Good morning and ohayou gozaimasu. I'm Robin Wilkey, Senior Vice President in charge of Investor and Rating Agency Relations. I hope each of you had safe travels here. I want to welcome you all today to the 2014 Tokyo Analyst Briefing. I hope you'll receive a lot of information today. I'd like to introduce for you today our emcee from Aflac Japan, Masato Kurose-san. Kurose-san is Head of Corporate Communications here. With that, I'm going to turn things over to him. Kurose-san?
Thank you, Robin. Good morning and ohayou gozaimasu. We are pleased that so many of you can join today. Before we start our presentations, I would like to cover a couple of things. If you need assistance, please let any of the Aflac staff members know. We are providing translation services all day today. Please use the earpiece in front of you and tune in to channel one for Japanese, channel two for English. Also, Wi-Fi service is available in this room and on the 27th floor. To get a connection, once you've clicked on the icon for wireless network connection, select Hyatt, and for the security key of Hyatt 2014. These instructions are also noted on the second page of the schedule in front of you. You'll find copies of the slides at your seat so that you can follow along the presentation and make notes on them.
Today, there will be two main Q&A sessions, one following the morning presentations, mainly geared to the morning speakers, and a Q&A session following the afternoon presentations. I'm sure you will probably have a lot of questions, but please hold them until the respective Q&A sessions. If you're not able to get your questions in the morning session, you will have an opportunity to ask again during the afternoon session. There's one exception, and that is questions for Mr. Miura at Yamagata Bank. He will only be available for questions during the morning Q&A. As you can see on today's agenda, during the morning session, we are focusing primarily on international public policy and regulatory development, the Japan macro environment, an overview of Aflac Japan, and Aflac Japan marketing and sales.
In the morning session, as I mentioned, we are very glad to have an external guest speaker, Mr. Shinichiro Miura, Senior Managing Director of Yamagata Bank, who will give us a presentation on bank sales. Following the morning Q&A session, we will move to the 27th floor to have lunch, during which a special guest speaker will present. In the afternoon session, we will cover Aflac Japan investments and financials, as well as capital position and capital management. Before we begin today's program, let me remind you that some statements you will 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 we discuss today.
Please look at our latest 10-Q filing for some of the various risk factors that could materially impact our results. Also remember, this presentation is being webcast. Please turn your cell phones and other electronic devices off or place them on silent mode. Now we will begin this morning's program with opening remarks from Paul Amos, President of Aflac. Paul moved from Aflac U.S. Sales Force to Aflac 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 Global Investments. Now, would you start off today with a few words, Paul?
[Foreign language] Good morning. Thank you for many of you who traveled halfway around the world to be here with us in Tokyo. We're excited you're taking part in our 2014 Financial Analyst Briefing. We've come a long way since 1974, when we at Aflac Japan were first licensed to sell business in Japan. In fact, in November, we'll be celebrating our 50th anniversary, a milestone that we're extremely proud of, one we believe has contributed, helped us overall in our long-term dedication to the Japan consumer and to our policyholders. By focusing on our policyholders and preparing them for whatever life may bring, it is a true promise that gives them peace of mind about their future.
We, as a company here in Japan, know that by focusing on our policyholders and steadfastly working for them each and every day, that we can, in turn, add value to all of our stakeholders, including company, analysts, shareholders, policyholders, everyone. Over the years, the market has changed dynamically. We have seen different things change in an economic, regulatory, and governmental perspective. Each of those things has been something that has challenged Aflac in its ability to grow and its ability to perform better. Those challenges have come in different ways. Aflac has reacted in different ways. We started in 1974 as a company selling a single product through a single channel, cancer insurance through corporate agencies. Over time, we have evolved.
From a channel perspective, we've evolved in many different ways, bringing on Dai-ichi Life as a key partner, selling through individual associates, opening up the bank channel. Most recently, a large expansion with our Japan Post network. Each of those has benefited Aflac's ability to touch the Japanese consumer and reach different profiles for different people all along the way. From a product perspective, we've expanded well beyond cancer into medical and into life insurance. Being our 50th anniversary, we've decided we will go back to our roots. As you saw on August 20th, Aflac Japan has announced that we will be launching our newest Cancer Plant, Cancer Days, at the end of this month.
That is an exciting opportunity for us at Aflac Japan, as not only will we be providing additional benefits, including outpatient treatments as well as multiple cancer occurrence benefits, but we also will be providing lower premiums across all agents. Additionally, we'll be providing an exclusive product for Japan Post and Japan Post Insurance, which will steadily grow our long-term relationship and our policies through Japan Post. That is something that we want to make sure we incrementally and long-term grow, as not only a partnership but as premium. The third place that I think we have truly benefited here in Japan and continue to evolve is one of diversity. Diversity has always been a major push for Aflac globally, but it's also been a push here in Japan.
We were the first life insurance company to promote a female to officer, and we continue to focus on promoting women and their activities within this country. Prime Minister Abe has come out and said this is a key component, as he called "Womenomics," in focusing on helping his third arrow in structural reform strategy. Ultimately, we at Aflac support that, and we're going to be putting in an enhanced program that will allow for the women within Aflac to continue to grow, to assume leadership positions, and ultimately help us. The evolution that has happened from a channel perspective, the evolution that has happened from a product perspective and from a people perspective, have all put forth Aflac Japan to be the company that we'll present to you today.
Since I've moved here earlier this year, I can tell you that I believe there are tremendous synergies, not only within Aflac Japan, but what can also be brought between Aflac Japan and Aflac U.S. Over the coming months and coming years, I want to work with our teams to continue to capitalize on those synergies and make them into reality. I'm very excited about you being here today, and I want you to know that Aflac Japan is truly committed to accelerating our growth and to great success. Thank you.
Thank you, Paul. The second speaker is Charles Lake, President of Aflac International and Chairman of Aflac Japan. Charles joined Aflac International and Aflac Japan in 1999, and from 2003 to 2005, he was the President of Aflac Japan, and since 2008, he has been Chairman of Aflac Japan. He will be speaking on international public policy and regulatory developments and the Japan macro environment.
Good morning. The purpose of this presentation is to provide an overview of the international financial regulatory trends affecting the insurance sector in Japan and the United States, and to provide an update on Japan's macroeconomic, political, and public policy environment. I will also provide an update on Aflac's ongoing strategic partnership with Japan Post Holdings. In the wake of the global financial crisis, countries have been working in international settings to develop financial standards with the aim of strengthening the global financial system and ensuring financial stability. Led by the G20 and the Financial Stability Board, or FSB, work is underway to develop a policy framework to address, as the FSB describes it, the systemic and moral hazard risks associated with systemically important financial institutions, or SIFIs, and in particular, global SIFIs.
Both the United States and Japan have been working to make sure their respective domestic financial regulations are in line with current international standards and to play a constructive role in the development of the global financial regulatory regime. The International Association of Insurance Supervisors, or IAIS, is tasked with setting, implementing, and assessing international standards in the insurance industry and promoting coordination among supervisors. In the context of a rapidly changing global financial regulatory regime, the IAIS is currently developing a set of policy measures to apply to designated Global Systemically Important Insurers or G-SIIs. It is also in the process of completing a common framework for the supervision of internationally active insurance groups or ComFrame, as it is known. IAIS has also announced a plan to develop a risk-based global insurance capital standard.
These developments require close coordination between companies, regulators, and standard-setting bodies such as the IAIS and FSB, and I'll discuss each of these items in turn. In the context of the lessons learned from the global financial crisis, the FSB and IAIS have taken coordinated action to address systemic risk in the insurance sector. In July 2013, for example, the FSB, in consultation with the IAIS, coordinated years of work with the designation of 9 insurance companies as G-SIIs. These are companies the IAIS describes as those who, quote, "Distress or disorderly failure because of their size, complexity, and interconnectedness would cause systemic disruption to the global financial system and economic activity," end quote. The IAIS has published key policy measures consistent with the FSB policy framework endorsed by the G20 for applications of G-SIIs to address global systemic risks.
Primary criteria for G-SII designation includes size, global activity, interconnectedness, nontraditional and non-insurance activities, and substitutability. Of the FSB's 9 G-SII designations, three are U.S. companies. The IAIS is developing core policy measures that will be applied to G-SIIs to ensure more intensive and coordinated supervision across jurisdictions, among other things, and include enhanced group-wide supervision, basic capital requirement, or BCR, interim measures serving as an initial basis for higher loss absorbency or HLA capabilities, in other words, the requirement to hold higher capital, and recovery and resolution plans or living wills. Although Aflac does not meet the criteria for G-SII designation, the ongoing discussions at the IAIS highlight important regulatory trends in the industry, and it is for this reason that Aflac is watching these developments closely.
As another example of FSB and IAIS coordination, the FSB has directed IAIS to build a work plan to develop a quantitative capital standard under the Common Framework for the Supervision of Internationally Active Insurance Groups, or again, in short, ComFrame. ComFrame is built and expands upon the high-level requirements and guidance currently set out in the IAIS Insurance Core Principles, or ICPs, and is a framework for supervisors to efficiently and effectively cooperate and coordinate. The ICPs are the globally accepted requirements for the supervision of the insurance sector and are used by regulators and standard-setting bodies, such as the International Monetary Fund, or IMF, to EVERluate entire insurance regulatory systems. ComFrame is being developed to provide Internationally Active Insurance Groups, or IAIGs, with more tailored, coordinated supervision across jurisdictions due to their complexity and international activity.
The IAIS has also committed to develop risk-based Global Insurance Capital, or ICS, for IAIGs intended to provide, among other things, an objective group-wide measure of capital adequacy for IAIGs that is comparable across jurisdictions. As depicted on this slide, the IAIS has identified two primary criteria necessary for Internationally Active Insurance Group designation. The first criterion is international activity. In other words, where premiums are written in three or more jurisdictions, and the percentage of gross premiums written outside the home jurisdiction is at least 10% of the group's total gross written premium. The second criterion is size based on rolling three-year average, namely that total assets are at least $50 billion or gross written premiums are at least $10 billion.
Aflac operates in just two countries, the U.S. and Japan. It does not meet the proposed criteria for an Internationally Active Insurance Group. This slide depicts in part the speed at which the global insurance capital standards is evolving. It is important to note that according to the IAIS, development of the BCR is the first step of a long-term project to develop risk-based group-wide global insurance capital standards. The second step is the development of HLA requirements to apply to G-SIIs due to be completed by the end of 2015. The final step is the development of a risk-based group-wide global ICS due to be completed by the end of 2016 and applied to IAIGs from 2019. In the international financial regulatory arena, there is an increasing emphasis on the need to foster cooperation and enhance coordination between supervisors.
This has led to an increased focus on the effectiveness of supervisory colleges, which are defined under IAIS Insurance Core Principles and viewed as best practices in global regulation. Aflac has welcomed this trend and has participated in its first supervisory college in September 2013. The Nebraska Department of Insurance chaired the first meeting of the Aflac Supervisory College, which included the attendance of Japan's Financial Services Agency. Perhaps unique among U.S. companies with significant operations in Japan, executive management from U.S. headquarters in Japan also participated and cooperated closely with both regulators. Since the launch of Aflac Supervisory College, the company has welcomed the opportunity to engage in discussions to enhance our regulators' understanding of Aflac's global governance and risk management. The next Aflac Supervisory College will take place this month in Tokyo, and we expect the Supervisory College to take place annually.
To wrap up this section of my presentation, let me say that although Aflac does not meet the G-SII or the IAIG criteria, the company has actively embraced the best practices amount coming out of ongoing global financial regulatory debate. Aflac is taking proactive steps to enhance our regulators' understanding of the company. My appointment as Aflac International President, with the responsibility for development and implementation of strategies to address initiatives in international affairs, is one indication of Aflac's commitment in this area. Next, I will discuss Japan's macroeconomic, political, and public policy environment. Since regaining power in 2012, Japan's ruling Liberal Democratic Party, or LDP, has skillfully executed policies on what matters most to Japan's voters, revitalizing the economy. Implementing Prime Minister Shinzo Abe's three arrow economic strategy, known as Abenomics, has been a top priority.
The administration continues to make strides to deliver on the three arrows, specifically bold monetary policy, flexible fiscal policy, and growth strategy. I'll address each arrow in turn. The first arrow, bold monetary policy, has entailed an open-ended policy of monetary easing by the Bank of Japan to overcome Japan's persistent deflation and achieve economic growth. Since January 2013, meaningful policy coordination between the government and Bank of Japan resulted in the central bank changing its inflation benchmark from 1% to a real target of 2%. To achieve this goal, Bank of Japan Governor Haruhiko Kuroda embarked on a policy of quantitative and qualitative easing. Under this policy, the bank changed its monetary policy framework to focus on boosting the monetary base, cash in circulation plus banks' deposits with the Bank of Japan.
As a result, the inflation rate, as measured by Japan's Consumer Price Index, or CPI, has consistently remained above 1% since November 13, 2013, including fresh food prices. The CPI has remained in positive territory since October 2013, even after excluding further the effects of energy prices. The second arrow, flexible fiscal policy, includes fiscal measures to end deflation and achieve fiscal consolidation. Recognizing that robust economic growth is essential for Japan to manage its national debt while maintaining the country's Social Security system, Prime Minister Abe's stated goal is to strike a right balance between fiscal consolidation and enhancing growth. For that reason, the second arrow consists of two stimulus packages, a JPY 10 trillion package for emergency measures issued in January 2013, and a JPY 5.5 trillion package to counter the impact of the April 2014 consumption tax hike. This second stimulus package was announced in December 2013.
In addition, the Prime Minister has set a fiscal consolidation target that includes reducing by half the government deficit as a percentage of GDP by fiscal 2015, excluding debt servicing costs and achieving a surplus by fiscal 2020. The January 2013 measure included tax breaks on capital investment and investment in public works projects related to the Olympics, among others. In contrast with the previous year's stimulus, however, this package did not require the government to issue new debt, as the measures are funded by tax revenues that exceeded earlier government projections and unspent funds from other accounts, among other sources. The measures also included scrapping one year ahead of schedule a corporate surtax that'll be to fund post-disaster reconstruction. The third arrow growth strategy, released last year in June 2013, has already started to produce tangible results.
In December 2013, six national strategic special zones were selected, including Greater Tokyo and areas of Kansai region, as designated areas where regulation will be eased to attract global investment and facilitate innovation. Additionally, during the most recent Diet session to realize an economic virtuous circle, approximately 30 bills related to the economic growth strategy passed, including bills, legislations aimed at liberalizing the electricity retail market, developing corporate governance reform, and establishing Japanese versions of the U.S. National Institutes of Health. To build on the initial growth strategy, a revised package was adopted by the government earlier this year in June, which I will talk more about later in the presentation. As you can see from the graph, since December 2012, the Nikkei Stock Average has recovered to and remained at levels seen prior to the global financial crisis.
Although there have been some market fluctuations over the past months, due possibly to uncertainty in the Middle East and Ukraine, consumer sentiment have remained resilient. This demonstrates that both the market and consumers on the ground here in Japan have welcomed the Abenomics strategy to revitalize the Japanese economy and achieve sustainable economic growth. As you can see from this slide, the Abe cabinet has maintained high public support since the LDP regained power in 2012. This high support rate is widely seen to be linked with Prime Minister Abe's commitment to economic reform. Furthermore, surveys taken immediately following the recent September 3rd cabinet reshuffle indicate public support for the Abe cabinet rebounding above 60%. When compared to former Prime Minister Junichiro Koizumi, one of the most popular leaders Japan has had in recent years, it is evident that the Abe cabinet enjoys historically high and stable public support.
This is an impressive feat considering that Prime Minister Abe has had to make a number of difficult political decisions on reform. For instance, Japan's interest in joining the negotiations of the Trans-Pacific Partnership Agreement was formally announced immediately before the critical upper house July 2013 elections, which the LDP later went on to decisively win. Another example is the Prime Minister's October 2013 decision to go ahead with the consumption tax hike from 5% to 8% beginning in April 2014. Given that all previous prime ministers who have raised the consumption tax have been forced to resign soon after taking that action, pundits speculated that Prime Minister Abe would postpone the decision to raise taxes. On June 24th, 2014, Prime Minister Abe unveiled a revised comprehensive growth strategy that put forward economic reforms in areas ranging from corporate governance and labor to agriculture, Womenomics, and healthcare.
Building on the growth strategy released in 2013, the revised package aimed to break through bedrock regulation, boost productivity, and enhance investor confidence, all of which are critical for achieving sustained economic growth in Japan. Overall, this gives cause for optimism, and I would like to discuss four key initiatives that will help boost investment in Japan. Prime Minister Abe has long pledged to make Japan among the most business-friendly places in the world and seeks to double the amount of FDI into Japan to JPY 35 trillion by 2020. To this end, the Prime Minister has established new deliberative bodies, including the Conference on Promoting Direct Investment into Japan. I'm one of the seven private sector members that serve on this conference, which also includes the Minister of Economy, Minister of Trade and Industry, Minister of Foreign Affairs, and Minister of Regulatory Reform.
The government has also taken key steps to bolster corporate governance in Japan. In May 2014, for example, the Japanese government finalized a stewardship code establishing principles for institutional investors to fulfill their fiduciary responsibilities and promote sustainable growth in investee companies. A list of institutional investors who have announced acceptance of the code is published and updated every three months by Japan's Financial Services Agency or FSA. Additionally, the FSA and the Tokyo Stock Exchange, or TSE, are currently working on a new corporate governance code, which will, among other things, require the appointment of outside corporate directors. The aim is to bring oversight of listed companies in line with international standards, such as those set forth by the Organisation of Economic Co-operation and Development or OECD. Listed companies will be asked to follow the comply or explain principle.
Both of these measures create incentives for enhanced corporate performance through improved corporate governance by binding companies to better standards of governance and disclosure, as well as facilitating increased dialogue between corporate management and institutional investors. To further increase investor confidence in the Japanese stock market and the value of Japanese companies, the JPX-Nikkei Index 400 was jointly launched by the TSE and Nikkei, Inc. in January of this year. The index showcases the most profitable shareholder-friendly companies based on return on equity or ROE, governance, size, and liquidity. With greater emphasis on ROE and governance, the JPX-Nikkei Index 400 has been designed to encourage profitable, well-governed companies. This is significant in the Japan context because the JPX-Nikkei Index 400 stands out from the Nikkei 225 stock exchange or the Tokyo Stock Price Index, or TOPIX, that include a higher percentage of traditionally run companies.
The JPX-Nikkei Index 400 has demonstrated that it holds even the most esteemed brands to its eligibility requirements. Japan's Government Pension Investment Fund, or GPIF, the world's largest pension fund at around JPY 126.6 trillion, has added the JPX-Nikkei Index 400 among its benchmarks for domestic stock. The fund is preparing to revise its policy asset mix to a new, more aggressive approach towards expanding Japan equity holdings. Given this shift in policy, government policy, and risk-taking, the fund will be under added pressure to deliver higher returns to cover pension payments for an aging population. As of the end of June 2014, the GPIF's portfolio has an approximate allocation of 53% to Japanese government bonds, 17% to domestic equities, 11% to foreign bonds, 16% for foreign equities, and 2% to short-term assets.
The revised growth strategy also outlines plans to strengthen the fund's governance structure by hiring professional fund managers and adopting the stewardship code. When considered in their entirety, these initiatives, the four initiatives that I discussed, demonstrate the sophistication and growing momentum behind Abenomics. It is clear that Prime Minister Abe is committed to achieving sustained economic growth by putting in place measures required to create investment returns needed to meet the challenges in the years ahead, including ensuring the sustainability of Social Security programs. The revised growth strategy, with its potential to boost competitiveness and entrepreneurism of Japanese companies, has evoked optimism in Japan in a sense that Japan's economy is headed in the right direction.
A major impetus for Abenomics is the need to secure sustainable economic growth as Japan faces a declining birth rate and aging population, which are among the most difficult challenges that Japan faces on the path to sustained growth and prosperity. As these trends progress, Japan's publicly funded Social Security programs will continue to come under ever-increasing financial pressure. In response, alongside measures to secure growth, the Japanese government is currently moving forward with a comprehensive overhaul of the Social Security system. This overhaul is based on the August 2013 report of the National Council on Social Security System Reform, an advisory body set up to discuss Social Security reform following a June 2012 agreement between the LDP, New Komeito, and DPJ, Democratic Party of Japan, to adopt an integrated approach to Social Security and tax reform.
In December 2013, the Diet passed a law that creates a Social Security System Reform Promotion Headquarters consisting of related cabinet officials. The law lays out a timeframe, timetable for the government to discuss and implement the reform measures suggested in the National Council's report. The Promotion Headquarters met for the first time in February 2014 and has already moved forward with discussions on issues, including raising out-of-pocket healthcare rates for elderly ages 70 to 74, who fall under the income threshold from 10% to 20%. This measure took effect in April 2014 and will be phased in over the five years. Measures such as this, such as the one above mentioned, that I just mentioned, increased healthcare costs do not require changes to the law. To address reforms that do, Promotion Headquarters is considering submission of a bill to the 2015 ordinary Diet session.
The integrated reform program also includes a 2-stage increase of the consumption tax as one of the primary funding mechanisms. The 1st stage, raising the consumption tax from 5% to 8%, took place on April 1st, 2014, and was accompanied by a ¥5.5 trillion stimulus package to offset the potential negative economic impact, as mentioned earlier. The 2nd-stage hike to 10% is scheduled to take effect on October 2015. The legislation contains an escape clause allowing a delay in implementation if macroeconomic conditions are not conducive to a further consumption tax increase. To make this determination, officials will watch economic indicators for July to September 2014, with the final decision to be announced by Prime Minister Abe in December 2014. Japan's financial system has changed dramatically during the past two decades.
The old Ministry of Finance emphasized maximum control, industry protection, and the use of informal administrative guidance based on its convoy system philosophy. The FSA replaced this philosophy with a rules-based regulatory approach, which relies on transparency and the notion of self-responsibility by financial institutions. In recent years, the FSA has taken further steps to achieve the best mix of principles and rules-based regulations, calling this the Better Regulation Initiative. Along with the Better Regulation Initiative, the FSA maintains a proactive approach and continues its role in helping to maintain financial system stability, improve consumer protection and convenience, and establish fair, transparent, and vibrant markets. In light of the lessons learned from the global financial crisis, while the FSA has maintained its Better Regulation Initiative, it has become more proactive, especially in enterprise risk management.
The FSA has been paying particularly close attention to such issues as investment risk management, protection of personal information, claims payment, and management of customer complaints. This trend is expected to continue under the new leadership recently appointed in July who have extensive international experience and are leading efforts to more actively adopt global best practices in FSA supervision, policies, and practices. For example, the FSA has begun implementing reform of its traditional inspection process, introducing a new financial monitoring framework starting in the 2013 program year, which is July 2013 to June 2014. Under the new framework, the FSA has combined off-site monitoring and on-site inspection related activities and is now conducting what's called horizontal reviews to actively supervise multiple companies simultaneously within an industry. In a manner that combines on-site and off-site monitoring, the FSA is placing a greater emphasis on best practices in the insurance industry.
The last topic I would like to discuss is Aflac's strategic partnership with Japan Post Holdings, which was announced on July 26th, 2013, and further expanded the partnership originally established in 2008. Aflac Japan and Japan Post have made significant progress in the past year, deepening our cooperation and gradually improving convenience for customers in all parts of Japan. As you can see from this slide, our agreement consists of three parts. First, through the alliance, Japan Post will continue to gradually expand the number of post offices that offer Aflac's cancer products, steadily increasing from the current 3,000 to 20,000. Second, Japan Post Insurance, or Kampo, began selling Aflac cancer insurance products at the end of July through their 79 sales offices. Third, Aflac has developed a unique Aflac-branded cancer product to be sold exclusively through Japan Post and Kampo beginning October 1st.
This afternoon, you will hear from the Japan Post Holdings President and Chief Executive Officer, Taizo Nishimuro. He will share Japan Post's perspective on how our strategic partnership fits into Japan Post's overall strategy to enhance its corporate value. In addition, Mr. Nishimuro will also make a special announcement. In closing, Aflac continues to closely interact with our public policy stakeholders in Japan, the U.S., and globally to anticipate change and advocate for constructive solutions. To this end, Aflac is well-positioned to take advantage of the opportunities presented in the marketplace based on its strategic understanding of developments in the public policy and regulatory arena. Thank you very much.
Our third speaker is Tohru Tonoike , President and Chief Operating Officer of Aflac Japan. He's a former Aflac Incorporated board member who joined our management team in 2007 and has been President of Aflac Japan since 2008. He is going to give an overview of Aflac Japan.
Good morning. I'd like to welcome you and thank you for being here. On November 15th, Aflac Japan will celebrate its 40th anniversary, and I'm delighted to hold this financial analyst briefing in Tokyo during such a commemorative year. In 1974, Aflac Japan was founded with the launch of a single product, Japan's first cancer insurance. As a pioneer of supplemental cancer insurance, we were the first company to sell an insurance product designed specifically to help with the costs associated with cancer. Cancer was, and continues to be, the most expensive illness to treat, which is a factor that has contributed to the explosive reception of our founding product. Since 1981, cancer has been the leading cause of death in Japan. Following our introduction of a stand-alone medical policy, Aflac has continued to be the innovator of relEVERnt insurance products and services that provide benefits for the living.
In 1974, our operations in Japan began with just 15 employees. Today, Aflac Japan has more than four thousand employees. Total assets are in excess of JPY 10 trillion, which puts us at number 7 in the industry. Aflac Japan's number of policies in force has been steadily increasing over the past 40 years. We established a solid position as Japan's number 1 life insurance company in terms of the number of individual policies in force in 2003 and have remained number 1 since then, with nearly 23 million policies currently in force. Aflac Japan's growth has been accomplished through the execution of strategies that are in harmony with Japan's insurance market. In addition to attractive relEVERnt products, we have created unique branding strategies, developed diverse and strong sales channels, and championed a customer-first approach to doing business.
In talking about Aflac Japan's growth, I'd like to go over the transition of sales channels as well. As you may know, for a while after being founded, we successfully put our business on track by selling cancer insurance products mainly to employees of large companies and associated groups at their work site. Sales activities were mainly handled by affiliated corporate agencies, which were subsidiaries of large companies. As you can tell from the slide on the right, the affiliated corporate agencies played a central role in terms of our business for a while after being founded. They accounted for nearly 60% of the new policy shares in 1993, despite a little over 20 years passing since being founded. From the late 1990s, however, customers began to shop more for insurance policies outside of their workplace. They wanted the opportunity to compare and choose from multiple insurance products.
In response, Aflac Japan proactively started the development of independent and individual agencies and trained agencies in order to conduct more consultative type sales, and also started directing efforts towards building relationships with non-exclusive agencies. From the year 2000 and on, the expansion and the diversification of sales channels accelerated through strategic alliances. In 2001, an alliance was concluded with Dai-ichi Life Insurance for cancer insurance sales. In the middle of the slide on the right is the share from 2003, and in it, independent agencies and individual agencies account for more than half of all shares, while the share of the affiliate agencies dropped to approximately one-third. Following the lifting of the ban on first sector products being sold at banks, we forged alliances with a large number of banks. In addition, in 2008, we also initiated our business alliance with the Japan Post Group.
The slide on the left shows how, excuse me, as we have expanded, our distribution channels have helped us grow our overall production. Additionally, you can see from the slide on the right that the 2013 share of sales results of the 3 agency categories: affiliated corporate agencies, independent or individual agencies, and other channels, was more evenly distributed. The rock-solid sales structure of Aflac Japan was established by adapting to a wide range of customer and third-party demands, as well as changes to the external business environment. A diverse sales channel and a rich product lineup both made major contributions to the growth and success of Aflac Japan. Now, I would like to provide an overview of Japan's life insurance market. This slide describes the trends of all life insurance companies in Japan in terms of the number of policies in force.
The red bar represents the first sector, and the green bar represents the third sector. As you can see, despite an aging population and declining birthrate, Japan's life insurance market is expanding. As of March 2014, the total number of policies in force of all life insurance companies was 143.9 million. Compared to the end of March 2013, this reflects an increase of 3.2 million first sector policies and 4.7 million third sector policies. We believe the increase in in-force policies for the industry reflects growing consumer demand, particularly for third sector products, as consumers see value at risk as living their assets. Over the past few years, we have seen a preference among consumers for living benefit products such as medical and cancer, rather than death benefit coverage. While companies are expanding their product offerings, they are also enhancing their efforts to maintain the policies in force.
This slide shows trends in new sales of first sector policies and third sector policies for all life insurance companies in Japan. From 2008 through 2012, you can see that sales rose sequentially. In 2013, however, total new policy sales decreased due to a decline in first sector sales. I believe this suggests there continues to be a need for both first sector and third sector products in Japan. Now, I would like to comment on the percentage of third sector sales you see at the bottom of the graph. The percentage of third sector policies to total policy sales significantly declined from 2006 to 2008. This is due to the inclusion of new sales from Japan Post Insurance, or Kampo, into the life insurance statistics beginning October 2007. As a result, total first sector sales increased significantly for the industry.
As you can see, since 2008, third sector products have maintained a stable portion of total new industry sales at around 40%. This slide shows the new products of our competitors that focus primarily on the third sector. ORIX Life and MetLife, along with life subsidiaries of non-life insurers such as Sompo Japan, Nipponkoa, Himawari and Tokio Marine Anshin have been successfully releasing new medical and cancer insurance products, thus strengthening their offensive efforts focused on large-scale, non-exclusive agencies. Additionally, uncertainty around Japan Social Security System continues. Many in the industry recognize the potential for growth in the third sector market. This has also prompted some domestic life insurance companies that typically focus on the sale of the first sector products are now also selling third sector products. It's also important to note that in recent years, the life cycle for new products has become shorter.
As such, it is important for us to be able to develop products and go to market quicker. As the leader of Japan's third sector market, Aflac will continue to implement strategic efforts to prEVERil over our competitors. This includes providing highly competitive products that appeal to diverse consumers within each distribution channel and their changing needs. The graph on the left indicates overall market trends for new sales of standalone cancer insurance. For the last 2 years, industry sales were stable at around 1.4 million new cancer policies each year. The graph to the right shows Aflac Japan's market share of new cancer insurance sales relative to all life insurers. During fiscal year 2013, Aflac Japan's market share was 43%.
Though a total of 27 life and non-life companies sell cancer insurance as of March 2014, Aflac Japan has maintained a dominant market share. The graph on the left describes the overall market trend for total new sales of standalone medical insurance. As you can see, market growth is trending upward. The graph on the right shows Aflac Japan's market share. Although our market share decreased slightly after fiscal year 2011, as of March 2014, our market share was 18.2%, reflecting an increase of 2.8 percentage points compared to the prior year. This reflects the popularity of our new medical product introduced in August 2013. The competitive environment for medical insurance is even more intense than that of cancer insurance, as there are more active competitors.
Additionally, they are introducing more price-competitive products that have lower profit margins. Despite this, nearly 20% of new sales in the medical market are generated by Aflac Japan, which is evidence of the strength of our brand, our expanded distribution system, and the attractiveness of our products. We believe that the most important aspect to the brand is establishing an unwavering trust with customers and society, and this takes time, especially in Japan. We continually concentrate on efforts that maintain and build upon the strength of our brand we have built in Japan. These efforts include ensuring timely and accurate payment of benefits and claims, providing services to maintain strong persistency, and promoting cancer awareness and engaging in philanthropic activities. Establishing a strong track record for paying benefits and claims is essential to sustain the company's brand and build trust with our customers.
This graph shows the payment amount and the total number of policies payable for cancer and medical insurance between 2003 and 2013. In 2013, approximately JPY 325 billion was paid for cancer insurance, JPY 112 billion for medical insurance, with 960,000 cancer and medical policies with claims paid. As of June 30th, 2014, since Aflac Japan was founded, we have paid a total over JPY 6 trillion in cancer claims alone. Over time, Aflac's accurate claims payments have helped us gain the trust of consumers and continues to build upon our strong brand. As you may recall, in February 2007, following the highly publicized claims payment issue among life insurers in Japan, the FSA ordered all life insurers to conduct a thorough review of their benefits and claims payments for the previous five years.
Since then, strengthening the claim payment framework has been an ongoing focus for Aflac and all life insurance companies. The graph on the left describes Aflac Japan's underpayment. In order for us to prevent underpayment from occurring, revisions to the assessment process and the enhancement of the verification function have been steadily gaining traction. As a result, we were able to reduce the 2013 total underpayments to 96 incidents, representing a drastic reduction. The graph on the right shows the underpayment results of FY 2013 for Aflac Japan and Japan's four largest insurers, excluding Japan Post. The Y-axis represents the percentage of underpayment instances to total number of paid claims. As you can see, even though Aflac pays the highest number of benefits payment, we still have the best rate of claims payment accuracy, as evidenced by us having the lowest percentage, which is 0.005%.
Paying claims promptly and fairly has always been and continues to be the cornerstone of our business. We are proud of the highest priority we place on being there for our policyholders when they need us most. Our long-term drive to paying claims fairly, accurately, and promptly has further enhanced the relationship of trust we have built with our customers. As Japan's leading life insurance company, Aflac Japan has established a strong brand with products consumers want and need, as evidenced by our nearly 23 million policies in force. The majority of Aflac Japan customers choose whole life products, which means customers have a level premium for life. This helps develop long-term relationships with our policyholders. Our focus on paying claims accurately and promptly not only gains the trust of customers, but we frequently obtain referrals from satisfied policyholders.
We are also focusing on keeping our policies in force with specific efforts in lapse prevention, while also providing variable customer service. For example, if we don't receive the premium due from the policyholder because the policyholder left the payroll account or because we were unable to withdraw premium from policyholder's bank account, we follow up with personal call to the customer. This follow-up call is effective in saving customers who want to continue their coverage. Because of services like this, Aflac's lapse rate for FY 2013 was 0.84%, which is 0.01% lower than that of the life insurance industry average. Given Japan's aging population, responding to the unique needs of the elderly has become a critical area of customer service for insurance providers. As such, establishing an appropriate process at each touchpoint is important for solicitation and policy maintenance to the elderly.
We are reviewing and making revisions to senior-specific tasks related to insurance solicitation, telephone operations, and policy maintenance services. We are also simplifying and making appropriate adjustments to documents, including application and claim forms where possible. While these efforts are low profile in nature, it is our view that by acting as good stewards, responding to the needs for the elderly appropriately, and solidifying the trust relationship, we will not only maintain our policy in force, but will also subsequently increase the number of in-force policies related to the elderly. As the leading cancer insurance provider, Aflac Japan has actively taken part in awareness activities, educating people about cancer, as well as philanthropic activities supporting cancer treatment and research to cure cancer. Aflac Japan participates in cancer awareness activities such as seminars, exhibits, and other events. Aflac Japan also supports children fighting cancer while also providing assistance to their family.
Additionally, we join with local governments and various organizations to educate people about the benefits of early cancer detection. In fact, on your way in this morning, you may have seen several booths that are part of our traveling exhibit designed to increase cancer awareness. Each of Japan's 47 prefectures have established partnerships with Aflac Japan. This reflects our reputation as having a wealth of useful cancer-related information. When Japanese consumers think of cancer insurance, the Aflac brand is top of mind. This is evidence of the success we have achieved from our far-reaching efforts to build a strong, trusted brand. This success cannot be easily duplicated and allows Aflac to stand out from the competition.
As you heard us talk before, we have begun a business modernization program referred to as CBEP that consists of multiple projects related to marketing, operations, and IT to achieve sustainable growth into the future. These projects are mostly medium to long-term and very broad in scope. The cost guidance that we provided on this program for 2014 and 2015 has not changed. We believe this program will have a positive impact on the targeted areas. We at Aflac are very fortunate to have played a part in providing insurance benefits to millions of consumers in Japan over the last 40 years, and look forward to serving the needs of Japanese citizens for many years to come. Thank you very much.
Our next speaker is Koji Ariyoshi, Executive Vice President and Director of Marketing and Sales of Aflac Japan. Ariyoshi-san joined Aflac Japan in 2008 after working for AXA and ALICO Japan. He's going to discuss Aflac Japan marketing and sales.
Good morning. Today, I will talk about Aflac Japan's marketing and sales strategies, as well as activities for executing these strategies to further our leading position in sales of third-sector insurance. I'll begin with a discussion about Aflac Japan's new annualized premium sales for the first half of this year. Third-sector sales in the first half of the year were up 3.2% compared to the first six months of 2013, and total new annualized premium sales were down 34% from the prior year. As we've said for many years, the foundation of our product portfolio has been and continues to be third-sector products, including cancer and medical insurance. Sales of third-sector products started off slower than expected for the first quarter of 2014, but improved in the second quarter as a result of measures that expand support for large-scale non-exclusive agencies and Japan Post.
Third-sector sales were up 4.5% for the second quarter. The industrial trend for large-scale non-exclusive agencies has been one of rapid growth in recent years. As such, we've reinforced sales support by shifting our human resources to focus on this channel. We are pleased with the progress we have seen to date, especially in the second quarter. Additionally, we look forward to strengthening our partnership with Japan Post and increasing sales through this strategic partnership. As many large insurance companies see growth opportunities in the medical insurance market, competition continues to intensify, particularly in terms of pricing. Despite this backdrop, as Tonoike-san mentioned, Aflac Japan remains the leading company in the medical insurance market. Following the August 2013 launch of our newest EVER medical product, sales of medical insurance in the second half of 2013 increased over the second half of the prior year.
This momentum continues into this year, with medical sales up 17.9% for the first half of 2014. We expect this momentum to slow significantly in the second half of the year as we face difficult sales comparison from last year. With the latest EVER product as a mainstay in our portfolio, we will continue to pursue ways to enhance our sales opportunities and further expand our market share. Growth in new annualized premium sales is a common metric used to measure a product's success. It is also important to consider the number of policies sold when measuring the success of a new product launch. Given the more affordable pricing of our latest EVER products, we believe that EVERluating the number of policies sold are more indicative when EVERluating the sales success of this product.
In addition to competitive pricing, our latest EVER product also offers comprehensive coverage designed to respond to changes in the medical environment, such as shorter hospital stays and increase in outpatient treatment. These benefits, along with the value EVER delivers, have been instrumental in increasing sales to customers in their twenties through forties. This is an age demographic in which we are under-penetrated, and we focused on appealing to these consumers when we developed our most recent EVER product. We believe that providing the coverage our consumers want and need is an important factor that has led to Aflac's position as a leading seller of medical insurance. In addition, Aflac continues to be the number one seller of cancer products in Japan, which affirms our reputation as a strong product innovator and a trusted brand.
With cancer insurance being the very product upon which Aflac was founded, we remain committed to maintaining this number one position. We continually update our cancer insurance policy to reflect the needs of consumers. In addition to benefits, value is an important factor for customers as they consider their insurance options. While cancer sales for the first half of 2014 were down 15%, cancer insurance continues to be an extremely important product for our product portfolio and our brand. We continue to ensure that we are offering affordable products while responding to the benefits consumers are seeking. Cancer is a leading cause of death in Japan. One in every two Japanese citizens will be diagnosed with cancer, and one-third of Japanese citizens die of cancer. The penetration rate of cancer insurance is 37.33%.
This is a small percentage when we compare to a percentage rate of 89% for life insurance and 74% for medical insurance. We believe that there is a potential for growth in the cancer insurance market as consumers become more aware of cancer, especially with government-driven educational initiatives. Therefore, we believe the demand of purchasing cancer remains strong. In the second half of this year, we believe we can improve our cancer insurance sales results with the release of a new Aflac cancer insurance product next week and the introduction of Japan Post exclusive cancer products on October 1st. Our cancer insurance products are the ideal example of our commitment to Japanese consumers. For more than 40 years, we've built a strong brand as an insurance company that provides products and services for daily living.
As Tonoike-san indicated, since Aflac Japan's founding, we have paid about JPY 6 trillion in cancer-related benefits and claims. We regularly revise our cancer insurance to respond to and anticipate customer needs. One of the competitive strengths of our cancer insurance product benefits includes helping our policyholders make an informed treatment decision by providing information about most available options . Because cancer is a disease with various treatment protocols that vary from case to case, cancer patients need the support of doctors, family members, and cancer experts in finding information and choosing the most appropriate treatment. To respond to the needs, since 2007, our cancer insurance products have been offering our policyholders a service called Premier Support that assists the patient in choosing treatment method and the cancer specialist.
A nurse with cancer expertise meets with the cancer patient or their family members, gathering medical information they need, and helps navigate through the information about the diagnosis and the treatment options while providing emotional support. This service connects cancer insurance policyholders and their families with cancer specialists for treatment and second opinions. This supportive service for our cancer insurance policyholders goes above and beyond the standard benefit offered by our competitors. Our cancer products offer coverage that includes benefits for upon diagnosis of cancer, surgery, anti-cancer drug treatment, and radiation therapy. These benefits are available whether the patient is treated in the hospital or on an outpatient basis. We believe that Aflac's long-standing history and activities covered by Tonoike-san exemplify our undisputed competitive edge. We are pleased to introduce our new cancer base product next week.
This product further enhances the competitiveness of our cancer insurance by expanding the benefits and lowering premiums for almost all age bands. With outpatient treatment on the rise, we have enhanced outpatient coverage benefits. We have also established a new rider that has been highly requested by customers allowing some payments, not only upon initial diagnosis of cancer, but also in the event of recurrence. Customers have different preferences when it comes to payment of premiums and the benefit options. According to our research, approximately 40% of women in their 20s through 50s request a paid-up option. Approximately 25% of all customers request a cash surrender value benefit, with many of those in their 20s and 30s. By offering such options, we see potential to increase the annualized premium per customer.
In addition, we believe these cancer products with lower premiums will appeal not only to customers in their 20s through 40s but also to those 50s or older who previously were deterred by higher premiums. Lower premiums have been accomplished through the revision of premiums based on the latest morbidity assumptions. In summary, we are providing coverage consumers of all ages seek at a good value. We expect these new products to attract new customers, especially young and middle-aged, while also appealing to the largest age group of our existing policyholders, ages 50 and older. We will promote our new cancer products through both brand and product advertising. For brand advertising, we will emphasize our formidable competitive edge, including our leading position in terms of cancer policies in force, our specialization in cancer insurance, and our strong payment record.
Through product advertising, we will feature prominent figures in Japan who've overcome cancer as they express their belief in the advantage of Aflac products. We will also introduce a new character called Hajimete Duck or Pioneer Duck to remind customers that Aflac was the first company to introduce cancer insurance in Japan. Let me now take a moment to show you two of our newest TV commercials. Aflac. In addition to our brand strengths and innovative products, Aflac's diverse sales channels have given us a competitive edge that has greatly contributed to our success. We strive to develop distribution networks that sell our products where consumers want to buy them, and we have been very successful in staying true to this simple philosophy.
In doing so, we've learned how to adapt to the ever-changing environment and the many factors that influence the place where potential policyholders prefer to buy insurance products. It is this adaptability and expansion that is the foundation of our success. In the mid-1970s, virtually all of our sales came from affiliated corporate agencies that predominantly sold our policies at the workshop, work site. This method was particularly successful at large businesses. Since that time, consumer purchase preferences have changed, and we have evolved with those trends. For example, during the 1990s, as more consumers chose to purchase their insurance away from the work site, we developed an extensive network of individual independent corporate agencies. These agencies focus on providing more face-to-face sales and reaching consumers outside of the work site.
More recently, as customers' needs for face-to-face consultation have continued to grow, we focused on selling in locations that attract many customers, such as large-scale non-exclusive agencies, banks, and post offices. Expanding sales through Japan Post Group's nationwide network is another example of our efforts to extend our reach to new customers. We aim to achieve sustainable growth for Aflac Japan by making the most of our diverse distribution channels and expanding customer base. Given that traditional channels produces the majority of our sales, it is critical that we continually help improve their method of reaching consumers. As consumer preference for face-to-face consultation is growing, especially among the young and middle-aged demographics, Aflac has provided a training program, sales materials, and the latest technology designed to enhance overall effectiveness and efficiency in consultative service.
In addition, given that the traditional channels is experienced in selling cancer insurance, we believe we can improve sales results in the second half of this year. Since the second quarter, we have conducted training programs aimed at enhancing cancer insurance sales in advance of the launch of our new cancer products. We intend to fortify work site marketing in line with launch of new products as well as promote our own sales by leveraging the customer base. That Aflac preferred independent and individual agent network. The bank channels continues to be an important part of our distribution strategy. Regarding the bank channel, sales of First Sector products decreased sharply following the revision of the assumed interest rate for our premiums in April 2013. Since then, we have shifted the sales focus through the bank channel from the First Sector products to Third Sector products.
As a result, sales of Third Sector products through the bank channel have steadily increased. As we showed at our New York analyst briefing in May, this chart represents the trend in the number of new policy sales for First Sector and Third Sector products. In the latter half of 2013, Third Sector products accounted for more than half of our total sales. These trends have continued in 2014 as well, and Third Sector products accounted for 50.60% of the total sales in the first half of 2014. This means that the banks and their customers are attracted to our Third Sector products as well as our First Sector products. Meanwhile, bank customers are searching for financial products that generate a certain level of return at a low risk.
To respond to these needs, we are also considering the development of a savings-based First Sector product that can generate high cash value if held for long period of time. While maintaining acceptable profitability, this will secure a more steady revenue resources for Aflac than before by appealing the advantage of these products that can generate high cash value if held for long period of time. Charles discussed our relationship with Japan Post in his presentation earlier, but let me say that we are pleased with our strong partnership with them. We believe sales through Japan Post will gradually but steadily benefit our cancer insurance sales in the coming year, and we look forward to hearing President and CEO of Japan Post Holdings, Mr. Taizo Nishimuro, during lunch.
As we move forward with our partnership, Aflac Japan and Japan Post will continue to deliver a training and monitoring program that not only ensures the success of our partnership, but more importantly, the best experience for customers. I want to update you on activities around our efforts that support large-scale non-exclusive agencies. These agencies handle products of multiple insurance companies and have grown at rapid pace through sales at their walk-in shop. To enhance the support system for these agencies, we have recently made significant changes to our strategy. We have shifted human resources from other channels, including individual agencies, to large-scale non-exclusive agencies and assigned dedicated sales promotional employees for this channel. As a result, sales in the second quarter improved substantially through this channel.
We are working on customizing our efforts for each distribution channel by offering the most relEVERnt products, services, and support in order to maximize the potential of each channel. Given this channel enhancement, we believe our efforts will lead to increased sales. We are focusing on 2015 product strategy in order to grow Aflac's business. As part of these activities, I believe it is vitally important to remain in tune with ever-changing customers and distribution needs as well as market environments. In doing so, we can develop new products that anticipate ever-changing customer needs. Although we will continue to focus on developing Third Sector products, we will also consider creating First Sector products that can contribute significant profitable growth in premium income through both bank channels and our traditional channels.
With respect to policyholders who purchased our various products through our traditional channel in 2012, 75% of these policy purchase led to the sales of our Third Sector products in 2012 or 2013. This tells us that offering attractive First Sector products is effective in cross-selling Third Sector products. Cross-selling lower premium and profitable Third Sector products with high premium First Sector products that have more modest profitability will result in maximizing sales opportunities per customer and the potential of the distribution channels. Moreover, about 70% of Aflac's policyholders have only one Aflac policy. We believe this indicates there is much potential for additional sales. Having the ability to provide Third Sector products is essential in face-to-face consultative settings.
As such, we believe that enhancement of the Third Sector product line will contribute to strengthening the sales capabilities of Aflac's distribution system and grow our customer base, ultimately contributing to sales of our mainstay Third Sector products. In 2014, we anticipate Third Sector sales for the full year will trend toward the low end of our expectation of a 2%-7% increase. In my presentation, I discussed how Aflac is promoting many measures, not only to achieve this year's target, but also to achieve growth in the longer term. I believe Aflac Japan's competitive strengths that have brought success to Aflac Japan for over 40 years will continue to contribute to our future growth in executing our product strategy, sales strategy, and promotion strategies. Looking to 2015, we expect improved sales results over 2014 based on a combination of activities, including product innovation and channel development.
As is our normal process, we will provide you sales guidance for 2015 as a part of our fourth quarter release. Thank you all for your attention.
Thank you, Ariyoshi-san. We would like to take a short break now. It's 10:28 A.M. right now, so please come back by 10:40 A.M. Thank you. Now it's time, so we would like to resume the meeting. Please be seated. We're going to resume the meeting, so please be seated. Now I'm going to introduce you the last speaker of this morning session, Mr. Shinichiro Miura, Senior Managing Director of The Yamagata Bank, Ltd. Miura-san joined Mitsubishi Bank, now Bank of Tokyo-Mitsubishi UFJ, in April 1994. After holding various positions, including manager at loan headquarters in 2003, he joined The Yamagata Bank, Ltd. as managing director in 2005, and became senior managing director in June of this year. He will talk on sales activities at a regional bank. Miura-san will speak in Japanese, so please put your translation devices on.
Good morning. I'm Shinichiro Miura, I'm the Senior Managing Director of The Yamagata Bank, Ltd. I'm very much honored to be invited to such a place as a guest speaker, truly thankful for that. Taking this opportunity, I would like to also express my sincere appreciation to the support and cooperation continually given by Aflac. Now, I am head of overall business promotion, including product planning, business strategy, business promotion, and insurance at The Yamagata Bank, Ltd. Today, I would like to explain our activities and initiatives for insurance sales at our bank. First, I would like to briefly introduce Yamagata Prefecture, the home region where our head office is located. Yamagata is 200 miles north of Tokyo. Facing the Sea of Japan. It is well known for the production of cherries, of which our prefecture's domestic market share exceeds at 70%.
The population of Yamagata is 1.15 million people living in 390,000 households. It is notable that the percentage of households in Yamagata Prefecture in which three generations are living together is 21.5%, which represents the highest percentage of all prefectures nationwide. 36.1% of households have two incomes, which is the second highest percentage in Japan. I would describe Yamagata as a family-oriented place where family members support each other to make a living, which is known as Kizuna or bond. Now the next slide. Next, I will briefly introduce The Yamagata Bank, Ltd. The bank was established in 1896, which means that we have 118-year history. Our bank's deposit balance is JPY 2.1 trillion. The loan balance is JPY 1.4 trillion, which places us in the middle among Japanese regional banks in terms of assets.
The Yamagata Bank, Ltd. operates at 79 branches and has more than one trillion account and 9,400 corporate customers. Through serving these customers, we aim to grow and develop our business as we remain in step with the needs of our customers in our region. This is our corporate goal. Yamagata Prefecture is located next to Miyagi Prefecture, which significantly suffered from the earthquake and tsunami in 2011. Sendai City, the capital of Miyagi Prefecture, is the largest city in the Tohoku region and is a 15-minute highway drive from Yamagata. As a result, our main markets are Yamagata Prefecture and the city of Sendai. Now, I will explain the position of insurance sales within our overall business. This slide shows the income statements of our bank for the past three years.
In Japan, reflecting the quantitative easing by the Bank of Japan, a historic low interest rate environment is persisting. The lending interest rate and intrinsic income source of the banking business has been declining. The net interest income of our bank has been declining accordingly. In order to offset this shortfall, our bank has placed one of the highest priorities on strengthening fee business to increase non-interest income. Insurance products are especially important because solicitations are relatively easy. This is because the needs of customers to prepare for their future living is well known, and also because insurance has a high affinity within the banking business. Commissions from insurance sales have now become one of the pillar income sources for overall fees and commissions. We are committed to strengthening insurance sales going forward. Please look at the next slide.
I will explain numbers related to our sales of insurance products. We implemented insurance sales upon respective deregulations for buying sales, and we have marked good sales results centered on lump sum payment products. The outstanding balance of mutual funds and insurance in proportion to the balance of retail deposits is 18% and 13%. If we take a look at insurance only at our bank, which is higher than any of six major regional banks in the Tohoku area. The purchase of lump sum insurance products is generally funded by retail deposits in the bank. This 18% tells us our lump sum insurance sales have been very successful. Given this success, we have strategically shifted our focus to the level premium side insurance products, such as a third sector product which are typically much lower in premium.
Customers like this type of product because it does not require high deposit balance. Our bank likes this product because we receive stable income from commissions. Slide, please. I will explain comparative sales results of level premium insurance products among major regional banks in Tohoku. If you take a look at the left-hand side of this slide, it shows comparative figures for the balance of retail deposits among regional banks in Tohoku. The red bar surrounded by the dotted line indicates our figure, and as you can see, we are the smallest. To the contrary, in the right-hand side chart that shows the number of level premium policies during recent six months, we were number one. Shown by the bar surrounded by the red dotted line.
Even though we are the smallest in terms of the size of retail deposits, our efforts to focus on insurance sales resulted in larger sales. We will continue to strengthen insurance sales going forward, and it is our understanding that other banks still have significant room to further expand sales of level payment insurance policy. This slide shows the number of policyholders of level premium insurance policies by age of our customers who keep deposits with our bank in an amount of JPY 1 million or above. As you can see, we have a relatively high penetration ratio for those in their 30s, but those in their 20s and 40s are low. This data indicates that there is much potential for us to increase sales of Aflac's level premium products at our bank.
In this regard, I also think there is substantial growth potential for Aflac's products sold through other banks in Japan. I truly believe so. Next slide, please. Now I will explain the promotional framework at our bank. We have eight branches called consulting plazas that specialize in professional sales consulting. These branches are equipped with staff members with strong skills in customer consulting. The professional sales staff provides customers not only with high-quality solutions after reviewing existing insurance policies, but also offers investment advice. Each consulting plaza also operates a housing loan plaza, which enables them to provide one-stop shopping services centered on mortgage loans. This function gives us the opportunity to approach these mortgage loan customers to review their existing insurance portfolio and possibly cross-sell insurance to them. Further, we have appointed area financial advisors, or area FAs, who specialize in consulting sales in each of our business territories.
Currently, there are 26 FAs, they are responsible to improve the general skills of salespeople of our bank. Area FAs provide on-the-job training programs or learning sessions by visiting customers with junior salespeople to provide customers with joint proposals and so forth. Please look at the next slide. Next, I will explain our efforts to cross-sell our level premium insurance products to visitors to our branches. Most customers who visit our branches do not come to buy insurance policies. Rather, they may have multiple purposes, such as placing deposits, consulting on loans, or transferring funds. Therefore, to sell insurance products, it is important to ask questions to uncover potential insurance needs and help customers understand various product features to meet their needs. Our bank welcomes approximately 1.78 million visitors to branches each year.
About 85% of those visitors are welcomed at high counters, where customers mainly conclude routine transactions. 15% are welcomed at the so-called low counters, where customers mostly ask us to provide them with consultations. We are currently strengthening our cross-selling approach to the 85% of customer traffic that comes to the high counter. Both sales representatives and lobby attendants interact with visitors to make the most of their time while they are waiting. Typically, the sales staff at the bank's high counter receives the customer request, but the actual transaction is handed off to someone in the back for processing. However, we are currently shifting our process so the transaction can be handled at the high counter and not require interaction with the back office. One reason we are doing this is to lengthen the face-to-face time with customers who come to the high counter.
While our branch staff is processing a routine transaction, they can also take additional time to solicit level premium insurance products. Next slide, please. Now, I would like to turn to our initiatives for the worksite market. Yamagata Bank has a strong business franchise in the small to medium-sized enterprise market in Yamagata Prefecture. We are leveraging our presence by proactively promoting business activities, including level premium insurance sales in this market. One of the advantages of this worksite market is that we can approach working-class customers who are not able to visit bank branches during business hours. Also, we may from time to time hold life planning and investment seminars for employees of corporate customers at their work site for their convenience. In this fiscal term, we have selected 421 corporate borrowers as our targeted corporate accounts, which have more than 54,000 employees.
To give you greater context, there is a certain regulation to prevent banks from using their positions and power as lenders that may put pressures on insurance sales to the employees of borrowers. We are, of course, in compliance with such regulation. However, we think if such regulation is loosened to some extent, customers will benefit largely from this change. As you listen to my speech, you may wonder why we have had great success relative to other banks in selling level premium insurance products. I believe the reason we've been successful with these types of products is our implementation of a consistent plain vanilla strategy while building trust with our customers. Japanese banks have expanded the types and number of insurance products they offer in accordance with deregulations that have been phased in over time. The Yamagata Bank, Ltd. has also adopted relEVERnt products of Aflac with each phase of deregulation.
Recently, Aflac products represent approximately 70% of all level premium insurance products we sell, and there are three major reasons why Aflac has become the choice of our customers. First, many Aflac products are simple, making it easy for both our customers and sales representatives to understand the product features. Second, very high customer recognition and brand power of Aflac brought by the commercials featuring the Aflac duck as one of the charm points. In China, a duck may remind people of tasty Peking duck, but in Japan, it often evokes an image of Aflac. Third and foremost, Aflac provides our sales representatives with very generous and thorough support. We have successfully enhanced the skills of our salespeople for level payment insurance products through education and training provided by Aflac. This has enriched their ability to explain product feature, uncover customer needs, and learn other important selling points.
These achievements are largely dependent on a strong relationship of trust relationship between the salespeople and the coaching staff of Aflac. In other words, I think our good results can be largely attributed to the support of staff members of Aflac. We would like to strengthen our partnership with Aflac and further endeavor to increase the sales of their products. I hope my speech gives you some sense of why it is reasonable to expect Aflac can expand its sales through the bank channel. Thank you very much for your kind attention. Thank you, Mr. Miura.
Of the morning. Before starting, we need a short time to assemble the table. Please follow these three rules when asking your question. First, please tell us your name and firm. Second, please wait for a microphone before you ask your question. Third, we'd like you to limit yourself to one question so that everyone would have a turn. Okay. Now we would like to start questions.
Yes. The person in third row in Yes. Here. Yes. Thank you.
Thanks. Thomas Gallagher, Credit Suisse. Just had a two-part question on your new cancer product. You had mentioned that you've lowered premiums across most age bands. Can you comment on what's the average % decline in premium on that product? The second part of that is, what is it about that new product that you think is the key new feature that's going to stimulate sales growth? Is it the cash surrender value or if you can elaborate on that.
Yes. First of all, about the premium. About the way we review the morbidity table ratio. The expected hospitalization, these morbidity, the expectation was reduced so that we realized that the premium can be reduced. That is the reason for that.
implication of the % decline in premium in terms of the rate that you're charging.
For the entire age group, the premium was reduced. Particularly for the aging policyholders, the premium decline ratio is higher than the other age group. For whether the insured is male or female, the premium decline ratio is different. Particularly for the male, aged older than 70 years old, the decline ratio is on 2-digit.
Corporate Actuary here in the back. The key is on an apples-to-apples basis, the premium will have declined, we actually don't expect the average premium size for the whole product series to go down because we have added additional features, and we've re-added cash value and some of the paid-up options. If you just looked at the same coverage for revised Cancer Days with original Cancer Days, the premium would have gone down probably in total less than 5%, it varies a lot by age. It actually went down more at the higher ages than at the younger ages. When you now add the new features that this product has that the former design didn't have, we actually don't expect the average premium will go down. It'll probably actually be a little bit higher.
Just to add that clarification from the actuarial point of view.
Okay. The gentleman in the second row.
Thanks. Randy Binner from FBR. I want to follow up on Tom's question. I guess the set of changes with the riders and the paid-up and cash surrender values is attractive, I guess, to younger clients. Is that different than what other companies are offering? Just trying to get a sense of what would make this work versus previous product changes in cancer versus competition.
As Sue mentioned earlier, the products of competitors Well, our features are different from competitors, so it's very difficult to compare on apples to apples. What we are focusing and emphasize on this time is that we are able to offer advice. For example, what kind of treatments are appropriate for those who are suffering from cancer. Professionals are able to offer advice. Also, since we have been offering cancer insurance for 40 years, it is not just premiums or riders, but it is a more comprehensive, more essential attractiveness of cancer insurance of Aflac is being appealed.
We decided to introduce the product with the cash value this time is that from our past experience, we know that certain numbers of the people, the good number of people prefer to have that kind of the coverage. Particularly that some channels, Japan Post is a good example. We heard that even the majority of their customers might prefer to have the coverage with cash value. In order to meet the demand for such part of our entire customer group, we thought that it would be good to have that kind of option.
Just one more follow-up. I guess, the comment on advice, maybe that's new for me. I don't know if that's something you've talked about. Is that something that differentiates you if these products are hard to compare apples to apples? Is the advice piece new, and is that something that sets Aflac apart more than in the past?
From 2007, we actually had this service being provided in our previous cancer, but we have never really emphasized that. Our competitors do not have these services being provided by professionals. Competitors' products do not have services to really care for their mental care for their cancer patients. Competitors' products do not have specialists in cancer insurance providing similar kind of services. That's the difference.
These slides on page three, the bottom slide, Premier Support is what he's talking about as far as this extra addition that we have, competitors don't have. At the top of page four, it also lists the enhanced benefits, and the recurrence benefit is another big change that will directly address competitive situations. That's another big piece of this new introduction.
Next, please. The lady in the second seat.
Joanne Smith, Scotia Capital. I was wondering if you could quantify or if you have quantified the impact of the increase in the consumption tax on your sales in Japan, if it has had a noticeable impact on sales, what do you expect when the consumption tax goes 10%?
We do not have any expected impact of the consumption tax on our sales in the hundreds of percentage or something like that. The reason is because the impact is not very sizable. First of all, our consumption tax is not imposed on the premium, so it shouldn't directly affect our sales. The only way that consumption tax hike or interest tax rate hike may affect our sales is through the diminished purchasing power of the consumers. Since the impact of the consumption tax rate increase on the purchasing behavior of the consumers is not very visible, particularly in the long run. I guess this is a long answer to a short question. I don't think that impact is very large.
That was what I was looking for, was the impact on the overall consumer from the increase in the consumption tax and the discretionary spending that they've done. I've heard that there's been a pretty noticeable impact on consumer spending as a result. I'm wondering if you have been able to quantify that impact on your sales, not necessarily whether there's been one that has been imposed upon your premiums.
Yes. First of all, the drop of the purchase activities by the consumers, we think is to a large extent temporary because before the consumption tax rate increase, people, the consumers tried to make the purchase before the rate increase. As a reaction to that, the consumption right after that tax rate increase tends to be very big. That will be flattened out, we think. Also, I'm not saying that will not impact our sales at all, we do not think it is very meaningful, and therefore, we do not have any particular number for that.
Just to add to that, when we look at macro numbers, as I'm sure you are looking at, post-consumption tax increase, the big-ticket items like cars, houses, and so on took the hit. Everybody anticipated that. The government anticipated that. The JPY 5.5 trillion stimulus was designed to compensate for that. Also the government is expecting that it will flatten out during the third quarter. When someone is making the decision whether to buy a house or not, or a car, that certainly is going to be affected. When you're buying an insurance that's essential to ensure that you're compensating for the universal healthcare system shortage in terms of coverage and so on, that's not discretionary. That's a decision-making process that is not going to be affected. That's our sort of anecdotal.
Therefore, we are not quantifying the numbers, what I think Tohru is saying.
Next. Gentleman in the fourth row.
Hi, thank you. Al Copersino, Columbia Management Group.
I believe it was Ariyoshi-san who mentioned a larger focus on the large non-exclusive agencies, and I was wondering if sales through that channel come with a lower margin or if perhaps the commissions are higher, but the G&A is lower. I'm just curious what impact this might have, focus on that channel.
In terms of non-exclusive agencies, as I mentioned in my presentation, it is not just one company, but they offer many insurance companies products. Particularly, they do have their own shop outlets. The customers will be visiting these shops, and that is how they are expanding their business. Particularly through the internet, customers are gathering information. They still do not know which insurance to purchase. There is a desire from customers that they would like to have face-to-face consultation. As a result, that need for the non-exclusive agencies are expanding. Your question was about the profitability or the revenue? In terms of the profitability, we are basically paying out the same amount of commissions as with any other agency. The profit margin is exactly the same. We have no different commissions just because they are a non-exclusive agency.
One, two, three, four, five. The gentleman in the fifth row. Yeah.
Thanks very much. Eric Berg from the Royal Bank of Canada, RBC. I was surprised to hear, I hope I heard correctly, that half of all Japanese will develop cancer and one of three will die from it. It's sort of a multi-part question. Is that one of the highest percentages in the world? What has the trend been in those percentages? Maybe for Sue or another member of the financial team, what are you forecasting is going to happen to these percentages, and what is reflected in the reserving? I know there's a lot there, but the statistic is pretty surprising.
The rate of the percent of the people who develop cancer in their lifetime has been growing very gradually. It has been high for the considerable length of time. That is well into structures, into our pricing. Even though the tendencies continues to be rising to some extent, it's something it is already taken into account. I do not know how the situation is in other countries, but my understanding is Japan is pretty much high in that respect because the percentage of people who develop cancer in their lifetime is pretty much a function of the average length of life. The longer people live, the more people will develop the cancer. Since Japan is famous for the long life, we have to expect the high percentage of people who develop the cancer. Is it okay?
Very good. Yeah.
What Tohru said is very accurate. Japan, compared to other countries, does appear to have a higher likelihood of cancer, but a lot of that is related to longevity. As far as in our reserving, we do stress test our reserves under various morbidity assumptions. One thing to remember is our products don't only have diagnosis benefits, they also have other medical benefits, such as hospitalization coverage. Given demographics really worldwide, but in particular in Japan, as your population ages, you don't see governments building a lot of new hospitals. Every year the demand for hospital beds increases. We're actually likely to continue to see a downward push on average lengths of stay and even just hospitalizations. That's really something Chris has talked about for several years here at FAB and mini FAB.
We don't project a lot of downward claim trends when we're testing our reserve. We're comfortable that the level of our reserves is adequate to handle what could happen with cancer incidence and cancer morbidities.
Okay. Next, please.
Thanks. Jimmy Bhullar from J.P. Morgan. There's a lot of talk about competition in the medical and the cancer market. Maybe if you could just talk a little bit more about where you're seeing the increased competition, whether it's domestic companies, international, or widespread. Related to that, how should this impact your margins on new sales now versus maybe five years ago versus 10 years ago?
In terms of competition, third sector is a growth market. Non-Japanese companies have always focused on the third sector products. Also domestic insurance in Japan and also the non-life subsidiaries have been entering this market. In terms of margins, Sue, could you elaborate?
When we're looking at new product developments, we are very aware of the profit margins of what we're currently selling versus what profit margin the new products will have. Really what Aflac Japan has focused on is really providing the consumers with the benefits they need for the treatment that they're going to require, whether it's a medical product or a cancer product. We've also tried to focus on things like Premier Support so that we can provide consumers with a more robust experience at claim time than they may see with a competitor. We have not seen a lot of deterioration in our profit margins. A big reason for that, we have seen favorable claim trends, but we're also just very aware of this.
We are trying to address competitive pressures, of course, but we're doing that in a more well-rounded way than just focusing on premiums. Chris, I don't know if you had anything else or Ken that you wanted to throw in on this, but that's the philosophy I think we've been using.
Overall, I guess margins would move very slowly because new sales don't impact the margins overall that much in a given year. Should we assume that even though margins are pretty good, they're not maybe as good as on sales five, 10 years ago?
Yeah. That's a little bit of a difficult question because whenever we introduce new benefits from an actuarial point of view, we are more conservative in our assumptions. How I would phrase it is the targeted profit margin doesn't change a lot. For example, if you look at the Cancer Days plan that this new product is replacing, we actually are targeting a similar profit margin for the new plan that we originally targeted on Cancer Days. The difference is the experience on Cancer Days has been more favorable than we expected. You end up in a situation where its actual profit margin is higher than what we had anticipated. It becomes kind of a complex thing going forward as to what's your targeted profit margin versus what you achieve.
What I think I would point to, and I think Chris and Ken have pointed to this in previous analyst meetings, is Aflac does have a pretty robust profit margin right now, and we would probably caution you to assume that's going to expand further, even though we see downward claim trends. I think that's sort of where I would come in on that.
Thank you. Okay. Next will be the last question of the morning.
Thanks. Andrew Kligerman from UBS. Just a question about the timing of the new cancer product rollout. Won't this product compete with the Japan Post exclusive product, especially given your comment that both will focus on cash surrender value?
About Japan Post exclusive product. That is actually can be cross-sell with Japan Post Kampo, the insurance. We wanted the Japan Post, the cancer is simpler so that we don't have any overlap features with the new cancer product. Japan Post will also sell the New Cancer Days that we will launch. Japan Post will sell both.
We are going to introduce 2 types of the product, one for the Japan Post exclusive, the other available for all of our sales channels, including the Japan Post. All the channels other than the Japan Post, what they are going to sell is what we call regular cancer product. Therefore, there will be no cannibalization from the Japan Post exclusive one. At Japan Post Group, they are going to sell both the regular products and their exclusive product. As Koji just mentioned, the exclusive product is designed so that it can be good typically for the people who already have the Kampo medical coverage. Coupled with that coverage, the Japan Post exclusive product is expected to be good. We think it is more complementary to each other rather than competing against each other.
Just a quick follow-up, just in terms of your prepared remarks about the new product. I think you also said, in addition to focusing on a different cohort, age cohort, you are also going to sell to the 50-year-olds that already have cancer. There will be an element of essentially substitution, folks that actually have your old cancer will essentially lapse that and buy the new cancer product?
You are talking about the general cancer products or the Japan Post?
Actually, we think hard at that because anytime you change premiums, you do want to assess whether you'll see existing policyholders lapse that coverage and take out new coverage. We don't expect to see very much of that with this. Since the cancer plan is priced on an issue age basis, there's no age ban. It doesn't take very many years before it's not cost-effective to do that. What we expect instead is customers will just purchase a small version of the new plan, and that will complement their existing coverage. In Japan, that's typically done more with purchasing a new plan instead of adding riders. I think in the U.S., we often convert products or add riders to do that coverage. In Japan, they actually just end up with multiple base plans, if that makes sense.
Thank you.
Okay. Now we'll break for lunch, which will be served upstairs on the 27th floor, in a room called Excellence. I'm sure you're eager to hear from Mr. Nishimuro, President and CEO of Japan Post Holdings, for his speech. Please head straight up to the 27th floor. Yes. He will make his speech in English, but be sure that he will answer your question in Japanese. Please bring your translation devices upstairs. Thank you.
May I please have your attention? Thank you very much. Shortly, we'll be inviting our special keynote speaker, Mr. Nishimuro, President and CEO of Japan Post Holdings Company, to make a presentation. After his speech, Mr. Nishimuro has allowed us to accept questions. However, he has a very tight schedule after this meeting, we would like to limit the questions to three. These should be related to the alliance between Japan Post and Aflac. Before Mr. Nishimuro-San presents, I would like to ask Dan Amos, Aflac Chairman and CEO, to come up. Dan wanted to personally take this opportunity to introduce Nishimuro-San. Dan?
Well, we have a special treat in store for you. Let me just say that he had something else scheduled, and he changed his arrangements to be able to come here today, and we are honored to have him. He is a very special guest, a speaker that's not only known here in Japan but worldwide for his business acumen. He is both noted for his business acumen, but let me say one thing about him, and he is a true gentleman in every sense of the word. He has been a champion of U.S.-Japan relations, and he continues to make a difference in the world today. Taizo Nishimuro is President and CEO of Japan Post, as they said, with a career that has spanned nearly five decades. Taizo is known to his friends, has been in key roles throughout Japan for so many years.
He was President and CEO of the Tokyo Stock Exchange, then he was also President and CEO of Toshiba Corporation. Taizo is a skilled international businessman. During his tenure with Toshiba, for example, he helped form alliances with companies like Apple Computer, IBM, Siemens, and Time Warner. He is also recognized as for his leadership in strengthening the Tokyo Stock Exchange. Taizo was the key advisor groups to the government of Japan, including serving as Chairman of the Fiscal System Council, an advisory panel to Japan's Ministry of Finance, then leading the Postal Services Privatization Committee until 2013. Taizo is the former Co-Vice Chairman of Japan's most influential business lobby, the Japan Business Federation, and led Japan-U.S. Business Council as Chairman between 2002 and 2005. In his various capacities, Taizo has fostered stronger and closer ties between the U.S. and Japan business, as I said.
He was even recognized by the American Chamber of Commerce in Japan in 2005 as the Person of the Year. In 2013, he was appointed as President and CEO of Japan Post Holdings, which, as you know, has a vast nationwide network and one of the most trusted institutions, in addition to being one of the most popular places to buy insurance, especially in the local communities. Taizo has done so much work over the years to build the business between the U.S. and Japan, and on behalf of Aflac, we are honored to have him here today representing Japan Post, our strategic partner. Ladies and gentlemen, with great pleasure, let me please introduce Taizo Nishimuro.
Thank you, Dan. Good afternoon, everybody. Because of my problem with the leg, may I sit down and speak to you? Thank you. I'm very much honored to have this opportunity to speak to you today. I would like to start, if I may, by telling you a little more about how I reached my present presentation. I have to appreciate Dan for a very generous introduction, and I'm going to add some more onto my background. I joined with Toshiba back in 1961. Toshiba was a different name, one is Tokyo Shibaura Electric Company, and now it is called Toshiba Corporation. From 1996 to 2005, I served as its President, CEO, and Chairman.
During that period, I focused on strengthening corporate governance by introducing a system of outside directors, which was rare in Japan back in those days, and shifting to a company with committed And introducing a pioneering code of conduct to facilitate Toshiba's growth into a global company. I also introduced management system based on the Six Sigma method developed by Motorola and General Electric company. I believe that Toshiba's current management methods have been greatly influenced by these changes. After retiring from the chairmanship, I was asked to be the advisor to the board for Toshiba, and currently still am. I retain that position as advisor toward Toshiba's board. I served as the present chairman of the Tokyo Stock Exchange from 2005 until 2011.
When I moved to Tokyo Stock Exchange, a rapid increase in trading volume was causing frequent system outages that undermined market trust, and I took decisive action to address this serious problem by dramatically upgrading information systems. In fact, I was invited to become a kind of figure chairman when I joined with Tokyo Stock Exchange. Tokyo Stock Exchange people told me that, "You can be at the office once or twice a week, and also spend half a day. That's all. You don't have to worry about what's going on in the market." The problem occurred continuously since I joined with them, and I found out that there should be very strong measures to change that total organization.
All of a sudden, towards approximately three or four months after my appointment to be a chairman, the president and that second COO came up to me and told me that they have decided to resign from their positions because of continuous problems that have occurred. I asked, "Who are the ones to run this company?" They told me, "You have the capacity to do it." That was terrible. I was hired to be with the Tokyo Stock Exchange. That was a kind of temporary nominal honorary position, and two days a week, that all disappeared. I have decided that there should be overall change in the system, all the systems. Let me show you that computer system was very much antiquated and frequent outage has happened.
At the same time, I made a decision to form four gates, that self-controlling systems to oversee all those transactions that took place in the market. In addition to that, I have made overall change of the total management system of Tokyo Stock Exchange. After three years of the first part of my tenure, the new system was introduced, totally different from the antiquated old system. That system is a better system, I believe, still, on any exchanges around the world. That is very reliable. No outage for the time being, for two years still now. Speed is almost up to the highest speed in U.S. and also in other countries. After making those changes, I decided that it is almost the time to retire.
When I decided to retire, the government asked me to be the chairman of the government's Postal Services Privatization Committee in early part of 2012. The role of the committee was to advise on progresses with postage service privatization and discuss a new Japan Post Bank and Japan Post Insurance businesses while considering the competitive environment in the market. Actually, you might remotely recall that Mr. Koizumi, the famous Prime Minister, who has been in his position for four or five years, he declared that the postal system should be privatized. That the law passed and the government declared that this postal system has to be privatized as quick as possible. Since then, so many changes took place in the political world, also there are so many changes and different opinions among the cabinet members.
Not cabinet members, I mean, member of the parliament, also the bureaucratic resistance were there. Still, we are not privatized as yet. After eight years since then, since opening, we are now in a position that we are going to be on the market to privatize, to start off the privatization sometime next year. I have a confidence that we will be able to do that. I believe the Japan Post Group exists to serve the nation as a public, and that its most important mission is to preserve the nationwide network of post offices as part of Japan's social infrastructure. This network of more than 20,000 post offices permeates the country like a system of nerve cells, supporting people's day-to-day work life and reaching into corners of the community that even local government cannot cover.
Through this network, the Japan Post Group has contributed to local communities and public life by providing the products and services of Japan Post, Japan Post Bank, and Japan Post Insurance. To expand further, it faces the challenge of developing a more comprehensive lineup of products and services that support daily life. The alliance with Aflac announced in July 2014 clearly demonstrated that the post office network had such capabilities. I determined that this was an ideal opportunity to showcase the potential and future direction of the post office network. Today, I would first like to outline the business of the Japan Post Group before talking about our alliance with Aflac from the Japan Post perspective. Postal business in Japan has long consisted of three main elements: postal services, banking, and life insurance.
The post office is an important part of social structure, having provided services to people throughout Japan as a fundamental part of their daily lives for more than a century, with postal services beginning back in 1871 for the postal service, in 1875 for banking, and 1916 for life insurance. The businesses were originally conducted by the Ministry of Posts and Telecommunications as government services, but were privatized, as I said, in October 2007. Now, privatized means in this term is only made a separate company totally owned by the government. When the Japan Post Group intervened, Japan Post Holdings, of which I am CEO, acts as the holding company and has three main subsidiaries: Japan Post, the Japan Post Bank, which is known in Japanese as Yucho, and Japan Post Insurance, which is known as Kampo.
Although the form of our business has altered, our role in providing universal services to people throughout Japan as a fundamental part of their lives remain unchanged. Since privatization, we have been expanding operations to include mail orders, shopping, and real estate services with aim of further enhancing customer convenience. As you will recall, the key features of Japan Post Group is its network of post offices throughout the country. Post office operations are controlled by Japan Post, which manages a total of approximately 24,000 post offices, consisting of approximately 20,000 directly managed offices and 4,000 contracted small, tiny offices. This number exceeds the 21,000 elementary schools throughout Japan, which will give you an idea of a crucial role that post offices play in people's lives as access points for logistics and financial services like to be found within walking distance. Excuse me.
Postal items are delivered to approximately 55 million households throughout the country six days a week. Japan Post handles 18.6 billion-- Oh, earthquake. Uh-oh. Oh, this is very close. Now, this is not the attraction prepared for you this time. It is over. Hopefully it is over. Postal items are delivered to approximately 55 million households throughout the country, six days a week. Japan Post handles 18.6 billion postal items a year, and if packets given via Yu-Pack and Yu-Mail services are added, this figure exceeds 20 billion. Japan Post stands for approximately 20% of all household savings in Japan. 20% of all household savings in Japan, making it the country's largest retail financial institution, with deposits of JPY 176 trillion. Similarly Still, it's strange. Well, anyway, we are not able to know as yet where is the source, it means that the source is a little bit too far.
It sways this way. If it is underneath, it is people jumping up and down. Okay. Making the country's largest retail financial institution at this deposit of JPY 176 trillion. Similarly, Japan Post Insurance accounts for approximately 20% of individual insurance policies in Japan, making it the country's largest life insurance company, with total assets of JPY 87 trillion. As customer contact points for these services, post offices represent a strong brand prioritization by high levels of security and reliability. Small post offices run by, in particular, focuses on financial services as their main business and are gradually upgrading such services by expanding their offerings to include investment trusts, life insurance, and non-life insurance. I would now like to give you an overview of the Japanese economy.
Despite the impact of the consumption tax increase in April this year, which was 3% in addition to 5%, which means 8% the consumption tax. The Japanese economy is experiencing a moderate upswing thanks to the effects of so-called Abenomics. The program of conservative and qualitative monetary easing carried out by the Bank of Japan since April 2013. Together with various economic measures introduced by the government, have boosted the corporate profits and stimulated personal consumption by improving the employment and the income environment, fueling a gradual economic recovery. Since the Japan Post Group operates mainly in the domestic market, Japanese economic trends have a major impact on the business performances of all our group companies. Fortunately, postal logistics businesses are reaping the benefit of Abenomics. Like other developed countries, Japan faces a decline in demand for traditional letters due to the rise of internet services.
The economic rise is boosting other areas of our business, such as demand from corporate customers for direct mail. Due to the expansion of e-commerce, postage of packets via our Yu-Pack and Yu-Mail services is another growth area. There are three main players in Japan household delivery markets. Yamato Transport and Sagawa Express, and the Japan Post. In recent years, Japan Post has increased the volume of packets it handles because it can offer finely tuned delivery capabilities by using small vehicles to deliver packages together with other postal items. On the other hand, ultra-low interest rates stemming from monetary easing have had a severe impact on the two financial businesses, banking and life insurance.
They both unfortunately reported lower year-on-year sales and income in fiscal 2013. Total deposits at Japan Post Bank and annual number of new policies at Japan Post Insurance are in fact increasing gradually. Leveraging that solid client basis, these two businesses will continue to fulfill their customers' expectations. The post office network acts as the base for universal service, encompassing postal service, banking, and life insurance. To fulfill this role steadily and appropriately, the network needs to diversify its sources of income and boost profitability. Utilizing the Japan Post Group's wealth of management resources and personnel, we aim to be of service to our customers and their communities, alliance with Aflac is an important part of our efforts to meet this goal, as well as a test case for diversification. I would like to speak a little more about our alliance with Aflac.
While, as I mentioned earlier, was announced in July 2013, Aflac started businesses in Japan, probably you have already been told, 40 years ago, and was the first company to sell cancer insurance here. As the founder of cancer insurance market in Japan, Aflac benefits from the high recognition and strong brand power, as well as unassailable position as a top insurer of new cancer insurance policies, and a high level of consumer support for its products. Japan Post Group began selling Aflac cancer insurance at 300 post offices back in October 2008 and has gradually built up its sales records. To strengthen and expand our collaborative relationship and offer cancer insurances to even more customers, the top management team of Aflac and the Japan Post Group entered into discussions and resulted in this alliance.
In Japan, Aflac sells about 1.5 million insurance policies each year through approximately 16,000 sales agencies and has built up expertise in supporting these agencies. Japan Post Insurance sells about 2.2 million insurance policies annually through its network of some 20,000 post offices and has established systems to support policy sales and administration in post offices. I believe that by pooling their strengths, these three strong players, Aflac, Japan Post Insurance, and Japan Post, can offer new value to customers throughout Japan. Aflac, I believe Mr. Charles Lake may have mentioned in his speech this morning, but this alliance is built on three pillars. The first is expanding the number of post offices selling Aflac cancer insurance. The second is selling the insurance under contract at directly managed Japan Post Insurance outlets. The third is developing an exclusive Aflac product for the Japan Post Group.
Firstly, we have already expanded the number of post offices selling Aflac cancer insurance to 3,000. As announced today, about 700 post offices will start selling Aflac cancer insurance from October the 1st. Expanding the number of more than 10,000 post offices, we then plan to expand further to 20,000 by fiscal 2015, and in cooperation with Aflac, we will continue our efforts to gain the understanding of all those involved. Secondly, directly managed Japan Post Insurance outlets began selling Aflac cancer insurance under contract on July the 22nd this year. After gaining approval from the Financial Services Agency and the Ministry of Internal Affairs and Communications, 79 such outlets throughout Japan are recommending Aflac cancer insurance to their customers base, who operates mostly small and medium business enterprises, SMEs, and supporting sales at post offices.
Thirdly, Aflac, Japan Post, and Japan Post Insurance are collaborating to develop an exclusive Aflac product for the Japan Post Group, which will go on sale on October the 1st. Devised specifically with post office customers in mind, this product features simple guarantees and low premiums. Specifically, it has been designed to offer relatively higher coverage in the form of initial diagnosis benefit when policyholders are first diagnosed with cancer while keeping premiums low to make them easy to combine with Japan Post Insurance products. We expect that existing policyholders of Japan Post Insurance products would welcome this new Aflac product.
Through these three major initiatives, we will enhance the win-win relationship between Aflac and Japan Post Group by offering postal customers throughout Japan the kind of simple, affordable cancer insurance they prefer, while also taking the opportunity to introduce Japan Post Insurance products to customers who have not previously used the post office for insurance. Post offices contribute to local communities and public good by supporting people's everyday lives. As a pioneer of cancer insurance in Japan, Aflac has been supporting the lives of policyholders battling cancer for 40 years. We formed the alliance after confirming that we can build a partnership based on shared values. By enhancing the value of post office network, I am confident that this alliance will boost the corporate value of the entire Japan Post Group.
In the belief that strengthening and developing our relationship will improve on peace of mind, we will cooperate with Aflac management to ensure that this alliance brings results. Thank you very much.
Thank you so much, Mr. Nishimuro-san. It was wonderful to have you share highlights of your remarkable career. Most of all, to make the announcement that we will expand the number of post offices offering Aflac products by 7,000, meaning we're going from 3,000 post offices plus the 7,000 for a total of 10,000 post offices on October 1. Thank you so much. Now, as I mentioned earlier, we will take three questions related to the alliance. Dan and Mr. Nishimuro-san have a very tight schedule, if anyone would like to ask a question, if you would please raise your hand. Yaron?
Hi. Yaron Kinar from Deutsche Bank. Thank you. Yaron Kinar, Deutsche Bank. As you think of extending, or rolling out into additional offices, I'm hearing about the 10,000 offices by the end of this year, can you maybe talk a little bit about which types of offices those would be, or kind of the order of rollout between major urban areas as opposed to more rural areas?
Well, mostly the targets are rural areas, not urban areas. Since Aflac started the cancer insurance business out here in Japan, that effort has been mostly centered upon those urban areas. The rural areas and small/medium enterprises are areas which have the possibility to expand, but we have more strength in that market. Therefore, the alliance with Aflac is a win-win cooperation. That is, the center is those not touched by Aflac, and still demands are there. That is the area that Japan Post Insurance can help with Aflac, those people who wishes to have the cancer insurance. Thank you.
Thank you. Steven Schwartz.
Hi. Steven Schwartz, Raymond James. Mr. Nishimuro, prior to the new agreement, it had been widely rumored, at least in the U.S., that Kampo was interested in developing its own product. You've obviously gone a different way. I was wondering if you could speak to why you made that decision to go with the partner as opposed to doing it internally.
Okay. Well, the decision that Japan Post Insurance decided not to pick up the cancer insurance was made prior to my appointment last year. The decision was made by predecessor one year prior to that. The reason is very simple, that in the cancer insurance area, Aflac is so influential and strong, and very difficult to formulate a new cancer insurance policy capable to deal with the customers in opposition to Aflac. Since I was installed as CEO, I have reviewed the situation and made a quick decision that it is the best way for us and Aflac, since we have the area where we can help, and Aflac has the potential to expand into the areas where they have not touched as yet.
this is, as I said, and probably Dan will agree with me, that this is a win-win cooperation to help for the health and for the sake of peace of mind of Japanese average people and small, medium enterprise. Thank you.
Thank you. Jay?
Thank you. Jay Gelb from Barclays. I was hoping you could give us some perspective on how the post office employees are incented to sell Aflac products. My sense is, and it may not be well-informed, my sense is that typically, products aren't sold in the post offices, they're bought. I just want to get a perspective from you of how the employees are actually incented to sell these products to consumers. Thank you.
Well, first of all, I explained to you that we have the approval from Japanese financial agencies, which insisted that it should be very difficult for average post office employees to go into this more sophisticated, different type of insurance than they used to sell. Therefore, that is the reason why we are careful to expand the number of the offices to carry. As we explained, that is now still 3,000 is the number that we have. We have decided and made announcement we will add additional 7,000. For the purpose of educating and giving the chance to understand the cancer insurance, we have no hesitation to spend the time and effort to educate them to be able to sell the cancer insurance.
Therefore, we are confident that we will be able to achieve or penetrate into 20,000 potential number by the end of the current fiscal in 2015. Thank you.
Okay. Thank you so much, Mr. Nishimuro, for those insightful answers. We appreciate it. If everyone would stay seated for just a minute, Dan and Mr. Nishimuro are going to their next appointments. I will just briefly touch on the things that we're going to do this afternoon, but if you would stay seated, I would appreciate that, please. Okay. After lunch, some of you may not have finished eating, but please go ahead and finish your lunch. It was delicious. We will resume our meetings downstairs in the basement level at 1:15. We believe that should give everyone enough time to take a short break. This afternoon, we're going to have financial presentations.
You will hear, first of all, from actuarial side, Japan. We will end the day and discuss corporate issues, which I know have been on the minds of many people. We've added that. Ken Janke will close today's session with a discussion of our capital and how we look at that going forward, our capital position for the corporation. I thank you all for your patience in the last few minutes. Now if you would like to finish your lunch, take a break. We will meet downstairs at the lower basement level at 1:15. Thank you very much.
We would like to resume the afternoon session in a moment. Please be seated. Before returning to the meeting, I think you noticed there's a bag in front of you. That's a special Japanese sweet dessert for you to enjoy. It's our 40th anniversary in Japan. It's a duck cake. You can eat it. I'm sorry? Yes? It's the 40th anniversary duck, it's in a cake. Before starting, let me remind you again that all electronic devices will be shut off or in silent mode. Thank you. The first speaker of the afternoon is Eric Kirsch, Executive Vice President and Global Chief Investment Officer. He joined Aflac in 2011. He's responsible for Aflac's global investment portfolio and investment teams. Eric is going to give you an overview of Aflac Japan investment, including perspectives on asset allocation and investment risk.
Good afternoon. It is great to see all of you here in Tokyo and to provide you with an update on our investment program. Since our financial analyst briefing in May, our investment strategy has stayed the course, and our new money allocations are on plan. Our investment results should exceed our budget net investment income for the year, and I expect our realized losses and impairments will be the lowest they have been in five years. For today's update, we want to provide you with insight into our strategic asset allocation, or SAA study, especially as it affects Aflac Japan investments, which we have targeted for completion by the end of the year. While still in progress and preliminary, we can provide some initial comparisons of this study with a prior exercise that we conducted with an external consultant in 2012.
One major difference today is that we now have the human capital and technical modeling tools to perform this complex work in-house as a result of our transformation program. Upon completion, the latest SAA study will provide us with a target portfolio for our investment program over the next few years, specifically from 2015 through 2017. Our goals for using an SAA approach included evolving Aflac's investment strategy from the historical buy and hold approach, which relied upon JGBs and JPY private placements, to a more diversified liquid strategy that included new asset classes while proactively managing our risks related to interest rate, currency, and credit. On one hand, we could choose a risk-free portfolio of government bonds, whether Japan or U.S., that minimizes risk and more closely matches our liabilities. We seek to target return above the risk-free rate and enhance risk-adjusted results.
Through market cycles, we believe that our approach will allow us to improve risk-adjusted returns. The SAA is an economic-based analysis which considers our asset portfolio, liabilities, and capital in conjunction with our corporate objectives and constraints. Using capital asset pricing model practices, we can model a variety of potential investment portfolios that minimize surplus volatility for a given level of return. The model portfolio options form an efficient frontier from which we can choose an optimal portfolio that should produce a target return for a given level of risk, primarily risk defined as surplus volatility. Upon selecting the optimal portfolio and obtaining all internal approvals, we develop an implementation plan. Typically, implementation, sometimes referred to as tactical asset allocation, is made through new money allocations. Opportunistic asset allocation shift can be done gradually, subject to gain and loss constraints.
As illustrated on this chart, key inputs include our risk management guidelines and policies determined by senior management and risk committee. Another input is our liability profile, modeled by our actuarial groups, which includes the types of liabilities and the associated duration and variability. We also consider current economic trends while using market-based information on a universe of potential asset classes, including historical risk and return profiles. We have defined investment objectives consistent with Aflac's corporate objectives, including meeting our key performance targets. Let me now illustrate how our portfolio has changed since we initiated the SAA framework in 2012. Please note that we are using the Aflac Japan portfolio statistics in these charts, not total consolidated portfolio figures.
In December of 2011, as the bar chart on the left shows, the Japan portfolio was heavily concentrated with 29% in JGBs and 58% in JPY private placements, including our reverse dual currency instruments. In addition, we had 8% in unhedged U.S. dollar bonds, which served as an economic hedge of Aflac's equity in Aflac Japan. Overall, 92% was JPY denominated and 8% was in unhedged U.S. dollar assets. From an accounting perspective, as the bar chart on the right shows, the Japan portfolio had 51% in held to maturity, or HTM, and 30% in available for sale, or AFS. To a large degree, the investment portfolio had built-in illiquidity, both in terms of assets and accounting designation. The next slide illustrates the recommendations from the first SAA work. Let me highlight those initial recommendations, which apply to the three-year time period starting in 2012 and going through 2014.
We targeted a new investment program focused on public U.S. dollar bonds, which are more diversified and liquid than our private placements, with the U.S. dollar currency exposure hedged via rolling forwards. The majority of our new cash flow would be invested in U.S. dollar corporates, with a targeted allocation of approximately 25%. We also targeted an allocation to growth assets of up to 3%. These growth assets might include public and private equity, real estate, infrastructure, and hedge funds. Additionally, we targeted small allocations of around 3% and 2% to bank loans and emerging markets, respectively. We aim to decrease our JGB and JPY private placement allocation as we directed new monies to the new asset classes that I just mentioned.
I'd also point out that we were decreasing our use of the HTM category and increasing our use of AFS category as we had planned for adoption of the policy reserve matching, or PRM, accounting classification. On this slide, you can see our progress toward achieving our allocation targets from the end of 2011 through June of 2014. Given the large amount of new cash flow in 2012 and 2013, and because we had ceased buying private placements, we allocated a large percentage of our new money to U.S. dollar bonds through most of 2013. As of June 2014, we were very close to our targeted allocation to dollar bonds, which represented 21% of the portfolio. Our current hedge ratio is approximately 64% of dollar bonds hedged back to JPY. Our allocation to JPY private placements went down significantly to 34%.
I should point out that during 2013, we tactically adjusted our targets due to the temporary spike in U.S. dollar interest rates, which impacted our solvency margin ratio, or SMR, and hence our investment goals. Our JGB allocation ended up higher, currently at 42%, as we tactically shifted more of our money to JGBs while initiating the PRM designation to lower our SMR volatility. We did not allocate any new funds to growth assets, high yields, or emerging market debt. As this slide shows, the portion of the Japan portfolio classified as HTM has declined to 42%, while AFS has remained relatively flat at roughly one-third of the portfolio. The amount of JGBs currently classified as PRM represented 15% of the Japan portfolio at the end of June 2014. Over this time period, you can see the significant changes in our investment portfolio.
I would highlight that these changes have increased the diversification and liquidity of our portfolio, created a much more flexible investment strategy, and achieved or exceeded our investment goals. I would now like to illustrate very preliminary findings from our new SAA work, which will serve as our guidepost for the next three years, beginning in 2015. These preliminary results incorporate current information about our portfolio, liabilities, asset classes, capital, and risk guidelines. These, of course, are subject to change as we complete the study over the next few months. Even at this early juncture, it appears to confirm our initial SAA performed in 2012 and that we are on the right track. Specifically, we expect the allocation to JGBs and U.S. bonds to continue to be a core part of the target portfolio. Exact ranges and characteristics are still being finalized.
Private placements and reverse dual currency bonds will be in the portfolio and have natural maturities and potential calls over the next few years. Moreover, we won't be buying any new privates. We expect our high yield and emerging market allocations to remain about the same. We could increase them if we see opportunities. Finally, growth assets will likely be reaffirmed for future allocations, which were recommended in the prior SAA study. These preliminary findings are confirming many of the recommendations of the original study. We have a few more months of work ahead of us, including a very important governance process, which I would like to review with you. At Aflac, we have a well-defined governance process, including processes at Aflac Japan and Aflac U.S. We cannot move forward until the study has been presented to the relEVERnt governing bodies and received final approval.
In addition, as part of our project, we have included all of our business partners, such as risk management, financial planning, and accounting, to get their input, feedback, and provide a check and balance to the team's work product. There is an SAA steering committee of senior peers that meets monthly to provide the working team with feedback and guidance. As this work product has developed, we conducted preliminary meetings with the Japan Internal Investment Committee, Global Investment Committee, and Investment and Investment Risk Committee of our board. This allowed us to give them initial insights and receive initial feedback, which we may wish to consider in our planning. As we finalize results, we then go through a well-coordinated approval process. This starts with Aflac Japan, where we would present for deliberation and approval to the Japan Internal Investment Committee.
Upon receiving that approval, we would present to the Japan Management Committee for deliberation and approval. The next step is to present to the Global Investment Committee for approval on a global basis. Next, we present to the Investment and Investment Risk Committee of the board for their approval. Upon that approval for Aflac Japan investments, it goes back to Aflac Japan for final sign-off by formal written approval by the president of Aflac Japan, referred to as Ringi. Let me now expand on implementation. It is a function of both tactical asset allocation and, for us, investing new money flows in new asset classes. The new asset classes are primarily growth assets such as private equity, real estate, infrastructure, hedge funds, and public equity. These new asset classes will form the core of our outsourced investment program. As we invest, we will be both opportunistic and prudent.
We will consider important variables such as the state of the investment market and the state of the asset class within the cycle. We aim to fund these new investments and average into them over time while taking advantage of buying opportunities at relatively cheap valuations. We will also consider unique characteristics of each asset class. For example, with private equity, we may choose to build a portfolio over different vintages throughout the cycle to diversify the exposure. We would also consider our budgeting process with respect to key metrics such as net investment income. Depending on timing, we will have a better idea later this year on our flexibility to allocate funds to new programs. I would like to spend a few minutes discussing our view on risk management.
As I mentioned earlier, our team, which consists of market strategists and professionals from the credit, portfolio management, and risk areas, focuses on the risks embedded in the portfolio, which includes exposure to U.S. and Japan interest rates, credit markets, and currency. These risks will vary depending on macro market conditions. Our team uses a well-defined investment process to assess these risks. We also have risk limits in place, which are calibrated to capital targets. Our investment team is then allowed to assess market opportunities within the prescribed risk-taking limits. We conduct extensive modeling and stress testing of the portfolio using both deterministic and probabilistic scenarios over numerous market cycles. In these stress test models, we compare the existing portfolio and target portfolio and apply a large number of historical scenarios to analyze their impact on SMR.
Our goal is to ensure that we stay above the firm's targeted minimum SMR range of 500%-600%. I should emphasize that our risk teams in Japan and the U.S. do independent stress testing to validate models, assumptions, and results, and of course, act as a check and balance to the front office. Of course, our investment team hopes to further minimize SMR decline by being proactive in our management approach around the key risk factors. There could be no assurance that we will be successful. From a risk management perspective, we assume the worst case. Our senior management understands that these worst-case scenarios are possible, yet of low probability. That is why contingency plans are in place. Otherwise, we would not take such risks. Let me tie this together in terms of achieving risk-adjusted return.
As you've heard, our risk limits are set by Aflac and calibrated to our targeted capital and profitability objectives. Our investments back the most important promise that we make to our policyholders, to be there when they need us most by paying claims fairly, promptly, and accurately. Hence, our focus on asset liability management to maintain liquidity and minimize risk while using surplus to generate excess returns at minimum volatility levels. We could certainly achieve this by buying risk-free assets such as JGBs, placing them in PRM, and thus greatly minimizing all of these risks. However, we would trade off enhancing returns, both economic and key annual targets such as net investment income. This is why we carefully do the SAA work to establish parameters that allow us to take risks, enhance the return, and add value for our stakeholders through disciplined investment and risk management principles.
Our enhanced investment capabilities developed through the transformation program allow us to actively manage our portfolio through market cycles, to be opportunistic while avoiding risk, and to achieve superior risk-adjusted returns versus the risk-free rate of an all-JGB portfolio. Let me conclude by saying I hope you found this of interest. I know our framework at Aflac has evolved from when I started in 2011. This new level of sophistication provides a foundation for world-class investment management and sound investment principles, which will benefit all stakeholders. I am extremely pleased with our results and optimistic about our future. Thank you.
Thank you, Eric. Next, we'll hear from Susan Blanck, who is Executive Vice President of Aflac and Aflac Japan and Corporate Actuary. She joined Aflac's Actuarial Department in the U.S. pricing area in 1993. She's going to discuss Aflac Japan's financial results in more detail.
Thank you. Good afternoon. At our May analyst meeting, you'll recall that Chris and Todd covered our financial results and capital management initiatives in great detail. Today, I would like to give you an update on some of the metrics they covered. Additionally, I'll discuss other items affecting our financial results in Japan. As you are aware, Japan's Financial Services Agency, or FSA, requires all companies to submit financial reports and disclosures on an FSA accounting basis. The FSA-based numbers are quite different from our U.S. GAAP filings. I will use the FSA-based financial report in many of the following slides to provide better comparability with other life insurers operating in Japan. FSA-based accounting has a March 31 fiscal year. As you can see from this chart, premium income for the life insurance industry as a whole increased from 2011 through 2013, and then saw a decline in 2014.
Aflac experienced a large surge in premium income growth in 2010 through 2013 as we generated strong sales from our higher premium first sector products, particularly WAYS and child endowment. Both of these products can be purchased using the discount advanced premium payment method or DAP. As we have mentioned, more than 80% of all WAYS products sold utilize DAP. The strong usage of DAP intensified the surge in our premium income growth rate on an FSA basis. This is because on an FSA basis, all premium received, including DAP, is designated as premium income for FSA accounting purposes. This FSA accounting treatment of DAP contrasts with U.S. GAAP and U.S. statutory accounting practices, which stipulate that premium income only reflect premiums earned in the reporting period, not premium received in advance.
2014 showed a sharp decline in premium income growth as we saw declines in first sector sales following our product repricing that was effective beginning April 2, 2013. For the fiscal year ended March 31, 2014, Aflac's premium income declined 16% to approximately JPY 1.7 trillion. Historically, Aflac has derived more than 90% of our premium income from renewal premiums due to the high persistency. We saw this shift in 2010 through 2012 with a significant increase in sales and greater utilization of DAP, particularly in the bank channel. We've now returned to levels more consistent with what we've seen historically. As of March 2014, Aflac Japan's total assets increased 9.8% to JPY 10.1 trillion over the prior year. As Tohru Tonoike mentioned, this places us seventh in the life insurance industry in terms of total assets.
Keep in mind, the amount of invested assets fluctuates in responses to changes in the financial markets. However, even with the impact of the financial crisis and our investment portfolio de-risking efforts, we've achieved steady growth in total assets over the years. In 2003, Aflac Japan became the largest life insurance company in terms of individual insurance policies in force, a position we've maintained ever since. In 2009, we became the first life insurance company in Japan that reached the milestone of 20 million policies in force. We saw our policies in force increase 1.8% for the fiscal year ending March 2014, reflecting our strong persistency and policy sales. I will now turn the discussion to new annualized premium sales. For these slides, I am using calendar years that are consistent with U.S. GAAP reporting periods.
Aflac Japan new sales on a premium basis increased strongly, rising from JPY 210 billion in 2012 from JPY 161 billion in 2011. Following rate increases on our first sector products in April 2013, sales declined to JPY 149 billion. 2013 also saw a renewed focus on third sector products and produced a 4% increase in new annualized premium third sector sales. As we've discussed, Aflac Japan's revenue composition has evolved over the last several years, primarily driven by changes in our sales mix. Until 2009, our cancer and medical products were the primary drivers of sales. In terms of new AP, first sector AP sales grew from just under 30% in 2009 to 65% in 2012. In 2013, we saw the proportion of first sector sales in terms of AP drop to 50%.
In the first half of 2014, first sector AP sales accounted for only 36% of the total new annualized premium sales. The shift in new sales in recent years has also impacted the composition of our in-force premium. Our in-force AP has grown nearly 150% from 1998 to June 2014. In 2008, our cancer insurance accounted for 51% of in-force premium, while medical accounted for 30% of total in-force premium, and WA accounted for just 1%. As of June 2014, cancer, medical, and WA accounted for 37%, 26%, and 14% of total in-force premium, respectively. This represents a significant change in our in-force block of business in a short period of time. It should also be noted that the proportion of WA in our in-force AP will decline as WA policies reach paid-up status.
This is because once a policy becomes paid up, it is not counted in the in-force AP number. I will provide more information on this later. When looking at this chart, I would note that the core health and other category includes cancer and medical insurance products, along with several other products that are not actively marketed. Importantly, the other component of this category represents less than 10% of total revenues for all years presented. The ordinary category includes WA, child endowment, and other life products. As you can see, Aflac Japan's revenue composition has changed over the last three years, with the contribution of the ordinary product line having grown significantly. In 2009, the ordinary life category was almost 10% of total revenue. In 2013, the ordinary category grew to just under 27% of total revenues.
Aflac Japan continues to produce increasing revenues in yen terms, despite slower investment income growth, primarily related to low new money yields. Revenue growth slowed in the last half of 2013 as we experienced a decline in the sale of first sector products. This was primarily due to the price increases that occurred in April 2013. It's important to note that certain product features, such as limited pay and discount advanced premium, cause revenue to develop differently for US GAAP and stat reporting bases versus FSA. Again, more information will be provided on that later. Additionally, 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 was about 44%, and this increased to more than 45% at the end of the first quarter of 2014. Keep in mind, 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 is no impact since the reporting basis is in U.S. dollars. Japan's benefit ratios were fairly flat from 2009 through 2011. However, with the significant increase in WA sales in 2011, 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 and continued improvement in claims experience for our third sector products.
Additionally, the reinsurance agreement we entered into effective September 2013 reduced the total benefit ratio by 50 basis points in the fourth quarter of 2013. I would note that the benefit ratio was further reduced due to the impact of currency translation on revenues from dollar-denominated investment income. The weaker yen suppressed the benefit ratio in the fourth quarter of 2013 by 90 basis points. In the first six months of 2014, we saw the benefit ratio continue to decline. The September 2013 reinsurance agreement reduced the benefit ratio by approximately 50 basis points in the first half of 2014, and we expect this impact on the benefit ratios to continue at a slightly declining rate going forward. The higher proportion of first sector sales and lower commission expense associated with those sales caused the expense ratio to decline from 2010 to 2013.
In the first six months of 2014, we have seen the expense ratio increase primarily to the higher proportion of third sector sales. Our pre-tax profit margin increased from 2009 through 2011. In 2012, we saw a decline in the pre-tax profit margin as we saw a somewhat higher benefit ratio, primarily reflecting reserve strengthening on certain closed blocks of business that include care and dementia products. The profit margin increased in 2013 and in the first six months for 2014, reflecting continued contribution from favorable claim trends as well as the impact of a higher proportion of new business coming from third sector sales. In the near term, we expect revenues to grow at a slower pace and the profit margin to stabilize as third sector sales are a larger portion of new annualized premium sales versus first sector sales.
Let me now update you on profit margins by product category that we communicated at the analyst meeting in May. I hope this gives you greater insight into assumptions supporting the EPS objectives that we communicated for 2014. Each product category shown on this slide reflects ratios for benefits, expenses, and profit margins to total revenues, which were used in the corporate profit model to develop our earnings guidance. The ratios represent the projected three-year average ratios for 2014 through 2016. I would remind you that there will be seasonality reflected in our actual quarterly results. However, we expect the annual average rates will be within these ranges for 2014 through 2016, but actual results will vary based on differences between our actual and assumed claims and volume mix by product category.
I would like to now provide you with some details on the impact that our limited pay products, such as WAYS, will have on our profit emergence in the near future. As Chris mentioned at our meeting in May, future revenue growth will be suppressed as we see limited pay products in our in-force block reach paid-up status. When these products reach paid-up status, they will no longer contribute to our premium income. However, it's important to remember that we continue to recognize profit on these policies after they reach paid-up status. This is because under U.S. GAAP accounting, 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. In that way, the profits are spread over the life of the policy.
As we have mentioned previously, we no longer sell the five-pay version of WAYS due to our desire to limit disintermediation risk. However, we continue to sell other limited pay products, including a 10-pay version of WAYS. This table shows the annualized premium of our in-force block of limited pay business for policies reaching paid-up status from 2014 through 2021. I will now focus my comments on several matters related to our operations. This slide shows that persistency has improved across the life insurance industry. Facing a more competitive new sales environment in recent years, Japanese life insurance companies have put greater emphasis on maintaining their existing customer base. I would note that for many years, Aflac Japan has consistently maintained the highest level of persistency within the industry.
We believe that our strong persistency rate is an indication of high customer satisfaction levels and consumers' confidence in Aflac's overall financial strength. Our persistency rate declined in 2014, primarily due to the impact of the introduction of our new medical product. In addition, we saw somewhat higher lapse rates associated with policyholders in our in-force block reaching retirement age. Let me briefly cover operating expenses. As can be seen from this slide, our maintenance expense for policy in force is considerably lower than the other top insurers in Japan by asset size. Our time-tested expense management is structurally embedded in our business model. However, recently, we have seen new entrants to the market that are also effectively controlling expenses. In November 2011, a corporate tax rate reduction was passed in Japan's Diet.
The first phase of that rate reduction occurred in April of this year, with the tax rate being lowered from 36.2% to 33.3%, effective January 1, 2013. The corporate rate in Japan declined once again earlier this year in April, decreasing to 30.8%. Additionally, the rate is expected to further decrease in March 2015, pending certain macroeconomic indicators, with the final decision being made in December of this year. Since Aflac Japan is a branch of the U.S. subsidiary, taxes paid in Japan generate foreign tax credits for the consolidated U.S. tax return and are used to offset our U.S. tax liability. On a consolidated GAAP basis, there is no impact to the overall tax obligation. However, the corporate tax rate change is anticipated to result in additional cash payments by Aflac U.S.
Another tax change that Charles mentioned earlier was regarding consumption tax, also referred to as the tax hike bill. As Charles noted, the consumption tax in Japan increased from 5% to 8% beginning April 1, 2014. Beginning October 1, 2015, the consumption tax will rise to 10%, pending certain economic indicators. Similar to the corporate tax rate change, the final decision on this increase will be made in December of this year. Our general operating expenses will increase slightly because the consumption tax will be assessed on goods Aflac Japan purchases. Additionally, consumption taxes are also levied on commissions paid to associates, and Aflac bears responsibility for this tax increase. Finally, let me wrap up the tax discussion by providing the impact on earnings.
We expect the overall impact of the increased consumption tax on Aflac Japan's earnings on a GAAP basis to be around JPY 3 billion-JPY 4 billion a year, with the first increase, which was effective April 1, 2014. This will grow to JPY 5 billion-JPY 7 billion a year following the second tax hike, which is expected to be effective October 1, 2015. At today's JPY-dollar exchange rates, this results in an EPS impact of $0.04-$0.06 following the first tax hike, and $0.07-$0.11 after the second tax hike. We anticipate EPS growth will be suppressed by less than 1% each year. Let me conclude my presentation this year by updating you on our first-sector sales strategy going forward. As we've indicated, we've concentrated our sales efforts on third-sector products since we repriced our first-sector products in April 2013.
We've done this by focusing production credit and production bonuses away from the first sector and towards third sector. For the future, we plan to utilize first sector products that contribute to Aflac's revenue growth and provide solid contributions to profit while also managing disintermediation risk. As we've discussed for several years, first sector products typically have higher premiums and lower profit margins than third sector products. However, the profit contributed by a first sector policy can be substantial, since the profit margin is applicable to larger premiums. First sector products are part of our strategy for future growth in both the bank channel and traditional channels. For the bank channel, we believe there will continue to be a market for attractive first sector insurance products.
For the traditional channel, we believe that having attractive first sector products is critical to attracting new customers, because it allows us the opportunity to offer both first sector and third sector insurance solutions. For example, for WAYS policies sold by the traditional channel in 2013, we have seen three third sector policies sold for every four WAYS policies sold. We believe this strategy will enable us to attract new customers and increase revenue and profit through first sector sales, while also optimizing opportunities with those new customers by selling them a third sector product. I hope my presentation has given you a better understanding of our strong financial position in Japan's insurance industry. I'll turn the program back over to Kurose-san. Thank you very much.
Thank you, Susan. Our last speaker today will be Ken Janke, Executive Vice President and Deputy Chief Financial Officer of Aflac Incorporated. He is also the President of Aflac U.S. He joined Aflac Incorporated in 1985 as Manager of Investor Relations. He will be covering Aflac's capital position and capital management. Kurose-san.
Well, I hope the earthquake and the slightly cooler temperatures here will get you through the typical jet lag period. As Kurose-san said, today I'm going to talk about our capital position and our thoughts on capital management. As a starting point, though, let me first comment on Aflac's financial strength from a rating agency perspective. This chart shows financial strength ratings from the major credit agencies for the largest companies operating in Japan as ranked by policies in force. As you can see, our ratings from S&P and Moody's compare favorably with the large Japanese life insurers and are consistent with large foreign companies operating in Japan. Although we don't believe we compete directly based on these ratings, we do consider them important. Our policyholders, distributors, the regulators, our shareholders, and particularly our debtholders, expect us to maintain a strong financial profile.
In Japan, there are three financial indicators that are most widely used to measure capital adequacy and profitability of a life insurance company. The first is the solvency margin ratio or SMR. As you know, the SMR is a Japanese version of the risk-based capital requirement in the U.S. A primary difference, however, between the RBC and Japan solvency margin ratio is that the SMR includes unrealized gains and losses on available-for-sale invested assets. Our SMR at the end of June 2014 was 832%, up from 775% at the end of March of this year. The second indicator is the real net asset ratio, which uses total assets as the denominator rather than risk as defined by the SMR formula. Both the solvency margin and the real net asset ratios have minimum regulatory levels as required by the FSA.
Insurers in Japan must maintain their solvency margin at 200% or higher and a net asset ratio at zero or greater. Aflac Japan's net asset ratio was 15.2% at the end of June. Basic earnings is the third indicator, which measures earnings from core insurance operations and excludes items such as realized investment gains and losses on securities or derivatives, among other things. Aflac Japan's ratio of basic earnings to assets based on June 30 results was 0.64%, which was the highest ratio of any of the top 10 life insurers as ranked by premium income. As I mentioned, the solvency margin ratio is similar to the RBC concept, the formula is similar as well. The SMR numerator is a capital component of the equation and is referred to as the solvency margin gross amount.
The solvency margin gross amount includes retained earnings after a provision of profit repatriation, as well as unrealized gains and losses on available-for-sale investments. The numerator also includes what is known as the core margin. The core margin concept was introduced in 2012 and creates a ceiling for taking credit for policy reserves that are in excess of cash surrender value. The core margin includes retained earnings, price fluctuation and contingency reserves, but it does not include unrealized investment gains. However, the core margin does include unrealized investment losses. That means that the SMR is impacted significantly if the portfolio is in an unrealized loss position. In effect, unrealized losses are counted twice. First, as a direct reduction to the solvency margin gross amount, and second, as a reduction to the core margin.
The solvency margin gross amount also includes the tax amount on grossed up retained earnings, as well as the price fluctuation and contingency reserve. The denominator or risk component of the SMR calculation captures several aspects of an insurance company's financial and operating risk. For Aflac Japan, the greatest risk amount relates to investment risk, which is composed of price fluctuation risk and credit risk. The second largest amount is related to interest rate risk that is embedded in policy liabilities. There is a greater risk amount for insurance contracts that have higher assumed interest rates than lower rates. The other risks, which include risk to insurance, business, and third sector insurance, have a much smaller impact on Aflac Japan's SMR. As I noted earlier, the SMR includes unrealized gains and losses on investments that are classified as available-for-sale.
Because we tend to hold long duration invested assets, this is clearly the most volatile component of Aflac Japan's regulatory capital. The continued low levels of U.S. dollar and yen interest rates, as well as the weakening of the yen, have resulted in an improvement in Aflac Japan's SMR over the last two years. In addition, the reinsurance agreement that we entered into last September materially increased the SMR and provided a sizable buffer to potential risks. Aflac Japan's solvency margin was 775% at the end of March, which was our fiscal year end. By the end of June, the SMR had improved significantly to 832. As you can see, the greatest contributor to the improvement in the SMR was the increase in unrealized gains on available for sale assets.
Under the current SMR formula, only 90% of unrealized gains are reflected in solvency margin gross amount, compared with 100% for unrealized losses. In addition, the core margin of the SMR formula improved since the end of March, which primarily resulted from the increase in retained earnings after the provision for profit repatriation. Outside the core margin calculation, growth of Aflac Japan's retained earnings improved the SMR by six points, and other factors, including slightly lower investment risk, also increased the SMR from the end of March to the end of June. At our analyst meeting in May, our chief risk officer, Todd Daniels, shared the sensitivity of our SMR to various external influences. Through the next several slides, I'd like to update you on those sensitivities using June 30th SMR data, beginning with Aflac Japan's exposure to U.S. dollar rates.
The growth of investments in U.S. dollar securities, which are classified as available for sale and therefore subject to mark-to-market adjustments, has caused the SMR to become more sensitive to changes in U.S. interest rates than it was in years past. This graph shows the relationship of our SMR to changes in yields of 10-year U.S. Treasury. We did reduce the sensitivity to U.S. interest rates by entering into interest rate hedges in the third quarter of last year on a portion of our U.S. corporate bond portfolio. The impact on the SMR from changes in U.S. dollar interest rates is not linear because the gains are counted at 90%, as I mentioned, with no impact on the core margin, whereas unrealized losses have a much greater impact on the solvency margin gross amount, and especially the core margin. The SMR is also sensitive to changes in Japan's yen interest rate.
This graph shows the relationship of our SMR at June 30th 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. In 2013, we began using policy reserve matching classifications on some assets, or PRM, to help reduce risk associated with future changes in Japanese interest rates, as this investment classification is exempt from mark-to-market investment treatment. Aflac Japan's SMR is also exposed to foreign currency risk. The non-yen assets in our portfolio impact the SMR in two ways. First, non-yen assets carry a higher risk charge than yen-denominated assets, although that charge is reduced for non-yen assets that are hedged into yen. Second, exchange rate changes influence our reported surplus position in yen when we translate unhedged U.S. dollar-denominated assets into yen.
Therefore, a weaker yen results in a larger solvency margin gross amount than a stronger yen. Aflac Japan's SMR is also sensitive to credit spreads. Similar to the impact from rising rates, the SMR declines when spreads widen because the fair values of the investments are reduced. However, these trends tend to have a negative correlation between credit spreads and risk-free rates. Therefore, the impact on bond prices does not tend to be as much as one might expect if only looking at changes in credit spreads. Having shown our sensitivities to various market risks, let me now discuss actions we have taken over the last few years to enhance Aflac Japan's capital position and mitigate potential risks from changes in interest rates, spreads, and foreign exchange rates. In 2012, we entered into a surplus relief transaction that benefited our SMR by approximately 20 points.
We have since entered into interest rate hedges on a portion of our U.S. dollar portfolio. As of June 30th, approximately 25% of Aflac Japan's dollar portfolio was hedged against the impact of rising rates. In addition, we've hedged about 64% of our dollar investments from a foreign currency perspective, which protects our capital position if the yen strengthens significantly. As I mentioned earlier, we began using policy reserve matching, or PRM, for newly purchased Japanese government bonds for Aflac Japan's portfolio. Finally, the 2013 reinsurance transaction, as mentioned, had a significant benefit to Aflac Japan's SMR, increasing our ratio by about 111 points last year. As we think about managing Aflac Japan's capital position going forward, we continue to believe that reinsurance is an effective and efficient tool for us.
One objective we will strive for in the future capital management initiatives involving reinsurance is for the net result to be accretive to earnings per share. To that end, we are currently exploring the best structure that will allow us to maintain a strong SMR for the benefit of our policyholders, while also enabling us to increase capital flows to the U.S. to generate better returns for our shareholders. For example, we know we can achieve additional reserve relief through a reinsurance transaction similar to the one we executed last year. We are also looking at the possibility of executing a separate transaction with the reinsurer to assume some portion of that risk into an Aflac Incorporated entity. The net effect of these two separate transactions would be to reduce the cost of reinsurance while enhancing our ability to manage our overall capital resources.
I'd point out that this concept has not been fully vetted or finalized. Other ideas may emerge that prove to be preferable. We wanted to give you some sense of one approach we are investigating with the assistance of some outside experts in this particular area. Finally, I'd note that in the event of extreme stress to our SMR, we 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 a very effective short-term tool to utilize. I'd like to turn from capital flows in Japan to the U.S., beginning with a discussion of the various accounting methods that we use to report our financial results.
As you heard from Sue, we report the results of Aflac Incorporated and subsidiaries on a GAAP basis, you know we also report our insurance subsidiaries on a U.S. statutory accounting basis. For Aflac Japan, we report on an FSA basis. As you know, GAAP accounting is accrual-based and reflects the concept of a going concern. By comparison, statutory accounting is a combination of accrual and cash accounting, while FSA accounting is more cash-based. Statutory and FSA methods are also more conservative than GAAP accounting, especially in the areas of reserving and expense recognition. Due to reserving requirements, FSA reporting is the most conservative accounting method for Aflac. To give you some sense for how these methods differ, let me show you a comparison of Aflac Japan's results for 2013 on the three different accounting bases.
I would like to draw your attention to two important aspects of this data. First, these numbers are on an operating basis, pre-tax operating, and therefore exclude realized investment gains and losses attributable to Aflac Japan. Second, I'd point out that there is actually no separate statutory entity for Aflac Japan, as it's a branch operation of our U.S. business. However, for this illustration, we have prepared a condensed statutory income statement to show you how the results differ with the various accounting methods. As you can see, revenues emerge more quickly on an FSA basis due to the cash nature of that method. For instance, Aflac Japan's FSA-based revenues were influenced by the sale of our WAYS product, especially those that were sold with discounted advanced premium. At the same time, the reserve requirements under FSA reporting are much more stringent than other accounting bases.
This is true for the first sector as well as the third sector and is clearly seen through the benefit line of this chart. Acquisition costs are not deferred under either statutory or FSA accounting, which results in higher operating expenses compared with GAAP accounting. I should note that the FSA-based results in this chart reflect the impact from last year's reinsurance transaction. The result of greater reserve requirements and higher expenses is lower FSA-based profits in early policy years, especially when compared with GAAP accounting. Eventually, the FSA profits become larger than the GAAP-based profit, but this does not usually occur until much later in the life of our long-duration policy contract. As this graph shows, pre-tax earnings for Aflac Japan grew at a fairly similar rate from 2009 through 2012, although our FSA results were noticeably lower than stat or GAAP.
In 2001, we were required to begin using the standard reserving interest rate for third sector products on an FSA basis. That change, along with other computational differences, is largely responsible for the significant gap between FSA and GAAP-based pre-tax operating earnings. However, you'll notice that our FSA earnings were very similar to our statutory earnings for 2013. That convergence was attributable to the reinsurance transaction, which reduced benefits and increased pre-tax earnings by approximately $1 billion on an FSA basis. By looking at the dashed blue line, which excludes the impact of the reinsurance transaction, you can clearly see that we would have experienced a very similar pattern as in prior years when comparing FSA to both GAAP and statutory financials. Although the reinsurance transaction had a significant impact on Aflac Japan's FSA-based earnings, we did not repatriate any portion of that benefit in 2014.
Instead, we elected to retain the capital in Japan to provide basically a one-time lift to our capital position, so we are better able to absorb potential risk to the SMR ratio without any material changes in our capital management plan. However, we still repatriated JPY 131.4 billion this year, or $1.3 billion based on our SMR level and capital generation through increased net earnings. As we've discussed, we view the amount that we repatriate as being highly influenced by our SMR. However, FSA-based earnings remain a consideration as they are an important contributor to the overall level of the solvency margin ratio. For 2015, our FSA earnings outlook has not changed from the projections we disclosed at our analyst meeting in May. I would remind you that Aflac Japan's net income can vary considerably by such items as actual sales and realized investment gains or losses.
That said, we currently expect to earn approximately JPY 140 billion to JPY 150 billion on an FSA basis for the year ended March 31st, 2015. Assuming no changes in dollar and yen interest rates from the end of March 2014 through the end of 2015, and a yen rate of JPY 97 to JPY 107 to the dollar, we would expect our SMR to be in the range of 780%-830% at the end of next March. Under that scenario, we would also expect to repatriate approximately JPY 110 billion to JPY 150 billion next year. Because of potential volatility in interest rates and foreign currency rates, it's possible the capital we ultimately repatriate from Japan in 2015 could be significantly different than the estimates shown here. I would also note that the estimated repatriation in this chart does not include any benefits from additional reinsurance transactions.
I'd like to relate Aflac Japan's capital position and repatriation to a discussion of Aflac Incorporated cash flows. This slide shows projected inflows and outflows to Aflac Incorporated cash and cash equivalents. As you can see, we anticipate sending dividends of approximately $1.5 billion to Aflac Incorporated in 2014. Those dividends are primarily funded by profit repatriation from Japan, as well as cash flow from our U.S. insurance segment. We expect management fees and allocated expenses to be about $305 million this year. In addition, approximately $200 million was moved to cash following the maturity of a parent company investment. The sale of other treasury assets accounted for most of the $138 million in the other category. Operating expenses at the parent company are estimated to be about $74 million this year. Interest expense is expected to be $197 million, which is largely unchanged from last year.
You'll note that we paid off debt that matured in July amounting to $337 million. We again expect to increase the cash dividend in line with this year's earnings growth per diluted share before the effect of the yen. As has been the case for the last three years, we would anticipate that the board of directors would contemplate any increase in the dividend to be effective with the fourth quarter payment. We still plan on purchasing $1 billion worth of common equity in 2014. This chart shows the change in Aflac Incorporated's cash and cash equivalents from 2013 through the end of 2014. I'd note that in 2013, we issued debt of $700 million and had no debt maturing. As such, cash inflows exceeded outflows by about $250 million. In 2014, we have not issued any debt at this point.
We have had debt that matured and was repaid. In addition, we increased share repurchase in 2014 by about $187 million over 2013. As a result, cash outflows from the parent will exceed cash inflows in 2014, yet we still project a balance of cash and cash equivalents of roughly $862 million at the end of this year. I should note that that estimate includes cash that we really consider to be set aside for other purposes. For instance, we have a balance of $180 million of cash collateral related to cross-currency swaps on our debt. We also have $300 million earmarked as a pre-funding for our 2015 debt maturities and $41 million of money market funds associated with a short duration portfolio.
We view the best estimate of our liquid cash position at Aflac Incorporated to be about $340 million at the end of this year. Our financial objectives for 2014 remain pretty consistent from prior years. First, we want to maintain a strong financial profile for the benefit of all of our policyholders and other constituencies. In keeping with that objective, we want to maintain minimum risk-based capital and solvency margin ratios of 500%-600%. I'd note that we are currently maintaining our capital levels above that stated minimum, which provides us with a buffer to macro risks, but also gives us capital management flexibility. We also want to achieve our objective for increasing operating earnings per diluted share, excluding the impact of foreign currency. For 2014, we expect to be in the range of 3%-4% earnings growth before the impact of the yen.
It's also our objective to produce industry-leading returns on equity. This year, we expect our currency neutral operating ROE to be in the area of 20%-25%. We want to maintain our debt to total capitalization ratio at a level of 25% or less, excluding unrealized investment gains and losses in equity. We also want to support our financial strength and debt ratings for the benefit of all of our constituencies. Lastly, we want to return capital to our shareholders by increasing the cash dividend and through increased share repurchase activity. I hope this discussion has enhanced your understanding of our capital position and strength in Japan, as well as the opportunities to maintain strong capital flows to the United States for the benefit of our holders. Thank you for your attention. I think we're ready for the next panel.
That's the end of our presentation today, and we will move on to the Q&A session for the afternoon. Please wait for a moment. We're going to prepare the tables again. Before that, we just found a handkerchief upstairs. Does somebody recognize if this is yours? Black one. Barneys, New York. Don't recognize it? Can I have it? Yes, it's expensive. Yes. I'm sorry. Now, before moving to our Q&A session, let me mention again that please follow these three rules when asking your question. First, please tell us your name and firm. Second, please wait for a microphone before you talk. Third, we'd like to limit yourself to one question so that everyone will have a turn. Now. Still waiting for people.
Thank you. This is Jay Gelb from Barclays. On the Aflac Japan operating ratios, there was a comment in there about revenue growth stabilizing and margin stabilizing near term. I would just like some clarification on what the drivers of that would be and what you're thinking about longer term expectations on both those areas. Thank you.
I think the key to that is based on the current sales assumptions we are using, but it is also influenced by these limited pay plans reaching paid-up status because those will suppress revenue growth, but profits will still continue to flow. Longer term, a lot's going to depend on where new money rates go and where sales go. A good part of our earnings is from the in-force block, and certainly for the next 1 to 2 years, that's the big driver. If you look further out, sales have a bigger impact, and of course, new money investment income has a bigger impact.
Get the mic.
Is that better?
Yeah.
Question about after the lunch presentation, just to better understand what's happening there. The way you've explained Japan Post has been very incremental up until now. Obviously, adding 7,000 new branches is not incremental. That's pretty significant relative to where we were. Is it still fair to say, even after that's turned on, that's still going to be an incremental assumption and contribution for sales? Is there a change to that? Relatedly, will the extra 7,000 branches be up and running immediately in terms of sales, or will they still be, even after they're turned on, a gradual expectation associated with that?
Morgan Wright. Right now, there are 3,000 networks. They're selling our product. These 3,000 post offices are rather big. 7,000 additional networks are smaller in size than 3,000. That is the reason we accept incremental sales. 7,000 additional networks will not really give us immediate ramp-up of the sales.
Look at the potential of the Japan Post business, I think that's very whether we are talking in the long term or short term. We think that the Japan Post would give us a very sizable amount of increase in our sales over time. Since Japan Post is a huge institution and until recently, it was a part of the government, it takes time for them to pick up their cancer insurance business as much as we are doing now. In the long term, yes, it can be very sizable increase, but it doesn't happen in a year or two. We expect that the gradual growth of the business with Japan Post.
Furthermore, if I can just add really quickly, we've reallocated resources as well. Obviously, our banking financial institution department that was dealing with them from a sales perspective had 20,000 branches nationwide that they were focused on selling through. The expertise they've gained, especially among some of the Shinkin banks and smaller regional offices, is expertise that we're shifting over and helping manage the Japan Post implementation. While Tohru is correct, it will take a period of time for these 7,000 offices to come online and get up to speed. We are allocating our resources internally to make sure that we can expedite that as quickly as possible, despite what is a very long-term governmental organization.
Okay.
Thank you. Randy Binner from FBR Capital Markets. I want to follow up on Tom's question a little bit there and maybe just hit it from another perspective. I think the commentary upstairs at lunch was that this next 7,000 is going to be more rural than urban, and I know there's lots of different sizes in there, but if it does indeed skew more rural, is there any way that you can help us understand if that's an environment where there's more or less penetration of the cancer products that Aflac's trying to sell?
Well, Aflac actually do have our own branches in some rural areas. There are some areas where our penetration is pretty high. However, the Japan Post or post offices do provide universal service, they do have a very vast network to the very end of Japan. From that perspective, the market that we have not been able to reach will be accessed by the Japan Post and post offices. We do think, and we do expect that the penetration will gradually increase.
Misunderstanding. Both 3,000 offices, which are selling our insurance right now, and the 7,000 offices to be added, both of those groups have the locations both in the city areas, urban areas, as well as rural areas. What we are saying is that the 7,000 offices which will be added in October will be a greater percentage of the post offices located in the rural areas. That's what we are saying. Also, even though the rural areas are where the Japan Post is relatively strong, the size of the post offices vary. The ones in the urban areas tend to be large, and the ones in the rural areas are small. Even though the Japan Post has a competitive advantage in the rural areas, the business produced per office might not be sold. It's a kind of the combination of various factors.
Okay, next.
Thanks. Ryan Krueger with KBW. I had a question about the captive. Can you give us some sense about how far along you are in forming a captive for potential internal uses of reinsurance? I guess if that's going to take a while, would you consider another external transaction as you continue to work through that?
Sure. First of all, my comments didn't reference specifically a captive. It was an Aflac Incorporated entity. We do have one potential entity, for instance, with CAIC, a South Carolina licensed insurance company, or it could be the formation of a new entity as a subsidiary of Aflac Incorporated that we would retrocede risk from the reinsurer to us or a portion of that risk. These are work streams that are currently underway. I choose not to give you real probabilities of what might happen when. I would say that executing another transaction like we did last year, without commenting on size, is a little bit easier to see because we have a precedent. I think it's also easier to see that that would be a potential use for capital that could move to the U.S. for some shareholder-related purposes.
Any thoughts of retrocessions related to the comments in my presentation are going to take a little longer. Again, it's something that has not been fully vetted. We're working with an outside consultant to come up with what would be the best timeframe and the best solution for that. Really what this involves, you've heard Chris talk for quite some time. In May, we were very transparent. Our FSA-based reserves, as you know, are significantly higher than our stat-based reserves for the same block of business. He had mentioned also repeatedly that it would be our preference to not see that difference grow in those two reserving methods. Actually, in 2013, the reinsurance transaction was an effective means for not only slowing the growth in the difference, but actually reducing it a little bit.
Lastly, he's commented on wanting to do similar transactions, but if possible, at a lower cost. You may remember that last year's transaction that released about $1 billion of capital cost about $35 million, from my recollection, about $0.05 a share. If possible, we'd like to find a way to do it at less cost to the company. Retrocession is one of the ideas that came out of that thinking that may work for us. Again, we'll still work on it.
Okay.
Hi, Erik Bass with Citigroup. I had a question for Charles on what is the outlook for medical co-payments. Is there anything being discussed about potentially raising those further?
One of the issues that we have talked about in the presentation in the morning, Sue commented on this, is the government is looking at ways that are politically acceptable to the people and yet reduce the cost of healthcare. Co-payment increase, I talked about for elderly, 74, that had been executed. It's always an option that they will have to explore. Right now, what they're focusing on is, for example, reducing hospital stay dates, making sure that beds are being used in a way that helps efficiency and so on. Those are not as blatantly obvious, actually, to the people in terms of cost being reduced.
The Ministry of Finance officials that I have certainly talked to have said, we're not trying to mislead our people, but at the same time, we're trying to get the hospitals to do more to reduce costs and enhance efficiency and so on. As I mentioned, this council that has been created is going to step up its activities in the coming year, and it has done so this year as well because, as you recall
The tax and Social Security integrated reform and how they named it. You cannot increase consumption tax without looking at the expenditure side and not look for efficiency. I anticipate that the government will do even more this year and into next year, including introducing legislation next year. The ordinary diet session starts in January of next year. That legislation will be interesting to watch. In that, would they include increased co-payment increase or not? We'll see. Those all are issues that are looking at. The important point for your looking at this down the road is they're turning now to the expenditure, the Social Security reform side, now that they have worked on the first step of increasing the consumption tax. Again, the decision will be made in December, with the second phase.
If they actually do make that decision, even more so the pressure will be on the government to enhance or look for efficiency in the healthcare system. It is part of the equation, but not yet any news item to say this is happening this year, next year. It is part of the discussion.
Thank you, Colin.
Thank you. Colin Devine, Jefferies. I will start with Ken on this for the first part of this question. Ken, with respect to the SMR, how would that look if we had a simultaneous backup in both U.S. and Japanese rates to the 150 points, the example today, would that be additive? From that, so we frame our thinking probably correctly for what may happen to capital management. I would be curious to know what Eric and Susan are working with in terms of assumptions for future interest rates, both in Japan and the U.S. over the next, let's say, three years. In terms of the rate levels, probably the most important part is when the portfolio flips from an unrealized gain to an unrealized loss position. It varies a little bit by JPY rate.
It would take a move in JPY interest rates of about 150 or so basis points to move it to an unrealized loss, about 100 basis points on the U.S. dollar portfolio. The reason that is important is that is when you start getting hit, not only through 100% of the losses through the solvency margin gross amount, but also through the core margin where you are hurt by the unrealized losses as well. Those are the types of risks that we give great consideration to. I want to follow up a little bit with the prior question, too, because in thinking of the capital management process, virtually everybody on this panel is involved in one way or another. In addition, certainly Chris is. Todd Daniels, since the first of the year, has been our Chief Risk Officer. He has built out a very good team.
They're spending a lot of time in looking at the stress scenarios that Eric referred to in his presentation and thinking through what would happen as these different stresses might emerge and what our responses to those might be. What I'd also say to this, too, though, is when we think about this, we're not just thinking about it in the current window and what might happen based on what Yellen does in a week or so time, for instance. We're currently moving toward a multi-year capital management program that would involve the forecasting of our ratios, the stressing of those ratios, the opportunities to remit capital once we know that our policyholders' interests are firmly protected here, and then what might be the best use of that capital back in the U.S.
If we go to your graph, which illustrate 150 points rise in rates, can I effectively just add them together to project what's going to happen to your SMR or not?
To a degree. There may be some correlation in between those. For instance, you may not see if U.S. rates move 150 basis points, it's not clear, for instance, that you're going to see JGB yields move in parallel.
No, that was the scenario I was going for. You have a simultaneous move.
If they did, yes, you could basically add those sensitivities. Credit spreads a little different because it hits all the AFS assets.
Currently separate. Then for Susan and Eric, what they're assuming for rates.
I think a key behind this is SMR is certainly one lens and a very important lens for Aflac because it's a primary regulatory ratio. We are also expanding our analysis on an economic value basis. One of the interesting things there is typically if interest rates go up, yen interest rates, you actually see an improvement in your economic value position because liability values also change, and that typically outweighs the change in asset values. As Ken mentioned, really with the creation of Todd Daniels' team, we are doing much more robust stress testing than we've ever done before and really just doing a lot of what-if analysis. It's not strictly on what you see in those charts, but just other even deterministic scenarios. You also have the exchange effect. That's another big driver of where SMR goes.
As you see by the chart, if the yen weakens, SMR is improved, so all of those things will factor in. Then I'll let Eric touch especially on SAA.
Sure. I think the question remaining for me is the forecast or the view of rates in the future. First, I have to start with a reminder. We're in unprecedented territory. We're not trading rates or currencies based on fundamentals of economies. We're trading based on central bank activity. It's unprecedented. We're seeing a lot of reactions in financial markets that historically may not have happened. Having said that, when we look fundamentally, I'll touch on the U.S. The U.S. economy is finally starting to show some momentum, but it's not super momentum. It's good momentum. As we look a year out, we would expect 10-year Treasury yields to be higher, maybe to the 3.25%-3.5% level.
That's probably on the high side because for the Treasury to get to 4% and 4.5% we'd need to see 5% GDP, much stronger changes to the jobs numbers, and the structural reforms that are going on. We don't see that. Even if you assume in a base case, the U.S. economy goes at a 3% GDP, jobs numbers get a little bit better. We don't expect big inflation, though it might get to 2%. You're looking at a 3.5% 10-year Treasury, maybe two years out, 4%. That's our base case, but again, I put an asterisk there. Two months from now, we might be looking at some weaker economic numbers in the U.S. and Janet Yellen not being so talkative about changing the program. We saw that going into this year.
At the end of last year, if you'd asked me, I would have said the 10-year this year, in 2014, would have been over 3%, as everybody would have in the market, and we were all wrong. At the same time, relative to Japan, again, massive central bank policy, Abenomics. It's hard to say. On average, I would agree with a lot of Charles' comments. We think there'll be success. If I look out a year or two from now, if there's success and there's inflation, we would certainly see JGB yields higher than they are today. We wouldn't see the 10-year JGB at 2%, for instance, not in our thinking over the next two years. That would take some massive changes to the economy over here. Of course, let's not forget the geopolitical risk.
All the activity going on from Russia, the Middle East, et cetera, the terrorism thing. Those events, because we have thought about them very hard, particularly from a risk management perspective, what could go wrong? Well, for us, most of those geopolitical events are a good thing. Not a good thing for the world, certainly. What will happen if one of those events arises? There'll be a flight to quality. Rates will rally in the U.S. The yen will probably stabilize because it's a safe haven. In those environments, we actually end up from a portfolio standpoint and an SMR standpoint coming out pretty well.
Yeah. Susan, I didn't catch what you said you were assuming for rates in your reserve strength.
We do a lot of modeling around various levels, but I don't know, Chris, if you want to actually quote a number. I think we actually had assumptions in your May slides, which would've likely been 1.75%-2% as far as our core modeling. Of course, we also look at the impact of higher rates, and we push Eric daily to achieve those. Are you talking about pricing or more corporate modeling?
Pricing.
Say it again.
Sure.
In the reserves on a Japan FSA basis, it's 1%. U.S. GAAP, it varies, but I think we're around the 1.5%. It's actually in my May pad notes. You can look there.
Okay.
Hi, Seth Weiss, Bank of America Merrill Lynch. If I could return to the sales environment, it seems a theme, especially among third sector cancer insurance, is the increased need and under-penetration of cancer insurance in the Japanese market. If you look over the last five years, growth has been anemic, I think averaging less than 1% a year in terms of growth over that period. Compounded on top of that is, of course, Aflac's loss of market share. Maybe you could just comment on the broader market in terms of why growth has been so slow despite the increased need. Then maybe also touch on Aflac's position in the marketplace in terms of their market share here, if it's something that will be defended or if you see it continuing to slowly erode with further competition.
In terms of market share, we strongly believe that our share will not decline. The fact that it is declining right now is because we launched a medical product last year, our agencies have heavily focused on selling our medical product, which was launched last year. Of course, in the medical market, there are many competitors that have entered, it is not the price. As I mentioned earlier, Aflac's quality and the brand, the things like Premier Support, and some added value are being provided from Aflac based on our 40 years experience. With this experience, I think we are able to still increase our market going forward as well.
I guess the part of the question was, given the increase in the number of the people who developing cancer in Japan, why is the average growth rate of the cancer insurance as a whole is so slow, the 1% or so? I think the answer is, even though the people are aware of the risk of the cancer and they are more concerned about the risk, still that change is gradual. Again, the development of cancer is gradually increasing, so is the people's awareness.
Part of the insurance companies are trying to market their medical insurance in lieu of the cancer insurance. For example, some of the insurance companies are selling the cancer riders in addition to the medical insurance. We believe that the cancer is such a unique disease, it is the right way to promote and sell the treat of the cancer insurance and separate it from the general medical insurance. Part of the demand is met by the cancer insurance sold by the companies like Aflac. Part of the demand is absorbed in the increased sale of the medical insurance with the riders. I don't know if that answers to your question.
Okay, next. In the front row. Yes. In the front.
Howard Gleicher, Aristotle Capital. Thank you for taking my question. For Eric, am I correct in that, as a Japanese insurance company, you are somewhat, if not completely unique, in not owning any Japanese real estate? Will that change in your new capital plan?
I think that statement's generally true. Most of the Japanese insurers have some allocation to local real estate, in particular. It's definitely true, the historical investment strategy at Aflac was basically all fixed income, the JGBs and the yen private placements. As I've discussed in our SAA study, that bucket that I call growth asset, that's where real estate would fit, and we would be exploring Japanese real estate to global real estate. When and how much we might do is yet to be determined, it's definitely within scope as a possibility.
Even considering the past 20-year trajectory of the value of Japanese real estate, it's still something that you're looking at.
Well, let me frame it this way for clarity. We look at all the potential investment options. As I said, tactical asset allocation and implementation is a matter of relative value. By and large, I can't wait for the next market disruption. Now that we're in a terrific position with the portfolio, SAA, the capital, when there's a market disruption, I want to be a buyer. Whether that's Japanese real estate or emerging markets, I don't know. My team and I will look at all of those asset classes continually, make a relative value decision. Is it cheap? Is it expensive? Calibrate that to all of our risk guidelines. Within that context, we would make a decision which asset class we want to use. As we open up that door to growth assets, it doesn't mean I'm going to plow ahead.
It doesn't mean we're going to buy a little of everything. We're going to try to make some relative value choices and average in, and build that part of our portfolio really over time. Hopefully, we'll be able to do it through the cycle. When there's a disruption, buy it cheap, and when markets are going well, we'll find the best value within those asset classes at the time. Where Japanese real estate falls today, we haven't really gotten to that in our EVERluation yet. That's in 2015, particularly after we complete this SAA study.
Okay. The gentleman in the last row.
Thank you. Eric Berg From RBC Capital Markets. Sue, just a quick review. Can you review why the reduction in the corporate tax rate here in Japan in last year? I'm sorry, this year. I believe you said it did not affect the, do I have it right, it did not affect the corporate, the effective tax rate, and why any future tax reductions would similarly not affect the GAAP effective tax rate, or would it?
Yes, Eric, the big driver behind that is the fact that Aflac Japan is a branch of Aflac Columbus. As such, we're taxed on a consolidated basis in the U.S. If we pay more tax in Japan, you have a bigger foreign tax credit, which offsets your U.S. GAAP obligation. I'm sorry, your U.S. tax obligation. The overall level of the U.S. tax is not impacted by what the Japan rate is. Does that make sense?
Yes. We can follow up because I realize it's quite technical. I would think if you are paying tax at a lower rate here and getting a full credit for that lower rate here on your U.S. taxes, your U.S. tax rate would come down.
What actually happens, the GAAP, the U.S. tax is what it is. What changes is the amount of foreign tax credit you receive. When Japan tax rate was higher, we had excess tax credits that would then carry forward. What's happening now is with the Japan rate being lower, we pay more tax using kind of cash in the U.S. is the best way to think about it.
Okay.
The amount we owe doesn't change, since the credit is higher or lower, depending on the Japan tax rate, it impacts where the cash from. You are right. It is a very technical thing. More than likely, Robin would want you to follow up in writing to them, then they can get with our tax guru, Steven Beaver, who knows all things tax.
Peter Deutsch, Fidelity Investments. Sue, you mentioned that Aflac has done some modeling of capital on an economic basis. Maybe you can talk about how you want investors to think about your excess capital on an economic basis, and maybe also talk about the outlook for the Japan regulatory regime to start looking at capital on economic basis and how that might change your capital plans over the long run.
I'll give very general comments about that. First, I'm going to start with the regulatory regime. The FSA has participated in various studies looking at economic capital models, and they actually have asked all companies in Japan to develop and start looking at an economic capital model. We have done the preliminary steps of that, and that is continuing to be enhanced. As far as how to think about it, Aflac in Japan has very long-dated liabilities, and typically our liability duration is longer than our asset duration. What that will mean in a rising rate environment is as rates go up, you actually improve your economic capital position because liabilities are worth more or less than the assets are worth less.
That's one view, and I think as we're building out the risk area and looking at those things, we're really focusing on multiple views of the business. There is no one magic number that says here is what the real risk profile of the company is. I think Todd, through some of the people he's bringing in and through the modeling work, they're really just expanding our capability to understand our risks under multiple lenses. Charles, I don't know if you wanted to comment on kind of regulatory future with capital.
Just to reinforce the fact that Sue's answer is absolutely on target, that FSA just announced a policy work plan or statement for this year, meaning this summer to next summer. I'm looking at the section that's relEVERnt to it, that they will be looking at the international trends. They have done field testing and looking at economic capital and solvency regime and how that might be adjusted carefully. Nothing's going to happen right away, but they're looking at it, and we're doing our work, so we're obviously on top of it.
Steven Schwartz, Raymond James. This is a question I asked Paul at lunch. I'd like to hear from Mr. Taniguchi and Tohru, if you would. Since the Big Bang, there's been the comment that it is not a competitive market in Japan, it is a crowded market in Japan, that there are a lot of products. It's hard for people to see past the products and compare the products and what have you. Today you're talking about, we didn't hear crowded market, we heard a price competitive market. Is there something real here, something changed, or are we just talking semantics?
In my opinion, the market is more crowded than competitive. The market continues to be that way. We see more competition and more crowdedness. The more companies are coming into the health sector market, including this cancer market. They are very anxious to get the market share away from the others. Unlike some health sector products, there are so many factors consumers have to be considering in deciding what insurance they want to purchase. They want to understand the different types of the coverages offered by the different companies. Also, the price is one thing, but there are the other factors that the coverages and also the creditworthiness of the company because this kind of the product is very long in the term. I'll say it is crowded and competitive, but not competitive only on the prices.
Our way is to compete on all factors related to the competition.
Tohru, with some of the new entrants, what are they emphasizing as their competitive advantage, if you will? What are they offering that maybe you or others aren't doing?
Yeah. I think that Koji can answer this, about the new entrances and what they are focusing on.
As for the new entrants, they are non-life insurance subsidiaries. They are selling new types of life insurance. For example, AIG-related subsidiaries have entered this market. Based on the experience, from our perspective, the maturity of their products are not there yet. Some of the products are discontinuing, or sometimes they have to suddenly change the design of the product. That's what we are seeing. It is true that the competition is becoming very fierce. That makes it the experienced company's more advantage, and that really now counts. It is true that the more competition, the more competitiveness that we really have to be feeling.
Into the market recently. Some of them seem to be focusing on the price, some others are focusing on the
A very unique type of coverage. Again, it varies. Like ourselves, the market seems to be competing on all of the factors involved in the marketing.
Joanne Smith, Scotia Capital. Ken, historically, Aflac has, and I think this was reinforced again today, that you have realized much higher margins than you priced for or reserved for initially when you introduced the product. Obviously, the earnings have benefited from that over the years. When we are talking about the reinsurance transactions and the benefits of those transactions for surplus relief, et cetera, what are the giveaways? What are you giving up economically, and how should we look at that in terms of future earnings growth? Because a lot of the earnings growth has come in the past from those better than expected margins.
Well, I will start and then ask Sue to talk about that. Basically, we are ceding commissions to the reinsurer. We are giving up a portion of the profit, although we receive a commission back from the reinsurer. The thought last year was, in looking at, if you want to call it trapped capital, but the capital that is over here on an FSA basis, we had the opportunity to generate relief of $1 billion at a cost of $35 million. We thought that that was a reasonable cost, although it did hurt earnings by $0.05 a share in perpetuity, a reduction of earnings, that we thought that was a reasonable cost to free up a significant amount of capital and give us some relief in the form of a higher SMR that could accommodate risk.
Again, Chris has basically issued a challenge in a way to continue to think in that manner, but to find a way to lower the cost, so that in thinking of the reduction of Aflac Incorporated's earnings going forward, that if we found a way to relieve another $1 billion just for the sake of argument, that it would be done at a much lower cost than the $35 million.
Well, just to highlight, I was checking to make sure we disclosed this publicly. I thought we had. In Chris's May FAB speech, he points out we are looking at this both on a U.S. GAAP basis, but we are looking very hard on an FSA earnings basis. With this particular transaction we did, it would have taken 25 years for the profit to have emerged versus what we achieved with this transaction. That was certainly a big consideration. That is in his May FAB speech.
I don't want to suggest that there's another billion-dollar transaction on the horizon. What I'm trying to suggest is that we're looking for more efficient ways to generate capital that can be used for other purposes, if possible.
Let me add just one thing to that. Joanne, we've talked about the cost of the capital in the last transaction because we retained the capital in the organization to bolster SMR, give us more capital flexibility, and the like. Going forward, I think we're going to look both at the sources and uses of capital, and we're going to compare the cost of the capital to the returns we can use by deploying the capital. The next challenge that I've issued is I want every additional transaction to be accretive in one way or the other. Okay? I think you're right to the extent we have improving profit margins over time relative to initial assumptions. We give up more than we thought we did. The real question is going to be, what are we going to be able to earn with the capital we released?
I wanted to thank those of you in this group. When the investor relations team and the management team go on the road, we talk to a lot of you, and you challenge us in this regard, and you force us to think. I mean, not that we weren't thinking already, but you give us ideas. I want to encourage you to continue to give us ideas, because that's part of the way we're seeking to improve the company. I think most of you in this room want to help us improve the company. At least that's the attitude I take when I'm out on the road talking to you. I do want to thank you for that. I want to add one last comment about the way to think of economic capital.
The way I think about it is that it's a lot bigger than our regulatory capital. We've got a lot of flexibility within our capital base here. The thing we're trying to do is to create a more strategic plan on how to use that capital. Particularly, it's not something that I can guarantee is going to happen each year for the next three years because tactics may have to be adjusted to fit economic circumstances. We are going to have more of a strategic medium-term plan for identifying appropriate sources and uses of capital. With the additional talent we've added to the team, I'm much more comfortable with our ability to plan for contingencies. That's about it. Thanks.
Okay. The next one is going to be the last one for the end of the day.
This is Jeffrey Show from MSS. Just a general question within the cancer product. Is there any way to get a sense of the average age of the in-force book and how that's progressed over the last couple of years? If that book continues to grow older, should frequency increase within that portfolio? The last one, if we just understand how the claims emergence from the product by vintage, any way that 80% of the claims is from sales pre-2005 or anything color on that would be helpful. Thank you.
As far as the average age, I actually don't know the exact average age, but we can get that to Robin and her team to provide you. Certainly on the cancer block, it's older than on medical, just due to the long history we've had with cancer. As far as how the claims have emerged, we can also get additional detail, but we've actually seen favorable claim experience on virtually every cancer product we've introduced. We talk about things in terms of old cancer, and old cancer is pre-2001, pre-deregulation. We look at each block separately, and we've seen better than expected experience on every cancer line that we've seen. As far as the weight, old cancer is still really big, but the newer plans are starting to get some real meat to them as well. I don't know how much detail you would want on that.
Okay. Well, thank you all for attending this year's analyst meeting. We look forward to keeping in touch. Please have a nice afternoon and enjoy your rest of your stay. Thank you.