Good morning, everyone. I'm Robin Wilkey, for those that don't know me, Senior Vice President of Investor and Rating Agency Relations. I'd like to welcome all of you here today. I'd also like to extend a welcome to those that'll be listening on the webcast. You'll hear from our speakers shortly. In the meantime, I'd like to introduce you to the other officers who are with us today from Aflac. If you will, please stand when I call your name. From the U.S., we're joined by the following officers, Audrey Tillman, Executive Vice President and recently promoted to General Counsel. Catherine Blades, Senior Vice President, Corporate Communications. June Howard, Senior Vice President and Chief Accounting Officer, Financial Services. Joining us from Japan are Charles Lake, President of Aflac International and Chairman of Aflac Japan. Masahiko Furutani, Deputy President of Aflac Japan.
Sue Blanck, Executive Vice President of Aflac and Aflac Japan and Corporate Actuary. Yukihiro Sugiyama, Senior Vice President of Financial Institutions and Support. Tomoya Uchida, Senior Vice President and Chief Administrative Officer. We're also pleased today to have with us Doug Johnson from our Board of Directors. Mr. Johnson is a retired audit partner with Ernst & Young. He is the financial expert of the Audit Committee and also serves on the Executive Committee as well as the Compensation Committee. He joined the board in 2003. He has given valuable service and advice to us over these years. I'd like to thank all of our board members and members of Aflac management for their attendance. Let's give them all a big round of applause, please.
Before we begin today, let me remind you, as always, that some of the statements you hear are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Our actual results could differ materially from those that we discuss today. Please look at our latest 10-Q filing for some of the various risk factors that could materially impact our results. You'll find copies of the slides at your seat so that you can follow along and make notes. We will have a Q&A session after all the presentations and before lunch, which should provide you with enough time for all of your questions. Please hold your questions until the end.
Please remember that the presentations are being webcast. As a courtesy, check now and ensure that your cell phones are all off and other electronic devices have been turned to the off position. After the presentation, there will be ample time to ask your questions. I'd like to start by introducing 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 the most successful state sales coordinators in our history. In 1983, he was appointed President of Aflac. In 1990, he became CEO of both Aflac and Aflac Incorporated. 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 recognized Aflac as one of the best places to work for the 16th consecutive year, and Ethisphere magazine named Aflac as one of the most ethical companies for the eighth consecutive year in a row. Dan has been named the top CEO in the insurance industry by Institutional Investor magazine. I suspect that one reason Dan has earned that recognition is that he listens to his shareholders. Dan has said on many occasions that he would not trade places with any other CEO, and I can safely speak for management today and say that we wouldn't trade him either. Right now, I would like to introduce you to Aflac's Chairman and CEO, Dan Amos.
Thank you, Robin, and good morning, everyone. It's incredible that to me, that this year marked my 25th financial analyst briefing as CEO. During that time, I've seen many changes in our markets. Although dealing with change can be challenging, I believe with change comes opportunity. Aflac has a history of successfully transforming change into opportunities. I am often reflect back on the eve of 2001 when Japan's insurance market was preparing for deregulation and liberalization, and this would mean that the large domestic insurance companies would now sell third sector product for the first time. There were those that thought deregulation would be devastating to Aflac. Some even said, and I can remember the quote was that Aflac's domination of the cancer insurance market is over. This is just an example of how change became an opportunity for Aflac.
Deregulation prompted us to diversify by entering the medical insurance market with a standalone medical product, which we had never done before. Not only did we maintain our number 1 position in cancer sales, but we emerged a year later as the number 1 seller of medical insurance. Clearly, the whole world had to adapt to changes that were brought about by the financial crisis in 2008. For us, it was our investment function. We reacted quickly to enhance our balance sheet by de-risking our portfolio, and over the last three years, we've transformed our investment function by bringing in new talent, work processes, and systems. For instance, we are excited that we are just implemented a new system that serves our main technologically platform, which prepares us as well for the future.
Most importantly, though, we are diversifying our portfolio, and we believe we're positioned to generate better returns going forward. More recently, we've been adapting to the dramatic changes in the distribution system in Japan. The bank channel is a great example. We always thought that the bank channel would be a great distribution for our third sector products, and it has been. We also recognize that there's an enormous interest in first sector products that respond to the needs of bank customers. We wrote so much first sector business, though, through our WAYS product, that we pulled back the sales of the product to evaluate the optimal mix of our business. While doing so, we concentrated over the last year on third sector products.
In the meantime, we've also been analyzing what the opportunities there are for us in the first sector. I want to give you some thoughts on that. Third sector products are lower premium, higher margin products than you generally find in the overall insurance market in Japan, which is one of the reasons we've generated such solid returns. Banks, which represents a significant portion of our distribution system, are more accustomed to selling higher premium products. We are currently in the process of determining how first sector products will best benefit us in the future. I want to emphasize that we're pleased with the first sector block of business, which amounts to just under JPY 450 billion in premium. Despite the pressure from low interest rates, I'm pleased that the first sector business generates a profit margin of over 10%.
That means that we're earning approximately $0.5 billion annually on this first sector block of business. After thorough evaluations, we are comfortable that we should supplement our revenue growth with the sale of some first sector products. Rest assured, we remain disciplined when it comes to our margin and our risk requirements. Our desire is to enhance shareholder value based on building sales volume at acceptable margins. Make no mistake, third sector products will remain our primary focus. Our goal is to remain the number 1 provider of cancer and medical insurance in Japan. Let me tell you about our plans to continue our leading position in third sector, especially as it relates to Japan Post. We are pleased with the strong relationship we have developed with Japan Post.
In fact, tomorrow, a delegation of high-ranking executives from Japan Post is coming to visit me in Columbus to discuss strengthening our partnership in Japan. In turn, I'm going to Tokyo soon to visit the CEO of Japan Post Holdings Company. I think that shows that we have bond between our two companies and that we're keeping our lines of communications open, which ultimately should result in stronger sales. I believe sales through Japan Post will gradually but steadily benefit our cancer sales in the coming years. Since October of last year, we've expanded our operation with Japan Post. Both Aflac and Japan Post have been laying the foundation for sales as we had planned. Because of the magnitude of Japan Post organization and its government ownership, we've exercised special care in methodically implementing a sales program.
Assuming Japan Post production improves over the coming quarters, which I expect it to do, I believe our annual sales target of an increase of 2 to 7 is reasonable. I believe that because the combination of increased resources that we are going to be able to provide Japan Post will continue, the development of product specific meetings, the needs of Japan Post customers, and the increase in the number of post offices offering our products will improve the overall performance and allow us to achieve our annual target. Nowhere is the need to adapt to change more apparent than it is in the U.S. In fact, through my 40 years with the company, I've seen more changes in the U.S. healthcare environment in the last 5 years than I saw in the first 35 years combined.
Specifically, we've had to be very adaptable due to the evolving market conditions brought about by the implementation of the Affordable Care Act. Uncertainty around healthcare reform implementation has prompted many businesses and consumers to delay decisions relating to healthcare coverage, especially with the accounts of 50 or less, which is our bread and butter. We believe the need for our products is just as compelling, if not more now, than ever before in our history. In that regard, our sales management team has not executed as well as they could have, and that is unacceptable to me. I am laser-focused on a number of steps that we're taking to improve U.S. sales.
These actions center on marketing, recruiting, training, performance management, coordinator expansion, and incentives for career agents to sell through businesses with 100 or fewer employees. As you know, we have also segmented the market toward the end of 2013 to better focus on our career sales agents, where they have traditionally been very successful. Although some of the changes can be somewhat disruptive, I believe with these changes comes opportunity here for us to grow our business. Our goal is to be where the people want to buy our products. We recognize that channel conflicts occurs within our distribution. We are working diligently to find ways for our agents and brokers to work together, and I believe ultimately, it will bring great success to us. Our field force continues to play an important role in the small business market of employees of 100 or less.
To encourage their focus on that market, we implemented a higher commission structure on second-year renewable business for our agents and field management. I believe this will help our sales, our policy persistency, and our agent retention. It's an important benefit for our agents as we segment and separately grow the broker market. We know that Aflac's field force is the biggest asset, and that the small business market has always been the sweet spot. Although it's not without problems, I believe our market segmentation approach, combined with our brand, will ultimately lead to big opportunities in the future. I know a more recent buzzword is exchanges, and to me, I see exchanges as another avenue to sell our products. At the end of March, we completed our initial test market of Aflac's proprietary exchanges called Everwell.
We're analyzing the first phase on a pilot program and making adjustments to the platform based on the insights and the field input. Additionally, we are continuing to build successfully our capacity to sell through the 50 brokerage houses in America who typically serve large businesses. This includes connecting with the brokerage houses' private exchanges, and we're making headway there. I believe that Aflac U.S. has the opportunity to emerge better positioned from an ever-evolving healthcare environment or marketplace. That's because just like national healthcare in Japan, a more uniform coverage will instill a better understanding and appreciation for the type of products that Aflac sells. As I said at the end of the first quarter, I think that the second quarter sales will be down while the latter half of the year should show an increase in sales for our U.S. operation.
Taking into account the strategic initiatives along with the challenging economic environment, I continue to believe that Aflac U.S. sales will increase in the range of flat to up 5% for the full year of 2014. Our decision 14 years ago to bring the Aflac Duck into our commercials was one of the best decisions we've ever made, and our name recognition at that time was under 10%. Our brand recognition just hit an all-time high in March at 94% in the United States. The Aflac Duck has also become an international icon when we began appearing in Japanese commercials in 2003, and today, it even has higher name recognition in Japan than in the U.S., which is hard to believe. At the same time, the strength of our brand, we know that the sales in both the United States and Japan can do better.
We're working to find ways to leverage our brand, and that includes the broker channel. Brokers love our brand, and because of our strong brand, it's hard for them to ignore us. In today's world, building a brand is much more difficult than ever. Brands in general are more valuable than ever because as more products and services hit the market, consumers have less and less time to evaluate individual products. They often prefer going with the market leader under the assumption that the leading brand is a better product. Let me remind you that Aflac is the market leader. To show you just how much consumers have to shift through different issues that they're trying to find out who to buy products from Back about two weeks ago, I decided that I needed a new cover for my cell phone, which was an iPhone 5.
I went to Amazon.com, do you know that there are 741,000 different cases to choose from? Like many people, I decided to stick with the leading brand, mainly because how do you sift through all of those particular choices? For consumers who want help sifting through insurance, again, I believe they will turn to the market leader, which is Aflac. We pioneered supplemental or voluntary insurance in the United States and Japan, and as time goes on, we want to continue establishing it as our own brand, as I believe we are well on our way to doing that. Instead of referring to supplemental or voluntary insurance, today, many people, even our competitors, call our type of insurance Aflac's products, which we hope will be similar to tissues versus Kleenex. We're working toward those things.
We continue our quest to own the voluntary supplemental insurance market category, and I believe we will. That's just one of the reasons that I rank protecting the Aflac brand as one of my main responsibilities as the CEO. I'm going to show you two commercials, one which you've never seen, or it's never aired before, and then I want to talk about them. Let's run the commercials.
Hammer that in.
Yep.
Thanks. Wrench.
What?
Aflac.
This is who you brought to help us out?
Oh, yeah. He's the best.
He doesn't look like he's seen a tool in his life.
Oh, he doesn't know anything about tools.
Aflac.
When I broke my arm, he lent a hand. He paid my claim in just four days.
Four days. Wow.
Tool.
Find out how fast Aflac can pay you at aflac.com. Better.
Okay.
Exhale.
Aflac.
A gentle wave-like motion. Liberate your spine.
Aflac.
Reach toward the left knee.
Not that great at yoga.
Yeah, when I slipped a disc, he paid my claim in just four days.
Four days?
Yep.
Find out how fast Aflac can pay you at aflac.com.
These commercials are meant to be funny, they're also meant to get your attention, there's a clear message that Aflac pays their claims fast. Our commercials say that we pay it in four days, which is the average time it takes for us to process a claim. However, in many cases, through what we call our SmartC laim process, which actually includes wellness benefits, we can actually pay the claims in same day, that's an enormous competitive advantage for us. The reason fast claims payments is so important is because people need the cash, they need to receive it directly as they can through owning our policies, they need it most, they've got it at that particular time with us.
To prove to you why it's important to pay claims quickly, you have to look at a recent survey from Prince Market Research, this is a staggering number to me. It shows that 49% of the workers or the workforce says that they can't afford $1,000 in out-of-pocket medical expenses. 49%. It goes on to say that 27% cannot even afford $500 of out-of-pocket expenses. Again, there is no doubt that consumers need cash quickly, paying claims fast and fairly will set us apart from the competition, I am convinced these commercials will increase our sales going forward. Since we started sharing the Aflac Duck with our Japanese operation in 2003, we've become just as popular, the Aflac Duck has, in Japan as he has in the U.S.
Our popularity there has resulted in strong and trusted brand the relationships we've established with consumers our distribution channels. It's also resulted in developing innovative products that suit the needs of the sales channels the customers alike. I want you to see two recent commercials from our campaign promoting our most recent EVER product, which is our medical product. The commercials feature the Black Swan, a somewhat menacing new character that represents the arch nemesis of the Aflac Duck. To set the stage, Black Swan's goal is to tempt consumers to make bad decisions about life and health insurance. Fortunately, Black Swan's efforts are foiled by the ever-vigilant Aflac Duck, who encourages consumers to make sound, positive, and healthy choices in life, such as purchasing medical insurance. Check this out.
One day in a town, I picked up a Black Swan. Since then, don't feel like going to work.
Quit. Quit your job. Skip it. Skip it. Jogging just makes you tired.
I'm thinking of buying medical insurance soon.
Unnecessary.
Who's this?
It's Black Swan.
Don't think about illness until you actually get sick.
Aflac.
Dang, he found me.
For those who consider seriously, a brand new medical insurance is bonding ever more to you.
It's much easier if you don't think about it.
When it rings a bell.
Aflac.
「必要ない、必要ない、保険なんて必要ない。」って言ってた俺がまさか病気になるとはな。
しかもちゃんと保険に入っていたとはね。はい、りんご。
Aflac!
今入っておきましょう。Aflacの医療保険。
いいやつだな。
I think you can see how we've adapted our advertising and marketing to reflect Japanese culture. The difference between the Aflac Duck in the U.S. and the Aflac Duck in Japan is another example of how we tailor our strengths to reach two distinct markets. A brand is only as strong as its foundation in terms of finances, and we believe that we are stronger than ever. As such, we remain committed to maintaining a strong brand in Japan and the United States, but we also remain committed to generating strong capital ratios, both our RBC and our SMR, on behalf of the policyholders and the bondholders. It's our goal to maintain a minimum RBC ratio in the range of 500%-600%. Additionally, our objective is to keep our SMR at a minimum range of 500%-600%.
As of March 31st, both capital ratios were very strong. We estimate that the RBC ratio for the range of 785%-815%, and the SMR to be in the range of 760%-775%. As we mentioned on the first quarter call, given strong capital ratios and risk mitigating strategies, we now anticipate repatriating about 127 billion JPY this year. This increase in repatriation bolsters our liquidity and flexibility and gives us the utmost confidence in this year's plan to repatriate or repurchase, I should say, $1 billion in common stock. It also allows us to focus more on positioning the SMR repatriation and share repurchase for 2015.
As we expressed, we have certain headwinds going into 2014 that have pressured earnings per share growth, including our expenditures on the Corporate Value Enhancement Programs, or the CVEP, in Japan, the increase in the consumption tax, and the impact of lower investment yields. I want to reaffirm our 2014 guidance of a 2%-5% increase in operating earnings per share, excluding the impact of currency. Aflac has been delivering on our promise that we make to be there for the policyholders when they need us most by paying claims fairly and promptly. We continue to believe that we are well-positioned in the two best markets in the world. I believe the best is yet to come for our company. Now, let me tell you what is currently most important to me as Aflac's CEO. First, we must find ways to generate profitable revenue growth.
We're looking at all alternatives. Second, it's important that we maintain a reasonable level of profitability. We don't want our margins to go too high, nor do we want a significant margin compression. Third, we want to maintain industry-leading return on equities that our shareholders have come to expect. Fourth, we want to continue to deploy significant amounts of capital to our shareholders in the form of cash dividends, share repurchase, and earnings growth. Finally, we want to expect to achieve our sales and financial targets that we've set for 2014. As I mentioned, it is incredible to me that this year marks my 25th analyst briefing as the CEO of Aflac. As I can tell you, I'm still enjoying it because I enjoy challenges. As I analyze our position in the industry, I feel we have more potential than any other insurance company or sector.
It's just a requirement that we continually adapt to the environment by being the low-cost producer, which will drive consumers to us with the best products at the best price. Now I'll turn the program back over to Robin. Robin?
Thank you, Dan. We will now turn to Aflac Japan with our first presentation coming from Paul S. Amos II. Paul moved from our sales force to headquarters in 2005. He assumed additional responsibilities as chief operating officer of Aflac U.S. in 2006 and was promoted to president of Aflac in 2007. Last year, he assumed reporting responsibilities for Aflac Japan and Aflac's global investment division, and he also recently moved to Japan for a time. Today, he's going to be discussing Japan's macro environment and the market overview. Paul?
Good morning. This year, Aflac celebrates its 40th anniversary of delivering our promise to Japanese consumers, and we're proud of that milestone. Since being licensed in Japan in 1974, Aflac has become one of the country's most respected insurance companies, and we work hard every day to earn the trust of millions of policyholders that they have placed in us. I relocated to Japan in January 2014, and I'm grateful for the opportunity to be in Japan during this momentous year for the company, and I'm pleased to be able to work more closely with Aflac Japan team to further strengthen our relationship with key stakeholders in this critical market. Today, I'll provide you with a brief overview of Japan's general economic environment, Aflac Japan's standing in the market, and our growth strategy in Japan.
For the first time in quite a while, people in Japan are positive about the economy. The Bank of Japan, for its part, has begun strengthening its assessment of the economy. Last May, in its monthly statement on monetary policy, the bank upgraded its assessment, stating that Japan's economy has started picking up. This April, the Bank of Japan further stated that Japan's economy has continued to recover moderately as a trend. Although this sentiment has been tempered somewhat by the consumption tax hike, which I will touch upon later, the sense on the ground in Japan is that the economy is improving and things are headed in the right direction. There are a number of reasons for this improved sentiment, but it is clear that the government's policies have played a key role in this shift in attitude.
Given this backdrop, I'll share with you an overview of the business environment for Aflac in Japan. First, I'll touch upon Prime Minister Shinzo Abe's economic strategy, aptly named Abenomics. Abenomics consists of a three arrow strategy, bold monetary policy, flexible fiscal policy, and a growth strategy that includes structural reforms. Abenomics has helped Japan garner global attention since its launch in December 2012. In the first year of Abenomics, the first two arrows have spurred growth and helped restore confidence with consumers and businesses alike to levels not seen since before the financial crisis. In 2013, the yen weakened 15% against the USD, and the Nikkei gained 57%, which is the largest gain since 1972. Additionally, inflation hit 1.2% in November. The Bank of Japan's Governor Kuroda, who I had the pleasure of recently meeting with, expressed cautious optimism regarding the state of the economy.
I increasingly hear Japan being touted as a potential model for developed countries that are struggling to address deflation, aging populations, and fiscal deficits. That said, I'm aware there is skepticism amongst many, especially outside of Japan, about the long-term prospects for Abenomics, particularly given the first two arrows, bold monetary policy and flexible fiscal policy, are unlikely to be able to be supported, sustained economic growth in the long term. While skepticism remains, especially outside of Japan, Prime Minister Abe's third arrow, growth strategy, is viewed as essential to Japan's sustained long-term economic prosperity. One phrase I keep hearing, "keiki ga yoku natteiru," meaning economic conditions are improving. The second character in the word keiki, or economy, suggests emotion or feeling.
I believe this change in feeling in Japan is largely due to Abenomics, and Prime Minister has demonstrated commitment so far to begin putting in place the measures required to realize the promise of meaningful structural reform. I think there's a concrete basis for this initial optimism. In the last few weeks and months, the government has come forward with measures to encourage wage hikes and increase participation of women in the workforce, as well as establishing strategically implemented special economic deregulation zones and a new national energy policy, among other things. A revised growth strategy will be announced in June 2014. It is expected to focus on structural reforms designed to make Japan, as the Prime Minister stated at the World Economic Forum in Davos, amongst the world's most friendly business places. These measures are a part of a sustained and focused reform agenda.
They have helped contribute to the sense that Japan's economy is headed in the right direction. As we've mentioned in previous analyst meetings, a declining birth rate, the rapidly aging population, and a ballooning fiscal deficit are among Japan's most significant challenges to achieving sustained growth. It is in this context that the government of Japan has begun moving forward with a comprehensive and integrated overhaul of the Social Security system, along with the healthcare and tax reform. Japan's demographic trends, when taken as a whole, are putting Japan's publicly funded social insurance programs under increasing financial pressure. Raising the consumption tax is seen as one of the primary funding mechanisms for Japan's Social Security costs.
As you can see from this slide, the consumption tax was raised from 5% to 8% on April 1st, 2014. It will be raised again to 10% by October 2015, with an escape clause if the macroeconomic situation is not conducive to an increase. Japanese government officials have said that the government will decide whether to go ahead with the increase by November of this year. To mitigate the negative economic impact of the increase, in January, the government enacted a JPY 5.5 billion economic stimulus package to take effect in the second quarter of 2014. Even with the stimulus package, however, the consumption tax hike is expected to cause an economic slowdown with a consensus of private economists predicting a contraction in real annualized GDP of 4.1% for April to June 2014, followed by a more moderate recovery in subsequent quarters.
The Bank of Japan maintains that Japan's economy has continued to recover moderately, although some fluctuations are expected with the consumption tax hike. They will continue both the quantitative and qualitative monetary easing as long as necessary, aiming to achieve the price stability target of 2% inflation. As mentioned above, government officials are closely monitoring the effect of the tax hike in the economy. Governor Kuroda has indicated that the Bank of Japan will take additional action if economic data suggests that the impact appears to be more than temporary. Japan's compulsory public healthcare systems costs are covered by premiums paid by the insured and their employers. Additionally, co-payments by patients and taxes are used to fund the public healthcare system. Given Japan's aging population and declining birth rate, as well as increasing medical expenses, the system has been under great strain.
Co-payments for people under 70 or high income seniors are 30%. Starting last month, the government began phasing in an increase in co-payments for elderly people aged 70 to 74 from 10% to 20%, in order to ease some of the financial strain on the system. For people aged 75 and above and who fall within the income threshold, the rate remains at 10%. Of the total population, elderly citizens make up 25.5%, and this segment is incurring higher medical expenses. These trends are expected to continue. I believe the combination of these factors will lead to heightened consumer interest in supplemental medical and cancer insurance policies. As I mentioned earlier, the government is in the process of comprehensively reforming the Social Security system, including pensions, healthcare, and nursing care. Japan's declining birth rate, aging population, and associated need for fiscal discipline will not change.
As such, it is unlikely that the government's final Social Security reform plan will bring about an expansion of government-funded national healthcare insurance coverage. Related to this, much of the need for our products will continue to rise because many expenses are not covered by Japan's healthcare system. Patients will continue to bear significant expenses while in the hospital, including extra charges for private or semi-private rooms, special treatments, or medicines not covered by the national healthcare system, in addition to transportation costs for family members and daily necessities. According to the most recent survey by the Japan Institute of Life Insurance, roughly one-third of patients had more than JPY 20,000 of daily out-of-pocket hospitalization expenses, which is up 25% from just three years ago.
Given Japan's aging population and declining birth rate, the government of Japan faces tight financial conditions, and many people worry that additional increases in out-of-pocket expenses will be necessary. Some worry that not only will this burden increase, but also the scope of government coverage will decline as well. In this environment, Aflac's products are well-positioned to meet the changing needs of consumers. The third main topic I would like to address is the role of women in the workplace. Since coming to office, Prime Minister Shinzo Abe has sought to increase opportunities for women in the workforce, or womenomics, as a core part of his Third Arrow growth strategy reforms. This is part of a broader realization by Japan's leadership that the country has an untapped resource in highly educated, skilled female population.
The government's June 2013 growth strategy states that promoting women's participation in the labor force and management will lead to the creation of new services and products that will reflect a diverse sense of values more than ever before and bring vitality to the entire society. I couldn't agree more with this goal, and I'm proud to say that Aflac is a strong believer in womenomics. Over the last 40 years in Japan, Aflac has believed that our commitment to promoting diversity and expanding opportunities for women in the workplace isn't just the right thing to do, it's good for business. We have always strongly embraced the role of women, not only as workers but as leaders of our company. It is an area where Aflac does well, but in the spirit of continual improvement, we can do better.
To that end, in the lead up to our 40th anniversary celebration on November 15th, I am pleased to announce that Aflac Japan will be establishing a new comprehensive leadership development program designed to support women by offering, among other things, additional training, coaching, mentoring, and networking opportunities to better activate women as valued employees, both present and future leaders. As you can see, Japan's life insurance market is expanding, with the number of life insurance policies in force in Japan increasing. As of the end of December 2013, the total number of policies in force for all life insurance companies in Japan was 142.1 million, of which 54.5 million were from the third sector. As of March 2014, Japan had a total of 36 competitors selling standalone medical products and 27 selling standalone cancer products, including both life and non-life companies.
This represents a slight decline in companies that sell standalone medical products from previous years as a result of mergers of insurance companies and discontinued sales by one competitor. The market is expected to continue growing as consumer demand continues to increase for third sector products that supplement the public social security system. In that context, Aflac Japan is determined to maintain and further expand its position as the leading insurance company in Japan's third sector market. This next slide describes new policy trends for all life insurance companies in Japan. Though the number of new standalone life policies, including third sector policies, decreased between the fiscal years 2003 and 2006, the trend shifted upward in 2007 as the result of a start of the postal privatization process in October 2007.
This increase reflects the fact that new policies sold by the postal insurer, Japan Post Insurance, began to be reflected in the industry statistics, along with those sold by private insurers. The share of third sector products steadily hovered around 40% of policies in force, which displays steady consumer demand for third sector products. I would now like to introduce several pieces of data pertaining to Aflac Japan's core lines of business, cancer and medical insurance. These figures are from April to March, Japan's fiscal year, and the latest data comes from the financial results of December 2013. I should also add that several non-life companies sell medical insurance, the data for which is not made public. Therefore, these charts include products only sold by life insurers. The graph on the left shows the year-by-year development of the standalone cancer insurance policies in force within the life insurance industry.
The graph on the right shows Aflac Japan's market share of the in-force cancer insurance policies. Aflac Japan's share within the cancer insurance market is approximately 70% as of the end of December 2013. Though the competition continues to intensify, our leadership position remains unchanged. Let's move to new cancer insurance sales. As you'll see from the graph on the right, in terms of actual sales performance from April to December 2013, Aflac Japan's market share was 44.1%. We recognize the duty and responsibility that comes with being the pioneer and leading company for cancer insurance. As such, we're actively engaged in cancer prevention awareness and education regarding the latest treatments through the partnership with all 47 prefectures in Japan.
Ever since Japan enacted the Cancer Control Act in 2007, cancer awareness of consumers and local communities was heightened, resulting in increased awareness for the need of the products that Aflac Japan provides. The following slide illustrates Aflac Japan's market share and overall market trends for standalone medical insurance products in terms of policies in force. Aflac's total market share in terms of policies in force was 18.2% as of the end of December 2013. While Aflac Japan was late in terms of entering the medical insurance market, we quickly rose to become the market leader as a result of the 2002 launch of our EVER product, which used the slogan, "Together forever, medical insurance EVER." I am pleased to say that we have retained our number 1 position ever since. The next slide reflects the market share of new policies.
Aflac Japan's market share of the total number of new standalone medical policies of the current fiscal year to date was 18.2%. This represents an increase from the previous year, due in part to our newest version of EVER that was introduced in August 2013. The market for medical insurance is growing, but competition is also intensifying. To remain competitive, it is essential that we promptly identify consumer demands and changes in the business environment. It's also crucial to promote attractive products through effective sales channels. Koji will provide a detailed explanation of Aflac Japan's products and the strategies used for these sales channels. This slide compares our key indicators with that of MetLife Alico and the four largest domestic life insurers, namely Nippon Life, The Dai-ichi Life Insurance Company, Limited, Meiji Yasuda Life Insurance Company, and Sumitomo Life Insurance Company.
As you can see, Aflac has two million more policies in force than Nippon Life and double the figure posted by Meiji Yasuda Life and Sumitomo Life. However, our policies in force are comprised of third sector products with low unit prices. Accordingly, in terms of total assets and premium income, while Aflac ranks higher than that of MetLife, the gap between Aflac and the four major domestic life insurance companies remains wide. Not only does 2014 mark Aflac's 40th anniversary, it also marks the first year of Aflac Japan's three-year midterm management policy. Toru will present details on the management policy for 2014, I want to emphasize our belief that in order for our employees and officers to move toward the same direction, it is extremely important to convey a clear midterm vision.
It is important to Aflac Japan to establish a solid operational foundation to ensure it remains able to respond to the promises of our policyholder while maintaining sustainable and stable growth. Accordingly, the corporate value enhancement program, CVEP, is a key component with the current midterm management policy, Toru will cover more on this in a moment. Since Koji will present the sales and marketing strategies for 2014, I would like to discuss two initiatives that are important in determining the direction of Aflac Japan's medium and long-term sales and marketing strategies. The first initiative is to expand our customer base, more specifically by targeting the young and middle-aged demographic. In Japan, the percentage of young and middle-aged individuals purchasing insurance is on the decline due to lifestyle changes, among other factors.
In this context, it is important to convey to customers the importance of having supplemental medical and cancer coverage, as well as the benefits of getting coverage while one is young, they are moving forward with strategies to get the word out and to attract young and middle-aged consumers. The second initiative is the promotion of alliance operations. In addition to The Dai-ichi Life Insurance Company, Limited, a long-term alliance partner, Aflac Japan concluded a comprehensive business alliance agreement with Japan Post Group last July. I am certain that these alliances will contribute to realizing stronger mid to long-term growth. In closing, let me say that I am excited about what the future has in store for Aflac. The company has come a long way since it first began operations in Japan 40 years ago.
We have remained steadfast in our focus and commitment to be there for policyholders in their times of need. This is true in the U.S., and it is true in Japan. Over the last past few months of living in Japan, I have experienced the commitment firsthand, and I've been able to combine my U.S. headquarters experience with an even deeper understanding of Aflac Japan. I've been able to listen, to learn, and I believe that there are tremendous synergies to be leveraged between the company's operations in the U.S. and in Japan. More than ever, I am committed to realizing the synergies between the company's operations, and I believe that doing so will enable us to further deliver on our brand promise, accelerating growth company-wide. Thank you.
Thank you, Paul. Our second speaker from Japan is Toru Tonaike. Tonaike-san is a former Aflac Incorporated board member who joined our management team in 2007. He is President and Chief Operating Officer of Aflac Japan, and this morning he will offer an overview of Aflac Japan and their operations.
Good morning. Today, I will provide you with an overview of Aflac Japan. This November, Aflac Japan will celebrate its 40th anniversary. Nearly four decades ago, we began with a single product, Japan's first cancer insurance. Even back then, consumers immediately understood the value and the straightforward benefits of our product provided, and it continue to provide today. I think the key to our success has been the fact that we pioneered the product that the Japanese population wanted and needed. Since then, as a result of continual efforts to offer products and services of value to our customers, we have maintained our leading position in the third sector market. In fact, we remain the number 1 provider of cancer insurance, our founding product, and medical insurance today.
Since Aflac Japan's founding, the business environment in Japan has undergone a number of changes, including regulatory and governmental shifts, as well as financial volatility. Throughout all these changes, Aflac Japan has been able to maintain its growth by staying focused on our business operations strategy that is based on seven commitments that describe what it means to do business The Aflac Way. The philosophy of The Aflac Way has been embraced by our employees, who have, in turn, shaped our company into the Aflac you know today. At the heart of The Aflac Way is the commitment of putting the customer first. We have always prioritized the needs of our customers and will continue to champion this philosophy as a core part of our culture.
The Aflac Japan that you see today was founded on the trust that our stakeholders have in us, and each day, we strive to maintain and develop that trust. The following slide shows the growth of Aflac Japan over the last 40 years. In the beginning, we were quite successful and have remained so throughout the years. For example, we forecasted our first five-year premium income to be JPY 5.4 billion. However, we actually produced an astounding JPY 33.9 billion of premium income within our first 5 years of operation. Additionally, in 2001, when Japan fully deregulated and allowed large Japanese domestic insurance companies to sell third-sector products, there were those who thought deregulation would be devastating to Aflac. Not only did we maintain our number 1 position in cancer sales, we emerged a year later as the number 1 seller of medical insurance, too.
The line graph on the left demonstrates the growth of total assets and the premium income in yen. Last year, we surpassed JPY 10 trillion in assets, which brought our standing within the industry to number 7. At the same time, premium income is around the JPY 2 trillion mark and stands at number 6 in the industry. The bar chart on the right represents the total number of policies in force. We became number 1 in terms of policies in force in the 2003 fiscal year and have remained in this position since. The growth of Aflac Japan can be attributed to the use of best practices by management. I can say with certainty that the competitive edge of Aflac Japan was established as a result of executing strategies that are in harmony with Japan's insurance market.
Having attractive products, robust sales channels, well-executed branding strategies, and effective corporate governance played a big part in the aforementioned strategies. We view the celebration of Aflac Japan's 40th anniversary as an opportunity to show our appreciation to our customers and to Japan society at large. This milestone is also a reminder to all employees to recognize the responsibilities of being entrusted with 22 million policies and ensuring lifelong protection of our customers. Recognizing this great responsibility and living up to it can be a great strength for Aflac Japan, as well as a starting point to initiate the future growth of Aflac Japan. As a responsible corporate citizen, Aflac Japan has established numerous charitable programs that advance cancer awareness, promote early detection, and support families who have been affected by cancer.
It is truly a team effort of Aflac Japan employees and agents who work together to donate both their time and resources towards helping those who are battling cancer. For 2014, we have established the corporate slogan of appreciation, commitment, and the next generation. Under this slogan, all employees and officers are engaged in their daily operations while being strongly aware of the meaning and importance of the 40th anniversary. As Paul explained earlier, Aflac Japan has established a three-year midterm management policy. In order for the company of 4,000 employees to move in the same direction, management needs to clarify its vision. The midterm management policy for Aflac Japan is important as it sets the direction of the management towards the growth of the next generation.
The goal of this policy is for Aflac Japan to continue being the leading company of the service sector, the insurance for daily living, and to live up to the expectations of society and of the customers. At Aflac Japan, we have identified certain initiatives to undertake in 2014 as part of our midterm management policy. These key initiatives are necessary to solidify the business foundation that attracts the unwavering trust of our customers. Today, I will highlight a few of those initiatives. Sales innovation, the Corporate Value Enhancement Program or CVEP, risk management, enhanced services for elderly to provide them with more options, and increased opportunities for female employees. Because Ariyoshi-san is going to talk about this year's sales and marketing strategies, I'd like to discuss a fundamental transformation of our sales division we began this year to position us for future growth.
We refer to this initiative as Sales Office Innovation, and it is a key part of our mid- to long-term growth strategy. We reviewed the roles and responsibilities of our 88 sales offices and simultaneously initiated a fundamental evaluation of what we believe is an optimal sales operation. Through this process, we are educating sales office employees on how to guide the sales agents to accomplish desired sales goals. In April, we began the initial phase of conversion, starting with four sales offices that have the goal of realizing the desired state we want to see for all of our sales offices. These four will serve as a model for the remaining sales offices. We firmly believe that through increasing efficiency and productivity of sales offices, we will lay a solid foundation that is necessary for future growth.
As Paul mentioned earlier, the objective of the CVEP is to establish a solid foundation for our operations to grow in the future. The CVEP is a medium- to long-term program that will span over several years and involves three areas: policy administration, IT, and marketing. The efforts around the marketing are intended to increase the number of new contracts acquired while promptly identifying the customer's needs and changes within the market environment. More specifically, we are undertaking efforts to establish and strengthen the existing agency channels and alliance sales channels, as well as the channels that Aflac directly manages. The efforts in policy administration minimize the administrative risks through the automation of data processing, and improve the productivity and the level of service. Our IT initiatives aim to restructure our systems to be flexible and to shoulder the burden of medium- to long-term business needs.
Through upgrading our systems, the productivity of development and the operational efficiency will be heightened. The CVEP is a medium- to long-term program, some of the programs in the marketing area, such as the establishment of Aflac Consultants, sales call center, and the life planning shops are in process. There are a wide array of items with a multitude of tasks, progress management in terms of business will obviously be conducted, and we intend to accomplish our goals one by one, surely and steadily. Additionally, in 2014, we are developing an integrated risk management framework that protects the financial soundness of Aflac Japan, and incorporates an economic capital model. We are currently in the testing phase and plan to implement this model in 2015. Paul will later talk more about the overall risk management of Aflac.
As I have said for many years, the aging of Japan society is progressing, and currently, one in four citizens are at or above the age of 65. According to the 2013 White Paper on the Aging Society issued by the Cabinet Office, by the year of 2060, this rate is expected to be one in 2.5 citizens. The aging of Japan's population has also highlighted certain social issues such as insufficient pension, rising medical costs, and scarce nursing care. Both the citizens and the government are engaged in discussion, which in some cases, has led to the development of initiatives to address these related problems. While the elderly population represents a sizable portion of our existing policyholders, this segment will also be an important part of the market that we will serve. We also acknowledge that the elderly market has certain needs that may require additional accommodations.
As such, establishing an appropriate response framework for the solicitation and the policy maintenance for the elderly is an important matter. It is my view that by acting as good stewards of Aflac, responding to the needs of the elderly appropriately, and solidifying the trust relationship, we will maintain our policies in-force and will subsequently increase the number of in-force policies as well. In addition to the actions we are initiating, Japan's FSA is encouraging our industry to develop policies and best practices around assisting the elderly. For example, the FSA guidance that will likely require actions such as the presence of a family member when selling insurance to advanced elderly ages 70 or above. In addition, the policy administration area is reviewing revisions to their handling criteria and operational methods with regard to the various procedures that are associated with the elderly customers.
The call centers are also making adjustments to customer reception script after taking into consideration the needs of the elderly. Furthermore, an analysis of the customer's voice from the elderly is being conducted, and the sophistication of a PDCA cycle that reviews and executes corrective response measures is being worked on. As you heard from Paul, Womenomics is important to Japan's economic future and is a priority for Aflac Japan. I would like to emphasize that this priority, namely to assist women at Aflac Japan in their growth and development in becoming an important part of the leadership team, is a commitment for us. Our goal is to encourage more women to participate in leadership in our workforce. This will be a top priority going forward.
Over the past 40 years, Aflac has been the driving force behind the third sector as a leading company. The trust of countless customers have been earned. In the special year of our 40th celebration, we are going to remain true to the words and promises that were mentioned today, continue to build on the solid foundation that we have established. In doing so, it is my belief that Aflac will live up to the expectations of our stakeholders. Thank you for your attention.
Thank you, Tonaike-san. Next, we will hear from Koji Ariyoshi. Ariyoshi-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.
Good morning. Today, I will talk about Aflac Japan's marketing and sales strategies, as well as activities for executing on these strategies. I will begin with a discussion about Aflac Japan's new annualized premium sales. Aflac Japan experienced strong sales growth through 2012 as we expanded our reach into the bank channel. We generated a considerable decline in total new annualized premium in 2013, primarily in the bank channel as a result of the revised assumed interest rate in April 2013. Premiums of rates and other first sector products increased, thus shifting banks' focus toward promoting investment trust and other saving options. It is important to note that sales through our non-bank channel was down only slightly and accounted for 68.7% of our total new sales for 2013, and 72.2% in the first quarter 2014.
The bank channel has excelled at selling our first sector products, especially rates, as many of their customers are looking to place a portion of their savings into high-yield alternatives. You recall that in April 2013, first sector products were repriced due to a change in the assumed interest rates. This resulted in higher premiums, followed by a significant decrease in the sales of first sector products. However, it is important to note that sales of third sector products through the bank channel in 2013 actually increased significantly, rising 22.7%, although this was on a small base. We are seeing a continued steady growth in the sales of the third sector products through this channel, reflecting our renewed emphasis on the sales of the cancer and medical products in 2014. While total new annualized premium sales declined significantly in 2013, sales on a policy basis were down only slightly.
It is interesting to note that on a policy basis, third sector sales have consistently accounted for the vast majority of our sales. Keep in mind that new annualized premium for first sector products is significantly higher than the new premiums for third sector products. Additionally, the third sector policies we have been selling more recently have a slightly lower average premium. The main reason for this is because our target market for our newest EVER medical products is consumers in their 20s through 40s. This chart shows the trend in the number of policies sold by first and third sector through banks. In the second half of 2013, we saw a shift in the banks' focus from first sector products to third sector products, with the third sector policies representing more than half of sales at 50.8%. This trend continued into 2014 as well.
We believe this demonstrates that banks and their customers find our third sector products to be attractive, as well as our first sector products. This slide shows the medical insurance market in Japan. Many life insurance companies see growth opportunities in this market, competition continues to intensify, particularly in terms of price competitiveness. Despite this situation, Aflac continues to be the leading company in the medical insurance market. In August 2013, Aflac began marketing the latest version of its medical label product series, Ever Responding, Ever More to Your Needs. Success with this campaign further reinforced our number 1 position. With this latest EVER products as one of our mainstay products, we will continue to enhance our sales capacity and further expand our market share.
Despite a large number of players in the market, Aflac has consistently dominated the cancer insurance market since opening business in Japan in 1974, and we continue to maintain our leading share today. This is because of our high product appeal and tremendous brand power. In addition, we are in the initial stages of rolling out the sale of Aflac cancer insurance at various Japan Post locations nationwide, and I will touch upon this later in my presentation. Product strategy is one of the key initiatives that we are undertaking in 2014 to grow our business. Awareness of ever-changing customer needs and the market environment is a critical element of our product strategy. This awareness enables us to develop new products that respond to and anticipate shifting industry trends and the needs of consumers.
We think it is important to develop products with premiums that are particularly attractive to young and middle-aged people, because this is the segment of the market in which we are under-penetrated. Of course, the overall profitability of any product we develop is an important consideration. One example that demonstrates our product innovation is our latest EVER medical policy, which responds to changes in the medical environment, such as shortening hospital stays and increasing outpatient treatment. In addition to its comprehensive coverage, EVER is competitively priced. This product has helped us succeed in increasing our sales to customers in their 20s through 40s. For example, during the initial 7-month post-launch period ending March 2014, the number of standard medical policies sold to people in this age group increased more than 89.3% year-over-year.
The focus of our product development remains on the third sector, products such as WAYS demonstrate how we are also evaluating additional avenues to utilize the third sector sales to promote third sector products. Through the combined sales of third sector products with lower premiums and higher profit margins, and first sector products with higher premiums and lower profit margins, we can better maximize the sales opportunity of each customer. Part of our product strategy is to sell first sector products as a lead into generating third sector sales. This slide shows the ratio of third sector policies sold during 2012 and 2013 to policyholders who had purchased WAYS in 2012 through our traditional channels. We will continue to use first sector products such as WAYS as a door opener and lead into third sector sales.
Offering attractive first sector products is an effective way to cross-sell third sector products. Additionally, almost 70% of Aflac Japan's policyholders only have one Aflac policy, which means there is a significant capacity for additional sales. Expansion and vitalization of our distribution channels are important elements for Aflac to achieve sustainable growth. As we move forward, in addition to strengthening existing channels and growing newer channels, we are also intensifying our efforts to enhance sales through alliance partners. From the standpoint of the strengthening existing channels, I'll discuss how we are working with traditional channels, banks, and large non-exclusive agencies. Strengthening the traditional channels is essential for us to achieve future growth as these channels comprise the majority of Aflac sales. Therefore, it is important to enhance the quality of their interactions with the consumers.
In order to do this, we are supplying the latest technology and sales materials to support face-to-face sales. Additionally, we are rolling out new training programs to enhance overall effectiveness in consultative selling. Through these measures, we believe the sales capability of our agents will be strengthened, and their activities will be optimized. As I mentioned earlier, following the repricing of first sector products in April 2013, the bank channel sales focused less on the sales of first sector products and more on the sales of third sector products. We continued to see growth of third sector product sales by the banks through the first quarter of 2014. Unlike exclusive agencies that have played a pivotal role and generated a significant part of Aflac sales, large non-exclusive agencies are selling products from multiple insurance companies.
Recently, large non-exclusive agencies have experienced notable growth in the industry, which mainly has been driven by sales through their walk-in shops. In spite of Aflac's strong brand recognition, both the sales volume and the share of Aflac products within the non-exclusive agencies has remained weak. We believe that by strengthening the support system around these agencies, we can expect more sales from large non-exclusive agencies to further growth of Aflac. For example, we plan to increase Aflac human resource support, as well as the number of visits to large non-exclusive agencies. We view expanding our newer distribution channels as vital to our strategies in reaching more consumers. Aflac Consultants, sales contact center, and life planning shops are the new distribution channels that provide direct contact with consumers. We will assess and enhance the efficiency and effectiveness of their sales models so that we can maximize their growth potential.
Enhancing our alliance is also another important part of our distribution strategy. You will recall that we launched our first alliance with Dai-ichi Life in 2001. Additionally, we formed a business partnership with Daido Life Insurance Company last year. As you know, Japan Post and Aflac initiated the business alliance in October 2008 to sell Aflac cancer insurance. I would like to now provide you with details on the efforts being made for the alliance with the Japan Post Group. The number of post offices selling Aflac cancer insurance has expanded from 1,000 in July 2013, when we announced the new agreement, to the current 2,980, and will ultimately expand to approximately 20,000 across the country. Additionally, Japan Post Insurance, or Kampo, will begin selling Aflac cancer insurance and providing administrative support for Japan Post, pending FSA approval.
Moreover, we are closely working with the Japan Post Group to develop an exclusive cancer product and anticipate rolling these new products out later this year once the product is approved by the FSA. With products that respond to the needs of our sales channels and consumers in mind, our innovative advertising has helped Aflac achieve strong brand recognition in Japan, where at least nine out of 10 people recognize the Aflac brand. This strong brand awareness was built mainly upon Aflac Japan's successful promotion strategy. As a result, we have continued to enhance our strong connection with consumers through commercials featuring the Aflac Duck that have captured the attention of Japanese citizens. In addition, Aflac Japan continues to create separate and unique spin-off characters related to the Aflac Duck to market specific products and drive sales.
Our most recent characters, Black Swan, promote our revised new EVER medical plan, which was introduced in August 2013. Black Swan, the arch nemesis of the Aflac Duck, is determined to convince the consumers to make unwise life decisions, including deciding against insurance. Fortunately, the Aflac Duck steps in to remind customers to make sound, positive, and healthy choices in life, as he also reminds them of the need for Aflac products, which provide financial protection and peace of mind. I would like to briefly cover our results for the first quarter. The sales of third-sector products increased 1.8% over first quarter 2013, while first sector product sales decreased 67.6% for the quarter. Total new annualized sales decreased 48.7% compared to last year. In the first quarter, third sector sales started slower than we originally expected.
We are taking steps to improve the result for the remainder of the year. We are making changes, including increasing our support to large non-exclusive agencies and Japan Post. With respect to Japan Post, we are expanding our sales support framework to enhance our training capacity for post office sales representatives. Assuming JP production improves over the coming quarters, I believe our annual sales target of a 2%-7% increase is reasonable. I believe that the combination of increased resources provided by Aflac, the development of products specifically meeting the needs of JP customers, and the increase in the number of post offices offering Aflac products will improve the overall performance and allow us to achieve our annual target. Thank you for your attention.
Thank you, Koji Ariyoshi. We'll now turn to Aflac U.S. with the first presentation by Kenneth Janke. Ken joined Aflac Incorporated in 1985 as the 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. Last year, he assumed the additional role of President, Aflac U.S., where he is responsible for the Aflac U.S. reporting segment. This morning, he will give us an overview of Aflac U.S. and its growth strategy. Ken?
Thank you, Robin, and good morning. You may recall that about a year ago, I was given the added responsibility of overseeing the Aflac U.S. reporting segment. While I remain very involved on the financial side of the business as Deputy CFO, as Robin mentioned, today I'll give you an overview of Aflac U.S. and our strategy for growth. As we've discussed for many years, Aflac has had a fairly simple and straightforward approach to growing the business through expanded distribution and product innovation. Let me first start with some comments on our approach to market segmentation, which we believe is a key factor for our future sales growth. Aflac's experience has shown that the needs of employers and employees vary by account size.
We've been taking steps to position our distribution channels to not only address the various needs of the businesses of all sizes, but to do so in a way that helps them with the greatest likelihood of success based on each distribution channel's strengths. First, we know that the small case market, which we define as employers with fewer than 100 employees, has historically been best served by our traditional sales force of independent career agents. Our career sales force offers that market a product portfolio of individually issued policies, and they use face-to-face enrollments. Our career agents have the greatest success in securing these small accounts, and we believe that's where they will continue to succeed. Second, businesses with 100 to 1,000 employees, which we consider the midsize market, are traditionally best served by local and regional insurance brokers as well as our more veteran independent career agents.
For the midsize market, we have strengthened our presence by adding standardized group products in addition to our individual product portfolio. Teresa White, who runs our Columbus-based operations, will cover the small and midsize market shortly. Third, we view the large case market as employers with more than 1,000 employees who are typically served by the top 50 national brokerage houses. These brokers sell customized group products and utilize electronic enrollments for the employees. As we examined market activity in that space in 2013, we concluded the best way to reach the large case market would be to manage Aflac Group as a separate entity. To carry out this approach to the large case market, we hired Dan Lebish to run our group operations in Columbia, South Carolina. Dan will discuss how he is executing on a strategy to address the large case market after Teresa speaks.
Next, let me briefly cover the four strategic pillars that are core to our growth strategy. The first of these pillars is improving and expanding our distribution. As I noted, the needs of our various distribution channels are different. Therefore, we customize our approach to support their sales efforts. Additionally, we are continually working on initiatives to provide our sales channels with the tools and support they need to succeed. As you heard Dan say this morning, we want to ensure that we have a presence where consumers want to buy their insurance products. Product innovation is another strategic pillar that is key to growing our business. Offering competitive and valued products has long been one of Aflac's strengths, and we're committed to becoming even better.
We are focused on developing products that will work well in the evolving healthcare environment, we're dedicated to delivering our products to the market more quickly. As we anticipate the changing benefit landscape for consumers, we will introduce innovative products we believe they want and need. The next strategic pillar is owning the customer experience from the viewpoint of the employer, the employee, as well as our distributors. It's important that we not only meet but whenever possible, exceed the service expectations of all of our customers. We're currently enhancing work processes and systems to increase our customer satisfaction. To that end, we've embarked on a program of business improvements through an initiative we call Accelerating Change Together or ACT. Through ACT, we are creating enterprise-wide solutions to address inefficiencies and enhance capabilities such as enrollment.
Although the solutions will encompass an entire U.S.-wide enterprise, we are taking an Aflac Group first approach within ACT to enhance their servicing capabilities more quickly. The final pillar is strengthening our low-cost model. We expect the U.S. market to become increasingly more competitive. As such, it's essential that we minimize the expenses associated with running our day-to-day operations. Strengthening our low-cost model involves streamlining processes and adapting new technologies while also eliminating non-essential activities unrelated to driving sales or improving customer service. Minimizing operational expenses will also free up resources for us to enable the other three pillars. By intensely focusing on expense management, we will be best positioned to continue to offer affordable and valued coverage to our customers, competitive compensation to our distributors, and reasonable profits for our shareholders.
We believe focusing on these strategic pillars will position us to increase our presence in the voluntary market for the small, medium, and large case employers going forward. As we've discussed in the past, the U.S. economic environment has challenged us a bit in recent years. This has been especially true from the small business market. That's very relevant to Aflac because about 90% of our payroll accounts have fewer than 100 workers. The Small Business Optimism Index has improved recently, but it's still not at pre-recession levels. Although unemployment levels have improved in recent months, overall employment remains somewhat sluggish, and nowhere is this more apparent than in the small business market. However, despite the employment headwinds, the U.S. workforce is sizable, and I'm convinced we can and should do a better job of execution to overcome those headwinds.
We've also discussed the impact we believe healthcare reform has had on our business. It has been our experience that some employees remain guarded and are hesitant to make healthcare decisions. With the many implementation delays in posturing for the midterm elections, it's likely the Affordable Care Act will remain in the spotlight. As such, we may see some continued reluctance among a few employers about modifying their healthcare benefits in the short run. However, as we look longer term, I believe healthcare reform will actually better define the need for the products we sell. We expect to see greater standardization of coverage with the metal plans of bronze, silver, and gold levels, for instance. More importantly, I believe the metal plans will help standardize and better define gaps in coverage going forward. In addition, healthcare reform is providing us with opportunities to sell through new enrollment platforms.
As we've discussed, we conducted a soft launch of Aflac's proprietary exchange called Everwell from last October through this March, and we're continuing to finalize our rollout plans to the vast majority of states by the end of this year. We also see potential for significant opportunities to have our products available on third-party exchanges, particularly in the medium to large case market. We continue to believe the opportunities in the United States are vast. Based on the most recent U.S. Census data, there are approximately 5.6 million firms with fewer than 100 employees in the United States, employing more than 39 million people. The midsize market is made up of more than 90,000 businesses, employing approximately 22 million workers. The large case market includes a relatively small number of firms.
That market accounts for more than 46% of employees in total, offering us potential access to more than 52 million workers. We also believe the market for voluntary products in the United States is positioned to grow. Based on forecasting from ZS Associates, the market is expected to grow at a rate of about 5% annually over the next four years. While sales through traditional independent agents are expected to grow at low single digits, growth through local, regional, and national brokers is expected to increase at a much faster rate. Overall, our vision is really simple. We want to be the number one multi-channel distributor of supplemental products to employees, enabling Aflac to own the worksite while enjoying industry-leading growth and profitability. I believe that's a realistic vision, and I, along with others, remain very excited about the opportunities for Aflac U.S. Thank you.
Thank you, Ken. Next, we'll hear from Teresa White. Teresa joined Aflac in 1998 and has served in various leadership roles in the administration and sales support areas. In 2008, she was promoted to Executive Vice President and Chief Administrative Officer. Last year, she was named Chief Operating Officer for Aflac Columbus. This morning, she's going to give us an overview of the Aflac Columbus market.
Thank you, Robin. Good morning. Today, I'll provide you with an update of the strategy and business operations in the U.S. related to the small and medium-sized markets. Let me start with the universe of opportunities in the United States, because we believe those are enormous. As Ken indicated, the most recent U.S. Census data shows that there's approximately 5.6 million firms with less than 100 employees in the United States, employing more than 39 million people. The midsize market is made up of more than 90,000 businesses, employing approximately 22 million workers. Aflac focuses on improving and expanding distribution, and as we do that in the small and medium-sized market, we want to be where the consumers want to purchase our products. What we want to do is streamline processes and make it faster and easier for consumers to purchase our policies.
As Ken indicated, our independent career sales channel has historically driven sales in our traditional or individually issued products sold primarily through relationships with employers in the small case market. These career agents have been and continue to be a critical part of our success in marketing to the small case employers. Our career agents typically enroll the potential policyholders in one-on-one interactions that many of the employees prefer, primarily using SNG, our electronic enrollment system. As Ken mentioned, we also are in the process of planning the rollout of Aflac's proprietary exchange called Everwell, a web-based platform that I'll cover in more detail. We'll continue to cultivate our career sales channel with particular emphasis on recruiting, training, and compensation. To support our focus on growing our career agent channel, we've taken specific measures to drive activities that stimulate recruiting.
This includes enhancing recruiting base incentives and increased resources for our field recruiting efforts. Additionally, we've relaunched recruiting commercials for a limited basis beginning February of this year. As a result of the steps that we've already taken, the volume of recruiting leads through the end of the first quarter increased by 116%, which was in line with our expectations. We believe our renewed focus on recruiting will help drive one of the key metrics of increasing average weekly new producers, thereby helping us to reach our overall sales objectives for the year. Training has also been a core part of the onboarding process for our independent career agents and a continued education process for our veterans and our coordinators. Training plays an important role in the current environment, particularly given the ever-changing healthcare landscape. We're strengthening our field recruiters and trainers through additional resources and performance development and coaching.
Additionally, we're emphasizing account management training to ensure that we're enhancing service, product penetration, and customer satisfaction. We're also training a team of career agents to become fluent in the Everwell proprietary exchange. As part of training for Everwell, we're covering Aflac's value proposition, the sales methodology, and we're equipping them with a focus on consultative selling. Additionally, we're modifying our compensation approach to help achieve the results that we want. Sales objectives and incentives for sales management and agents are now better aligned to drive behaviors for specific sales activities. For example, to focus our sales agents on selling to small businesses, contests are constructed to reward agents who open new accounts at businesses with fewer than 100 employees.
While our career agents' focus is on the small case market, local and regional brokers, which we refer to as our core brokers, provide access primarily to the mid-size employers with 100 to 1,000 workers. The product needs for this market segment range from products that are individually underwritten to group products that we call semi-customizable. With respect to enrolling employees, in addition to face-to-face enrollment conditions, the mid-size employers often opt to use alternative enrollment tools such as third-party call centers or self-service technologies. As part of our efforts, we began providing two value-added services to core brokers that provide them with education and support within the voluntary market, and which many of the core brokers are less familiar with. First, what we're doing is we're sponsoring business development sessions to educate core brokers on voluntary market products.
Now we have a formal process in place to place seasoned agents within the core brokerage houses, and we refer to this program as Wingman. Wingman provides value to these core brokers by bringing product knowledge and expertise, enrollment tools, and other voluntary experience to their firm. The core brokers interview and choose the commission compensated agent that they believe best fits within their company. Together, these programs increase the overall revenue for our core brokers while also providing additional business opportunities for Aflac. When it comes to product innovation, our goal is to design products as an addition to, not a replacement for, the insured's primary insurance, whether privately or publicly provided.
As we began to expand our accounts with 100 to 1,000 employees, we also began to expand our product offerings as well from individually underwritten products to now include Group to Go products that I mentioned before. These products offer a specified selection of benefits and premium that are customized based upon the needs of the business and its employees. These Group to Go products have the look and feel of fully customized products. Because of the range of benefits that have been predetermined, Group to Go products meet the rapid go-to-market needs of those brokers who need them and the budget of the consumers. We're developing products to meet emerging needs in the evolving healthcare environment by providing the most comprehensive coverage around medical events. Making insurance coverage available for people with significant illnesses but little savings is one of our goals.
Our new Aflac Plus Rider accomplishes that by paying benefits on individual policies based solely upon the diagnosis of numerous catastrophic illnesses. According to recent data from market research firm, Prince Market Research, 49% of workers have less than $1,000 in savings, and 27% have less than $500. This information, and the fact that out-of-pocket medical expenses are continuing to rise, we believe this type of coverage will be more in demand than ever before. We're also launching a new guaranteed issue life product and a new Aflac Hospital Advantage employer paid product, which allows employers to offer Aflac's valuable benefits at a lower premium, even if they're choosing to send their employees to an exchange for major medical coverage. We believe the products that we introduce in 2014 will result in Aflac continuing to have the best guaranteed issue portfolio, often with the lowest participation rates.
Products and relationships attract new customers, it's our excellent customer service that enables us to retain customers and drive policy and account retention. For Aflac, our customer consists of policyholders, employers, agents, and brokers alike. Owning each type of customer experience is at the core of everything that we do. We pride ourselves, especially pride ourselves, with the ability to pay claims quickly, on average within four days. We continually survey our customers and make process enhancements to key customer touchpoints based on their feedback. We're finalizing our plans to roll out a new tool that will enhance the enrollment process for our career agents, who really focus on that small case market. Everwell is Aflac's web-based platform that's designed to offer small employers, especially businesses with less than 50 employees, access to all applicable employee benefits in one centralized location.
The Everwell platform is a win-win for all key constituents, as it enables Aflac products to be sold in conjunction with major medical and other ancillary benefits with simplified and self-contained benefits administration. Agents will experience a user-friendly enrollment system and increased commissions. Employers will have a one-stop shop and consolidated billing for many of those benefits offered. Employees will receive the benefits consultation and support that they need, and Aflac will have the analytics and increased penetration rates that drive bottom-line growth in this market. Through offering a holistic approach to benefits with major medical and other products consumers demand, the platform will provide our agents with more access to employees. We expect that this will allow even greater access to the smaller case markets. Pilot results have been very positive, and participation rates have been better than expected.
We continue to expand our distribution channels, we recognize that some businesses are going to send their employees to the public exchanges. Many consumers are being pushed towards a subsidy eligible or defined contribution plan design. We're currently developing and utilizing strategies to access multiple carriers and ensure full geographic coverage to maximize the potential of Everwell. We further believe that key factors in assessing exchange opportunities will be brand, pricing, and relationships. Based on this, we think that Aflac has the greatest opportunity to benefit from overall industry growth in the middle case market. We continue to build out enrollment platforms and are currently on more than 80 electronic enrollment platforms, with some of them known as exchanges. The majority of these enrollment platforms support the core broker sales activities. Our focus to increase shelf space in the mid-market segment has not changed.
We're working on building relationships and enhancing our internal technology to support this. Key decision points include return on investment as well as marketplace needs. These two components ensure that Aflac's not spending funds on all platforms, but on the right platforms. We believe that electronic enrollment is going to grow in popularity overall, not just because of the increase in millennials in the marketplace, but also because the government is promoting overall electronic utilization. We continue to execute on the strategies that I've discussed today, we realize that many of the lines that we've drawn with regard to market segmentation act as a framework that will guide our decisions. We expect to see improving trends in 2014, with 2015 being an even better year. I remain optimistic about our sales results and their improvement as we continue to execute on those strategies.
It's been and continues to be a longstanding goal for our vision to be the leading provider of voluntary insurance in the United States. We look to the future, we maintain our leading position and we will work harder to enhance that position. Thank you so much for your attention.
Thank you, Teresa. Before we take a short break, our final speaker for the morning will be Dan Lebish. He joined us just in August of last year as Executive Vice President, Aflac Group Insurance. Prior to Aflac, he was Executive Vice President at Highmark Blue Cross Blue Shield, serving as CEO of two of their national subsidiaries, HM Insurance Group and United Concordia Dental. Today, he will give us an overview of Aflac Group Insurance. Dan?
Thank you, Robin. Good morning. I joined Aflac in August 2013 to lead Aflac Group Insurance. Having acquired 30 years in the healthcare management and insurance industries to draw from, I knew assuming this role was an exciting opportunity. Given the healthcare reform landscape, it was clear to me that individuals would be faced with larger out-of-pocket expenses, meaning voluntary products were going to have significant growth potential in the future. I felt large brokers would be the ideal distribution channel to sell these products. Couple that with the chance to work with the company that created the voluntary market and has established the strongest brand in the benefit market, I jumped at the opportunity to grow Aflac Group business unit into the leader in the group market in the same way it historically has been in the individual market.
Having been at Aflac going on a year, I am even more enthused and energized about this opportunity, as I've had the chance to experience Aflac's commitment in this individual market, in the group market firsthand. The goal of Aflac Group Insurance is to be the number one provider of group voluntary products and services in the U.S. Aflac Group, under my leadership, is responsible for the creation, sale, and management of group products and utilizing these products to enhance our relationships to the top 50 national insurance brokerage houses. Let me start with some information about the market in which Aflac Group operates. You can see from this chart that over the last several years, the contribution of group products to total voluntary insurance sales at the work site has steadily increased.
In 2011, sales of voluntary group products at the work site eclipsed individual products, a milestone that further supported Aflac's decision to expand into the group insurance arena. By 2013, voluntary group sales at the work site accounted for 64% of total work site sales. We're confident that our strong brand comprehensive product portfolio will broaden the appeal of our products to consumers throughout the U.S. As Ken pointed out previously, by 2018, it is expected that $6.2 billion of the total $7.6 billion voluntary market will be driven by brokers, which is more than 80% of the market. Aflac Group's focus is to assure brokers that we'll work through them and not sell directly to their clients. I'd also like to share some perspective on the opportunity in the large case market. Businesses with more than 1,000 employees account for 46% of the total employees in this country.
This segment is a target market for the top 50 national brokerage houses. We are designing products with these brokers in mind as we continue to develop products with them and we develop relationships with them. Large case businesses served by these national brokerage houses are a particularly attractive market segment to target. This is because businesses of this size are benefiting more from the economic recovery than smaller employers that are more sensitive and slower to recover from a downturn in the economy. Having covered the voluntary market environment and market opportunity, I'll provide some information about our products. Aflac Group Insurance is responsible for developing, creating, and managing all group products that Aflac sells. Our customized group products are targeted primarily to businesses with 1,000 or more employees.
Our approach includes understanding the needs of the largest national brokerage houses and their clients, then designing relevant products that are competitive within that market. These customized group products can be built to include specific benefit requests by a particular business. We believe that innovation is a primary cornerstone of Aflac's group strategy. For our group product offerings, we are committed to filling competitive gaps in our product offerings that will enhance our product portfolio. While products are the foundation of our business, distribution is equally critical to our success. In 2014, one of the most important strategic initiatives at Aflac Group is the aggressive expansion of our internal distribution channel. Aflac Benefit Solutions, or ABS, is Aflac Group's internal sales division, focused on selling group products primarily to clients of the top 50 brokerage houses and consulting houses.
Let me provide more detailed insight into the infrastructure of ABS. ABS sales division employees are salaried and receive performance-based bonuses, which is the industry norm in the group insurance market. As you can see, the team is led by regional vice presidents, or RVPs, who are responsible for developing and driving the sales strategy with their particular assigned geographic territory. Three RVPs are responsible for leading their teams in each of their respective geographic regions. They are also charged with developing business plans consistent with the company's objectives to drive sales, as well as acquiring and retaining clients. RVPs lead a team of business development executives, or BDEs, to help drive results. The BDEs are the feet on the street who directly interface with the large brokerage houses and consulting firms.
Our goal is to have these brokerage houses and consulting firms offer Aflac Group product portfolio to the nation's leading employers. Typically, BDEs have 15-20 years experience in the group insurance market. This means they frequently bring relationships with brokerage houses and consulting firms that are already established and strong to ABS. BDEs are supported by group representatives who help identify and market opportunities within the top 50 brokers and consulting firms. Let me update you on our progress in building out this ABS team. We have segmented our build-out into 3 phases and expect this build-out to be in place by the end of 2014. This means that by the end of this year, we anticipate being staffed up and engaged with a combined team of 40 BDEs and group representatives covering every major metropolitan market in the U.S.
In doing so, we're leveraging Aflac's strong and trusted brand to open the door to more opportunities. A key goal of the ABS sales channel is to secure a spot for our group products on the menu or exchanges of the top 50 national brokerage houses. Our Aflac Group products are currently offered on four national brokerage exchanges, and we're actively working on relationships with many more. In addition to building out these relationships, it is also important for us to ensure that we have the capacity to operate with the benefit administration system platforms that brokerage houses have selected. We are currently connected to more than 80 benefit administration enrollment systems in anticipation of increasing the number of relationships we have with the top national brokerage houses.
While developing products and securing relationships with brokers are both important, it is also critical that we maintain these relationships through providing the best customer service experience. Excellent customer service not only includes directly taking care of the broker, but also creating positive touchpoints with policyholders, producers, and employers. We continually seek opportunities to improve our customers' experience. This includes enhancing our customer service through enterprise transformation initiatives that focus on process improvement, technology advancements, and supporting organizational structure changes. As you heard from Ken earlier, Accelerating Change Together, or ACT, is an enterprise-wide solution to address inefficiencies and enhance our capabilities, in turn, improving our service to customers. ACT is funded internally through strategic resource allocation. We approach this initiative from a longer-term perspective, as we anticipate it will take several years to fully implement.
Our emphasis in 2014 will be on several enhancements related to processes and technology designed to enrich the customer experience. These enhancements address market expectations, the company is taking an Aflac Group first approach to quickly improve our group servicing capabilities. For example, we're streamlining processes to significantly reduce the time involved to issue new business. We are working on improving claims processing time, enhancing our billing capabilities, and expanding access to our call center representatives. 2014 is a critical year for Aflac Group as we build out our infrastructure for future growth. I believe the initiatives we're undertaking this year will better position Aflac Group for significant growth in 2015 and to be the number one provider of group voluntary benefits in the U.S. Thank you for your interest and attention.
Thank you so much, Dan. Now we're going to take a short break. If you will go outside the doors, you will find some refreshments. Please try to be back in here in about 10 minutes so that we can start on time. Thank you. Okay, welcome back, everybody. Now we'll hear from Eric Kirsch. Eric joined Aflac in 2011 as Senior Vice President and Chief Investment Officer and was promoted to Executive Vice President 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 at 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 here presenting on our investment activities. This past year presented many challenges for investors as central bank policy created volatility across global financial markets. I am pleased to say my investment team and I were able to navigate the market volatility, implement new investment strategies, and meet or exceed our investment objectives over this time period. Today, I will provide you with a review of investment metrics, an overview of recent investment activities, and our outlook for 2014. I will conclude with an update on the progress of our transformation program. I would like to start with a brief overview of our investment objectives. Our mission is to enhance our risk-adjusted return with a focus on maximizing economic returns over the long term, while considering our liabilities and minimizing risk to our capital.
This past year was a good example of our investment strategies having to be more dynamic. Global Investments has two key performance metrics related to these objectives, net investment income and pretax realized gains and losses. For 2013, net investment income was $3.3 billion. While somewhat lower than in 2012, mainly due to the depreciation of the yen, we slightly exceeded our targeted goal. Our 2013 net pretax realized gain, excluding derivatives activity, was $63 million, far exceeding our targeted goal of no more than $500 million in realized losses. I am extremely pleased with both results as they demonstrate our new strategies are adding value for our stakeholders, both in terms of income and, importantly, reversing the trend of five consecutive years of realized losses.
With that in mind, we will continue to focus on net investment income, driven by economic returns designed to achieve superior long-term results, while minimizing impairments and investment losses. Our investment objectives are primarily driven by careful consideration of our liabilities and capital requirements. In Japan, our liabilities are yen-denominated, have long durations, and are generally very stable. Our investments are primarily focused on longer duration fixed income securities. These include both government securities, such as Japanese government bonds, or JGBs, and credit investments, which are a combination of privately issued securities and publicly issued U.S. corporate debt, a portion of which is hedged back to yen. In the U.S., our 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 key risks, including credit, interest rate, and currency. 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 as a function of ALM, while also protecting asset values in times of rising interest rates through various use of hedging strategies. Finally, we also manage our foreign currency exposure, including the use of hedging. I would like to provide a brief overview of the investment markets last year. I think it's fair to say that 2013 was the year of the central banks. In the U.S., the Federal Reserve initiated its program to unwind excess liquidity from the financial system.
In addition, the Bank of Japan initiated its programs to provide abundant liquidity to their market to spur economic growth while targeting a 2% inflation rate. As you can see from the charts, dollar and yen interest rate and currency markets became extremely volatile in the middle of the year. The 10-year Treasury yield, which rose by more than 100 basis points in the span of five months, was historically volatile. Similar extreme movements occurred with the currency as well. The volatility of these risk factors significantly impacted Aflac's investment portfolio and played a large part in our investment decisions for most of the second half of the year. As you can see on the chart, investment grade spreads in the U.S. and Europe had a big rally year-over-year. We experienced some volatility in spreads as a result of the May 2013 Federal Reserve announcements.
From their peak, spreads declined by almost 50 basis points to where they were at the end of April. Fundamental credit is strong, and there is great demand for risk assets. The strong performance of the credit sector had a positive impact on the value of our credit investments. I would now like to shift to discussing portfolio metrics as well as investment activities. Our consolidated invested assets grew to more than $105 billion at March 31st. Approximately 90% are associated with our Japan business segment. The U.S. segment includes portfolios backing the respective books of business for Aflac New York and Aflac Group. We also hold a small portfolio at the holding company level for corporate purposes. As you know, JGBs play an important and core role in our portfolio, specifically to back our long-dated yen liabilities. JGBs currently represent 39.2% of our consolidated portfolio.
We expect JGBs to be in the 35%-45% range over time, which is in line with our Japanese peer group. Historically, Aflac has primarily placed its credit investments for the Japan balance sheet in privately placed securities. At March 31st, 2014, yen-denominated privates, including reverse dual currency bonds, represented 27.5% of consolidated assets, which is a reduction from 33.4% last year. We will continue to allow the private placement asset class to decline over time, and I will cover these private placements in more detail later in my presentation. Our consolidated public U.S. dollar exposure is around 31%, up from 28% last year. For Aflac Japan, we expect non-yen investments, such as the U.S. bond program, to be a core part of our portfolio and represent between 20%-30%, depending on market conditions.
By investing in U.S. dollar securities, we are able to diversify and seek more attractive yields. Additionally, by investing a portion of Aflac Japan's assets in dollars, we helped mitigate the currency impact on Aflac's consolidated GAAP equity. It is important to note our aggregate asset class exposure. JGBs represent 39.2% of our portfolio, and the remainder, which primarily consists of credit investments, including both private placements and U.S. bonds, comprise 60.8%. This is in line with the direction of our current asset allocation strategy. In the future, we will supplement this investment strategy by diversifying with new asset classes such as equities, real estate, private equity, infrastructure, just to name a few. It is most likely these new asset classes will be added gradually through new money investments over time.
We plan to conclude our new strategic asset allocation by this year-end, which will give us a new target portfolio calibrated to our liabilities and capital policies. We will then develop the plan to migrate to this target portfolio starting in 2015. As seen on this slide, the credit quality of our portfolio remains very high, with an average portfolio rating of single A. Some minor shifts occurred over the past year. Specifically worth noting is the change in the double A category, increasing from 42.7% to 45.8%, mainly from new JGB purchases in this rating category. All of the other ratings categories marginally declined, including our triple B and below investment grade. Our focus will continue to be on maintaining a single A average rating. Our sector allocations saw modest change. As you can see, our government allocation increased to 45.1% from 42% last year.
This primarily reflects a larger share of our cash flows going to JGBs in the second half of 2013. Of significant note is the decline of our financial exposure going to 14.8% from 18.2%, reflecting in part our continued effort to reduce European financials. Also note that our industrial and utility allocations stayed relatively flat to last year. As global investors, we also diversify our portfolios geographically. Given that almost 90% of our liabilities are in Japan, we expect that country to remain a key part of our investment activities. As you can see, 42.3% of our consolidated portfolio is invested in Japan as compared to 39.4% last year. We continued to reduce European exposure, which declined from 20.3% to 17.3%, reflecting our desire to further reduce our exposure to the region. Our investments in the U.S. increased to 25.9% from 23.4%.
We believe allocating to one of the strongest credit markets in the world is a strategic policy to enhance the diversification quality and earnings power of our balance sheet. From a global risk perspective, we have carefully managed our bank and sovereign exposures. This chart excludes JGBs and U.S. Treasuries. While we had made great progress in the past two years in reducing our exposure, we made even further improvements this past year. As you can see, we reduced our banks and sovereign exposure on a global basis by 13%, down to $15.2 billion from $17.5 billion. Of this, subordinated debt was reduced to $5.3 billion from $6.2 billion. In Europe, our total exposure was reduced by 11%, down to $6.7 billion from $7.5 billion. Our PIIGS exposure remained relatively flat and is now less than $1 billion.
Our subordinated debt is primarily held with parent companies of top-tier banks in Europe. Therefore, while these securities are lower in the capital structure, we believe these higher quality banks are less likely to run into financial distress. Our subordinated exposures across Europe was reduced to $3.1 billion in the first quarter of 2014 from $3.6 billion at the end of March of 2013. Next, I would like to discuss our yen-denominated private placements. We are very pleased with the quality and outlook of our remaining holdings in private placements. Yen-denominated private placements have been reduced from 58% of our total portfolio in 2010 to 28% as of the end of the first quarter. We owned 163 unique credit issuers at the end of March, with an average size of 17 basis points of the total portfolio, down from 191 issuers and 30 basis points at the end of 2010.
The average size of each individual issue has also declined notably from 19 basis points in 2010 to 11 basis points today. Below investment grade private placements have been reduced from 5.1% of assets in 2010 to 2.9% today. We have greatly reduced concentration risk by all of these key metrics. In terms of regional diversification, about 50% of the yen-denominated private placements are exposed to Europe, which represents 14.4% of our invested assets. The remaining regional exposure is diversified across the rest of the world. Additionally, we are well diversified across European countries. The portfolio is also well diversified across sectors. Our industrial and utility holdings represent 12.7% of our total invested assets and are generally stable infrastructure assets which should perform well over time. From a credit quality point of view, the majority of the yen-denominated private placements are in the single A and triple B category.
Our average quality is A minus, generally comparable to the overall single A rating of our consolidated assets. I want to also highlight that we have below investment grade puts on about $3 billion of various holdings. These have proven to be valuable as a number were exercised at the height of the crisis. We recognize private placements have less liquidity than publicly traded bonds, so strong fundamental credit analysis and vigilance is critical. To this end, during this past year, we formed a private placement committee that meets regularly and reviews all of our private placement holdings. This provides strong oversight and governance, supplementing our strong fundamental credit work. In summary, we feel very good about these holdings and believe they represent good value for the future.
I would also like to provide further detail on the U.S. dollar investments, in particular, those public U.S. bonds backing Aflac Japan liabilities, which total $19 billion. We own a total of 395 unique credit issuers spread across 794 issues. As a percentage of the Japan U.S. dollar portfolio, this is an average of 25 basis points per issuer and 13 basis points per bond issue. Relative to our consolidated portfolio, these are approximately five and two basis points respectively. We have a high degree of diversification at the individual issuer and issue level. The average quality of the portfolio is A minus, our average duration is just under 10 years, and the book yield is 4.19%. 62% of these assets are hedged back to yen through currency forwards.
The U.S. bond program is achieving its goal of providing diversification, liquidity, and high quality to our Aflac Japan balance sheet and Aflac's consolidated assets. Because of the liquidity of the U.S. market, we can be flexible and trade the portfolio to adjust its exposures over time as cycles or individual credits change. We view this asset class as an excellent alternative to achieve excess returns over JGB yields while providing diversification and liquidity. As of March 2014, the consolidated portfolio had an unrealized gain of $4.9 billion, remaining approximately the same as March of 2013. The rise in yen and dollar interest rates generally hurt our unrealized gains during this period. However, that was offset by tightening credit spreads in Europe and the U.S., improving unrealized gains on most of our European private placements and U.S. dollar assets. The net impact of this can be seen by asset type.
The unrealized gain of our yen-denominated assets increased by approximately $700 million, which was offset by a decrease of $600 million in dollar-denominated assets. As I discuss our new investment activities, it is noteworthy that, as expected, our cash flow to investments in 2013 decreased by $6.6 billion from the previous year to $13.4 billion. This decrease was primarily attributable to the decline in cash flow from operations, reflecting the sales results you heard about earlier. Through the first quarter of 2014, we had $4.5 billion of new cash to invest. For the full year, our projection for new cash flow is approximately $8.4 billion. In 2013, our new money yield improved slightly for the U.S. portfolios to 4.06%, and for the Japan portfolio to 2.48%. In the first quarter, our new money yield improved to 4.33% for the U.S. portfolio.
The Japan portfolio declined to 1.99% in the first quarter, primarily reflecting the higher JGB allocation and shorter duration of our U.S. dollar assets or U.S. dollar asset purchases. Let me move to reviewing key accomplishments in 2013. I will cover quality, asset allocation, portfolio structure, and currency hedging. Last year, we continued to improve the overall quality of our investments by reducing large concentrations, most notably in two of our previously outsized positions, Israel
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and the Republic of Tunisia. Given the geopolitical uncertainty in the region, we were extremely pleased to reduce each by 62% and 56%, respectively, including activity through March of 2014. We also further reduced positions in subordinated debt. In total, we had $1.1 billion in opportunistic de-risking transactions in 2013. You see, this activity, including impairments, has substantially decreased. As we wind down de-risking activity, we will transition to a relative value approach, carefully managing our credit exposures. In the first half of last year, the majority of our consolidated cash flow, about 72%, was allocated to U.S. bonds. In the second half, about 82% was allocated to JGBs, primarily as a tactical shift due to rising U.S. interest rates and their impact on our solvency margin ratio or SMR. For all of 2013, we allocated 49% of consolidated cash flows to JGBs and 50% to-
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Additionally, in 2013, we continued to implement our asset allocation strategy by adding to our U.S. bond program. The hedged U.S. bond program in Japan successfully helped us achieve diversification and enhance yields. We grew the total U.S. bonds in Japan from 14.1% to 19.2% of the consolidated portfolio by year-end. We also made significant changes to our portfolio structure to decrease SMR sensitivity. Specifically, we initiated the policy reserve matching, or PRM, accounting classification in the third quarter of 2013 through a swap program of the majority of our available-for-sale, or AFS, JGBs. Prospectively, we are designating the vast majority of our new JGB purchases as PRM and now have about 15% of the Japan portfolio in PRM. By shifting a portion of our yen investments from AFS to PRM, we reduced the sensitivity to yen interest rate changes because PRM assets are not marked to market.
Our AFS assets, primarily U.S. dollar exposures, were reduced from 34% of the Japan portfolio at the end of 2012.
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to 31% at the end of 2013, and remained at 31% at the end of the quarter. This decreases SMR sensitivity to U.S. interest rates. Additionally, we instituted an interest rate hedging strategy through the use of zero cost interest rate collars and option-based strategy, hedging approximately 25% of our U.S. dollar interest rate exposure. This was put in place primarily to protect against extreme upward moves in U.S. interest rates, further decreasing SMR sensitivity. Finally, our currency hedging strategies on the U.S. bond program continued, primarily through rolling three-month forward contracts, and our costs remain low, averaging below 25 basis points over the past year. I would now like to discuss our 2014 outlook and key investment themes. These themes are based on our year-end planning cycle and our market views.
Although future events could impact our tactical decisions, this presentation will give you a basis of understanding our investment strategy. The first theme is asset allocation. Given the improvement in SMR and extensive stress testing of our asset allocation program, we have the capacity to allocate beyond JGBs for Aflac Japan. For the first quarter of this year, our allocation to U.S. bonds was 30% and 70% to JGBs. These weights were in consideration of cash flow timing as opposed to a tactical market call. However, for the rest of the year, we expect the allocation to be heavily weighted to U.S. assets. Our outlook for the full year is to allocate between 40%-60% of our total portfolio cash flows to U.S. bonds, with most of the remainder being allocated to JGBs.
Additionally, we are planning for a small allocation to other asset classes, depending on the progress we make with outsourcing. In deciding on the lower and upper limits within our U.S. bond allocation range, which will be mostly reflective of Aflac Japan's cash flow, we review our outlook for U.S. rates and other factors. With the 10-year Treasury yield currently under 3%, our preference is to be at the lower end of the range. We would rather save our capacity and take advantage of higher yields in the future. We will also focus on expanding investments within the U.S. bond program in 2014. We are targeting half of the allocation to be in U.S. corporates and the other half to be in U.S. Treasuries or other non-corporate securities. Despite strong credit fundamentals, corporate spreads are extremely tight, and we believe a lower allocation is appropriate at this time.
We are also shortening the average duration of new investments to approximately seven years. Given the likelihood of increasing rates, shortening the duration will decrease our market value sensitivity. We carefully follow the markets, and based on our forecast and risk tolerances, we will adjust these decisions accordingly. Currency hedging is another theme for us this year. Currently, our public U.S. dollar assets represent approximately 23% of the Japan balance sheet, and of this, two-thirds is hedged. Given our view of a weakening yen, we are maintaining this hedge ratio for the near future. We plan to use currency options, specifically zero cost option collar contracts, as another hedging tool. This will complement the forward strategy and mitigate the risk from increases in forward costs. We are currently finalizing the governance and operational processes around this new strategy and expect it to be active before the end of the year.
Our approach to currency management will be dynamic, including relative value decisions around the amount of currency exposure and type of hedging tools. I feel confident that we have the ability to manage our currency exposure through market cycles. Managing U.S. dollar interest rate risk will also be a theme for our team this year. To this end, late last year, we implemented a hedging strategy to protect against large, unexpected spikes in U.S. interest rates, which I mentioned earlier. This was primarily focused on reducing SMR sensitivity, and we consider this a capital protection strategy. We chose to use zero cost interest rate collars, hedging about 25% of Aflac Japan's notional U.S. dollar exposure. Our plans are to continue this program and adjust the hedge ratio depending on market and capital management considerations. Finally, we will pursue investing in new asset classes identified in our asset allocation program.
I would have to acknowledge that due to our focus on volatility last year, we did not make as much progress as I would have hoped in this area. I am pleased to let you know that we have picked up on our research efforts this year, as well as making sure we have necessary infrastructure to support this effort. We will target allocations in asset classes such as high yield, emerging markets, real estate, infrastructure, equities, and alternatives. These would start small and be funded through new money over time. In addition, the management of these assets would be outsourced to expert money managers. I am hopeful that we will be able to initiate some of these strategies soon. I am pleased to report that our multi-year transformation program is in its final year with great success to date.
You will recall we launched it back in mid-2012 based on the strategic review by McKinsey. Our goal was to benchmark Aflac to be a world-class investment group in every dimension. This included the front, middle, and back offices, investment and risk professionals, along with infrastructure and technology. Our accomplishments include significant de-risking of the portfolio, implementing new investment strategies based on a strategic asset allocation, currency and interest rate hedging programs, redesigning our investment and risk management processes, hiring over 60 new investment professionals, opening an office in New York, building out an operations and technology team, and finally, selecting the BlackRock Aladdin system as our main investments technology platform. All of this has already paid dividends as we have put money to work in new strategies to complement our core JGB holdings and earn additional return.
Our team has successfully identified de-risking opportunities in highly illiquid names, negotiating favorable pricing, while reducing high-risk credits and improving the health of our balance sheet. Finally, with the heightened volatility of last year, our capabilities allowed us to implement hedging strategies, helping to better manage our risk. For the remainder of this year, we will complete the installation of our technology system, implement a new credit research system, perform a new strategic asset allocation for implementation in 2015, and complete the build-out of our teams. This will conclude our transformation program, and we will transition into business as usual in 2015. We made a strong financial commitment to fund the transformation, increasing our costs from about three basis points on average invested assets in 2011 to 7.2 basis points today. Roughly speaking, we are spending $44 million more annually to run our investment division.
It is difficult to quantify all of the benefits of every item in our transformation program, but let me estimate one to highlight the point. Our hedged U.S. bond program for the Japan portfolio is a clear accomplishment, and those assets would likely have been invested in JGBs. The current portfolio size is $13.3 billion and has a current gross book yield of 3.48%. Taking out 1% for estimated future hedging and settlement costs and deducting 1.61%, the average 20-year JGB yield since the inception of the program, we are earning an incremental spread of about 87 basis points. That converts to an incremental $115 million in annual income. That is a return of over two and a half times on our investment of $44 million.
We will continue to leverage this investment platform to generate risk-adjusted excess returns through a variety of new strategies while protecting our asset base through market cycles. The commitment of the senior management team, as well as our board, has been tremendous. In closing, I would like to emphasize that our investment results have been solid. We've effectively managed our risk positions and made good choices on our new investment strategies. All of this has improved the overall profile of Aflac's total portfolio. Our transformation is creating a dynamic and experienced global investment organization that can improve returns while performing well through market volatility. I'm extremely pleased with the results and excited about the future. Thank you.
Thank you, Eric. Next, we will hear from Todd Daniels. Todd joined Aflac in 2002 and has held several positions within the actuarial area. He was promoted to vice president of financial planning and analysis in 2011, and in 2012, he was promoted to senior vice president, deputy corporate actuary. At the beginning of the year, Todd became the chief risk officer on a global basis, and he holds that title today. He will be discussing risk management and our capital position. Todd?
Thank you, Robin. Good morning. I'll begin my presentation today by providing an overview of Aflac's principal operating units and then discuss our global risk organization structure. Aflac Incorporated's principal subsidiary is American Family Life Assurance Company of Columbus, or Aflac, which is domiciled in Nebraska. On a U.S. GAAP basis, we report two operating segments, Aflac U.S. and Aflac Japan. For financial reporting purposes, the Aflac U.S. segment includes Aflac Columbus and Aflac New York, which is a subsidiary of Aflac. Aflac New York is domiciled in New York and subject to the insurance laws of that state. The Aflac U.S. segment also includes Continental American Insurance Company, or CAIC, domiciled in South Carolina. CAIC-branded Aflac Group Insurance was acquired in 2009 as a subsidiary of Aflac Incorporated.
Aflac Japan, which operates as a branch of Aflac, is regulated by Japan's Financial Services Agency, or FSA, on a standalone basis. However, as a branch operation, the insurance laws and regulations of Nebraska also apply to Aflac Japan. 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. Since January 2014, when I assumed responsibilities of managing global risk for Aflac, we've taken several steps in the development and implementation of key strategic global risk management programs and policies for the company. One of the main priorities of the risk organization includes setting a risk appetite statement that protects policyholders while allowing the company to return an appropriate amount of capital to shareholders.
To do this, we establish risk tolerances around our primary risks, which are insurance, investment, and operational risk. Setting the risk tolerances requires a strong capital modeling framework so that capital requirements can be measured on both an economic and a regulatory basis. Following management's acceptance of the framework, robust risk reports, including stress tests, can be utilized internally. These reports will also be presented to the board of directors, regulators, and other external constituents, such as rating agencies. Overall, we want to build an enterprise risk management function that creates a company-specific economic capital model to be used as part of management's decision-making process. The risk organization includes the U.S. Risk division, the Capital Modeling division, and the Global Investment Risk Office.
The risk organization in Japan is an important component of the overall risk function, and we coordinate activities in order to prevent duplication of efforts and, most importantly, to align corporate-wide risk objectives. Additionally, we work closely with the actuarial departments in Japan and the U.S. in modeling liabilities and assets to ensure we have the appropriate level of surplus. Management utilizes our U.S. statutory risk-based capital ratio, or RBC, and Japan solvency margin ratio, or SMR, to help set appropriate objectives for capital management. Over the past 12 months, we've enhanced our capital models to better analyze our regulatory capital position under both deterministic and stochastic scenarios. We're also expanding our management decision-making toolkit by establishing an economic capital framework. This framework will aid us in the measurement and management of risks related to investments, insurance, and operations based on company-specific assumptions.
Economic capital-based models in conjunction with stress testing regulatory capital will be used to develop quantitative risk metrics around investment risks, such as interest rate, credit, and foreign exchange, as well as insurance risks such as persistency and morbidity. These risk levels will be measured periodically and incorporated with our regulatory risk measures in setting global risk tolerances for the company. Our risk management philosophy starts with an examination of the characteristics of the liabilities. We identify the appropriate level of investment risk in addition to economic and regulatory surplus levels to ensure our policyholders are protected. Our capital management objectives are designed to provide a strong financial profile for the benefit of all stakeholders. As I said earlier, the first objective is to maintain appropriate capital levels to protect our policyholders. Our capital analysis starts with the RBC ratios for each regulated entity.
Aflac's RBC ratio includes our Columbus-based U.S. operations and our branch operation in Japan. Aflac New York and Aflac Group each meet their own risk-based capital requirements on a standalone basis. Aflac New York's RBC ratio once again 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 subsequent capital strain. Aflac Group's RBC ratio improved dramatically in 2012, reflecting the benefit of a surplus note as well as a quota share reinsurance agreement with Aflac. The ratio came down somewhat in 2013, mainly due to increases in risk amounts associated with growth in assets and premium. The next slides will go into more detail on Aflac's RBC ratio. Aflac's RBC ratio has been strong for many years.
From the start of the financial crisis through 2011, downward ratings migration on certain investments and fairly sizable capital losses restrained improvement of our RBC ratios. In 2012 and 2013, we saw our RBC ratio grow primarily due to substantial increase in surplus, particularly from our Japan business. Let me share with you some details regarding our 2013 RBC ratio development. Aflac's RBC ratio improved significantly in 2013, primarily from strong earnings and surplus, which drove a substantial increase in surplus. The improvement in asset quality and concentration risk also benefited the RBC results. At 786%, our RBC ratio significantly exceeded our 2013 corporate target of 500%-600%. We estimate our RBC as of March 31st, 2014, to be in the range of 785%-815%. Aflac's RBC ratio is impacted by changes in yen-dollar exchange rates due to the relative size of Aflac Japan's business.
In prior presentations, we pointed out that a significant portion of our statutory capital is dollar denominated. Total adjusted capital, or TAC, which is the numerator, is only slightly influenced by currency fluctuations. The company action level, or CAL, which is the denominator, is more sensitive to changes in the exchange rate. When the yen strengthens, yen-denominated assets and liabilities translate into more dollars. When risk factors are applied to these additional dollars, the result is an increase in the denominator, thus reducing the RBC ratio. As Ken demonstrated last year, the sensitivity of our RBC to fluctuations in foreign currency changed due to the hedged dollar investment program initiated in 2012. The dollar assets we purchased and hedged into yen are treated as yen-denominated instruments from a Japanese regulatory perspective. They are treated as dollar-denominated instruments for RBC purposes. That means required capital is not as sensitive to currency charges as it was in prior periods when we were applying risk factors to dollar-denominated assets rather than yen-denominated assets. Total adjusted capital was also affected by the hedged dollar program because it includes unrealized gains and losses on derivative contracts used to hedge dollar-denominated principal. At year-end 2013, those derivative contracts were in an unrealized loss position because the yen had weakened. As we continue to purchase and hedge dollar assets for Aflac Japan's portfolio, and the yen continues to weaken, surplus growth will be somewhat constrained. The factor affecting our RBC ratio most significantly is credit migration.
Before I discuss the details of RBC sensitivity to credit migration, I would like to provide you with some context around our bond portfolio on a statutory basis.
In this slide, you'll see the distribution of the portfolio by NAIC classification, which determines the risk charge applied to each security. The higher the number, the higher the risk charge. The majority of our bond portfolio, or 71.1%, is classified as NAIC-1. Additionally, 25.5% of our bond portfolio is classified as NAIC-2, and 3.2% is NAIC-3. Improvement in the ratings distribution contributes to a stronger RBC. The chart shows the RBC ratio assuming a one-notch downgrade for all holdings of Aflac, excluding U.S. Treasuries. For example, if 15% of our holdings were downgraded across the board by one notch, the resulting RBC ratio would be 689%. The company action level increases as a result of our bond exposures being subject to a higher risk charge, which creates the sensitivity. Japan's SMR is similar to the RBC concept. The minimum required RBC ratio in SMR is 200%.
Unlike the RBC ratio, the capital component of Japan's SMR includes unrealized gains and losses on investments classified as available for sale. Because our invested assets tend to have a long duration, 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've experienced significant improvement in Aflac Japan's SMR over the last two years. We estimate our SMR as of March 31, 2014, to be in the range of 760%-775%. In 2013, we took actions to bolster our SMR. The most impactful step we took was entering into a reinsurance transaction on September 30, 2013. This transaction improved our surplus position and strengthened SMR by 111 points as of December 31, 2013. Additionally, we took measures to reduce SMR volatility in the event of a rate rise in Japan and the U.S.
First, we sold a portion of our JGB holdings from the AFS category and purchased additional JGB securities and placed them in the policy reserve matching classification, or PRM category. We also entered into interest rate hedges on a portion of our U.S. dollar portfolio. While the impact of these two items was small at their inception, we believe they will provide considerable protection in the event of a spike in interest rates. Let me now provide you with further detail on the reinsurance transaction we entered into September of last year. We ceded 33% of the sickness and accident hospitalization claims for a closed block of medical policies issued from 2002 to 2009. In this transaction, there was no initial transfer of assets. Aflac will receive a reinsurance commission on the ceded premiums to compensate us for expenses and future profit on the block of business. Thank you.
The reinsurance agreement is in effect as long as the block remains in force. The commission structure is heaped with a higher commission rate in years one to five and a lower commission rate in later years. On an FSA basis, we released approximately JPY 103 billion of FSA reserves associated with the liabilities that we reinsured when the contract was initiated. The reinsurance commission and cash flows will impact our FSA income statements as they are received. The reinsurer is not admitted as an authorized reinsurer in Nebraska, therefore, the agreement resulted in no impact to our U.S. statutory surplus at contract inception. However, the reinsurance commission will impact our U.S. statutory income statement as it is earned. On a U.S. GAAP basis, there was minimal impact to our balance sheet.
We released approximately JPY 64 billion of policy reserves at contract inception and put them into a deferred profit liability or DPL reserve. The DPL will grow with the excess of the early year heaped commission and be amortized over the remaining life of the contract. Therefore, the expense of the reinsurance agreement is a relatively level % of premium. The reinsurance commission and the change in the DPL flow through the incurred benefits on the income statement. The premiums ceded to the reinsurer flow through the earned premium line. The impact of these transactions reduces incurred claims and the benefit ratio. We routinely stress test our SMR by exposing it to various changes in interest rates, exchange rates, and credit spreads.
We've also applied various stress test scenarios, including a replication of the Lehman shock, accompanied by significant defaults in Europe and a scenario of a substantial spike in U.S. and Japan interest rates. We do not view these scenarios as probable, they do provide us with a better understanding of SMR sensitivity to those risks. The growth of investments in U.S. dollar securities, which are classified as available for sale and subject to mark-to-market, has caused the SMR to become more sensitive to changes in U.S. interest rates. This graph shows the relationship of our SMR at December 31st, 2013, to changes in yields of 10-year U.S. Treasuries. We reduced the SMR sensitivity to U.S. interest rates by entering into interest rate hedges in the third quarter of 2013 on a portion of our U.S. corporate bond portfolio.
You'll note the impact of changes in yields on the SMR is not linear due to the impact of unrealized gains and losses on the solvency margin gross amount, which is similar to the total adjusted capital calculation for RBC and is the numerator in the SMR formula. Unrealized gains benefit the numerator by 90% of their value. Unrealized losses reduce the gross amount by 100% of their value. A concept called the core margin is impacted by unrealized losses net of taxes, further reducing the solvency margin gross amount. The core margin has no benefit when the assets are an unrealized gain position. This core margin concept was introduced in 2012 and creates a ceiling for taking credit for policy reserves in excess of the Zillmer reserve or cash surrender value. The SMR is also sensitive to changes in Japan's interest rates.
This graph shows the relationship of our SMR at December 31st, 2013, to changes in yields of 10-year JGBs. Just like the previous chart, the impact is not linear due to the effect of unrealized gains and losses. The initiation of the PRM classification helped lessen the risk associated with future spikes in Japan interest rates. Aflac Japan's SMR is also exposed to foreign currency risk. Non-yen assets we hold in our portfolio affect SMR in two ways. First, they carry a higher capital requirement than yen-denominated assets. The capital requirement is less for non-yen assets that are hedged into yen. Second, the exchange rate influences our reported surplus position in yen when we translate unhedged dollar-denominated assets. A weaker yen results in a larger surplus than a stronger yen.
Based on the data in this slide, for every 10 JPY weakening in the yen-dollar exchange rate, the SMR would have increased by about 20 points. However, for every 10 JPY strengthening in the yen-dollar exchange rate, the SMR decreases by about 70 points. As you can see, this graph is also non-linear due to the impact that unrealized gains and losses has on the solvency margin gross amount, as I mentioned earlier. This slide demonstrates our SMR sensitivity to credit spreads. Once again, this shows the SMR declining when solvency margin gross amount is impacted by assets in an unrealized loss position. You can see a steeper slope in SMR sensitivity as credit spreads widen. However, there tends to be a negative correlation between credit spreads and risk-free rates, which mitigates risk over time.
As credit spreads impact SMR negatively, risk-free rates impact SMR positively and vice versa. We have tools at our disposal, such as reinsurance to enhance SMR if needed. We also have a multi-currency line of credit that can be used by either Aflac or Aflac Incorporated if we need to increase our regulatory capital level quickly. This line of credit would be an effective short-term tool to utilize. We continue to analyze other hedging strategies to help mitigate various risks to Aflac Japan's SMR. Before I move on to a discussion of cash flows and capital deployment, let me comment on Aflac Incorporated's capitalization on a U.S. GAAP basis. In thinking about Aflac Incorporated's debt capacity, we focus on cash flows, ratings, and our debt to total capital ratio. As we have stated in the past, our overall preference is to issue debt in yen.
Significantly lower interest rates, combined with yen cash flows to service yen-denominated obligations, make that market particularly attractive to us. In June of 2013, we issued $700 million of 10-year senior notes, which pre-funded the 2014 and a portion of the 2015 maturities. These notes were effectively swapped into yen through the use of a currency swap, giving us the benefit of paying lower effective rate. We have $332 million of debt maturing in July of 2014. 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 most of our equity is dollar-denominated, a weakening yen decreases our reported debt balance in dollar terms.
Our debt to total capital ratio decreased slightly in the first quarter of 2014 due to the growth in shareholders' equity from earnings being greater than the impact from the stronger yen on the debt balance. Our interest coverage ratio remains strong, although it has declined somewhat recently, reflecting higher debt balances. Keep in mind, these ratios do not reflect the debt repayment scheduled in July. Let me now turn to a discussion of the cash flows that support our operations and those that are available for shareholder-related activities. Although Aflac Incorporated can receive cash from borrowings, its principal source of liquidity is from the operating units. Aflac Japan annually remits a portion of its FSA-based after-tax net earnings, as well as allocated expenses to Aflac U.S. Aflac Japan also pays a management fee directly to the parent company.
Aflac US 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 the prior year's statutory surplus, or the prior year's statutory net income from operations, which excludes net realized investment gains. Based on our 2013 statutory financial results, the maximum dividend allowable in 2014 without regulatory approval is $2.36 billion. 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 at the parent company and our desire to maintain a strong RBC ratio, we did not send any dividends to the parent company in 2012.
In 2013, we returned to our normalized historical dividend policy to the parent company and expect to continue this for 2014. Allocated expenses have experienced little change over the last three years. Management fees charged by Aflac Incorporated to its subsidiaries represent the revenue stream to pay for services performed by our executive officers, corporate-level functions, and 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. The expenses paid by Aflac Japan represent costs incurred at the holding company for the benefit of Japan's insurance operation. 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 US segment.
We issued $1.5 billion of senior notes and subordinated debentures in 2012. As I covered earlier, we issued $700 million of 10-year senior notes in June of 2013. Aflac Incorporated has additional sources of cash, which are reflected in the other line. These sources include investment income from the small parent company portfolio, cash collateral received from derivative counterparties, treasury stock reissue, and cash from the exercise of stock options. You'll notice there was a large increase in other in 2013, due largely from cash collateral received from derivative counterparties related to cross-currency swaps held at Aflac Incorporated. The largest capital flow from Aflac Japan to Aflac US is profit repatriation, which was JPY 76.8 billion, or $771 million, in 2013. As we stated in our first quarter earnings release, we expect to repatriate approximately JPY 127 billion in 2014.
Aflac Incorporated's cash outflows are primarily to counterparties for operating expenses, interest expense, and debt repayments. In addition, Aflac Incorporated may supply capital support to Aflac Group if needed to fund its growth. Ultimately, the parent company uses capital that is not needed to support 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, primarily as a result of share repurchase activities and maturing debt obligations. As I mentioned, interest expense has increased largely due to our increased borrowings. Aflac Incorporated's cash 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%. We purchased approximately $300 million of our shares in the second half of the year. In 2012, we raised the dividend payment by 6.1% on a quarterly basis and repurchased $100 million of our shares in the fourth quarter. In 2013, we again increased our repurchase activity to just over $800 million of our shares from the initial estimate of $600 million while increasing the quarterly cash dividend by 5%. We also deposited a portion of our 2013 debt issuance of $491 million into short-term investments in anticipation of future debt maturities. As you see here, we anticipate sending dividends of just under $1.5 billion to Aflac Incorporated in 2014. Those dividends are primarily funded by profit repatriation from Japan as well as profits from the U.S. insurance segment.
We are not assuming any proceeds from borrowings at this point in 2014. We expect management fees and allocated expenses in 2014 to be little change from 2013. Operating expenses at the parent company are expected to be in line with last year. Interest expense will be largely unchanged, reflecting maturing debt in mid-2014. We again expect to increase the cash dividend in line with this year's growth in operating earnings per diluted share before the effect of the yen. As has been the case for the last three years, we anticipate the board of directors will contemplate any increase in the dividend to be effective with the fourth quarter payment. You'll note that these cash flow estimates assume we repurchase $1 billion worth of Aflac's common stock in 2014.
This chart shows the cash position of Aflac Incorporated over the last few years and an estimate for the end of 2014. Although we expect 2014 cash outflows from the parent to exceed inflows as a result of increased share repurchase, we still anticipate having a significant amount of cash at the parent company at the end of the year. I hope this presentation has given you a better understanding of our capital position, cash flows, and how we're approaching risk and capital management. We will continue to manage our capital in a way that demonstrates strong support for our policyholders and enhances shareholder value.
Thank you, Todd. We'll conclude this year's meeting, as we always do, with a presentation from Kriss Cloninger. Kriss joined Aflac in 1992 after spending 15 years as a member of KPMG's audit team, where Aflac was a client. He is President of Aflac Incorporated, Chief Financial Officer, and today, Kriss is going to present a discussion of Aflac's financial results and capital position. Kriss?
Well, let me conclude this year's meeting with a discussion of Aflac's financial results. I'll start with an overview of each of our segments and then go into more in-depth discussion of the development of our operating ratios, our returns, and our modeling assumptions. Aflac Japan remains the primary contributor to our overall operations. In the first quarter of 2014, Aflac Japan represented approximately 75% of our pre-tax insurance earnings. As you know, the main components of total revenues are premium income and investment income. The largest component, premium income, has benefited from a predictable and stable source of renewal revenues. In fact, we estimate that 92% 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 increased from 2008 through 2012. Revenue growth slowed in the last half of 2013 as we experienced sales declines in the first sector due to the April 2013 price increases. In addition, as I mentioned last year, future revenue growth will be suppressed to some extent. This is because a significant amount of limited pay products we have sold will reach paid-up status and will therefore no longer contribute to our premium income. It is important, however, to remember that we will continue to recognize profit on these policies due to the accounting model we use on limited pay products. A deferred profit liability is accrued during the premium-paying period and released to profit through benefits over the remaining life of the policy after the contract becomes paid up.
It's also worth noting that the yen-dollar exchange rate influences 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 Japan's total investment income. By the end of 2013, that percentage had increased to about 44% and increased even more to 45% for the first quarter of 2014. Remember, 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 is in dollars. As you'll note from this next slide, Japan's benefit ratios were fairly flat from 2009 through 2011. However, with a significant increase in 2011 of WAYS sales, which continued in 2012, our benefit ratios started to rise.
That trend reversed during the second quarter of 2013, reflecting the dramatic decline in sales of first sector products, as well as the continued improvement in claims experience for our third sector policies. Additionally, the reinsurance agreement we entered into in September 2013 reduced the total benefit ratio by 50 basis points, both in the fourth quarter of 2013 and the first quarter of this year. I would note that the benefit ratio was further reduced due to the impact of currency translation on revenues from dollar-denominated investments, as I just discussed. The weaker yen suppressed the benefit in the ratio in the fourth quarter by about 90 basis points and in the first quarter of this year by 40 basis points.
As you can see on the chart, the operating expense ratio has trended downward in the past few years, in part reflecting the lower commission expense associated with the sale of child endowment and WAYS products. In addition, the lower expense ratio in the first quarter of this year increased substantially. The expense ratio increased substantially, primarily due to the change in mix of business from new sales. Remember that the expenses in the first quarter of 2013 were unusually low. We believe expenses for the remainder of 2014 will be more in line with 2012 levels as the year progresses. While it isn't apparent in this slide, it is worth mentioning that since 1998, our pre-tax profit margin has steadily increased, 15.5%, but went up in 2013 to 20.5%.
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. Aflac pre-tax operating earnings grew from JPY 261.7 billion in 2009 to JPY 353.9 billion in 2013. The significant increase in first sector sales contributed to both revenue and profit growth over this period. The impact of non-deferrable acquisition costs from new sales somewhat suppressed the rate of growth of our products, but it's important to note that the profits were still strong. In 2013, our pre-tax operating earnings as measured in yen were up significantly, partially due to a larger contribution from dollar-denominated investment income translated at a stronger dollar.
In the first quarter of 2014, our other reportable segment to Aflac U.S. represented approximately 25% of insurance earnings. Aflac U.S. revenue growth is largely driven by the rate of premium income growth. Premium income growth has grown at single-digit rates over the last five years, reflecting the weak sales we discussed earlier today. This has been somewhat offset by generally improving persistency. In the first quarter of this year, persistency started to return to more normalized levels. Over an extended period of time, the operating ratios for Aflac U.S. have been very stable. As discussed in prior years, 2010 benefit and expense ratios were influenced or impacted by lapses associated with the loss of a large payroll account at the end of 2009. 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. The benefit ratio improved in 2012 and 2013, reflecting lower incurred claims. We saw the benefit in operating expense ratio decline in the first quarter of 2014. For the full year, operating ratios should return to more normalized levels as we expect to see increased spending and somewhat higher benefit ratios in the last three quarters. While Japan is the dominant segment of our total company results, Aflac U.S. remains a significant and important contributor to our growth. Assuming that normalization of the benefit and expense ratios in the near future, we would expect the growth in Aflac U.S. profits to be in line with its revenue growth. Interest expense in 2013 was slightly higher than 2012, reflecting the higher debt balances.
However, as Todd mentioned, we have a Samurai debt repayment of approximately $332 million in July, which will lower the interest expense in the latter half of the year. Parent company and other unallocated expenses in 2013 were also slightly higher than 2012. Our consolidated tax rate was 33.4% in 2012 and a point higher at 34.4% in 2013. The rate in 2012 reflected some favorable results we achieved when the IRS completed a tax exam. We expect our 2014 annual effective rate to be in the range of 34%-34.5%. This next slide shows the growth in operating earnings per diluted share, both as reported and excluding the impact of currency translation. At the bottom of the slide, you'll note the per share impact from the changes in the average yen-dollar exchange rates for the last five years.
The yen strengthened during the period 2009 through 2012, adding to our reported earnings. In 2013, the yen weakened significantly, causing reported earnings to be $0.76 per share lower than they would have been had the currency remained unchanged. We have a long history of increasing operating earnings per share, excluding the effect of the yen. While the rates of growth excluding currency slowed after the financial crisis, they stabilized in 2012 and 2013. We're still guiding to EPS growth ex currency in the range of 2%-5% for 2014. The effect of currency on our earnings varies over time. In 2013, every one yen move in the average annual exchange rate resulted in an impact of $0.043 per diluted share.
In 2014, we estimate that a one yen change in the average annual exchange rate will equal about $0.035 per diluted share. The sensitivity declined a bit, primarily due to both a weaker yen rate and an increase in the proportion of our dollar-denominated investment income for our Japanese segment. 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 derived from operations, inclusive of interest cash flows associated with notes payable, but before investment gains and losses from securities transactions, impairments in derivative and hedging activities, as well as other and non-recurring items.
We use operating earnings to evaluate our financial performance because realized gains and losses, the impact of derivatives and hedging, and other non-recurring items tend to be driven by general economic conditions and events, and therefore may obscure the underlying fundamentals and trends in Aflac's insurance operations. Our realized investment losses in 2012 were less than half the level of the prior year, but were still significant. In 2013, we have realized investment gains as we move forward in our global investment transformation. The impact from derivatives and hedging on net earnings is primarily associated with our use of interest rate swaptions. This line item also reflects the change in the fair value of the yen-dollar swaps associated with our recent dollar-denominated bond issuances.
Now I'd like to turn to give you a more in-depth look at our operations in Japan and to give you a better understanding of the benefit, expense, and profit characteristics of our various product categories. As you can see, Japan's revenue composition has changed over the last several years. In this chart and the others that follow, the core health/other category, which I may just refer to as core health, includes our cancer and medical products. The other category includes several products that are not actively marketed, such as care and annuity, that represent less than 10% of total revenues for all years presented. The ordinary life category includes the WAYS, child endowment, and other life insurance products. As a result of our success in selling these products, especially through the bank channel, the contribution of the ordinary life line grew significantly between 2011 and 2013.
In 2011, ordinary life insurance was 15.2% of total revenues. By 2013, those revenues from ordinary had grown to 26.9% of the total. 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 category toward products with lower benefit ratios. As you'll recall, Japan's national healthcare system has been under severe pressure to reduce costs. The government has modified their reimbursement practices to pay a higher amount per day for shorter hospitalization stays. This has had the effect of significantly shortening those hospital stays. The reduction in days per stay has particularly impacted our cancer insurance business, causing the ratio of our actual to historical claims experience to fall from 79% in 2007 to 72% in 2012.
Now this decline occurred at a much faster rate than we originally expected. That does mean, of course, that there may be less room for further reductions in average hospital days in the future, although we do still expect to see some additional improvement in the years to come. Claims for our medical products have also been lower than our original assumptions. Just as we've seen with our cancer policies, we expect favorable experience for our medical product to continue. Yet there is also limited room for significant levels of claim improvements as average hospital stays for medical events are shorter for medical than those for cancer treatments. Consequently, we expect the rate of decline in average days per hospital stay for the medical events to slow down a bit in future periods.
The other major factor impacting Japan's total benefit ratio has been the change in business mix over time. Our efforts at broadening our product line have significantly changed our in-force business. For many years, the product mix trended toward products with lower benefit ratios, including medical products and health insurance riders. More recently, the total benefit ratio has been affected by the sale of our higher benefit ratio products, including child endowment and WAYS. Reflecting the trend of favorable claims experience, the benefit ratio for our core health products declined in 2011. In 2012, the benefit ratio stabilized for the core health as a result of offsetting factors, including reserve strengthening in response to the low interest rate environment and continued favorable persistency experience, which causes future claims to increase. In 2013, we once again saw a decline in the benefit ratio for core health.
The benefit ratio for our ordinary life products has increased recently, rising from 77.4% of revenues in 2011 to 81.5% in 2013, due primarily to the higher production of child endowment and WAYS. In addition, the ratio in 2012 and 2013 was impacted by the low interest rate environment as we established GAAP reserves for new issues, assuming lower investment yields reflective of the decline in the new money interest rates during that period. Taking all these factors into account, the overall benefit ratio increased in 2012. However, in 2013, we experienced a modest decline in the benefit ratio for all products combined, as the ratio for ordinary life moderated and the core health benefit ratio declined. We anticipate that the overall benefit ratio will remain relatively stable in 2014.
Although the benefit ratios of our ordinary life products are higher than those of our health products, commissions and other expenses are lower for the life products in relation to their 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 has been relatively stable over the last several years, as there's been little change in the product mix within that block. Meanwhile, the expense ratio for the ordinary life category has declined, dropping rather significantly from 11.2% of revenues in 2011 to 8.3% in 2013. This is primarily due to lower commission rates on child endowment and WAYS. Overall, you can see that the average or the aggregate expense ratios have declined.
We repriced our ordinary life portfolio effective April 2nd, 2013, in conjunction with the FSA requirement that standard interest rates be reduced and reserve postings increased. That premium rate increase improved the profitability of new sales for the ordinary life line. We've also implemented new 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 we're selling products that increase shareholder value and allow Aflac to meet its overall profit objectives. After improving in 2011, the pre-tax profit margin for core health products declined slightly in 2012, primarily reflecting the reserve strengthening we did on certain closed blocks of business, including care and dementia products. Those reserve additions were prompted by the persistent low interest rate environment.
In 2013, we saw an improvement in the pre-tax profit margin for core health, reflecting favorable claims experience. We also did not have any additional reserve strengthening on the care and dementia in 2013. When you look at our ordinary life business, it's important to note that the profit margin of these products exceeded 10% in 2011 and 2013. Given the substantial growth in ordinary life revenues over the last three years, the growth in ordinary life profits has contributed significantly to the overall growth in Aflac Japan segment profits over that period. With the significant increases in sales of ordinary products in 2011 and 2012, those products strongly contributed to growing our total pre-tax operating earnings. The contribution of ordinary life products to overall profits more than doubled between 2009 and 2013, growing from less than 6% in 2009 to more than 13% in 2013.
This is due to the fact that new sales of ordinary life are still significant, even though they're down from the level of sales achieved in 2011 and 2012. Last year, we provided information regarding the expected ratios for benefits, expenses, and profit margins compared to total revenues for both our product categories and in total for Japan. As I mentioned then, the ratios represented the projected three-year average ratios for 2013-2015. The actual results for 2013 were impacted by the weaker JPY. Revenue and pre-tax earnings in JPY benefited from the increased value of USD coupons translated to JPY. As a result, the JPY's depreciation contributed to reducing the total benefit ratio by some 80 basis points and increased the pre-tax profit margin by 90 basis points. For both categories in 2013, the benefit ratios were below the estimated ranges.
Expense ratios were within the estimated ranges, and the pre-tax profit margin was just above the top end of the range, both for core health and for ordinary life. In total, the pre-tax profit margin was at the high end of the estimated range. You heard earlier today that our sales objective in Japan for 2014 is to increase third sector sales by 2%-7%. For projection purposes, we're modeling 2%-8% for third sector sales growth in 2015 and 2016. Again, I want to remind you, let me stress, that our modeling assumptions are not official sales guidance. Some of you like to take it as such, but it's just not that. We select these modeling assumptions as kind of placeholders in a sense, because I need to put something in there to project future revenues.
Quite frankly, with 92% of Japan's revenues being from renewal premiums, I could put in -10% for new sales or +15% for new sales, I wouldn't change these ratios very much at all. It's inaccurate for you to consider my modeling assumptions official guidance. I didn't even talk to the marketing guys about this, I can't say it enough because some of you like to publish notes with these numbers that say, "Cloninger gave us sales guidance for 2015 and 2016," and Dan would shoot me if I did that. I'm disavowing it, okay? For the first sector, we're modeling a sales decline of 25%-40% for 2014, which would bring us back to a level of first sector sales that's comparable to the range of actual life sales we achieved between 2008-2010.
For 2015 and beyond, we're modeling those first sector sales to be flat to up slightly. Again, not official guidance. I had to put a placeholder in there. This is it. Our projections assume new money yields will be in the range of 2%-2.5% for 2014 through 2016. That's also a placeholder. I didn't sit down and intensively vet that with Eric yet. We also assume that persistency during that period will be stable. Our new money yield assumptions reflect a current level of interest rates, credit spreads in our current asset allocation, which is subject to change, as Eric told you. Again, this year, I am providing projections for a period of three years. These projected ratios represent what we expect the three-year average to be over the 2014 through 2016 period.
As I mentioned last year, there'll be some variations, including seasonality trends and exchange rate impacts, and now reinsurance, reflected in our actual quarterly results. However, we do expect that the average annual rates will be within these ranges for 2014 through 2016. That might help you in your modeling. In the aggregate, the projected annual profit margin for the next three years is about one point higher than it was in last year's projection. Actual results, of course, will vary based on differences between our actual and assumed claims and volume mix by product category. They'll also be impacted by the growth in revenue, which will be influenced by our investment results.
You're going to have to use some of your own judgment in deciding what you want to publish, but my intention is simply to provide you with some additional insight into our business and how we develop our own outlook and the guidance we give you. As you'll recall from FAB last year, we provided the projected ranges for the three-year average ratios, 2013 to 2015, for Aflac U.S. We didn't break out product categories for the U.S. because within the U.S. segment, most of those products sold have similar financial characteristics. As you can see, the actual results for 2013 show that the benefit ratios fell slightly below our anticipated range due to better than expected claims experience, and consequently, the profit margin came in at the upper end of the range. Now I'll show you the assumptions we've plugged into the modeling for the U.S. business.
Again, these are modeling and sensitivity testing assumptions. For the years 2014, we put in the sales growth of flat to 5%. New money rates, we used 3%-4%. Again, those are just modeling estimates more or less reflective of current levels of rates, spreads, investment duration, and credit quality. We are anticipating that persistency will remain fairly stable over the outlook period. This next slide shows the anticipated three-year average ratios over the period 2014 to 2016 for Aflac U.S. We expect stable to slightly improving margins with earnings growth primarily being driven by the growth in total revenues. Now let's turn to our capital situation. With Todd having covered our current capital position, let me take a few moments to discuss my view of capital management strategy going forward.
As we've noted, it's our goal to maintain a minimum RBC ratio in a range of 500-600. An SMR in the same minimum range of 5-600. At present, we're electing to maintain current ratios above those stated ranges. We believe that having this buffer enhances our financial flexibility and gives us greater confidence in our ability to strengthen profit repatriation. Once policy holder obligations are satisfied, our objective is to enhance shareholder value through expanded share repurchase and a growing cash dividend. We are comfortable with a debt to total capital ratio of about 25%. We want to demonstrate a strong financial profile for the benefit of all of our stakeholders.
To that end, we're utilizing various capital management tools to ensure that we maintain appropriate capital levels to protect policyholders, support our current financial strength and debt ratings, and operate in a capital efficient manner in order to return additional capital to our shareholders. Recently, some of you have heard me refer to the difference of approximately $8 billion between the FSA basis and the U.S. statutory basis policy reserves we hold on our business in Japan. To explain further, FSA accounting generally utilizes more conservative assumptions than U.S. statutory accounting, particularly in interest rates. FSA reserves are also computed on a net level basis. That reserving method requires benefit reserves to be built up from the first policy year owned.
The combination of this net level reserve method and the requirement to expense acquisition costs as incurred, has a big negative impact in the year new business is written. In contrast, U.S. statutory accounting provides some relief through the use of what they call a preliminary term reserve method. Under the preliminary term method, no benefit reserve accrual's required for the first one or two years of a policy life. This technique helps reduce the surplus drain associated with the immediate expensing of acquisition costs on new business. While the difference in the reserving method goes away over the life of the contract, the early year FSA reserves are substantially higher than the U.S. reserves. As the slide demonstrates, the reserves that Aflac holds on both the FSA and the statutory basis has increased over time as our business has grown.
However, focusing on the difference, the change in the difference between the balance in these two reserves, that's what hits earnings. The difference in the FSA versus U.S. statutory has grown from JPY 509 billion in 2009 to JPY 788 billion as of December 2012. That equates to an average annual growth in the difference of the reserve balances of just under JPY 90 billion or almost $900 million. In 2011 and 2012, we experienced higher than average growth in the difference between the reserve levels due to the high level of new annualized premium sales. In 2013, we saw the difference in these two reserve amounts decline primarily as a result of the impact of the reinsurance transaction we entered into in September of last year.
I should note that while the higher FSA reserve requirements impacts FSA earnings, it does not always impact the solvency margin to the same extent. I think Todd mentioned we are allowed to add back a portion of the excess of FSA policy reserves over the policy cash values to our capital for the SMR calculation. Unfortunately, we don't have time today to cover the rather technical adjustments that are made to determine the amount of capital that goes into SMR. Just let me say, I'm trying to move toward a focus on SMR capital adequacy rather than purely FSA earnings when we're considering what level of profit repatriation is appropriate. I really have to consider both things. FSA earnings has got the strain in it. It's also got the impact of reinsurance in it in 2013, maybe going forward. SMR's got unrealized gains in it.
You have to look at both these things. It's not just a simply mechanical process of determining what level of profit repatriation is appropriate. Now let me say that based on our cash flow testing and gross premium valuation work, I'm satisfied that our U.S. statutory reserves on our Japanese business are more than adequate from an economic point of view. Therefore, going forward, my goal is to mitigate the growth and impact of these reserving differences through reinsurance and other capital management techniques that we are analyzing. While various tools are available to reduce the difference between the FSA and the U.S. statutory reserves, our evaluation indicates that reinsurance provides a cost-effective means to increase capital in Japan. Essentially, reinsurance allows us to accelerate the recognition of FSA profits inherent in the reinsured block.
Let me give you some context on how this develops by using the reinsurance agreement we executed last year as an example. Without that reinsurance agreement, we project that it would have taken just over 10 years for the reinsured block to earn the JPY 103 billion in gross FSA earnings that we realized at the inception of the reinsurance contract. It'd take more than 25 years before the cumulative FSA profits without reinsurance exceed the cumulative FSA profits with reinsurance. For that reason, we're likely to use additional reinsurance transactions in the future. Another option we're exploring in terms of getting some reserve relief to mitigate this difference is the possibility of establishing a captive reinsurance entity. That way, we may be able to free up capital in Japan while saving on the expense of reinsurance through a third-party reinsurance.
Of course, there are upfront costs, and there are some legal and regulatory issues that we would have to consider relative to captive reinsurance. Those are items that we will consider as we analyze the viability of establishing a captive. We currently estimate that Aflac Japan's FSA basis net income for the fiscal year ended March 31, 2014, will be approximately JPY 190 billion to JPY 200 billion, assuming no additional realized investment losses. It's important to note that these numbers reflect the impact of approximately JPY 68 billion net of tax from last year's September reinsurance transaction. When we executed that transaction, we made the decision that we would not repatriate the FSA earnings resulting from the reserve released in that transaction, basically because we were trying to bolster our solvency margin at the time.
As I just said, I'm trying to shift the view of profit repatriation to be at least as highly influenced by an SMR level as I am in our FSA earnings. Projecting and looking at the projected SMR at the end of the first quarter, we concluded that if the SMR was in the range of 750-775, we'd be comfortable increasing our originally estimated profit repatriation by about 25% to amount to JPY 127 billion this year. That's what we expect to repatriate now. We estimate that the majority of the capital transfer will occur in July. I'd note that a significant portion of this year's anticipated repatriation has been hedged for currency against the risk of further yen weakening. We've also started to hedge a portion of our 2015 expected profit repatriation.
As we've discussed for many years, it's not our policy to hedge foreign currency translation for financial reporting purposes. We do give serious consideration to hedging economic transactions such as profit repatriation. After adjusting 2014 to exclude the impact of reinsurance, we anticipate that 2015 FSA earnings should grow by about 15%. That can vary considerably depending on actual results involving sales and investment items. In addition, you'll recall that SMR is influenced by foreign currency rates, interest rates, credit spreads, as Todd covered. As such, it's possible that the capital we ultimately repatriate in 2015 could be significantly different than the estimates shown here. Let me turn to a discussion of ROE, return on equity. On a consolidated basis, Aflac's business model has generated industry-leading returns on equity for many years. From 2009 through 2013, Aflac's consolidated ROE averaged 20.3%.
Despite the impact of lower investment yield and business mix changes that have been reflected in our financial statements, our ROE has remained consistently strong, reflecting the high profitability of our insurance operations. It is interesting to note that excluding the impact of the yen, the operating return on equity over the last five years has been very stable and strong, averaging 25.1% over this period. We continue to believe that generating an industry-leading return on equity is extremely important to us. In fact, it is included as an element in our executive compensation program these days. This next slide illustrates the capital flows to shareholders since 2005. I really like this chart, by the way. I love it. It goes up, goes down, goes back up. I think it's good.
We've got the steady increase in cash dividends and share repurchases from 2005 through 2007. During that time, we paid out an average of about 54% of GAAP operating earnings to our shareholders. In early 2008, we committed to deploying what we considered to be a significant amount of excess capital at that time. In the first half of 2008, we entered into an accelerated share repurchase agreement and bought back about close to $800 million worth of our shares. In the third quarter, we repurchased another $683 million a month or two before the Lehman failure. Brilliant move. Four years following that crisis reflected the conservative posture we had to adopt on capital deployment, our payout ratio declined to about 25% of operating earnings.
That decline in shareholder return was necessary to cover the investment losses we realized as a result of the financial crisis. As those losses diminished, the cash flows available to shareholders increased, this chart reflects an assumption that we're increasing the cash dividend in line with earnings growth before the impact of foreign exchange in 2014, it also assumes that we repurchase $1 billion worth of our shares this year. We believe those are realistic assumptions, we expect to deploy a high level of capital in 2015 as well. Our financial objectives for 2014 are to increase operating earnings per diluted share by 2%-5%, as you've heard, excluding the impact of currency, to produce an operating return on equity in the range of 20%-25%, again, before the effect of foreign exchange.
As we previously communicated, our 2014 EPS will benefit significantly from increased share repurchase activities but will also be challenged by several headwinds. Those include the low interest rate environment in Japan, sizable expenditures in both Japan and the U.S. to enhance our operational infrastructure, and an increase in Japan's consumption tax, which increased from 5% to 8% starting in April 2014. As we look to the future, we anticipate the headwinds we face in 2014 will diminish somewhat in 2015. Those expenses for infrastructure will still be in there, but they're not increasing in our assumptions. Who knows about the interest rate environment, what that'll continue to bring, and the like. Anyway, we think that once you get something in the comparability area, then you're sort of okay for the next year.
As we approach the middle of the year this year, we're focused on several priorities, as always the case, we remain committed to achieving operating earnings per share growth targets. We're also focused on maintaining our industry-leading returns on equity. As always, delivering on our promise to policyholders remains a top priority. As such, we want to produce risk-based capital and solvency margin ratios that are consistent with the management objectives we have set, and we also want to return additional capital to shareholders in the form of dividends and share repurchase. I hope that today's discussion of Aflac's 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 you have a strong sense or a sense of our commitment to thorough and transparent disclosures.
We believe it's important to present information 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. Apologize for the length of it all. Robin?
Thank you very much, Kriss. In talking with a lot of you during the prior break, you mentioned that you would rather have more Q&A time, since we're behind a little bit, we're going to ask all the Aflac folks to come forward and take their seats up here, We will move directly into Q&A. While they're setting up, let me go through the rules here. I'm sure you all know it, we're going to go through it one more time.
Okay.
First, raise your hand if you have a question. Second, wait until you get the microphone before you say anything. Third, state your name and the firm you're with. Fourth, limit yourself to one question so that other people in the room will have a chance to ask a question also. Okay. Any questions or this is just okay. All right. Up here at the front, Suneet.
Thanks, Robin.
Is that on?
No, turn it up. Yeah, I think it's on. Thanks, Robin. Suneet Kamath from UBS. I guess for Kriss, a couple questions on the estimated FSA earnings and profit repatriation slide. First, as you mentioned, if you back out the reinsurance deal, the net income in 2015 is supposed to be up 15% or so. What are the reasons behind why it's so strong?
Probably the slowdown in surplus strain associated with the first sector business is a significant contributor to it. You get somewhat easier comparisons because the lower new money rate's been baked in for a couple of years. That's a bit of a contributor. Let me ask either Todd or Sue if they want to supplement that commentary. What I'm going to do today, Suneet, is to try to turn to the people that actually do most of the work to contribute to answering these questions instead of taking it all myself. Todd, do you have any sense of that you want to-
I think it's primarily related to what you said is the surplus strain when related to first sector, the lack thereof.
Okay.
If we assume that first sector kind of now grows right off the-
Yeah
the decline, that the difference between the 15% and whatever your GAAP earnings are growing at should probably narrow.
Yeah. Well, the FSA earnings, if they grow faster than GAAP, yeah, the difference in the two absolute level earnings will decline.
Okay. Just one quick follow-up. Just the $110-$150 assumption for profit repatriation in 2015, does that assume any incremental reinsurance transactions?
No.
Okay.
No.
Got it. Thanks.
Okay. Thomas Gallagher.
Thanks, Robin. Is this working? Okay. A follow-up on the $110 billion-$150 billion profit repatriation. Kriss, this year some of the incremental profit repatriation's going to repay debt. Should we also expect that some of the profit repatriation for next year will go towards other purposes other than buybacks, or can we assume all of that can go to buybacks?
This is Ken. I'll start that. I don't know that it'll all go toward buybacks. We don't have the significant debt burden in 2015. We do have $300 million of debt. I think it's due in August that we had pre-funded, and we have, I believe it's only about JPY 15 billion of debt, JPY loans actually that are due next year, which could very likely be serviced with some of the repatriation that we pull out.
Just a follow-up on the, I think it was page 48 that had projected cash flows. If I look at the, and I just want to make sure I'm understanding this correctly, the dividend from Aflac that says $1.475 billion, that's the expected repatriation amount coming from Japan, plus how much you would take out of the U.S. related to the U.S.-based earnings. Is that the right way to interpret that?
Yeah, that's right. That's the right way to interpret it.
My follow-up to that is if you're earning $700 million-$800 million on the U.S. portion of it, why can't you take more of that? Because if I'm understanding this correctly, you're only taking $200 million-$300 million of U.S.-based earnings and using those. That would appear to leave a lot of potential cash flow on the table that's related to the U.S. business, if you follow my logic.
Right. I think there's other items that come out of the U.S. cash flow that we identified earlier in the speech. The debt servicing comes out of the U.S. earnings. We don't repatriate to pay back the debt servicing. That's actual cash that comes out of the U.S. operation. It's more of a cash versus an earnings view of things if you look at the actual cash earnings versus the GAAP earnings and what those dollars are being used for in the U.S. operation.
Okay. Thanks.
John.
Thank you, Robin. John Nadel from Sterne Agee. Maybe it does follow up or dovetail a little bit on Tom's question. I'm curious why when I think about Aflac, especially the U.S. business, but maybe even more broadly, I think about Aflac in a 500%-600% minimum risk-based capital ratio, and I think a lot of us in this room think about Aflac and compare Aflac to a Torchmark or a Unum or companies like that are continuing to run at risk-based capital ratios in the low 300s, maybe as high as 400. This is a very excessive level given the business mix and the risk of your businesses. I understand what you went through five years ago, but the balance sheet looks so significantly different today.
It looks like there's so much available capital that could be freed up if we just temper that concern over what happened five years ago. I just wondered how you'd react to that.
Well, the 500-600 minimum RBC target we've got reflects the fact that we have a consolidated statutory financial statement for Japan and the U.S. If you're just looking at a Torchmark, which is U.S. only, and some other companies that are primarily U.S. only, that aren't sensitive to changes in foreign exchange, though that's a less significant item these days. Actually, I think it's fair to say that our RBC is much higher, and it's controlled or driven to some extent by the capital we've got to maintain in Japan. Japan is still 80% of the statutory operations, and so it's closer to the SMR.
Well, maybe if I get at it a little bit differently then, right? Your SMR and risk-based capital ratios are today 200 points, maybe more than that, above the upper end of your targeted ranges in both Japan and in the U.S.
Well, they're 200 points below the minimum. If you actually look at all the Japanese companies, we're not even in the top half of SMRs among Japanese companies. We're kind of in the middle of the bottom half, 775. I mean, a number of companies are closer to 1,000. Part of that's due to the fact that SMR includes unrealized gains that are significant today, and we're not comfortable spending unrealized gains. If we liquidated assets and realized those gains, we'd reinvest at low yield rates, and we don't choose to do that. Fact of the matter is that if you let the capital include the unrealized gains, you've got to keep in mind that those could go away. As assets move toward maturity, they will go away even if you never liquidate anything. That's another part of it, John.
Just my second question or separate question is just about EPS guidance for 2014. I think when you originally set guidance, the expectation was, among other assumptions, that about 90% of your cash flow in 2014 would be invested into JGBs out of Japan. Now you're talking about 40%-60% into U.S. dollar assets. I think that's a pickup of something order of magnitude $25 million-$30 million of after-tax earnings. I'm wondering why you don't raise guidance for that.
Let me turn to Eric on that. Right now, our net investment income is right in line with our budget. Eric, you want to make any comments about what you think the rest of the year is going to bring?
Certainly, I know one of my charts had it. Our new money yield will go higher for the rest of the year because we really used our JGB budget in the first quarter, we will get some benefit to that. It's also an issue of timing, and we also had a large majority of cash flows invested in the first quarter, which helped us on one hand, they were invested in JGBs, that was a lower yield. Remember, it's also dependent on when cash flows come in. As an example, off the top of my head, in July is when we almost have no cash flow to invest because we're sending money back from Japan to the U.S. You always have to look at it on an impact basis. I do think there'll be some pickup.
I don't have the exact numbers, it'll also be within the ranges that we projected at the beginning of the year.
More of a tailwind.
Right.
That would push us perhaps toward the upper end of the range if we were able to realize less of a headwind associated with those investment activities. That's one of the reasons we've got a range out there, too.
Nigel?
Great. Thanks. Kriss, just going back to the reinsurance transactions. Should we expect a transaction to be announced on an annual basis going forward? Should we expect one toward the end of this year? Also, in terms of the size, kind of similar magnitude to what we saw last year? In your comments, you also just discussed potentially setting up a cap of certain complexities involved with that. Just hoping you can flesh that out as well.
What I said in the speech is that we intend to take steps to mitigate the growth and the difference between the FSA reserves and the U.S. stat reserves on the Japanese business. I think we had numbers in there that were JPY 60 billion-JPY 70 billion estimated changes in the next two years in there. That's kind of order of magnitude what I would try to mitigate. I don't think it's appropriate to expect a reinsurance announcement every year. We wouldn't do it if we didn't think we needed to do it. I'd say I would really like to stop that reserve difference from growing, and reinsurance is one way to do it. We are also looking at two other strategies we aren't ready to talk about that might also be ways to mitigate and achieve the same result.
Just a quick comment. You'd mentioned a captive. I mean, that's something that we've talked about internally, we started looking at. Just note that we'd have to give consideration not only to the U.S. but also Japanese regulators because of the nature of the branch structure. It is something that we're looking at now.
Yaron?
Thank you. Can you hear me? Yeah. Yaron Kinar with Deutsche Bank. Couple of questions on sales. First, in the U.S., 0%-5% growth target for this year. We heard a lot of new information on or additional color on the segmentation within the U.S. Could you maybe give us a little more color as to which of those three segments, kind of the zero to 100 employees, 100 to 1,000, and then over 1,000, where does most of that sales growth come from this coming year?
I'll do that. Let me also mention one other thing. Our director of sales is not here, I'm kind of taking these questions because he's been with us a very long time, and he's told us at the end of next year, he wants to retire. We're in the process of trying to find a person that will be his assistant for next year. Then will take on the role, because it's really a changing role because our director of sales, prior to really the changes that have taken place the last few years, was just concentrate on our field force, and that's it, and understand it.
Today, because of the elements that are involved with what we call core brokers, which is what I call the smaller town brokers that can write 100 to couple of thousand people in cities, counties, boards of education, and then the major brokers are the top 50 brokers. I just wanted to mention that because somebody might say, "Well, where is the person that's going to be doing it?" What we're trying to do now is set up who that person will be that'll work closely with Tom and then work closely with me and Teresa and others to do that.
One other point that I'll make about U.S. sales, and this is a kind of long answer, but I want to kind of incorporate it into everything, is Doug Johnson, our board member, our lead director, said to me, "If you can break down what are short-term things that you're doing and longer-term things that you're doing to try to turn sales around." Let me talk about that, and then I'll break it down. The quick answer to your question is that if we're up, like right now, our brokerage business and our large accounts are up significantly. The percentages don't tell you the story because it's up, Dan can tell you, 35 or some-
28%.
28%. If our small business or the under 50 is down two, it offsets it. You can't look at just percentages to get the number. I think that we are honed in on a real success pattern here with the 50 and larger accounts. There's not as much conflict. We've handled that with our agents. We have told our agents that we have what we call a no-call list, certain big accounts they can't call on. Do they like it? No. There's enormous channel conflict there. They don't like it. They do understand it. They never wrote them anyway. They always want to try to do it.
Going back to short term, what I've tried to do and work closely with Teresa and Ken, although Ken, long term, we're trying to get him back to Chief Financial Officer role, playing a heavier role of that with Kriss, as you can see today. I've told him, "Give me the top three things that you need fixed to increase sales." They said, "On a group basis, we need claims." We had averaged 8.8 days for claims. We now have it down to 3.1. It's fixed. Overall, we've always been below four, so that's not been a problem. On the group, so we have that fixed. The next thing they want on a short-term basis, some administrative issues, specifically processing. Almost everything deals with Aflac Group, the issues that they've had. Remember, why would Aflac Group apply to our field force?
We did what we called a wrap, where people couldn't steal our business on a group basis. Some of our medium-size accounts, by that I mean maybe 100 to 1,000 cities, counties, boards of educations, we put in a group product. Within their platform of how they normally sell an individual product, they also have a group product in there. If there's a slowdown in processing at the group level, it affects even their individual level. That's the reason they're complaining about that. My contention is I've heard all the damn complaining, and I won't, and I don't care about it. I'm not going to give you any excuses. We're not going to take any excuses from our field force. I'm knocking them down one excuse at a time to where they won't have anything to fall back on.
Those are the issues. We're working on this administrative issue. The other thing that we're doing is that we have the ability to direct deposit our claims. Literally, we're going to be able to handle claims in one day, literally same day. Send through the internet a bill to us. We'll pay it same day back to you on direct deposit. Enormous ability it's going to be for us. That will be done in July and August. We're basically finished. We've got that part. I expect sales Longer-term things. Another shorter-term thing is recruiting. We've got enormous recruiting going on, where we're running ads on TV. We're doing things along that nature. We're spending extra money there short-term. Longer-term is training the people. Longer-term, specifically for next year, will be this commission change. Remember, it starts with the second year commission.
It's renewals. It will affect our management structure, especially our district and our regional level, which are the lower levels that are training people. That's going to be very important. Now, if I tell you I'm going to give you $100, you like it, but when you have the $100 in your hand, you know it. They have not gotten the money in their hand because it doesn't start till next year when policies renew. As they've sold in January, come next January, they'll start getting the renewals. I think it'll have more impact then than it is now because they can't spend it or use it at this particular point. There's something that's mid-range, not this year, but next year. It's just going to be the new management, the new person we're bringing on, the structured organization.
A lot of the things that were done in previous years have worked. The difference is that with this market segmentation, it defines it and it's over, and they've got to work within these parameters. When people say to me, "Well, I thought the brand would help you more," my answer is, "The brand is the only reason the brokers are doing business with us," because they don't like the channel conflict. If they sell with other companies, they don't have channel conflicts because they don't have our group of agents. What we're looking for is ways to where our agents can help supplement them in re-enrollments and things of that nature that will ultimately enhance their production and productivity.
That will be done on a longer-term basis, only as they get comfortable with us, with that our agents are not trying to switch their business, that they can work together and they can make money that all of this will work. Long answer. Sorry.
I appreciate it.
All right.
If I could, one quick one to Kriss. If I look at your outlook and guidelines, I realize that it's not guidance, but at the end of the day, the placeholders that you're using for sales, both in Japan and in the U.S., seem incongruous with what we've just heard now or what we've heard through the rest of the day. I'm just curious, is that just you being very conservative here, or what's leading you to choose those numbers and not something a bit higher and more in line with what we've heard?
Well, I'll just say, I hope they're conservative. That's all I'm going to comment on.
Okay. Jay?
Thanks very much. Jay Gelb from Barclays. I was hoping we could hear more about the Japan Post opportunity. It seems that there may be just a bit slower of a ramp-up rate on that than we were thinking about three or six months ago. First, I want to hear about that. Second, what is the impact so far of the increase in the consumption tax rate in Japan? If that were to increase again, as anticipated, how much of an impact could that be?
Go on, Takuya.
Well, let me start from the JP. Well, since JP is almost like a public or almost like a government company, I think we need to go steadily towards ramping up. Right now, what we are doing is to have a very thorough training with them and for them. What we are expecting so far is that there will be a sound growth from here and on because the full-fledged activities will be implemented from this point on. In addition to that, we are planning to have a new exclusive product for them, and that is what we plan to do. Excuse me, one more. There will be an expansion or increasing the number of post offices adopting Aflac products.
In terms of the impact of the consumption tax, since consumption tax is not directly imposed onto the premiums, we do not believe that there will be an impact there. As in terms of the overall consumption tax impact onto the economy, people were concerned, and now that we have entered into May, the reaction of the increase in the consumption tax is not as severe as it had been expected because in March, there were last-minute sales and last-minute purchases by the consumers, and that would impact the slowing down of sales overall in Japan. However, that has not been the case right now.
Interpretation correction for one point about JP. The part of the expression about the explanation of Japan Post is that it's a government-owned company. Correction.
Eric-
I want to make one comment about working with the Japanese in general. They actually know more about the Post to some degree, but I've found in all of my dealings with going back to Dai-ichi Life, when they set objectives, they generally make the objective. Now, we normally deal with people at the corporate level, not at a government level that's a corporation. It can vary. I do believe they will come through with the numbers that they have told us. Now, they may not, I still believe they will. I'm going to get much more color on that tomorrow when I'm with them in Columbus, and then I will see them again within the next couple of weeks. I will have seen all the key executives in the entire operation over the next two weeks.
Just understand that they generally come through on what they promise you. They do not like to make projections and then miss them any more than anybody else, but especially the Japanese. I do feel that they can come through. We'll have to see.
Eric?
Thanks, Robin. Eric Berg from RBC Capital Markets. My question, I guess, is best directed to Kriss. Kriss, it seems that the growing size of the company, paired with the slowing sales both here and in Japan, has led over many years to a sharp decline in the growth of the in-force. My question is, if we think of the growth of the in-force as the key driver of the growth of premiums, and perhaps ultimately of revenues, when can we expect the growth of the in-force? Can we expect the growth of the in-force to return to the much higher level, I believe it was at one point double digits, that we saw in the past?
In Japan, it will take quite a while. You get the law of large numbers. You've got your renewal block being 92% of the total. Okay, if new sales grow premiums in-force only by if they're 8% of the total, a 10% increase in new sales translates to about a 1% increase in premiums in-force. You look at it, and that's just law of large numbers. Now, the impacts on profitability can come not only from new business, but also renewal business. It can come through investment yields. It can come through claims experience. It can come through expense management or other activities. It's not necessarily all driven by growth in premiums in-force. I think I mentioned earlier that actually we'll have some pressure on growth in premiums in-force when the limited pay products start to be paid up, and we don't have premium income from that.
I've explained to a number of people today and earlier that don't expect the drop-off in profits because the accounting model we've used basically recognizes profits more in proportion to policies in force than premium income, because we deferred some profit during the premium period to be recognized in the paid-up period. Turning to the U.S. business, where we've got about a 75% persistency rate, it's a lot easier to grow the U.S. business with new sales than it is to grow the Japanese business. To some extent the U.S. has the opportunity to be a growth leader if we can reinvigorate sales.
If I could just ask the exact same question, just a little bit differently. Do you ever envision a time in the next few years or ever, could you envision a time when the earnings, not the earnings per share, but when the earnings in the company would again grow at a high single digit or double-digit pace?
Yeah, I can envision that.
When?
Whenever investment yields improve and whenever claims continue to improve. Like I said, the earnings come from the whole block of in-force business, not just new sales. That's not the only driver.
Joanne? Joanne Smith, Scotia Capital. This question is for Eric. I'm looking at page 35 in the slide deck, the middle slide, where you're talking about the hedge ratio of the U.S. dollar investment at 62%. I'm wondering how you came up with that number. What's the optimal level of hedging on interest rate risk and currency risk, I guess? They're both relevant. How does that interplay work with the expected growth in the FSA earnings and future creation? I'm wondering if you hedged more, maybe you could repatriate more? That's what I'm trying to get to.
Okay. On the first part, it's a 2-part process in terms of how we got to 62% or 63%.
Primarily driven by, you'll recollect that historically we had what we called the Japan legacy dollar portfolio. Going into this year, we combined all the U.S. assets. That historical Japan legacy portfolio, by definition, was always unhedged. Going into this year, when we decided to combine all the U.S. dollar assets on behalf of Aflac Japan, after some analysis of where SMR was, our views about the yen, we decided to keep that stable, that ratio. That's how you get to 62%. In other words, even though we combined the assets, we decided to keep the old assets unhedged at this time. That's just how we got to step one. Prospectively, though, or what we do today is, based on our investment guidelines, our risk guidelines, we're always analyzing where our SMR is based on market conditions.
That does give us a little bit of flexibility, not a lot, but a little bit of flexibility to say, "Well, we'd like the ratio to be 60% or 70%." I don't think you'll ever see us go from 60 to 30 or 60 to 100 because we are comfortable with some of that currency exposure. It also hedges Aflac, the parent's equity in the branch to some extent. We will use that dynamic process going forward to decide how much of that currency risk are we willing to bear or do we want hedged. That's how we'll be doing it.
Should we think about the sensitivity of the SMR ratio to those changes in the same manner as was illustrated in Kriss's presentation?
In Kriss and Todd's-
Todd's presentation
Todd's presentation. That's right. That's where we collaborate together to understand all of those sensitivities as well as the correlations between those different risk factors to help us decide what level of currency exposure are we comfortable with.
Remember, too, with that sensitivity chart that we're hedging for SMR purposes and trying to protect ourselves against a much stronger yen-dollar relationship than we have now. If we saw a significant weakening in the yen, it actually would benefit the SMR to leave it exposed.
Okay.
Hi, thank you. Seth Weiss, Bank of America Merrill Lynch. This question's also for Eric. Eric, that illustration you gave us in terms of the $115 million gross benefit on the net investment income from the U.S. corporate bond buying program was very helpful. As I think about that, I suppose what I think is the greatest risk is going forward, and it's probably a couple of years going forward, as short-term rates eventually do rise, that the cost of the forwards will go up. You mentioned some zero cost collars that are designed to help protect that. Could you give us a sensitivity in terms of thinking about the costs of the forwards in the future, to what that may do to the cost structure of these hedges and ultimately on that $150 million base that we're starting from today in terms of excess investment income?
Sure. Realize that was a swag and an estimate because as I said in my speech, I estimated 1% for hedging and settlement costs. Since these programs started, we're paying 25 basis points or less. You are right. I certainly expect a time and then somewhere in the future where the short-term rate differentials will go up and the cost of the hedges will go up. That's why we've always said to ourselves, 1%, as just a thoughtful future process, should be a good number. That doesn't mean it's under 1% all the time. If it gets to 1.5%, we need to recognize we have a few years under our belt where it was well under 1%. We really need to look at the net earnings over time.
Having said that, when those costs do rise, and this gets a little bit to how I explained Joanne's question, we have a choice to hedge, to not hedge, use option contracts, we don't have to use just forwards. We could reduce the hedge ratio, maybe that will be to our benefit at the time, depending on where the yen is. As we've looked at it historically, and looked at various scenarios, we think we have enough tools to manage that. Even if forward costs should go up substantially to 3%, we might use more collars, or we might lower the hedge ratio to somewhat offset that. I can't give you a black or white answer other than it is dynamic, and we have the tools in place to manage that amongst a variety of risks that we're able to take.
It's also going to depend on what happens to the yield curve. If it flattens out, the economics change. If you see it steepen, you may be better off paying 150 basis points for that hedge and have a better return depending on where you're investing in the curve. What we're really looking at is the economics. Are we better off buying that dollar asset, paying the hedge cost than we would be for what most likely would be a JGB.
I would just add one other thing. In those environments, there could be a day when yen yields are higher than U.S. yields. We can't assume it's never the case. If that were the case and forward costs were going up, well, depending on our gains and losses, we might say, "Let's reallocate out of U.S. assets into more yen assets." There's a variety of tools that we have at our disposal, given the broadness of the balance sheet, asset allocation, cost, all of those factors, that I think we've got enough to mitigate that risk.
Thank you.
Erik Bass with Citigroup. I was just hoping that you could talk a little bit more about the growth opportunity for group in the U.S. I was interested in your comment that kind of your aspiration is to be number 1 in group voluntary products. What are Aflac's
Competitive advantages that would allow you to get there, and is there any disadvantage by not being able to bundle with life and disability or some of the other core products?
Well, I think our biggest advantage is pretty straightforward. It's the brand. Regardless of whether brokers are used to working with Aflac or large employer groups are or not, employees want Aflac. Every time that we are out selling with a broker, what they will always say to us is, "We would rather sell your product because we get asked the question all the time from the employees, 'Where is Aflac?' if we're offering something else." Our focus right now has really been on building relationships with those brokers. I talked about our plan to add 40 sales reps this year. We have about 20 people in place right now that are all producers, whether they are RVPs or BDEs or broker development executives, or whether they be group reps.
We plan to add another 20 on top of that to get to 40 by the end of the year. We have an active channel already in terms of group opportunities through brokers. Dan was talking about it earlier. When you look at this year thus far, Aflac Group is up by about 24%, but the biggest part of that is with brokers, by far. The large brokers, the ABS brokers that our sales force works with, is up about 28%. The core brokers is up about 51%. The problem is, as he said also, we're starting with a really small base. Using those percentages, you can't compare it at all to the large traditional base that we have.
We believe that as we build out this sales force, as we work with the brokers to build those relationships, and we're hiring people with good, strong relationships with those brokers, that it will build upon itself. We view 2014 as really a build-out year. We view 2015 as the beginning of growth, in the years after that as more significant growth.
All right. Is there an issue with not offering or at least in a major way, the group life and disability products, or the brokers really look at you as a single product?
It truly varies by broker. Some brokers do like to wrap it all together. We do have life and disability that we can sell. It is not our core product line. Our core product line obviously is the accident and the critical illness and the hospital indemnity. I find that probably about in 75% of the cases, brokers will pick and choose, if you will, the best of breed of products, so that you don't need to have all the best of all those products. In about 25% of the cases, they like to go simple and just do it all with one. We're looking to build out our product portfolio as well, strengthen our life products, strengthen our disability products, either internally or through partnerships with others.
Thanks.
Ryan.
Hi. Can you hear me? Thanks. Ryan Krueger with KBW. A follow-up for Kriss. To the extent that you are successful using reinsurance or other options to reduce that JPY 67 billion annual reserve strain in FSA, should we expect you to then repatriate that additional capital to the U.S.?
I think it'd be reasonable to assume we would seriously consider repatriating at least a portion of that.
Okay. Last year, you gave a few years of guidance saying with the expectation that Japan FSA income would be, I think it was about 55% of your GAAP income in Japan. Has that expectation changed at all as we've rolled forward a year?
Well, it is going to be a function of what happens with the reinsurance activity. If you look at it for 2013 on a calendar year basis, comparable periods, FSA is going to be a much higher % of GAAP than it was in the prior year due to the reinsurance. To the extent we use reinsurance in the future, the GAAP will be narrowed because there is no impact on GAAP earnings from this type of reinsurance. Well, except for sort of the cash differences. There is no major reserve relief on a GAAP basis, you do have the cost effect, the cost impact of the reinsurance, which was a few cents a share.
Al.
Thank you. I think it was Paul that mentioned that there is a large synergy opportunity between the U.S. and Japan. I do not think I have heard that discussed before. I would love to hear more about it.
I would be glad to. If you think about the history of Aflac Japan and the history of Aflac Columbus, they are very different. We started with the large corporate agencies in Japan, which really represents much of what Dan is talking about today with the large brokerage model. In the United States, we started with individual agents who were selling to individuals and the smallest businesses and began working their way up. Over time, the approach to the marketplace has begun to collide. Additionally, obviously, we have sold all 40 years in a government-regulated, government-insured environment in Japan. Now through ACA, we are seeing the U.S. head toward a national system of healthcare, which begins to bring them closer together. There are sharings between the two operations that are happening now in a very different way. You see Dan show the commercials today.
Obviously, for a few years, the two brands were not unified by not having the duck. When we brought the duck on board, we brought the duck in a very different way. We're collaborating from a marketing perspective on how we're approaching our customer, the utilization of leads, what channels are most effective for actually approaching a customer outside of the difference between the Japanese consumer and the American consumer. We do find there are a lot of different ways. Sometimes it's not a direct correlation, but sometimes it is. That collaboration is something that, having had experience now on both sides, that I feel like I'm trying to help bring to the table, and utilizing resources from Aflac Japan to help Aflac US as well as the reciprocal.
Thanks.
Okay. Oh, well. Anybody else that has not had a question? Oh, Graham.
Thank you, Carrie. Thank you. This is sort of a demographic question. With the massive aging of the population in Japan, will we be swimming upstream, or is the tide working in our favor in terms of if you age band the cohorts of buyers, new buyers or existing holders of policies? Thanks.
Do you want to answer that from an actuarial standpoint, or what do you want us to-
I think it is a sales question.
Yeah.
I will start with the answer, and maybe the Japan team would want to kick in. On the medical product, the new medical product we introduced, and Graham, stop me if I am not on the right track with your question, but we felt like we were losing some market share in the demographic range of age 20 to 40, and we felt like it was important to try to re-exert our influence in that age range because of not only current purchases of medical, but the policyholder relationships where we could sell cancer in the future when they got to their 40s to 50s and that kind of thing. The demographics in general, people still have the opinion that the national healthcare system in Japan is less of a help today, or I think one of our slides said it is either adequate or inadequate, and it is about 50/50.
A little more on the inadequate side. The older people that are under the national healthcare system still need certain types of insurance, and we do sell more in the older age market in Japan than we do in the U.S. Perhaps, I do not know, Toru or anybody on the Japan side.
I will pass it off to Ariyoshi-san in just one second. The other comment I would make is, if you think about the commentary about the long-term economic viability of the Japanese model, you ultimately have already realized that with the third arrow of structural reform, you are unlikely to see the co-pays and deductibles or co-pays go down. In fact, you are beginning to already see some loosening of the co-pays, as in the older ages 70 to 74 that I mentioned earlier. The likelihood that the younger generations will be able to keep the co-pay at the current level is highly unlikely, especially if they are going to continue to pay down debt at any significant level, even with 2% or greater inflation.
While we cannot quantify when that will happen, we do believe there's a potential for that to happen, meaning that the larger amount of money that an individual is going to be responsible for in terms of their medical care, meaning the reality of the size of the policies that we could sell is potentially larger. While there'll be a smaller population base, the potential for sales per policyholder will be higher, and that we think that somewhat offsets the countervailing wind of the population decline.
Yeah. In addition to that, I'd like to add one factor that I think helps us. Paul is right, that it is widely believed that the level of the co-payment will increase over time, although we don't know when it would happen. In addition to that, the people are becoming less and less confident about the viability or the sureness of their protection they get from the national health program or national pension program. Particularly the younger people who have the longer future than the elderly people are more concerned about that. Even though they have no problem today, they are more concerned about the future. They tend to buy more insurance than the people who have less concern. That would help us a little bit to some extent.
John has one more quick question.
It's just one more, evidently. On the cancer side in Japan, you guys talk about still being number one. That number one position has been slowly declining. You're number one in sales, but your percentage of market share there is 15 or 20 points below your overall in-force market share. That in-force market share is going to continue to decline. My question is this, you've got exceptional distribution now being supplemented even more by the rollout of the postal opportunity here. Have you studied or have you at least looked at, and I realize this is a slippery slope, but have you ever looked at, can we price a little bit more cheaply, regain our more dominant portion of market share of new sales, and grow our business faster than we otherwise have been growing it in a product that is, your words, "Our bread and butter?
Well, I will answer this part of it is that I believe part of it is due to the strong success of the EVER products. If you go back to when you see the drop-off, we didn't sell anything but basically cancer and a rider to medical. Now they buy the medical product a lot of times, especially the younger people, and then later on, we can go back and sell them cancer. It is consumer-driven that that's what they want to buy more than anything. I think it's our success on the medical side that's brought it down to some degree.
Dan, isn't it true that actually the number of policies increased, but the price per policy-
Yeah. That-
was cheaper?
Yeah. We did, in fact, bring on a lower price product, the number of policies were actually growing. The premium per policy, because there's no basic cash value in there anymore, is the difference.
Okay. Thank you.
Good point, Robin.
Thank you. Okay. I think that wraps it up, which means now it's, good news, time for lunch. We're serving it just next door to the right. Before you go, I want to mention just that we're having the Mini FAB in Japan, September the 16th. If anybody's interested, please go on the website. I've been contacted by other companies that are going to be participating, I think there'll be a full week of companies participating over there, it should be nice. We appreciate everything. If you want to follow up next week with us, we'll be in the office and be glad to take your call. Thank you so much for attending.