoint, which I believe best reflects the true economics of the products and is the most appropriate basis for decision-making. This concept of profit does not rely on a specific accounting model or any capital allocation process.
As you can see, the profit margins on our core health products are much less sensitive to the lifetime net investment yield than they are on our WAYS products, where margins increase from 7% to 9% of premium at a lifetime net investment yield rate of 1.5% up to 22% to 30% of premium for a yield of 2.5%. We also look at internal rates of return. We find these rates of return are generally consistent with and move in the same direction as our profit measures. By internal rates of return, we mean the discount rate at which the present value of the initial investment in a block of business, represented by acquisition costs and capital requirements, is equivalent to the present value of profits from that block in subsequent years.
One difficulty with using IRR is that the results vary depending on the accounting basis or the capital allocation method used. We've chosen U.S. statutory accounting for this presentation as it's the most common basis used by U.S. life companies. I would note that for IRR purposes, it's our practice to establish statutory reserves and provide for additional capital at levels that would support a 500% RBC ratio. In addition, we've chosen to provide a point estimate for IRR rather than a range to illustrate what we believe is the most likely result. Obviously, the IRR will vary just as the profit results vary within the illustrative range. Given these points, we believe that the best estimate of the IRR for medical and cancer is around 22%, assuming a 2% lifetime net investment yield. For WAYS, the corresponding IRR would be 16%.
At 2.5% lifetime net investment yield, the IRR for WAYS would improve significantly to 22%, whereas the core health IRR would improve only slightly to 23%. Let me turn to the accounting practices for our ordinary life products. Most of our products where the premiums are paid over the life of the contract are accounted for under GAAP using FAS 60. For policies where the scheduled premium period is shorter than the benefit period, we're required to use FAS 97. Let me quickly review the most significant similarities and differences between those two accounting methods. First, premium income is recognized over the scheduled premium paying period under both methods. For example, for a 10-pay product, all the premium income is recognized over 10 years. For the more traditional whole life product, premiums are recognized over the life of the contract.
Second, under both methods, reserves are established based on similar interest and morbidity assumptions, including a provision for adverse deviation. Those assumptions are locked in from the issuance of the contract and cannot be modified in future periods. Third, the deferred acquisition costs are established at issue and amortized over the premium paying period under both methods. In the case of the limited pay products, FAS 97 requires that a deferred profit liability or DPL be established during the premium paying period. This deferred profit liability grows during the premium payment period and is released through benefits over the remaining life of the policy after the contract becomes paid up. The changes in the DPL flow through policy benefits, along with the changes in other benefit reserves, and in that way, the profits emerge fairly evenly over the life of the limited pay contract.
This next slide is a simplified numerical example demonstrating a single policy accounted for under FAS 97. This shows how the profits would be recognized both with and without the changes in the DPL for a policy with 10 years of benefit coverage, paying premiums for five years. For simplicity, we're assuming an annual premium of JPY 2,000, a discount rate of zero, no terminations due to mortality or voluntary lapse, and that all acquisition expenses are deferrable. You can see in the last column, without the deferred profit liability, profits would emerge during the premium period as a level amount equal to 14% of earned premiums. With the DPL, profits are reduced during the premium period and recognized over the remainder of the contract's life as the DPL is released.
This accounting treatment is important to understand, as you'll see a significant impact from limited pay products in our future financials over the next several years. Premium income will decline on that block of business as the policies reach paid-up status. The benefit ratio will also decline as the DPL is released, allowing profits to be recognized over the remaining life of the limited pay contracts, even though no premium revenue is being recognized. The net result is that the profit recognition for both the lifetime pay and the limited pay policies will be similar in relation to the policies in force. That is, the profits aren't going to go away on the limited pay. They'll still be there. They'll just emerge based on policies in force instead of as premium is recognized.
This table shows the annualized premium of our in-force block of limited pay business for policies reaching paid-up status from 2013 through 2020. You can see that in 2017, just over JPY 67 billion of annualized premium will become paid up. This is mainly a result of the high volume of five-pay WAYS we sold in 2012. When these policies reach paid-up status, we won't see any more premium revenue recognized in the income statement, the profits will be there, and the key operating ratios, such as benefit, expenses, and profits to revenue will all be affected. Let me comment on our return on equity results. For this illustration, we've used the segment profits and segment equity computed on a GAAP basis. In addition, when calculating operating return on equity by segment, the shareholders' equity component excludes the impact of unrealized gains and losses.
Aflac Japan's ROE 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 2008 through 2012. For the Japan segment total ROE, the impacts of de-risking and capital preservation, which means reduced profit repatriation, are apparent in 2011 and 2012. We anticipate that Aflac Japan's operating ROE will remain relatively stable over the next several years. Aflac U.S.'s ROE is also influenced by market conditions and portfolio de-risking and other capital considerations. Both on an operating and total basis, ROE in the U.S. has remained within a relatively tight range from 2009 to 2012. I'd note that in 2008, operating ROE increased as dividends to the parent company significantly exceeded profit repatriation from Japan in order to support the increased levels of share repurchase at that time.
For total ROE, the impact was mostly offset by realized investment losses. We anticipate that U.S. ROEs will remain 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 2008-2012, Aflac's consolidated ROE averaged 19.4%. Excluding realized investment gains and losses in earnings and unrealized gains and losses in equity, our operating ROE averaged 25.8% over the same period. While the effect of lower investment yields has been reflected in our financial statements, our returns remain consistently 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.
As you heard Dan say during the first quarter call, the compensation committee of Aflac Incorporated's board of directors made a decision to include operating ROE, excluding currency impact, as a component of the bonus structure for Aflac senior management effective this year. For 2013, our goal is to increase operating earnings per diluted share by 4%-7%, excluding currency effects. It's also our objective to produce operating returns on average shareholders' equity of 20%-25% for 2013. We believe these objectives are achievable and are based on reasonable assumptions. As noted on our first quarter call, we've elected to modify our timeline for providing earnings guidance for the following 12-month period.
We anticipate providing our official 2014 EPS objective when we announce our third quarter results. Last year, we provided information regarding the expected ratios for benefits, expenses, and profit margins to total revenues for our product categories and in total. As I mentioned then, the ratios represented the two-year average ratios for 2012 and 2013. For Aflac Japan in 2012, the actual results were in the estimated ranges for all the categories. For our ordinary life and total product categories, we were toward the high end of the range for the benefit ratio, but toward the low end of the range on expenses. This was primarily due to the higher than expected sales growth of the WAYS product. Overall, however, we were in the middle of the estimated profit range for each of the three categories. For 2013, we're focused on third sector sales.
Our sales assumption is for third sector sales to be flat to up 5% in 2013. For projection purposes only, but not our official sales guidance, we're modeling flat to 5% increase in sales growth for 2014 and beyond. For the first sector business, we're modeling a sales decline of 25%-50% in 2013, which will bring us back to a more normal level of first sector sales. That is more normal compared with what we had in 2009, 2010, as opposed to the big increases we saw in 2011 and 2012. For 2014 and beyond, we're modeling first sector sales to be flat to slightly positive. Our projections assume new money yields will be in the range of 2%-2.5% from 2013-2015.
This year, we're increasing our outlook period to three years to give you a sense for what we believe to be the stability of our business. These ratios represent the projected three-year averages for 2013 through 2015. As I mentioned last year, there'll be some variations, including seasonality trends, reflected in the actual quarterly results, that we expect the actual results for these ratios to be within the ranges I show here on average for the entire period, 2013 through 2015. Note that in total, we anticipate the benefit ratio will increase slightly, while the expense ratio will decline from the level we saw in 2012. The average profit margin is projected to be fairly stable. Actual results will vary based on differences between our assumed volume mix by product category and will also be impacted by the growth of revenue, which is influenced by our investment results.
You can use your own judgment in estimating the aggregate results. Again, my intention here is to provide you with some additional insight into our business and how we develop our guidance and outlooks. Last year, we showed the anticipated two-year average ratios for the period 2012 and 2013 for Aflac U.S. We didn't break out the product categories for the U.S. segment because most products, including those sold through Aflac Group, have similar characteristics from a financial perspective. As you can see, for 2012, the benefit ratio fell below our anticipated range due to better than expected claims experience, and the profit margin came in at the upper end of the range. For the years 2013 through 2015, we're assuming sales of flat to up 5%. Again, I would emphasize that these are simply modeling and sensitivity testing assumptions rather than official sales guidance.
In terms of new money yields, we've assumed we'll invest in the 3%-4% range over the three-year period, and our new money yield assumptions reflect the purchase of shorter duration and higher quality purchases in sectors other than financials. We anticipate our persistency will remain fairly stable throughout the outlook period. This next slide shows the anticipated three-year average ratios for 2013 to 2015 for Aflac U.S. We anticipate stable margins with earnings growth being driven by growth in total revenues. As we approach mid-year 2013, there are several priorities we're managing toward. As is always the case, we're committed to achieving our targets for operating earnings per share growth. We believe our publicly stated targets for 2013 are reasonable, even with the negative impact of the low interest rate environment, and we'll 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 by growing our cash dividend and increasing share repurchase. Our top priority remains to ensure that we meet the financial obligations we have to the tens of millions of individuals who are covered by our policies in Japan and the United States. As such, we want to produce risk-based capital and solvency margins that are consistent with the management objectives that we've set. 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, as we always have, we'll maintain the highest degree of integrity in the way we manage Aflac and report its financial results. Thank you for your attention. Robin.
Okay, we're going to set up for Q&A now. You've got five minutes, so if you want to take a very quick break, please make sure you're back in here in five or six minutes so that you get the most time for Q&A. Okay?
One, two, three, four.
Test. Okay? Okay. If everybody would please take your seat, turn your cell phones off. We'll get started with Q&A. All right. Cell phones are off. Everybody's ready? Hands are up, we're ready to go then. Okay. Please state your name, the firm you're with before your question. Please keep your question to one question and one follow-up related to the question. Y'all know I have to say that every time.
Okay. Mark Finkelstein, Evercore Partners. Ken, in your presentation, I think it was on page 45, you gave kind of a framework for looking at FSA earnings to GAAP operating earnings. The ratio averaged about 55.1% for 2008-2012, kind of going to 56.2% for 2013-2017. I guess the question is, why isn't that ratio going a little bit higher over the near term, just knowing how strong the sales were in 2011 and 2012, particularly in the WAYS product? When do you see that kind of magical crossover point where FSA earnings and operating earnings converge? Thank you.
Are these on? I guess they are.
Yes.
Let me start with that, Mark, either Chris or Sue will probably want to chime in on it. Part of it is the sales assumption. I mean, the quickest way to have the accounting methods converge is to simply stop selling and close the clock in Aflac Japan. Obviously, that's not a good way to maximize growth of that business on a U.S. GAAP basis. It, in part, relates to the GAAP sales assumption. Again, the biggest change in the relationship came when we had to adopt the standard reserving rate, which you've heard is now 1% for first sector products to third sector products. It had a pretty significant impact on us going forward, there still is significant reserve strain from sales activities. Largely, it is heavily influenced by the sales.
I know a number of you have had the same kind of question just from the one-on-ones I've participated in over the course of the last six months, I've thought about how to try to explain it to you. As Ken said, back when we first started having to use the standard valuation interest rate for our health products back in 2001 or so, that's when you saw the ratio of FSA earnings to GAAP earnings start to decrease significantly because we were having to put up significantly more reserves on our third sector business, and that just carried through to the first sector business. Now, what I want to try to do here is use kind of a simplistic illustration that I like to use to explain things, I hope it helps. If it doesn't help, it doesn't help.
If you look at policy reserves as a bucket, okay? You look at it as a bucket. You put a couple of things into the bucket. You put a benefit reserve premium. Eric's shaking his head. He's heard this before. You put a premium into the bucket, a benefit premium into the bucket. You put net investment income into the bucket. Claims flow out of the bottom of the bucket that's got a little bit of a hole in it, and those claims or actual current claims are funded by what flows out. Then you've got reserves released at policy termination that also flow out. What happens when you've got a more conservative set of accounting assumptions under one basis than the other, is that if you've got a lower interest rate, your benefit premiums are higher.
The revenues that flow into the bucket from investment income are lower. The premiums are more important in the early years of the product than the net investment income, because the net investment income is only accreted on the policy reserves as they're built up. In the early years, you've got a lot more premium flowing into the reserve bucket on the FSA basis with the 1.5% interest assumption than you've got coming on a statutory basis, which is typically, today it's around two. It's what we use in our statutory statement. We put a lot more into the bucket on the FSA basis in the early years. That builds up higher reserves. The interest difference doesn't occur until later in the policy life. Then what you get is a scenario where you can build up FSA reserves that are higher than statutory reserves.
You got to look at the first derivative and the change of the reserve curve in order to get the rate of change. It's not going to reverse quickly, necessarily. It'll reverse, but the primary point at which it reverses is when policies terminate. The fact of the matter is you're building up excess reserves on an ex-FSA basis. You don't get to release the excess until policies go away, either through surrender, just normal expiration, or death. The situation is that we're going to have this excess. It isn't going to reverse quickly.
Our modeling that was reflected in Ken's slide says, 2013 to 2014 through 2017 or whatever the range was, it's going to go up a little bit to 56% or 57%. That's our modeling based on actual anticipated events. It's just not going to cross over that quickly. It'll start crossing over later in the contract's life as these policies expire or terminate. The fact of the matter is, we're stuck with the excess reserves for a period of time. There are ways to get out of that. I'm going to stop there because I could go on.
You all say, "Well, what can you do to get the excess capital out of the business that you know is there by being hidden in the reserves things?" There are a couple of ways you could do that, none of which are really acceptable to the FSA. I'm going to stop there and just say we've tried to do our best to estimate when the turnaround is, but it's not going to happen in the next couple of years, unless we get a lot of terminations for some reason.
I guess as a follow on to Chris, just looking at your block and the vintages of the block, is there any point in time where maybe that curve starts to shift a little bit?
Well, yeah, obviously there is. It varies by type of contract and the like. I would say it typically occurs later in the policy life. We do have some shifting probably going on on our old blocks of business today. Sue, you going to comment?
Well, really, Chris hit on the key element, that is the impact of new sales. One way to think about it is the burden of excess reserve is largely funded in that first year from issue. Once you leave that first year and go into the second, third, fourth year, you don't really have additional burden, or not a lot of additional burden in the second, third, fourth year. You're actually showing what I would call pretty normal income in those years. You're not going to catch up from what happened in the first year until later. Since our repatriation is based on earnings, you actually recover the earnings in the second, third, and fourth year. You just don't recover the lost earnings from the first year until later. I don't know if that helps at all.
Nigel?
Hi, Nigel Dally, Morgan Stanley. Just on the issue of profit repatriation, it looks like you're continuing to target the 80%, but your solvency margin ratio is clearly well above the target. If you continue to go at 80%, I'm guessing the solvency margin doesn't come down. Why not do something more than 80%? Could you move to 100 or even beyond 100?
We potentially could. Again, it all starts with our view, not only the absolute level of the SMR, but also the risk to the SMR, some of which are macro-related risks, like interest rates and currency rates that we have to contemplate when we view capital adequacy. We are, as I mentioned, addressing and looking at, it's very high on the priority list, actually, hedging strategies that might mute the impact somewhat of a change in rates, an increase in rates in a stronger yen. If we have those in place, that might give us more comfort to remit more from Japan to the United States. It really all is contingent on, first, us being able to adequately protect the policy holder as measured by the SMR. There's nothing terribly magical about the 80%. It's simply a rule of thumb that we've used for several years.
As I indicated, there was a time in the past where we went to 100%, and obviously, there are times we've been much lower than that as well.
I can give you a little background. When I first took over as CEO, we couldn't bring a penny out because our sales were growing at such a rate. We had never brought any money out from a profit standpoint. I negotiated the deal with them initially, and then Chris got them up to say we needed even more, and the numbers increased. They're very reasonable, make no doubt, the financial crisis shook the FSA. The only thing that would be worse than not bringing as much money as we could possibly get is if another financial crisis hit and we had overextended ourselves, and then we would look stupid. We're trying to make sure that we look at this from a moderation standpoint of doing what's best for the shareholders.
We want to bring out, let's be very clear, we all want to bring out as much as we possibly can. We want to do share repurchase. We want to increase the dividend. We want to do it with the idea that we've got cushion, because never again do I want to go through a 2009. I've been there, done that, don't ever need to do it again. I know. Chris will say the same thing from that standpoint. John Nadel.
Thank you, Robin. John Nadel from Sterne Agee. Chris, I'm curious on the Japan margin outlook, especially for 2013 through 2015 versus what was achieved in the 2012-2013 averages. I guess I can't read the page numbers I'm sorry. What I'm so curious about is the ordinary lifeline. It appears that, and I guess based on your statements earlier and what we've understood, is that that first year of sales, which was so significant in 2011 and again in 2012, that that's really put some pressure in that first year downward on the margin. You're telling us to expect sales to be down significantly in 2013 and then only modestly higher from there through the rest of this forecast period. New money yields are better. I guess I'm struggling with why the overall profit margin on the ordinary life side would be down at all.
I would have expected it to actually be up, maybe even up significantly.
All right. Well, I'm going to let Sue handle that. She directed the modeling that's behind this.
Really, a couple things happened since last year. Probably the main one is we did see lower investment yields, and so we modified our reserve assumptions for GAAP to use a lower new money rate, which impacted those ratios. That's really the biggest thing. If Eric achieves like we expect him to, there's a decent chance that this year we will modify again on an upward basis our GAAP reserving assumptions, and if so, that would improve that outlook. We're not ready yet, Eric.
If I could just-
Yeah, what about non-deferrable costs? Does that have a major impact? He's expecting some relief from that.
You get some, but with how we do GAAP reporting, with the provisions for adverse deviation, the early policy years are where you typically show a lower margin, and then you show a higher margin in the later policy years as those pads reverse. You will see some relief from that, but the bigger driver was the fact that we strengthened our reserve basis by lowering the new money yield.
If I could just follow up, I think earlier in the presentation, I don't remember exactly what it was. The new money yield, 2%-2.5% for Japan, and I think that's through this whole forecast period as well. Are the reserves now reflecting that level of new money yield?
They're at the low end of that.
Okay.
That's why hopefully we're going to be actually getting some relief this year. We set our reserve assumptions typically on an annual basis.
We won't really make a change to what we're doing until the end of the year because we want to see the whole year's experience before we do it. Last year, we had made some contingencies in our quarterly reporting for the likelihood of using a lower new money yield, and then in the fourth quarter, we did use a lower new money yield. This year, since we think we might raise the new money yield, we'll probably just sit tight and watch what happens on the investment horizon and really have a lot of communication with Eric and his team. As we get more and more comfort with the robustness of the new investment strategy, then we can be more aggressive on the reserving side.
I'm sorry to push it just a little bit further. Can you give us some help in understanding what does a 50 basis point move in that reserving assumption do to overall margins here? Should we just assume it's 50 basis points higher margin, or I suspect it'd be more impactful than that.
No, it's actually more than that.
Yeah.
It's not going to be a big impact in the first year, but it's something that grows as that reserve grows, and I don't have off the top of my head what that would be, but we could try to provide that.
Thank you very much.
Jay.
Thank you. Aflac's share performance this year.
Name?
Oh, I'm sorry. Jay Gelb from Barclays. I'm sorry. She's so strict. Aflac's share price performance has meaningfully underperformed the rest of the life insurance sector so far this year. I think that's driven largely by the market essentially using Aflac as a proxy for yen weakness. I was hoping you could just take this opportunity and try and help the investor community better understand why that may not be the case. Thank you.
Well, the only other comment I'd make about that is we also outperformed the life insurance index in 2012, by quite a bit. There is some offset there.
Well, let me comment on that a little bit. Like many of us up here, we've been here a long time. We've seen directional changes in the currency from a stronger to weaker yen and vice versa. I think there's probably a lot of market participants that don't have that longer-term perspective because really for the last four or five years, we've been in a stronger to stable currency market. Kind of going back to our thinking on Aflac currency 101 that we've discussed for years and years and years, we do try and differentiate between translation risk and transaction risk. This is what I alluded to in my comments. Translation risk meaning that we are exposed to foreign currency risk from taking a self-funded yen-denominated entity of Aflac Japan and translating revenue and balance sheet or income statement and balance sheet items to dollars for financial reporting purposes.
That's really not an economic event. It's a financial reporting event. We've chosen not to hedge the financial reporting event because it is not economic, and by hedging it, we would be turning it into an economic event. As we've discussed for years and years and years, we set our corporate targets just as we have for this year for both earnings and operating ROE on a currency neutral basis. We want our performance, the performance of this management team, to be based on a currency neutral basis because it is outside of our control. We do look at the economics of transactions, and again, I think the most visible one would be the repatriation from Japan to the U.S., where we definitely have an interest in hedging that if it makes sense for us to do that.
For this year, for instance, I didn't comment on it in the speech, I can tell you that of the JPY estimates that we presented for profit repatriation of JPY 70 billion-JPY 75 billion, we currently have JPY 60 billion of that hedged. We're protected at a rate of a little over JPY 96 to the dollar, although that erodes a little bit if the yen significantly weakens, meaning above JPY 105. That'll step up a little bit. That's a very good example of us being focused on the difference between economics and financial reporting.
Just to pick a scenario, if the yen continues to weaken, and let's say the average exchange rate for this year turns out to be JPY 105, but in 2014, it's JPY 103, we've benefited from a financial reporting standpoint, even though the yen in 2014 would be significantly weaker than it was at the end of 2012. We tend to set those types of currency risks aside.
Thank you for that. My follow-up is, given where the yen is now, to what extent would you consider hedging for profit repatriation for 2014?
Well, again, I did mention we have just started that. Once we got comfortable with where we were in 2013, again, hedging the lion's share, we have started the process of hedging the 2014 cash flows. We will be a bit cautious in it because, again, we have got a lot of time. We have got a full year before we file our 2014 financials with the FSA, and the estimates that I showed you today, the JPY 96 billion to JPY 98 billion, could be subject to significant revisions. We do want to protect ourselves against currency depreciation from a dollar standpoint, and so we have started and will continue to evaluate that.
Bass.
Thank you. Erik Bass with Citigroup. I was just hoping you could talk a little bit more about the potential risks of a rise in long-term JGB yields and kind of how you think about that, and is that one reason that you are holding the solvency margin higher than or above your target range?
That is probably the primary reason that we are holding a higher solvency margin ratio. It is not for competitive purposes. We have never had any issues related to the level of our SMR vis-a-vis peers or competitors in Japan from marketing and sales. Again, we want to make sure we have appropriate buffers. Eric and his team, combined with our enterprise risk management team operating out of Columbus, is looking at various strategies that may insulate us against some of that risk. We do have a very long-dated portfolio to match the long-dated liabilities of Japan, and that means there is volatility with the mark to market as rates change. We do feel that it is appropriate that we match asset and liability durations the best we can, but that puts us at the long end of the curve and exposes us to rate risk.
Just to follow up, what are some of the strategies, if you could elaborate, that you are looking at to mitigate that? Is it doing more in held to maturity? Are there things where you do not have to mark to market?
That's an ongoing strategy that we do evaluate. We've also looked at, and I think we discussed this last year, there's a special category in Japan that has similar features to held to maturity, where you're really designating specific assets to policy liabilities, and you avoid the mark to market on that portfolio as well. We are looking at that as well as option strategies that may make sense.
Thanks.
Schuman.
Jeff Schuman from KBW. Just kind of a fine point. I was wondering, if the 2014 repatriation assumption, I guess depending on where you hedge it, could be roughly $950 million, $1 billion, something like that. Why is the repurchase assumption sort of below that at $600 million-$900 million? Is that just caution about where you end up hedging it? Is there something else you have to fund there?
Well, Chris may want to add to this. My comment is that the $600 million-$900 million is a starting point based on the way we see the world right now, knowing that we've got a lot of time to modify that based on what happens. With us focusing on $600 million this year, a step up to $600 million-$900 million makes sense. It will be largely dependent on where the repatriation number comes in.
Okay. I'm just curious because you kind of hit a point estimate on the repatriation, but this big and lower range on the repurchase, so I didn't understand. There's nothing else that you have to fund out of the repatriation?
Just being conservative. No. Right now, you saw that roughly assuming that we will dividend $1 billion from Aflac to Aflac Inc. this year. That's kind of our preliminary thought for next year as well, but again, that's subject to change as well.
Okay, thanks.
Well, it's not fair to say that repatriation would only be used for share repurchase because if certain events occurred tax-wise where Aflac U.S. had to bear a full burden of tax for things that we didn't get an offsetting cash transfer on from Japan, we might have to use a portion of repatriation to offset some of that. It's not absolute that share repatriation all goes to share repurchase, or profit repatriation all goes to share repurchase. That's been the tendency. It comes to Aflac U.S., it forms a part of Aflac U.S. surplus, and then it's dividended to the parent. There are some other corporate purposes that profit repatriation could help us fund.
Eric.
Thanks, Robin. Eric Berg from RBC Capital Markets. Dan, for most of the history of the company, it's my sense that you've been in the business of selling medical insurance in general and cancer insurance in particular to people for whom the product made a lot of sense, largely because they were older and the incidence of cancer is obviously exponentially greater than it is among younger people. I'm thinking about your sales objectives for this year and maybe even for next year. You've said that you're interested in selling medical insurance and cancer insurance to much younger people. Why do you think they're going to go for it, given the difference in incidence?
I think the rate will be appropriate.
Right.
The pricing will be appropriate. We are reviewing to make sure that each age group stands totally on its own. Right now, there is some supplement that the older ages are paying a little less than they should, and the younger ages are paying a little more than they should. As we're evaluating products and looking at those type of things, we are looking at that. I can't go into any great detail, but we believe that that's a target market that we can get to and the consumers will, in fact, buy. Remember also, it's not cancer, it's medical.
Oh.
It is medical insurance, younger people, women having children, other issues that are out there that they need coverage for. It's not just cancer. The product we're talking about that will drive sales in the second half is medical.
We are vastly under-penetrated in that specific area vis-a-vis the competition.
The service shop is playing right into that. The service shops, people are coming in. As an American, you probably can't grasp this, but I have been to the service shops, I've gone through it. They come in for 2 hours, the first couple does. They come in for 2 hours. They get a presentation, and they give them all the information on their income, all the details. They formulate a plan. They leave. They come back again for an hour. Generally, a third
A follow-up for an additional hour that they set with these appointments. It's a grander picture of covering all aspects of the body, as I say it, which include health insurance and life insurance.
I just wanted to add one thing and actually pass it over to Toru and Shinkai-san. In regards to cancer, the public knowledge about cancer in Japan is well behind the public knowledge about cancer in the U.S. In fact, many consumers in Japan don't realize cancer is a disease of age. Actually, our partnership with the prefectures is one of the ways we're trying to help educate the public more. I don't know if Toru and Shinkai-san want to add anything to that, but it is evolving there as far as just general knowledge of the need.
Yes. That is true that the knowledge among the young people that cancer is primarily the disease of age, so the occurrence of cancer increases when the people get older very rapidly. That is one of the reasons why, but another reason is that in Japan, cancer is by far the largest, the most important disease for the people. The importance is growing every year. People are aware that cancer is something they have to fear. Even the younger people are becoming more and more conscious of the potential risk of cancer when they get old. That's why we see the growing demand in that younger age group.
Joanne?
Joanne Smith, Scotia Capital. I was just wondering, when you increased the target for profit repatriation this year, what was the factors that led you to do that, and could they repeat in 2014?
I'll answer that. The last real numeric estimate we had given of a little more than JPY 50 billion was based on our estimate at the time of Aflac Japan's net income, but it assumed that we were not going to repatriate a portion of some realized gains that we had generated last year on a bond swap program. At the time, the JPY 50 billion equated to roughly about 65%, maybe 67% of net income. We wanted to do that until we saw where our solvency margin ratio would fall out. We did generate additional gains in the first quarter of this year, with our solvency margin being very healthy, we consulted with Toru and his executive management team and concluded that 80% was an appropriate number to remit from Japan to the U.S.
We increased the percentage that we were pulling out, and the income went up as well.
Just a follow-up. I remember you were talking about certain strategies that you could try and extract some extra profit repatriation out of Japan because of the very strong solvency margin ratios there. Is this part of that? Is this something that kind of fell out of that thought process?
More than anything else, that was a byproduct of the investment decisions that Eric and his team were making for managing the portfolio, more than anything else. What helped the SMR, as I mentioned, was going from an unrealized loss to an unrealized gain position on the AFS securities in Aflac Japan's portfolio, combined with the weaker yen. That raised the SMR ratio a bit, gave us a bit more buffer against adverse developments like a stronger yen or rising rates, and that's why we felt comfortable pulling that out. As that relates to the decisions we'll make a year from now on 2014, it's possible. We'll have a lot of portfolio management activities between now and then that could result in net gains or net losses.
We'll have to see about de-risking opportunities, about bond swap opportunities, whether it's in our best interest to capture some of those, crystallize some of those gains through sales or not. It would be reflected in net earnings for Japan and could be reflected in repatriation.
Larry Greenberg from Janney Montgomery Scott. This is for Eric. I know you've done a decent amount of de-risking, but I'm just wondering where the throttle is in the opportunistic de-risking phase. As spreads have narrowed, it would seem like there would be more opportunities, yet your actions have declined over the last few quarters or so. I'm just curious, is that a sign that you feel really good about the portfolio and don't think there's any real need prospectively to do more de-risking? We shouldn't expect if spreads were to widen all of a sudden that your activities would pick up.
Sure. I think it's a combination of a few of the things you just mentioned. As we have done such a tremendous amount of de-risking, remaining holdings end up being the better ones, the ones that we feel more confident of. As I showed on the charts, the amount of financial exposure went down tremendously. Particularly for our subordinated debt, which went down tremendously, what's left is of higher quality banks that are less likely to be impacted by further volatility in Europe. Would that mean even though some of those banks may have an incentive to pay us back, we automatically want the money back? Not necessarily, unless it's on good economic terms. This is where the value of our global credit team comes into place. We would never be in a panic situation.
We can do thorough credit analysis on the holdings and then take appropriate action. One of the things that's occurring, particularly, in Europe, and with our holdings in particular in the financial space, but sometimes it happens outside of it. The ECB has provided plenty of liquidity, and those financial institutions are recapitalizing their balance sheet. Our debt ends up being one that they pick on because, as you know, in our private placements, we don't actually have the currency exposure. The issuer that issued the bond to us has the currency exposure, and they typically put on a cross-currency swap on their books. There are two positive things going on for Aflac. One is that counterparty, that bank or institution's looking to recapitalize, and their cross-currency swap is costing them money now because of the yen depreciation.
That's when we get an incoming phone call saying, "Gee, Aflac, would you be interested in taking back your debt?" That's a much better position than 2011, when we had to call issuers and say, "Would you be interested in negotiating with us?" Which was more on their terms as opposed to ours. When I say opportunistic, the holdings are getting much, much better, and the quality of our credit team says, "Those are holds. We can live through the following five years, even in a European recession." When we get those incoming phone calls that say to us, "Gee, you can get out at par for something that maybe last year was priced at 85." Yes, we'll entertain that. That's opportunistic.
The amount of those opportunities are going down because the quality of what's left is improving, and the amount of the private placements, as I've shown you, have decreased significantly. The work that we've done is taking hold, it's making progress. The word de-risking, you'll probably hear us say less and less, but we'll be opportunistic when they come about.
Larry, let me add one thing to it. It is clear that de-risking for a prudent portfolio manager is an ongoing process. You may hear less of it, but it's never going to truly end, and Eric and his team's challenge will be to identify credits that may be deteriorating and represent small problems before they become big problems, and I think that's how we'll think about it more on an ongoing basis. I also want to let everyone know that there's very solid governance around de-risking, and that was the case in 2011 as well. As a matter of fact, several of us on this panel participate in the Global Investment Committee. We participate in the Investment and Investment Risk Committee of the Board of Directors, where we have these discussions in the credit subcommittee.
We look at the de-risking opportunities through a lot of different lenses, including all of our financial reporting bases, including tax, what it does to our tax loss carry-forward, if anything. We certainly evaluate it in terms of an FSA impact and what it might mean to profit repatriation, free cash flows, as well as our capital adequacy ratio. I just want to let you know, Eric and his team are doing a lot of the heavy lifting, and then around that heavy lifting, there's a lot of governance related to any de-risking.
Christopher Giovanni.
Thanks. Christopher Giovanni, Goldman Sachs. I just wanted to focus a little bit on sales, first in Japan. When we think about the guidance there for first sector sales being down 25%-50%, if we take the 50%, that still implies, I guess, WAYS and Child Endowment sales of JPY 60 billion or so this year, which would still be up 50%-60% from what you sold in 2010, and somewhat consistent with what you sold in 2011. I guess when we think then about the following year, where you're pointing to flat to up 5%, why shouldn't that number be lower?
You want to let Koji
There seems to be a bit of confusion here, so let me just clarify that the flat to 5% is the third sector product target that we are currently aiming to shoot for.
Okay.
Go ahead.
Yeah. I was going to say, I guess the guidance in terms of the first sector for 2013, you have down 25%-50%, which implies JPY 60 billion or so of sales, which would still be up 50%, 60% versus 2010. Then you're pointing to kind of flat to up 5% in 2014 and 2015 in the first sector as well.
Okay. Well, let me just try to take a stab at this and make sure I've got it. Number one is, let me talk first about WAYS and bank channel. We really have no idea the impact of what WAYS is going to be. I've seen April sales, they're down what I told you they'd be down, more than 40% they're down. That has certainly happened, and it's carrying through in May as well. There are no surprises there for us. We've never been in a position where interest rates affected our products to such a degree, and we're learning through the process
Of what takes place. We were surprised to some degree March was so strong, but it was. We wondered, well, what would happen in April? It did drop off dramatically. Going forward, it is very hard for us to predict exactly what this wave and what's going to happen. What we tried to do in our projections was to give you a number that we were comfortable with of the 0%-5%. Assuming we get approval from the FSA, that approval would start, that's when we'll see the surge in the sales, hopefully, of medical insurance at that particular time.
The mix, the reason it's just a projection to the best of our ability that I call it more of a guesstimate than an estimate because we are not sure yet because if all of a sudden interest rates do move, these products move accordingly. That does not happen in third sector, but it will happen in the life insurance. As we saw last year in February when all of a sudden interest rates dropped dramatically and all of a sudden our WAYS product shot through the roof. Had we not had been working on the corporate bonds and what we were planning on doing in the U.S., we would have had to have stopped sales. Because we had that in our quiver, we were positioned well for that. Does that.
I would also remind you that what Chris used, those numbers for 2014 and 2015 were only for modeling assumptions, and I think he said that several times. It is a modeling assumption only. It is not an official projection of what we think will happen.
Okay. I guess for Paul in terms of the U.S., some good color there in terms of PPACA, obviously some delay in terms of implementation, the exchange that you're looking to set up for 2014. I guess maybe a bit shortsighted, but when we think about the sales target for 2013, is that potentially at risk given the down 5% we saw in the first quarter? Maybe the delay of some of the exchange in PPACA implementation outside of this year.
No. We expected Q1 being our toughest comparison from the previous year to definitely be our most difficult quarter, with Q2 being our second most difficult quarter. The first half I expected to be challenged and to be down. I've said all along, the fourth quarter will likely be our best quarter. The real difference between, I think, zero and up five is going to end up being how the third quarter plays out. It's our work in the broker market that is driving a good bit of that. We continue to see strong broker growth. We believe that the relationships that we're building there, both the small and regional brokers as well as now in the budding stages with the larger brokers, will help us have a better back end of year.
It's never as much fun to come from behind, that's just the reality of where we are, I still feel confident about flat to up five.
Ryan?
Thanks. Ryan Krueger with Dowling. We've talked a lot about the overly conservative reserve requirements in Japan. I think last year, maybe it was two years ago, you did do a small reserve financing transaction that freed up some of those reserves. I'm wondering if that or potential securitizations are options that you're considering that could help free up some of the reserves faster than it would take otherwise.
I'll start that and see if Sue Blanck has any follow-up comments. Reinsurance securitizations are not popular with the FSA. They basically only permit reinsurance transactions to occur in the year a business is written. They don't normally allow them for existing blocks of business that we would see in the U.S. I think it would take a change in the mindset among the FSA officials before we were able to do that. If we were able to do it, that would be one of the ways to solve the so-called excess reserving and would be attractive depending on the financing costs.
I think it'd be good for Charles to give a little color on the FSA because he deals with them, so does Toru constantly. Just give an overview of how dealing with them and what all is taking place in the political environment with the changes. I think you'd all find that interesting.
Thank you. Of course, like many regulators, the financial crisis experience has driven the mindset and the reevaluation of standards and so on the part of FSA taking part in the G20 Financial Stability Board discussion as a single regulator of banking, securities, insurance, and capital markets. It's not just insurance, but how they look at the entire financial system drives many of these discussions. From FSA's point of view, the primary objective, as always, is protection of consumers, policyholders in Japan, user of the financial system. Therefore the financial system protection, prudential regulation in that regard is key. If you're looking at it from that point of view in a bank-centric way, you're going to be even more probably conservative as an insurance regulator in a way that, for example, U.S. insurance regulators may not be.
With that mindset, we're constantly talking about issues but with this principle of self-governance and so on. It's not that they're preempting all the time, but they want to always be able to ask the tough questions and for us to be able to explain how we make our management decisions in light of those regulatory objectives that they constantly have. That is the protection of Japanese consumers and the Japanese financial system. If we are able to make the case that those issues are completely being addressed and therefore we're making repatriation, for example, then that's fine. The challenge is constantly in that kind of an environment, discussing it. Dan talked about politics. I may get in trouble when I go back to Tokyo, but let me say this.
The past three years, under the Democratic Party of Japan governance, there's been a challenging environment for the business community, because in many ways the lack of experience in governing led to problems with execution, and very harsh treatment of business overall, not American or European, all businesses, domestic and foreign. That has completely changed with the Abe government's arrival and Abenomics. If you're going back three years, particularly post-financial crisis, in that kind of a political environment, regulators are going to be even more conservative about many of the issues that they're responsible for. Going forward, maybe things may change with Abenomics working in essentially a pro-business government.
It remains to be seen whether that happens or not, and we'll continue to work with the government in Japan to try to see if we can make the kind of progress that we would like to make, as Chris talked about.
Toru, you want to add?
Thanks a lot. Seth Weiss, Bank of America, Merrill Lynch. Given the sensitivity of first sector profit margins to interest rates, just wanted to dig into the differences between the new money yield that Eric's earning versus the 2%-2.5% that's built into the model for 2013 to 2015.
Let me make a comment on that first, then Eric might want to make some follow-up comments. In doing our profit analyses, we look at expected cash flows over the entire life of the product. Our products are long duration, particularly cancer insurance, WAYS insurance. They all are lifetime type products as opposed to term products. What we're looking at in doing our profit analyses or what I characterize this year as lifetime net investment yield. Back when we were investing more in private placements, 20, 30-year private placements with embedded cross-currency swaps, we knew what the net investment yield on those instruments were for the period of the instrument, 20 to 30 years or perhaps longer. I didn't have very much question about what the appropriate investment return for profit testing was.
Today, we're investing in somewhat shorter instruments in the corporate dollar bond program, and we're hedging the dollar instruments into yen, potentially using several different techniques, the cost of which are somewhat variable over time. What I said was, okay, I don't know exactly where to hang my hat on what the lifetime net investment yield is going to be. What I'm going to do is say, okay, here's the profit number at a specified lifetime net investment yield. I turn it over to Eric and I say, okay, help me understand what our lifetime net investment yield is going to be net of hedging costs. I'll let him follow up a little bit on that. We're looking at a number of different things, that's kind of the difference in the sensitivity between historical presentations and current presentations.
The add-on I would add to that is as we're evolving in our investment strategies, which if you think about it, are really putting Aflac more in line with most other U.S. or Japanese life insurance, a robust portfolio of different fixed income instruments and perhaps a small allocation to some others. The evolution of how we do asset allocation and ALM studies becomes more important to us because it's through that information, which incorporates our risk tolerances, stress testing on capital, where we can go back to Chris and our partners on the product side and say, here are expected returns for the future under the following set of assumptions. Those studies are redone at a minimum every three years, but perhaps more often if markets change or the business changes substantially.
Our first experience with that at Aflac was last year when we did the first asset allocation ALM study. Now, of course, the portfolio's evolving to Chris's point. It's changing, and it's actually changing fairly rapidly between new money coming in and some of the de-risking we've done. The importance of coming together on this side with these studies and then helping Chris put that into his model and how he wants to project things will continue to be an exercise that's important to us and hopefully continue to get sharper as this evolves.
I just want to add, when we set the reserve assumptions for GAAP reserving, those assumptions don't impact the actual profitability of the business. All they impact is the emergence of the profitability. Even though last year we used a lower new money rate or a lower yield rate to establish the reserves, what Eric's team actually earns is going to be what impacts the actual profit that emerges on that business. The reserves are just going to impact the timing of the emergence.
Sure, I appreciate the difference between the GAAP modeling versus the actual IRRs. They'll be appreciated. I guess I was just trying to put it into context to the 1.5-2.5 sensitivity range that you showed where the 275-300 that you've been earning is a little bit off that range.
I think the biggest driver of the difference is the fact that Chris' chart is the net, it's net of hedging and those sorts of things.
Clearly the actual yields net of hedging costs are higher today on the U.S. corporate bond program than the illustrated numbers. On the other hand, we won't do U.S. dollar corporates for all of our cash flows for an unlimited period of time. Even this year, we'll have a mix of yen-denominated instruments added to the portfolio, whereas in the first quarter, we had very little of that. We concentrated on the corporate U.S. dollar bond program. That's it.
All right. Schwartz.
Steven Schwartz, Raymond James. I want to go back to Mark, because Mark Finkelstein was asking about when things turn on the profitability between FSA, STAT, and GAAP, and the answer always is, well, it depends on sales. I'm a 50-year-old male. I buy a cancer policy. When does it switch over?
A long time from now, Steven. I mean really, over 20 years.
Over 20. 20 years it takes.
More than 20 years from now.
More than 20 years. Okay.
I think we need to distinguish between the cumulative profit that's emerged and the year-by-year profit that's emerged.
Okay.
The real pain is in that first year. After that first year, the FSA versus GAAP versus STAT profits aren't that much different for year 2, 3, 4, or 5. The pain that you felt in that first year continues. That's what takes such a long time to recover from.
Right. That's what I thought you said. It goes back to, okay, WAYS presumably, if sales aren't going to be that great next year, cancer, medical, okay, WAYS not. If everything turns to normal in the second year, as you say, because it's really the first year that takes the hit, why don't we see greater money coming? Why don't we see a higher ratio of FSA to STAT and GAAP earnings?
Sooner. To some extent, you're impacted by the higher third sector sales proportionately because the first-year pain of those is even greater than on the WAYS.
Okay.
It really is just pretty complex.
All right, let me ask one more on this. How long does it take you to get to even on a cancer policy, cumulatively, get to even on a cancer policy? Get your money out. Okay, versus WAYS.
You mean in terms of break even?
On an FSA reporting basis.
What's your break even point?
We were talking about that earlier. Go ahead.
Third sector stuff typically takes about 10-15 years. First sector is more like 14-17 years. It takes a good while.
Okay, thank you.
It depends on the rate. It depends on the assumption for the profit testing interest rate when you look at those break-even periods.
Don't forget the life insurance, because we had such a strong first quarter, it delays things, too. You got to take that into account as you're thinking about 13.
These are really more common. They're closer to what you experience in the U.S. life insurance industry. It used to be in Japan for third sector business, before we had to start using the standard valuation rate, we could use a reserving rate closer to the pricing rate. We broke even in three or four years. Now it's just more stringent and takes a longer period of time. Since you asked the question, I want to tell the whole group that Steven did all his homework, and he looked at my limited pay accounting slide and found an error in it. The net liability in the second policy year ought to have a minus sign in front of it, and that makes all the math work.
If you have your people go through these slides and you're looking at things, you'll find one error that was identified by Steven Schwartz. Thank you, Steven.
The first one he's ever made in his life.
He gets an extra cookie in lunch or something.
Yeah, extra cookie.
We will correct the slide for the book.
Okay, Joann.
Thank you. Joann Kinnear from Deutsche Bank. I want to go back to U.S. sales in 2014 and beyond, thinking of the Affordable Care Act exchanges, the fact that you're now tapping the other 50% of the market that historically you hadn't been. It just seems like 0% to 5% growth is modest at the end of the day, and I was curious to hear a little more about what got you to those numbers.
Obviously, looking at zero to five out in the future is dependent upon a lot of variables.
One of the things that we're having to think about is we really don't know, as I mentioned in my speech, when PPACA is going to truly be implemented. We thought it would be 2014. Now we're hearing it's going to be 2015. While our exchange that we're going to own from a proprietary standpoint is something that we can launch independent of that, we do believe that the effect and the push for businesses to adapt is going to be strongly influenced by when the government actually implements PPACA. As I also mentioned, that you still got small business impact that's highly correlated to their belief of what's going to happen from a certainty standpoint, and there still remains a lot of uncertainty in terms of their hiring, in terms of the forecast of what's going to happen. I think we're giving you a conservative estimate.
Do I believe that there's upside? Do I believe there's potential for greater growth? Of course, I do. I think there is potential for greater growth. I think at this point, just telling you that we're going to be stronger than zero to five is based on what we hope will happen in not only economic conditions, but what's going to happen within government regulation and a lot of things that are outside of Aflac's control. I do believe long term that Aflac U.S. is a strong business, one that we can continue to grow. We have to be very careful as we step into 2014 with the effect that PPACA could have on our distribution, with the effect, the confusion among the American consumer and business owner.
As I mentioned, the Japanese consumer is much more educated around what happens and why they need to own our products. There is a temporary potential for confusion. Longer term, I'm very optimistic. Short term, I want to be conservative in how we look at what's happening in the business.
Thank you.
Okay. Jimmy?
Hi, Jimmy Bhullar, J.P. Morgan. You sold a lot of AIFs through the bank channel the last couple of years, and I think part of the reason might have been to preserve, enhance your relationships with the banks. If you look at third sector sales, last year, second half, you sold about the same number of policies you sold three years ago. Maybe if you can discuss the long-term potential of the bank channel in terms of selling third sector products and your level of satisfaction or dissatisfaction with what you've seen over the past?
I'll let Shinkai take that, I want to remind you that if you look at policy count versus premium, it's a totally different picture because remember, AIFs sells for nine times more. Shinkai, would you like to take that question?
Okay. Because of the 30% of the number of policies coming from the third sector products for the bank channel, as I mentioned. In terms of the APs, only 5% of the total bank channel sales comes from the third sector because of the premium is much, much lower compared with the AIFs. Because of the cross-selling effort we have been doing since last year and enhancing this year, this third sector sales is consistently increased. Also, we believe we could see another consistent increase for the third sector products this year, next year.
Even the number of policies is about the same as 2009, second half. It hasn't grown since then. It declined, then it's gone up a little bit.
Well, what I would argue there is that salespeople or banks take the path to least resistance. Because our interest rate was high enough that it was much better than anything they could get anywhere else, they sold the path of least resistance, which happened to be AIFs. It is my hope now that that has fallen back in terms of the lower interest rates we're now using, that there will be a shift, and we will see more sales from the medical side and the cancer side. Only time will tell how that works out. I think that if anybody's going to do it's going to be us. We're well-positioned, we're right there, and we've got them on top of that. That's really what is the driver.
When you look at the bank sales of the third sector products like cancer, you have to keep in mind that this is a quite new product for the banks. The banks have been selling the financial products, but not the insurance products, particularly the third sector. It is natural for them to start selling the insurance product, focusing on the third sector, which has more similarity to the financial products which they are familiar with. It has been only several years since the bank channel was open for the insurance. It takes time, the banks to get used to the pure, I should say, the insurance products like cancer. Their awareness of this kind of product is increasing, and we feel that the banks are becoming more comfortable in selling those products as they are getting used to the insurance.
I think we can be a little bit patient in seeing how they develop over time. I think we are quite satisfied with what we are going on, hoping that we have a huge potential in that channel going forward.
Remember, 70%-80% of the customers at the banks are new to Aflac, so that gives us plenty of opportunity to go back and sell those third sector products, and that's what they're working on now.
On Japan, maybe for Charles, do you see any move, given the budget situation, the change in government towards an increase in co-payment rates, if that's realistic over the next few years?
This issue has to be discussed in the context of the integrated tax and social security reform, which was a deal that was struck prior to the Abe government coming in, as you recall, so that consumption tax will go up next year and then the year after, pending macroeconomic numbers being correct. As that is being pursued, and then you combine that with the fact that I think anything can happen in politics, but at this point it looks like Abe government is well-positioned to win the upper house election. You will have essentially three years of stable government control of lower house and upper house. With the tax deal came a council that was created to begin to evaluate the kinds of issues that relate to healthcare reform that's necessary.
All the issues that we've been talking about, aging society, low birth rate, the accumulating debt, and so on. I anticipate in the coming years, particularly next year after the upper house election, there'll be a lot of discussion about healthcare reform. The fundamentals will not change. Universal healthcare system will still be there. That's given. In terms of how to make that system more efficient, how to deal with the sustainability issues are going to be discussed. All of that means the consumers will be even more aware of the need to take care of themselves, and so it's, I think, good for our business, but also it will be a consideration given obviously to the issue of co-payment in that context.
That's coming after upper house election, probably next year, so we look forward to talking to you and updating you about that next year.
One more question. We're past due, and I'm going to get in trouble, Bill?
Yes. Bill Rubin from BlackRock. Question for Dan on the combined payout ratio longer term. I understand the last four to five years why the payout ratio was lower. I understand those factors and reasons, when I look back prior years, for many years, the payout ratio combined was 50%, 70%, even higher. Is it fair to assume that two, three, four years out from now, we might get back to a range of total payout of the golden years?
Certainly, I think that's the way we'd like to head. We're going to have to watch the markets and what all is going on. Yes, ultimately, we'd like to be back where we were.
Fair enough. Thanks.
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