Ladies and gentlemen, welcome to MetLife's 2014 Asia Investor Day. Please welcome Senior Vice President of Investor Relations, Edward Spehar.
[Foreign language] Good morning. Welcome to our 2014 Asia Investor Day. For those joining by webcast, presentation materials are available at metlife.com through a link on the investor relations page. This is our cautionary statement. I'm not going to read it, but I'll point out that we will make forward-looking statements and discuss non-GAAP financial information. The safe harbor statement contained in the appendix covers the forward-looking statements made here today. Forward-looking statements include our near and long-term outlooks and any other statements providing information about future prospects. As the statement notes, actual results might differ materially from projected results. For a discussion of the factors that could cause actual results to differ, please see the risk factors in our 10-K, 10-Q, and other reports filed with the SEC.
The explanatory note on non-GAAP financial information in the appendix includes how we calculate non-GAAP financial measures and the reasons we believe this information is useful. Reconciliations to the most directly comparable GAAP measures are also included in the appendix. I will now provide a brief overview of what you should expect today. Our goal is to build on the information we provided you on our December outlook call and at our June investor day. We know you have questions about growth prospects in Japan for foreign life insurers and the outlook for cash from these businesses. We will address these questions and also highlight the attractive growth opportunities we see across Asia. We're going to kick off with introductory remarks from John Hele, CFO of MetLife. We will then hear from Chris Townsend, President of Asia.
Chris will then be followed by Toby Brown, CFO of Asia, who will then discuss two of our key initiatives to drive growth across the region. We'll hear from Kathy Awanis, Vice President, Direct Asia, who will discuss our digital strategy, and from Dr. Nirmala Menon, Head of Designated Markets in Health Asia, who will talk about our accident health strategy. After that presentation, we'll take a short break. We'll then return for a discussion of our Japanese operations. From the Japan team, we'll hear from Sachin Shah, Chairman, President, and CEO of MetLife Japan; Koichi Yamaguchi, Chief Distribution Officer; Atsushi Yagai, Chief Customer Marketing Officer; and Greg Brennan, CFO. Chris will then come back up for some closing remarks, which will be followed by a Q&A session. The Q&A session should end at approximately 12:30. We'll serve lunch.
With that, I'd like to turn the podium over to John Hele. John?
Good morning. I'm very pleased to be with you here today in Tokyo. I'm here because Asia is an important business for MetLife today and tomorrow. Asia represents about 18% of our first half operating earnings, which annualizes at about $1.2 billion a year. A big business, and we expect it to be bigger tomorrow. In terms of premium fees and other revenues or our revenue, our top line, Asia has grown slightly less than the rest of MetLife. It grew 3% since 2011 compared to the rest of MetLife growing at 5%. When you reflect the yen weakening over the same time period, Asia grew at 7% compared to 5%. The real story has been the increase in operating earnings by Asia.
Asia grew at 19% since 2011, compared to 15% for the rest of the company, and 26% when you reflect the yen weakening on a constant currency basis versus 16%. We did have some unusual items in the time period. We had the tsunami in 2011, and in 2013, we had some extra fees from slightly higher surrenders from the fixed annuity businesses in Japan. If you adjust for these two items, the compound growth rate was 15% on a constant rate basis and 22% at- 15% on a reported basis and 22% on a constant rate basis. Very good overall operating earnings growth from Asia. I get asked often, was Alico a good deal for MetLife? Was it what we expected it should be?
Here are some metrics as how we had looked at the acquisition of Alico, and in particular Japan, when it was bought and what really happened. Japan accounts for about 65% of Alico earnings, so it's a major contributor. When we looked at the business, we had expected over the time period of 2011 to 2013 to have about $4 billion of operating earnings from Japan. We had $2.8 billion was the reported. I'm sure you all remember we had this DAC accounting change starting in 2012. That did two things. One is for new sales, we couldn't capitalize as much acquisition expenses as before, so that depresses GAAP operating earnings. Doesn't change the economics. That changes the operating earnings.
In terms of the retrospective adjustment, the restatement from the accounting rule, we could only go back 13 months from the purchase of Alico in terms of the restatings. That also changed the impact for us on the DAC. If you adjust for that, we are basically at the $4 billion that we had expected. Very pleased for Japan operating earnings over this time period. What we really liked also was the capital release. We had expected that $1.5 billion of capital release over this time period from Alico. We got $4 billion, $1.7 billion from Japan, so it exceeded our expectations. We also had less capital losses than we had expected when we set up the acquisition. About half, really, of what we had set out. Integration expenses were higher than what we had assumed. Alico is a very complex integration around the world.
We've got that done now, and that was more than we had expected, but far less is really covered by the capital losses. All in all, Alico has met or exceeded our expectations from the acquisition. We're very pleased. But one of the key themes you will hear here today is that the long-term story for Asia is more than Japan. As we've said, we expect single to low double-digit growth, operating growth in Asia over the long term, and a big piece of that will be the rapid growth outside of Japan. We also expect to see improving cash generation from Japan, and this is a key objective. There are ways to improve cash flow from subsidiaries and businesses. You can do it through product design and other elements. You can also use certain tools like reinsurance to change the timing of cash flows from a business.
When you do that, there's always a cost and effort to do, say, a reinsurance transaction, and it really depends upon the need you have as a holding company for additional cash. As some of you may be aware, we've been preliminarily designated a systemically important financial institution. If we're ultimately picked to be a systemically important financial institution, we will be subject to higher capital rules as required under Dodd-Frank. We don't know yet, have no insight really as to what those capital rules may be, and we've been generally conservative in uses of capital deployment with the cash of the holding company. So right now we don't see a large need or usage for additional cash at the holding company. But it is a big objective for us to improve cash flow.
We understand the tools that can be used from that, and you'll hear about that a little later on this morning. We need to have a use for it when we get there. The key takeaways from my very short introduction is Asia is a very important market for MetLife today and tomorrow. The Japan results were favorable to what we had expected at Alico, and Alico was a good deal for MetLife, and we expect to see continued success in Japan and strong growth from the rest of Asia. Thank you. I would now like to introduce my good friend, Chris Townsend, the President of Asia.
Good morning, thank you, John. Let me add a very personal welcome to all of you to Japan. As you know, Japan is MetLife's second-biggest market outside of the U.S., we're very appreciative of you all taking the time and the effort to travel over to meet us. You're very welcome here. What I intend to do today is to walk through a few things in terms of the strategic themes, which we outlined in both December and June, to really try to demonstrate that we've got a very strong track record in Asia, as John mentioned, that we're already a meaningful contributor to the MetLife, Inc. business. I want to demonstrate that we have a good market position in both the mature markets and some of the high-growth emerging markets around the rest of Asia.
I want to demonstrate that we're exploiting our product and our distribution diversification and that we're also investing in new areas which are very appropriate to the growth of this region, which might develop in a slightly different way to some of the other regions around the rest of the world. That going forward, we're going to deliver earnings that will outpace market growth and expenses that will grow at less than 50% of the revenue across the region. First I want to talk about strategy, then give you a brief overview of our footprint. I'll talk to some of the businesses which are not represented here today, talk to some of the differentiators which we believe are driving value across the business. Asia as a market.
The key point to note here that over the next 10 years, half of the growth of the life industry right around the world will come from Asia. We estimate that 30% will come from the Americas and 20% from EMEA. Asia is a super important region in terms of the global life industry overall. If you break it down into the ranking of some of the individual countries, Japan is number 2 globally, China number 5, Korea number 8, and India at number 11. We expect that by 2016, China will move up one notch to number 4, and India will be inside the top 10. Why that's important, it will mean that MetLife has very strong position in the four largest markets of Asia, being Japan, Korea, China, and India, we're well-placed in each of those markets.
In terms of the future growth prospects, particularly of the mature markets, Japan, Korea, these will be driven predominantly by fiscal factors, which are creating government balance sheet strain, which will lead to higher growth in the health and retirement product, some of the demographic factors such as the aging society, which will lead to growth in both the accumulation and other retirement products. In China and India, the powerhouses in terms of emerging markets in Asia, we expect that CAGR growth to be around 15%, this is driven predominantly by the rise of the middle class in those two countries. That also will have an impact in terms of the South and Southeast Asia markets, which as markets we expect to grow at a CAGR of approximately 7% over the next decade.
We believe we're very well placed to exploit these growth trends, as I say, in both the mature and the emerging markets around Asia. If we look at this in context of our own strategy, hopefully the four boxes on the left, you're very familiar with. These are the cornerstone pillars which we announced in spring of 2012. On the right-hand side, you can see the Asia strategic themes. The first point to note is that three of the pillars are highly appropriate to all of our businesses around Asia, including obviously customer centricity and brand, including the employee benefits business, and of course, including the growth of emerging markets, which we're making very good progress with across the enterprise. In terms of the Asia strategy, it's a very clear four-point strategy. The first is to secure maximum earnings from the mature markets of Japan and Korea.
Second is to build a long-term growth platform for China and India. Third is to ensure solid earnings contribution from the other markets, which we collectively call the designated markets. Fourth is to find a route into the high growth, high margin markets of Southeast Asia in an economically disciplined fashion. Let me talk briefly about the balance we have in our business across the region. I think I've said this to you before, that MetLife and Asia are not an all-in-one product or channel business. We've got great diversification, as you can see on the two pie charts on the right-hand side, across both of those areas.
If you look at it from a geographical perspective, Japan and Korea currently make up about 95% of our operating earnings, about 85% of our revenue, and at the end of this year, from a sales perspective, Japan and Korea will contribute 75%, and non-Japan and Korea, Asia, which John referenced previously, will account for 25% of the sales. That's an important trend for us. I think that's indicative of how you'll see that business continue going forward. It will take time, obviously, for the earnings to be impactful on an Asia level across the board. In terms of product diversification, we have a little over 50% of our business emanating from the capital life protection products of Group, of A&H, and the life protection. Obviously, we also have a good life savings business.
You'll be aware that that's at the lower end of our acceptable return spectrum, please don't lose sight of the fact that that's super important for us in terms of the packaging ratio of our protection product. Sachin and the team will talk more to that later on. The distribution is very well diversified. We have about 130 bank relationships in the region. We've very good direct platform, particularly in Japan and in China. We have an extensive agency reach. Our MetLife agents or career agents, which only sell MetLife products. We have about 50,000 agents right across the region, and we have about 100,000 independent agents or IFAs which we have business with. Very broad and extensive reach.
We believe that this diversification on product and channel is a competitive advantage for us because it allows customers who are changing in terms of their demands to access us through a range of products that meet all of their life needs, importantly, through a channel of their choice. Let me touch just a bit on some of the markets which are not represented here today in terms of the Korean designated markets, China and India business. First of all, Korea. As I mentioned to you in June, the Korea agency channel, the mainstay of our business there is the Korea agency channel, which is highly productive, and we have a market leading 815 Million Dollar Round Table members. That's higher than any other company, domestic or foreign, in the Korean market. The market is evolving. It's moving fairly rapidly into independent agency and also into bancassurance.
We have anticipated those changes and built a very successful independent agency channel leveraging off the independent agency channel in Japan. That now accounts for 40% of our sales in Korea, which is up from 12% in 2012. We've done that through a very distinct value proposition, which is around customer relationship management. It's around best in class training, and it's around compensation, which is competitive, but definitely not best in class. We've also, with the aging society and that balance sheet strain I mentioned earlier, there's been a move towards health and protection products. We also have leveraged what we've got in Japan into the Korean marketplace. A&H in Korea now accounts for 20% of our sales, which is double what it was four years ago. It's a very significant progress in terms of those protection products.
In our designated market businesses, these are made up of Hong Kong, Australia, South Asia, which is made up of Bangladesh, where we've been since 1953, Nepal. Our businesses in Southeast Asia, of Malaysia, Vietnam, and soon to be Myanmar. For Australia, our business is 100% employee benefits. We focused on the large superannuation or the large pension schemes. Our strategy going forward is to diversify that business so we grow the corporate employee benefits business and also the direct or retail life business to give us more balance in our distribution. In Hong Kong, we've historically been a bancassurance business. We're growing rapidly a differentiated agency model to capture the growth in that market, which also includes a fair amount of RMB or Chinese RMB business coming across the border into Hong Kong, which is fueling a lot of growth in that market.
In Bangladesh, we have a number one position in that market. We have a 25% market share. Our aim going forward is to protect that market share. It's highly profitable business, albeit with a range of additional competitors coming in. That business is predominantly face-to-face agency business. In Southeast Asia, we've made good progress in the last 12 months. We've started our business with AmBank. We've rebranded ourselves to AmMetLife in that market. In Vietnam, with our joint venture partner, BIDV, which is the second largest bank in Vietnam, we've now received our license. We will start writing business there in the fourth quarter of this year. As you know, we have a rep office license in Myanmar. Southeast Asia remains an area of interest to us and remains open for further disciplined expansion. Moving to China and to India.
China, we have a 50/50 joint venture. As you're probably aware, the foreign joint venture companies, and I think there's 26 or 27 of them, overall have a limited market share. It's 5% overall at the moment. Our aim there is to create a value platform because we're going to be limited in terms of the volume we can attain with that market share. We have a prioritized geographical footprint. We're in 24 cities across 10 provinces. We're in the right 10 provinces because it gives us access to about 50% of the GDP of China. We're in exactly the right places there. We've also recently been the first foreign company to receive a license in the Shanghai Free Trade Zone, which might open up further opportunities in the future. The key to our business in China really is the differentiated telemarketing business we have.
We have about 3,500 telesales agents right across those provinces I mentioned, who are highly productive. From a telemarketing business, we're number 2 only to one large domestic Chinese carrier. What we'll do going forward is to protect that in terms of lead generation through a digital capability, which Kathy will talk through later, and continue to significantly grow that channel. The other interesting point about our China business is that 75% of it comes in the capital light protection business, and most of it is A&H business. It's the right business to be in. The final point in China is that we have a productive, albeit a modest, agency force of about 3,000 agents, double what it was two years ago, with higher productivity, higher retention, and higher activity ratios. In India, this is the first time we've given any details about our Indian business.
We have a joint venture operation there where we have a 26% market share. We're capped in terms of that from the current regulatory environment. That'd be maximum where we're able to own there. We've been in that market since 2001, and in 2013, we consolidated our business there with our partner, the Punjab National Bank, which is the second largest public sector bank in India. It's a very substantial organization, and we have exclusive bank assurance distribution with that partner. They have 78 million customers across 6,000 branches right across India. It's a very powerful distribution mechanism to be partnered with. We also have two other strong bank assurance relationships with Jammu & Kashmir Bank up in the northwest and Karnataka Bank down on the south, both of whom have been with us for over 10 years.
Going forward, we will optimize our physical footprint so it's centered around the core urban areas, which talks to the urbanization of India. Also, we're going to continue to extract value out of our agency business. We have about 18,000 MetLife agents in India, but we've also got a mechanism or a capability called insurance managers, which are effectively salaried career agents, and their productivity is 70% higher than our traditional agency force. That, again, is a differentiator in that market in India. Let me talk briefly to the areas of focus which we're going to use to drive value across the region, and there's four key areas I want to focus on. The first of which is to transform distribution and to drive higher productivity.
The key proof points we've got here, we think are in Japan, where our career agents or our MetLife agents, the active agents there sell on average 5.5 policies per month. The A&P is $8,600 per month. That productivity is up 13% over the past three years. Secondly, in Korea, our career agents produce an average of four policies per month. They produce A&P of $9,200 per month, that productivity ratio is up 17% in the last 12 months. The third area I want to focus on is the independent agency business, which I mentioned in Korea, which is very significant in terms of its contribution to sales in that market. The second area is to increase our product profitability, we're doing this right across the portfolio.
Probably the best proof point I have in this, in a move from volume to value, is right here in Japan. You saw us take some action at the back end of last year and early part of this year in terms of elongating commission to move it away from first-year commission to reward the right behavior. Plus, we repriced our yen-based life product. It was at the lower end of our acceptable return spectrum at the time. What that did is had a significant impact in terms of sales volume for our life business and also an associated packaging impact to our A&H business. You've seen that play through in the first half, and you should expect to see it in the third quarter as well. It significantly improved the value of the business.
It's a real good proof point in terms of what we're actually doing to improve value across the organization. To complement that, Sachin will talk to this later on, we've just recently relaunched some life products, which is much higher in terms of the value, and also a range of market-leading differentiated A&H products, which will correct that issue going forward. The third area is to focus on customer experience. This is our overall user experience. Again, the proof point's right here in Japan. Consistency is up 380 basis points over the last three years, we have 35% of our customers buying two or more products from us. It's a proof point that our customer experience is working, where more customers are buying more from us and staying with us for longer. The fourth point is to improve efficiency and leverage scale.
What we've been doing there really is to invest heavily into technology to both improve our customer experience and to improve the efficiency of our business. You'll see later on that our expense ratio since we bought the purchase Alico is down about 400 basis points. We've done that whilst investing a significant amount into technology to improve this efficiency and also stay within that guideline we mentioned to you in terms of expense growth being half of revenue growth. I want to just look briefly at how we're leveraging strength, both across the enterprise in terms of global capabilities we're bringing to Asia, also regional capabilities that we have here that we're spreading around the rest of the region.
I've already touched on a couple of those in terms of the career agency and independent agency, which we've taken from Japan to a couple of other countries. First, in terms of the global capabilities, the key one to call out really is our employee benefits capability. It's a modest business for us right now in Asia, but it's a very powerful differentiator for us globally. Our strategy going forward is really, it's a bookend strategy, where we're going after the multinational corporations at one end, playing off all of those global relationships we have. Then the other end, we're going after the small to medium enterprises using our career agency capabilities, particularly in Japan and in China. That's the employee benefits business. As you know, or as you now know, the Australian business is 100% employee benefits already.
If we then talk about capitalizing on some unique strengths and capabilities we have in Asia, the main one to call out is our health business. We are already a very significant health player in Asia. In fact, from 2013 sales, we're number two of all companies around Asia in terms of sales. We have a pioneering history of health, particularly here in Japan, where we've been at it for 40 years, and we have a great track record of bringing new, innovative products to the market. Again, you'll hear more about that from Sachin later on. The key, though, is how we take that, and bear in mind that was part of the reason for the Alico transaction, and spread that out around the rest of the region.
If you think about this, really, the big sort of social macro issues right around the region, be it in mature markets or emerging markets, governments simply can't afford to pay for that broad and deep healthcare that society needs. For well-placed companies who have great health capabilities, opportunities abound right around the region, and you'll hear more from Dr. Nirmala Menon about that later on. We're also investing in three differentiators, which we believe are highly appropriate to the growth of this region. The first of which is digital. I ask you please not to think of digital as purely an end-to-end capability in terms of sales, a simple term like an A&H product.
Think about it more in terms of an ecosystem which covers both sales, service, social, and interacts and supports all of the distribution channels, be it lead generation in telemarketing or our agency business or bank assurance. We've been at this for a while. We haven't spoken a lot about it externally, but it's a multi-year program to invest in digitalizing our organization here in Asia. You'll hear from Kathy about some proof points in other countries. What we're doing specifically is to build this in China, where there's a very significant propensity to buy financial service products online, and then we'll build it and reuse it around the rest of the region. More from Kathy on that later on. We're also building a data analytics capability in the region. We have 12 million customers in the region and a rich pool of data.
This data analytics capability, the test cases we're using at the moment will focus on persistency, claim, and cross-sell. We're going to build this and explode it around the rest of the region. The third is innovation. We've recently created an innovation center in Singapore. The aim of this is to be a disruptive business model innovation capability to think of how we look for new business models as opposed to pure product innovation. The focus of that center is really across three of the big drivers of growth in the region, that being health, wealth, and retirement. That's being built in Singapore. Hopefully we're seeing this play out in terms of our financial performance.
As you can see from the chart here and from what John mentioned previously, the performance we've managed to achieve is very much in line with the prior guidance we've given. We've got a strong, sustainable earnings base, and as you've just heard, we're investing for the future, albeit within the auspices of that expense framework I mentioned. Over the long term, improving cash generation, particularly out of Japan. Before I pass across to Toby, let me just give you a few key takeaways. First of all, by 2020, half of the life industry's growth will come from Asia. Think of that not just from emerging markets. It's probably split about 30% of that growth from emerging Asia and 20% from developed Asia.
I firmly believe that we're in the right place in key markets, in the right customer segments, and with the right channel reach to access that growth. We've got a clearly defined strategy, and we're making great strides in terms of the execution of that strategy. We already have a differentiated offering, and in the areas I've mentioned, you can see we're investing to build capabilities for the future so we can capture the growth of this region. Finally, as John mentioned, we're already a meaningful contributor to the organization, and I believe we're well placed to create greater shareholder value over time. Let me stop there and pass across to Toby, please, and the rest of the team. Thank you.
Thank you, Chris. Good morning to everyone from me as well. Before we start today, you've probably seen from the agenda that the finance section we have today is split into two segments. The first segment I'll cover here now, which will cover Asia overall, and then later on this morning, Greg Brennan, our Japan CFO, will cover some of the Japan specifics. Let me start by saying the four key themes that you will see from my presentation this morning. First, our current year-to-date performance in Asia is good and is right on track with all of our plans. Second, this has been driven in part by a continued focus on operational efficiency. Third, our cash generation is improving, primarily following the local incorporation of our Japanese business.
Finally, but of very high importance, our dedicated focus on improving shareholder value is starting to have real results for us here in Asia. If I turn to look at our first half 2014 performance versus first half 2013, we look at four key value drivers across our business in Asia. Organic growth, the value and volume of new business, operational efficiency, and over the page, I'll talk to you about capital management and cash. If I talk to the first three here on this page, you can see that in terms of the first area of growth, our reported operating earnings are down 2% year-over-year, but on a constant currency basis are up 3%. Likewise, our reported GAAP PFOs are down 5%, but up 2% on a U.S. GAAP basis, and our statutory PDOC is up 20% on a constant currency basis.
These results obviously show a slightly weaker performance due to the weakness of the Japanese yen. As John mentioned at the beginning, they do include some one-time items. I'll show you in the coming pages more of a breakdown of that, which shows more of our underlying performance, which is much stronger. If you look at the second area there, the value and volume of new business, you can see that Asia sales are down. This is in line with our expectations and the previous guidance we've given you. As a reminder, this was the result of the deliberate actions we took in Japan to reprice our products and reduce the overall compensation. This has lowered the sales of our yen life products and the packaged A&H. However, the changes we've made, as Chris mentioned, have also resulted in an overall improvement of value.
We're happy with this trade-off in the short term for a couple of important reasons. First, the changes that we've made to the compensation models in both Japan and Korea, we believe are exactly the right things to do to improve shareholder value. It spreads the commission cash flows over the life of the policies, and it also reinforces customer persistency. I've included on the chart here our first-year commission ratio year-over-year, and I think from the numbers here, you can easily conceptualize the improvement in product profitability that we've seen. Secondly, the reduction in our Japan sales was offset for us in Asia by performance elsewhere. We saw a strong return of foreign currency product sales in Japan, and the rest of Asia continued to grow at a very good pace.
As Chris mentioned, we have several new products coming online in Japan in the fourth quarter, we feel confident that we're moving in the right direction. You'll hear a lot more about those products in the Japan section later this morning. Shifting to efficiency, you can see here that both our GAAP expense ratio and, more importantly, our gross cash administration expenses continue to show signs of improvement. We're making a lot of new investments into the business, as Chris mentioned, and these savings here are net of all of those new investments. We expect further gains as we continue to focus on both front-office and back-office efficiency, and I'll give you more of a breakdown of our expenses later. If we turn to our fourth area, which is capital management and cash.
We're really pleased that this year represents the first regular annual dividend payment from our new Japanese subsidiary since we incorporated in 2012. Whilst the amount paid in 2014 is only about 20% of our GAAP earnings, it does represent about 50% of our FSA earnings since incorporation. In the second half of my presentation this morning, I will walk you through why we are comfortable with our long-term guidance about increasing remittances over time to 50%. I should also note here that our other two mature businesses of Korea and Bangladesh also paid dividends to the holding company this year. We made capital contributions in Asia, too. In 2013, the number there represents capital that we contributed to fund new business growth in our Australian business, and it also represents money we paid into our two big emerging markets of China and India.
In 2014, we expect no capital contributions to our existing businesses. The JPY 277 million you see here actually represents the money we've paid for our two new ventures, JPY 248 million being our acquisition in Malaysia, and JPY 29 million being the new capital we've sent to Vietnam to help fund the first four or five years of our operations there with BIDV. Finally, our solvency. Our solvency ratios across all of Asia are very strong. For our core market of Japan, which I've shown here, as of the first quarter FSA reporting, our solvency margin is over 1,000%. We expect this ratio to remain comfortably above 900% through the year-end. When Greg talks later this morning, he'll give you some more information on that. Let me walk you through some of these areas in a little more detail, first starting with earnings.
As you saw from that first page, our reported earnings in the first half are down 2%. We don't believe this accurately reflects the underlying growth of our Asia business. We believe we've done much better than that. If you look at this chart, in addition to the foreign exchange shifts, you can see that both periods include a number of one-time items, which, if you adjust for them, show an underlying growth rate of 11%. Going forward, we continue to believe that a good growth target for Asia, excluding major foreign exchange shifts, is in the high single to low double-digit range. I should note for you here that we do expect the second half of 2014 to be slightly lower than the first half, as obviously some of these one-time items won't repeat. Let's cover revenue and sales now.
This is a complicated slide, but I think it's very important. This slide shows that while sales were down overall because of Japan, revenues have remained flat and even grown according to some measures. In order to really understand the trends that are going on in Asia, I split the presentation here into two buckets, one covering Japan and one covering the rest of Asia. If we first look at Japan, you will see that our PFOs are down 9% on a reported basis, but flat on a constant rate basis. This includes three important points for you to know. Firstly, you can obviously see the impact there of our reduced sales of Yen Life and A&H, which have high US GAAP PFO recognition. You can also see that our revenues remain flat due to continued strong persistency in Japan.
The third thing you should also know in the year-over-year is that 2013 also included in our revenue the impacts of higher surrender fees in Japan, which are obviously not reflected here. When you take all those factors into account, on a constant rate basis, our PFO in Japan is actually growing. Statutory PDOC shows a much stronger performance, and this includes the bounce back of our foreign currency sales in Japan, which have very low credit on a US GAAP PFO basis. If you look at sales measured on an ANP basis in constant currency, you can see our sales down in Japan 14% year-over-year. As I mentioned at the outset, we're okay with this in the short term for the reasons I mentioned.
You now look at Asia excluding Japan, our US GAAP, PFO, and PDOC grew on both reported and constant currency basis. This is supported by broad growth overall, and in particular, it highlights the shift towards A&H protection in Korea versus savings products, which have higher PFO recognition and lower deposit premium volumes. You see the inverse trend happening in Korea from Japan. These numbers here exclude China, which is not consolidated on a US GAAP basis, and China standalone is growing at 23% year-over-year on a PFO basis and 21% on a PDOC basis. If we did include China here, the Asia excluding Japan growth would be 12% for PFO and 6% for PDOC, which is very strong.
You look at our sales for the rest of Asia, you can see that the year-over-year growth there is 7%, and that's supported by solid growth overall, but especially from China. The other important point to note from the picture here is the growing proportion of A&H from the rest of Asia. Nirmala will touch on some of the success here later this morning. Let's cover expenses now, and let me explain a little bit to you about how we're managing for efficiency. This slide here shows how we're controlling our expenses. As Chris mentioned, he gave some guidance in December 2013, and I'm happy to report today that we're actually delivering on that guidance. In addition to our usual expense ratio, we monitor expenses in Asia on a gross cash basis before accounting adjustments for DAC.
On this cash basis, you can see two important trends here. First, our gross acquisition expenses are being managed in line with our sales volumes. Second, our administration expenses are being managed to grow no faster than half the rate of our US GAAP revenue growth. When you consider the point I just made on the revenue slide, that GAAP revenue doesn't give us full credit for a lot of our sales, I think you can clearly see here that our expenses are being managed very well. Two final points I would make here on this page. First, these achievements have all been done whilst we are still reinvesting in several critical areas, and we continue to expand geographically.
Second, you should expect from us continued improvement in efficiency over the next two to three years, as some of the various initiatives we're doing around Asia really start to take hold. In Greg's presentation later on today, he'll give you some specific examples of some of the initiatives we're doing in Japan in this area. Let me move away from our current results now and talk to you a little bit about how we're managing capital and cash. We've previously stated to you our target is to increase the proportion of operating earnings that we remit from Japan, 30% in the near term and 50% in the longer term. I'm happy to reconfirm that guidance for you today. Our success is about more than just Japan, as you've heard.
Whilst Japan will remain a material and important part of our Asia business for some time, our focus on cash generation extends across all of our Asian businesses. We remain committed to generating more cash from all of our Asian businesses. I want you to think about our business in Asia in two segments. The first segment, which you can see here, is our mature businesses. These aren't necessarily mature markets, but they're certainly mature businesses. We've been in Japan for over 45 years, South Korea for over 25 years, and as Chris mentioned, in Bangladesh for over 60 years. These businesses have sufficient maturity and critical mass in their respective markets to generate regular cash remittances. Our objective for these businesses is to generate stable, growing amounts of distributable cash every year. Within these businesses, the remittances from Japan have obviously been distorted in the recent past.
We've explained to you before the impacts of the local incorporation that involve several material one-time effects and impacted our cash remittances immediately following the incorporation. This process and these distortions are now done. In respect to the year ending March 2014, we've restarted regular dividends from Japan. Looking ahead, we've stated our target of driving up cash generation in Japan, and I will share with you later some of the reasons we are confident of achieving that. The situation for the other two mature markets here of Korea and Bangladesh is a little bit more mixed. Bangladesh consistently returns something like 45%-55% of its GAAP operating earnings, and 70%-80% of its statutory earnings as a dividend. Korea has been much tougher.
2014 also represents the first dividend from Korea for more than three years, and whilst that in itself is pleasing, it's only about 10% of our GAAP operating earnings. In relation to Korea, the broader A&H strategy you'll hear about later, and several other factors we're working on mean that we think that the distributable cash flow from Korea will grow also. Our other Asian businesses shown here as growth businesses are all much younger. Consequently, our attention on these businesses is about helping them grow and become future cash contributors. For example, in China and India, our focus is on attaining capital self-sufficiency during their transition from large but immature operations today. You should therefore expect us to reinvest capital generated from these businesses back into the business to fund future growth. Let me look now and explain to you what we're doing to improve cash remittances.
As you already saw on my first page on Asia, there's four key areas we're focused on to improve value creation, and ultimately distributable cash. Organic revenue growth, the value and volume of new business, operational efficiency, and capital management. I've already given you an indication of how we're doing in a couple of these areas, namely revenue growth and operational efficiency, so I won't cover more on these areas this morning. In my final few slides this morning, I do want to touch upon the other two areas there of value, and specifically our product and pricing regime, and also on capital management, where I'll talk to you about reinsurance and subordinated debt. As we all know, distributable cash is driven by statutory net income and not US GAAP. Statutory accounting is often more conservative than US GAAP, and there are broadly three main areas for this difference.
Firstly, a more conservative reserving basis dictated by local regulations and rules versus best estimate assumptions under US GAAP. The second area is on acquisition expenses, where in US GAAP, we're able to defer them, whereas in statutory accounting, they're accounted more on a cash basis. Finally, there are a few differences in relation to how we account for investments and other areas. These differences create a timing difference between US GAAP earnings and distributable cash, in particular, when a company is continuing to grow. This is best seen from an example, and on this page here, I've illustrated for you the typical profit signature for a life savings product in Japan. You can clearly see here the first year strain in dark blue on a statutory basis, as acquisition costs are expensed immediately versus US GAAP, where we get the DAC benefit.
You can also see in the subsequent years, the statutory earnings emerge more slowly as commissions are continued to pay and the more conservative statutory reserves continue to build. After that, though, you see a turning point where the statutory income actually starts to exceed the US GAAP income. Let me talk about how we're working to address cash generation through some of our product pricing process. The table on this page gives you the average break-even periods for a broad representation of our products in our two biggest GAAP profit markets of Japan and Korea. In Japan, our life products have an average statutory payback of nine years, and our A&H products have an average payback of three years. Both of these are broadly in line with our Japan peers. You can also see a similar pattern for the Korean products illustrated here.
That is longer break-even periods for saving products and shorter break-even periods for A&H products. Obviously, these break-even periods are not static. They change depending on our product mix, premium frequency, and other things. We do monitor these cash flows closely, and it is part of our product pricing and design process. We also monitor the break-even periods. This table is really important. It validates for you our strategy to package more A&H in Japan, and also it validates our strategy of growing A&H more broadly around the rest of Asia and Korea. Nirmala will talk to you about how we plan to roll out A&H more broadly later on. The final point I want to make on this page is about pricing discipline. I know every company you talk to probably tells you the same thing. We're really disciplined on pricing.
I want to give you a couple of areas of tangible evidence that show you that here at MetLife, we actually do focus on this. When we look at overall product design, we adjust where we see a value maximization opportunity. I've included here on the page the things you heard about from Chris about compensation design changes to give you an example of how we do that. More importantly, where things change, we take action. We've already disclosed to you previously the situation we faced in Japan in 2013, which skewed the mix of our business. We identified the issue and acted decisively. We removed the products from the shelf, reassessed them, and adjusted the design and features. We relaunched them only when we are comfortable with their projected returns.
These are bold things to do when many of our peers still focus on sales volumes alone to try and differentiate themselves. We believe it's the right thing to do to maximize shareholder value, and we'll continue to do the same thing in the future if a similar situation arises. The picture on the previous page and the data here are not meant to do anything but remind you that whilst it does take time for statutory conservatism to unwind, we are focused on it and constantly looking for ways to reduce it. Let's look at the final area we're actively managing to increase value and cash generation, capital management. We often get asked if we plan to use reinsurance to improve distributable cash.
I therefore wanted to share some thoughts with you on this and remind you that we've already been quite active in this area for some time. Reinsurance can be appropriate, as you know, to manage both return by limiting downside risk and for increasing our profit margins. Reinsurance isn't free though, of course, but it can allow us to increase value if the insurance company has a greater appetite for certain risks than us or can achieve a lower effective cost of capital, for example, by pooling certain risks. Additionally, reinsurance can be an effective tool to manage the timing of the emergence of profits. We've discussed with you previously about our local incorporation in Japan and the impact this had on our FSA earnings and our remittances.
During this incorporation process, we executed reinsurance transactions which enabled us to fully utilize accumulated losses in the branch and hence fully utilize tax losses. If we hadn't taken this action, these tax losses would have been lost. Our actions there also allowed us to fund a material remittance at a very low effective cost of capital. Whilst these transactions create positive FSA results on execution, they do give rise to a drag in the following years. An important point for you to note on the slide here is that the transaction we executed is causing a drag of approximately $200 million per annum against our FSA net income currently. This will fall in the next couple of years, and this will directly increase our distributable earnings.
This is one of the key drivers of why we feel comfortable in increasing the level of cash remittances from Japan. Regarding these transactions and others, we continue to monitor the usefulness for managing our balance sheet in Japan and elsewhere, and it remains an option for us in the future. As I mentioned previously, reinsurance is not free. We always have to ensure we're going to get a good deal. As John mentioned at the outset, we also have to balance this with the cash needs of the holding company before we take any decision. The final example I want to show you is one where it may be possible to reduce our cost of capital itself. This is an example of a subordinated debt deal we did in China in the second quarter of this year.
This deal provided a number of benefits for us. First, it reduced the net cost of capital for both the shareholders, which was MetLife and our Chinese partner, as the business continued to need capital fund growth. Secondly, it provided a cash tax benefit for us via the tax deductibility of the interest payments because we've recently started to become a taxpayer in China due to our positive China GAAP earnings. Finally, it will act as a natural RMB currency hedge for MetLife as the business there grows and starts to generate positive capital flows. These are just a couple of examples of what we're doing in capital management, which highlight our focus on optimizing both sources and returns on capital, and also on actively managing the timing of conversion of these returns into cash.
Let me conclude now. I've covered a lot of ground, so I want to recap on some of the key points. First, Asia is delivering on all of our 2014 key targets across growth, value, efficiency, and cash. Our operating efficiency is continuing to improve, and you should expect more to come. We're confident that our cash remittances will grow to the stated levels organically, and if we choose, through other tools available to us. Finally, we have a disciplined approach to capital management with a clear focus on pricing and also cash flow volumes and cash flow timing. With that, I'd like to say thank you very much and introduce Kathy Awanis, who's going to talk about one of our important initiatives here in Asia. Thank you.
Thank you, Toby. Good morning, everyone. As Chris presented earlier, in Asia, we're investing in differentiators to further build out our capabilities. They are data analytics, innovation, and digital. Digital for MetLife offers a significant opportunity. Customers today dictate how and when they want to buy. At the same time, they want anywhere, anytime interaction. If we look at Asian consumers alone, they're not only comfortable transacting online, they're also demanding for online and offline integration. Over the course of my presentation, you will see that the e-commerce sales opportunity in Asia alone is quite sizable, as is the opportunity to digitize the entire organization. Chris actually mentioned that sales or digital is not just about straight sales, it's about looking at ways of enhancing your organization and also the rest of your distribution franchise. At MetLife, we're very well-positioned to take advantage of this opportunity.
Apart from having successful mobility solutions that I'm going to take you through today, we've also taken the lead in building a digital ecosystem, starting with China at the end of next month. We're also able to activate it in all our other Asian markets as well as enter new markets quite quickly and efficiently. This capability will allow us to attract more customers through a mix of digital, but at the same time, traditional distribution channels. What is digital? Digital is the automation and augmentation of offline activities. It really allows us to not only speed the process to market but also accelerate sales and services. For MetLife, it's a driver for change. Digitization will allow us to deepen our engagement with our customers, set their expectations, meet their expectations, and at the same time, provide services, products, and information that is easy to understand, find, and compare.
With such enablement, through existing learnings that I am going to take you through later on, we are very well positioned to enjoy enhanced engagement, not just with our consumers, but also with our distribution partners. Our proven capabilities and experience, along with data analytics and also through social monitoring that we do continue to keep an eye on, we are able to anticipate and meet customer demands and also shape their expectations based on their preferences. Digital in Asia is quite real. As you can see from the pie chart, 46% of the world's internet population is in Asia. That's making it the largest region from a penetration perspective. At the same time, whilst penetration is at 32% in Asia, and you compare it to the U.S., which is at 85%, you can see that there's real opportunity for growth with China in particular and India leading the way.
The same applies if you look at the bubble chart for social media. India and China, again, are leading the way and using social media beyond just building fan bases. When we look at sales generated through electronic commerce alone, you'll see that Asia's business to consumer sales are expected to increase from JPY 301 billion to over JPY 1 trillion by 2017. This year alone in Asia, business to consumer e-commerce sales are expected to reach JPY 525 billion. Notably, China's e-commerce is second to the U.S., but not for long. By 2016, China is actually going to overpass the United States. When we look at the influence of the growth number of mobile users as well, you'll notice that China, again, has seen a significant change in mobile subscriptions with over 2.5 billion users.
China in itself has 464 million smart users, which increased by 43 million in less than a year. In Asia, consumers are more likely to buy goods online, at the same time, they're doing that with mobile devices, which of course, in the same way is actually driving user behavior, and it's driving, again, life insurance in our case. Let's move on to how MetLife is leading digitization. Our vision, as you can see, is to become the leading digital life insurance in Asia. That's driven by 3 key pillars, revenue growth, value, and also efficiency. When we look at building a foundation and touching on to an earlier point that Chris made, we have built a reusable ecosystem on not just sales, but service and marketing as well.
This platform enables us to take it to any other market in Asia, our very first proof point is in China, launching at the end of next month. When we look at localized sales and service, we've built flexibility and agility to react and meet market needs. Let me give you an example. In China, launching next month again, we've enabled sales service capability to defend our direct marketing leadership. At the same time, we've built a new digital channel and also built lead generation opportunities for our agents, our group business, as well as providing integration capabilities with our bank partners. In exact contrast in India, we've built digital capabilities to manage our orphan policies and also to grow our new direct marketing channel.
When we look at our third pillar, deploying new markets, as you can see, given our digital readiness and a mature customer base that demands online capability, online and offline, the direct and digital channels provide us with the speed and agility to enter new markets at a marginal incremental cost. What you're seeing here is our new China website. Again, launching on October 27th. It's actually more than just a digital site, and it's not a one-time IT activity. It's an ongoing commitment that will continue to grow and evolve across every part of our organization. In China alone, our program is over 3 and a half years long. Our vision is to become the leading digital insurer, as I said earlier on.
For China particularly, we're launching nine digital products, lead generation for agencies, integration capabilities for banks, and also we've developed black box underwriting, sales and service. As I say here, once and done, fully automated, end-to-end automation, an actual reduction of manual touchpoints, black box underwriting, real-time fulfillment, and real-time policy distribution. What that means is that customers for the first time can actually complete a transaction, fulfill a transaction, submit a claim, check on a claim, all either through a mobile device or through their PC or tablet. At the same time what we have done, recognizing that social media is big in Asia and particularly in China and India. We've integrated phone telemarketing customer service with social media.
Later on, I will show you the impact that social media platforms like WeChat are having in a market like China, just to get you to see the opportunity that is actually available for life insurers. This slide shows you our customer portal. Again, something that's going to be delivered October 27th. It's a dedicated self-service portal for our customers. What this allows them to do is to securely access not just their policies and their accounts, but to again, buy online, get a quick quote, make an appointment with an agent, speak to a telemarketer through click to call or click to chat or social channels, make payments, or check on their claims. What you'll notice, if you can see this diagram quite clearly, is this dashboard allows a consumer to see and actually manage their life through the touch of a mobile phone or a mobile device.
They get a lot of health awareness and content information that's specific to their life stage and also specific to the city and the province they're in. What we have done through big data and also through understanding our customers is contextualize the way we communicate with them. At the same time, we've integrated with social, and we've also integrated with loyalty programs and education programs to ensure that when they're engaging with MetLife, they're getting the right protection, and they also understand what they're buying, which is absolutely critical. Earlier on, I actually spoke about mobile enablement and the growth of mobile use in Asia. If you look at what we have to deal with in the Asian market, it's very impatient customers who want information on the go and expect a lot of mobile applications.
What you see on this slide is some existing and successful mobile applications that we've launched in Asia. If we go from left to right, starting with MuLearn in Korea, it was launched in 2013, and we have won an award, actually, since its launch. It's a self-service mobile application tool that allows our customers to make premium payments, fund transfers, insurance loans, and claims inquiries all through one mobile device. What's even more important, beyond just winning awards and industry recognition, is that to date, since 2013, we've seen 88,000 of our customers actually subscribe. That's 9% of our total customer base, and we're seeing 13,000 transactions every month just through one device. Right next to MuLearn is MOS. You may have remembered in 2012, we actually presented MOS in the life of the super Korean customers.
MOS, quite simply, allows our agents to complete an illustration, do some pre-sales work with their customers, and actually complete transactions in real time. MOS, again, has won us two awards, 2012 and 2013, but most importantly, it's been launched beyond Korea. We've launched it in China, India, Hong Kong, and Vietnam. In Korea alone, 3,000 of our agents are currently using it. That's 65% of our agency base. That's a great success story that we'd really like to share. We'll go over to the use of mobile solutions and social media. We've recently launched MetLife Infinity in China and Hong Kong. MetLife Infinity is like a consumer's own personal safe or vault. It allows them to save any critical documents, contracts, policy documents, and also personal information, photographs, videos of births and weddings, and other social events.
They can actually save all these files securely on a cloud, and also share them with designates and trusted contacts. They can share them in real time or in future dates. What this allows them to do is, first of all, save personal information in an environment that will actually future date everything, and at the same time, connect with their networks. What it does for MetLife, it allows us to connect deeper with our customers. Since its launch in April of 2014, we've seen 21,000 subscribers, and it's actually growing. Last but not least, WeChat. Earlier on, I spoke about mobility, but I also spoke about the importance of social media in Asia, in this case, in China. WeChat is currently one of the largest social channels with over 600 million subscribers.
MetLife China is the first foreign insurer to actually launch this channel and to enable our customers to self-service themselves, not just for payments, but also to submit claims, check on claims, make basic policy changes to their policies, and also organize meetings with agents and with telemarketers. What we've seen since its launch is 60,000 of our policyholders actually using it on a daily basis, and the launch, mind you, was in June 2014 of this year. Out of those 60,000 users, we also see 53,000 transactions coming through, which clearly actually indicates that it's a very good channel, and it's a channel they feel very comfortable in using. At the same time, whilst we recognize that it's a successful channel, what we saw, and it was a bit of a surprise, was that customers chose to actually make a lot of policy changes through this channel.
In effect, it reduced our call center calls by 33% in a space of four months. Recognizing that it's been very successful, what we decided to do at the end of last month is also launch a sales channel through WeChat alone. Maybe in two years I can talk about that again as a success. The key takeaways for us are actually quite clear. Digital in Asia is a significant opportunity. From the information I shared with you today, you can see that Asian consumers are comfortable transacting online, increasing the need for us to provide seamless online to offline integration. Earlier in my presentation as well, you saw that the e-commerce opportunity in Asia is sizable. It should be noted, however, that the digital impact and the resulting commercial potential is significant but not immediate for new streams of profitable revenue growth.
This is particularly true with a lot of other life insurers who are pursuing digital in a traditional mindset and tailoring unconnected activities around restrictions of their own legacy systems. At MetLife, we are already starting to see the benefits of digitization across our organization. Results from the mobility solutions that I just shared with you this morning are encouraging our vision, and our new digital ecosystem to be released in October will further solidify our ambition. With that, I'd like to thank you for your time and introduce you to Dr. Nirmala Menon.
Thank you. Good morning. I will now take you through our strategy for A&H in the region. A&H is an attractive business opportunity, I think we'd all agree, and MetLife is well-positioned to further capitalize on this opportunity through our existing strength and our footprint in the region. Asia is home to 60% of the world's population, and a really diverse one at that, ranging from the aging economies of Japan and Korea to the youthful, fast-growing ones of Southeast Asia. There are two key challenges in this region that we see. For the consumer, it's about access to quality and affordable healthcare, and to governments, it's the ability to provide the funding for this healthcare. In the region, there is high awareness for health and medical, but penetration varies significantly across the various markets.
The ability to convert this awareness into purchase and repurchase will be key to success in the region. I will take you through our customer-focused strategy that we believe is key success to drive growth in this market. 2013, a snapshot. The gross written premiums in Asia for A&H alone stood at $74 billion. As I said before, MetLife, with its current footprint, has access to 77% of this market. The market is large, as you can see, and growing, and historically over the last five years has grown at a CAGR of 8%. We believe that this is poised to continue over the next few years, driven by four key factors. Emerging affluence, creating increased demand and expectations for quality healthcare, increasing lifestyle-related diseases, and a consumer awareness of medical advances.
Limitations in public healthcare and insufficient depth of universal coverage, causing consumers to look increasingly more towards private health insurance. Finally, an increasing living risk concern that goes beyond the traditional life coverage, and with the need to protect for quality of life. Where are we in MetLife on A&H? 2013 financial contribution from A&H to Asia, $980 million in new business A&P. As Chris mentioned to you earlier, putting us very definitely at the number two position for new business sales in Asia. A&H also represented 48% of our operating PFOs and 47% of our operating earnings. These results speak clearly to our deep strength in the business, driven by our leading position in Japan.
It is important to note here, and I'd like to call that out, more than 40% of the A&P of $980 million shown here come from sales outside of Japan, notably China and Korea. We've achieved this through a well-balanced multi-distribution capability and our proven expertise in product development, leveraging from the strength and capability that we have in Japan. However, as competition intensifies and products become more and more commoditized, to win in this market, in this space, we believe that we need to go beyond the traditional distribution and pricing strategy and truly drive a customer-focused approach to sustain growth. How will we do this? We will do this by conducting interactive and focused customer research to truly understand the needs, preferences, and demands of the consumers.
We will use data analytics to validate these findings against our own database so that we can identify attractive segments and offer them appropriate products and solutions. These segments will naturally vary across the different markets, as the markets are so different in themselves. As an example, some insights have shown that women and families to be key target segments where there is a growing demand and awareness for medical and health. Results also show that there is attractiveness for packages and segment-anchored products covering children, juveniles, or parents. With research, we can also create innovative value-added features that resonates well with the target segments that we identify. This will allow us to create customized and tailored solutions that will resonate well with this audience.
Each of these efforts looked at singly is not new, when done together in a focused manner, and with our established strength in distribution and product capability, will be our success factor in this space. That's not all. Success will critically depend on us being able to repeat our customer and execute our customer-focused strategy across the key markets that we've selected, Korea, China, India, and Malaysia. Leveraging, of course, on the strength and capability that we have built in Japan. The markets selected are where we believe maximum growth and value will be driven out of. There is a high degree of awareness and demand in these markets. Sharing best practices across these chosen markets with an ability to implement fast-to-market product development capability will help us to grow.
We will further optimize on our digital capability that you've just heard about, our exciting digital capability, I should add, to drive deeper customer engagement and superior customer experience in these markets. A&H today is a material earnings contributor for us from Japan. By diversifying our portfolio across these various markets, we can ensure sustainability of future A&H earnings. Let me now show you examples of where our strategy has already worked in a very short period of time. Korea, a market with high awareness and high ownership. We were selling mostly A&H riders attached to life and savings policies. In the latter part of 2011, based on our understanding of a growing awareness and need for cancer and other critical illness type products, especially seen in our target demographic of affluent families, we launched our first standalone cancer product.
We leveraged our expertise from Japan, both from a product innovation capacity as well as from a training and development perspective for distribution. Sales of the product was phenomenal. We went on from there to introduce critical illness products, standalone again, leveraging our capability from Japan, extending the distribution capability from career agents to general agents, momentum continued. The ability to do all of this in a relatively short space of time resulted in what you can see, a huge growth of 79% CAGR from 2011 to 2013, resulting in a total ANP in 2013 of close to JPY 120 million in new business sales. As you heard earlier from Toby, these products have an earlier statutory payback period, which will improve our distributable cash profile for Korea. China. Similarly, in China, we saw a growing awareness of cancer.
Once again, leveraging our expertise from the region, we were able to quickly and successfully introduce this offering to the market, targeting here specifically young professionals. We leveraged our existing expertise or existing strength of distribution in direct and telemarketing, as well as in career agents, resulting in the 15% CAGR growth in sales in this space with a total ANP in 2013 of almost JPY 220 million. Further, I'd like to point out that the sharing of best practices happens both ways, where, for example, we leverage our strength and capability of direct telemarketing in China across to other operations to deepen offerings through that channel. Really, it is about leveraging strengths across all of the operations to enrich capabilities and succeed. In conclusion, A&H is an attractive business opportunity. I think we're all convinced of that.
We also know that it's a market with attractive margins and low capital requirements. MetLife is well-positioned, and as you saw in 2013, we already were number two in the market with new business premiums. Well, we have a long history of success in Japan, and we have shown you how leveraging on that success, we have been able to succeed in markets like Korea and China. Continuing to execute on our customer-focused strategy and leveraging on the capabilities that we have already built from Japan, we will drive profitable growth in the five key markets as I have shown you before. Thank you. I would like to now invite you to join us for refreshments outside before we move to the next segment with Sachin and Team Japan. Thank you.
Thank you, Nirmala. If we could please take a 10-minute break and start back with Japan. Thank you.
[Break]
Okay, if everyone could please return to their seats. All right, we would like to start the second half of the presentation with our discussion of our Japan operations. We'll kick this off with Sachin Shah, Chairman, President, and CEO of MetLife Japan.
You can tell who the Japanese people are in the audience. Welcome to Tokyo. It is good to see many of you again. Today we are very pleased to have the opportunity to discuss the performance and health of our business in Japan. Let me start by stating that first, MetLife Japan is a unique platform with significant opportunities for sustainable profitable growth. Second, we have a track record of outperforming the market. Third, we are accelerating value creation through improved persistency and better cost and capital management. Importantly, these factors are steadily improving dividend capacity. This morning, I will speak to you about growth opportunities in the Japanese market and how we are well-placed to take advantage of these opportunities.
Following me, Koichiro Yamaguchi, our Chief Distribution Officer, will talk to you in more detail about our broad distribution footprint and how we are leveraging it to capture growth opportunities. Atsushi Yagai, our Chief Customer Marketing Officer, will speak to you about rebranding MetLife, which took place on July 1st of this year. How customer centricity is driving persistency improvement in our business. Finally, and equally importantly, Greg Brennan, our Chief Financial Officer, will speak to you in more detail about our financial performance and our efforts to increase value creation. Let's get started. MetLife Japan is a top 10 life insurance company in Japan with a consistent record of outperforming the market in terms of premium growth. Our strength in diverse distribution and a broad product portfolio enable us to organically grow faster than the market.
Because of these strengths, we do not have to chase growth. Growth in single premium yen whole life and annuity products in the bank channel boosted each one of the top 4 players on this slide. As we have consistently stated, we do not emphasize single premium yen whole life and annuity business due to concerns about profitability. This is a good example of where being better than the market is better than being the best. Since the acquisition of Alico in 2010, we have focused on balancing our strength in top-line growth with value growth. This emphasis on balancing value and volume enables us to better utilize our strengths and take advantage of profitable growth opportunities in the Japanese market.
Over the past year, we have intensified these efforts through life product repricing, commission scheme changes, improved distribution and marketing capabilities, and most importantly, new product launches, signaling a return to our first-to-market legacy. As Chris mentioned earlier, Japan's long-term growth prospects are driven by economic, demographic, and social changes. Several consumer needs are emerging in the market and our diverse distribution channels and broad product offerings provide us multiple ways to grow. An aging society and public debt that stands at more than twice the size of the economy are putting pressure on social security and essentially shifting risk from the government to individuals. A quarter of Japanese people are age 65 and over today, with that share expected to rise to 45% by 2050.
Notably, this is the generation that controls most of Japan's significant household wealth. We see growing needs for medical, retirement, and inheritance solutions to keep pace with the changing social security and tax environment. Single-person households are expected to make up nearly 40% of all households by 2035. There are also increases in single-parent families. As demographics change, so do lifestyles and consumer buying behaviors with customers looking for both online convenience combined with a need for trusted face-to-face advice. Amid these economic, demographic, and social changes, Japanese consumers are becoming more sophisticated and value a seamless multi-channel experience that much of the Japanese life insurance industry today cannot provide. This provides us an opportunity to differentiate and profitably gain share. Furthermore, the impact of Abenomics may act as an additional catalyst to growth.
While Prime Minister Shinzo Abe's program of fiscal and monetary stimulus, the first and second arrows, has improved Japan's growth outlook in the short term, rising inflation and yen depreciation are driving demand for foreign currency-denominated products. Ultimately, changes in taxation will drive opportunities for tax planning and wealth transfer solutions, things that life insurance is extremely well-suited for. Let's discuss some of these trends in a bit more detail. Japan's aging population is driving increased government expenditure on health and pensions. The Ministry of Health, Labour and Welfare estimates that by 2025, social security payments will need to increase by 35% in order to maintain today's level of benefit. This strain is already showing in increases in health co-payments. For example, earlier this year, co-payments for those aged between 70 and 74 rose from 10% to 20%.
Additionally, out-of-pocket hospitalization expenses are rising, up 25% from three years ago. As a result, consumers are increasingly concerned about the adequacy of state-provided healthcare provisions in the future. These concerns are driving increased interest in private sector solutions for medical and cancer protection. Research shows that Japanese consumers view medical as the most important risk to insure against. While medical insurance penetration is growing, more slowly, and now at 88%, customers are constantly reviewing and changing their coverage, leading to significant business opportunities to offer products better suited to their needs. Moreover, cancer insurance penetration rates are still low at 33%, but increasing strongly in recent years. In the medical insurance market, riders attached to life policies sold by domestic players still make up a large share of the market. These riders are typically 10-year term riders.
At the end of the term, the premium increases substantially, prompting the customer to not renew the term rider and essentially shop for standalone medical insurance. This not only creates an opportunity to capture their medical business, it creates an opportunity to capture the whole relationship. More on that later. As a result, while riders still make up a large share of the market, their overall share is shrinking as customers shift to standalone medical products that are more attractive in terms of both features and whole of life pricing. In effect, there is a shift happening in the medical insurance market that the overall growth figures do not show. Notably, we have been capturing a good portion of these switchers, which has helped sustain growth in our medical business.
Competitive products are important. We are also focused on enhanced product marketing as well as increased customer retention so that customers find it easier to come to us and stay with us. Yagai-san and Greg will discuss in more detail about the improvements we've made in persistency and how that is contributing to overall A&H revenue growth in our business. Retirement is the other area of significant concern in the minds of Japanese consumers. They are increasingly turning to annuity products and single-premium whole life insurance products for retirement and inheritance needs. The graph on the left side of this page shows the increasing penetration rate in annuity insurance overall. Keep in mind, the majority of the market is yen-denominated product.
We almost exclusively play in foreign currency-denominated fixed annuity and life, where we have strong competitive advantage and which we believe to be the most profitable segment in the market. To repeat a point I made earlier with some data, the fastest-growing consumer segments are seniors and middle-aged singles. Both have strong needs for medical and retirement products. Importantly, they prefer or favor different sales channels. Even though the family and couple segments are declining, many of these consumers, as I mentioned earlier, are switching their medical insurance from riders to standalone whole of life products. Capturing the medical switchers also gives us an opportunity to capture their in-force life insurance business, in essence, transferring the whole relationship from a competitor, not just the medical relationship. Where others may see challenging demographics, our diverse distribution and broad product portfolio enable us to capture profitable growth opportunities.
Japanese consumers are clearly becoming more sophisticated and value a seamless multi-channel experience that much of the life insurance industry in Japan cannot provide. Online is playing an increasingly important role, particularly in information gathering. There is a strong preference for trusted face-to-face advice. Yamaguchi-san will discuss in more detail about how our unique distribution footprint allows us to offer consumers choice in how they access insurance, and therefore capture demand from different segments. As well as expertise, convenience, and price, consumers in Japan consistently place trust as the most important factor when purchasing life insurance. Our market research shows that today in Japan, almost three out of four consumers say they do not trust their current insurance advisor. Yagai-san will discuss what we are doing to build our trusted brand in Japan, and Snoopy's a big help here, and make improvements in persistency.
Complementing our diverse distribution, our broad product portfolio helps meet high priority consumer needs in health, savings, retirement, and inheritance. We have a well-diversified product mix, and the mix is weighted towards higher margin protection and foreign currency products. The pie chart on the left-hand side shows MetLife Japan's premiums, deposits, and other considerations by product line. The bar chart on the right side shows sales by product line as compared to two of our more notable foreign competitors. Both are for first quarter 2014. There's a lot of information on this slide, so I'll discuss it by product category. First, as you can see, a little more than 25% of our premiums, deposits, and other considerations, and one-third of our sales come from accident and health.
Second, foreign currency products make up approximately 45% of premium deposits and other considerations as our retirement products, represented by 14% on the pie chart, are almost all foreign currency. We are a leading provider of both foreign currency single premium annuities, and both recurring and single premium foreign currency life products. Third, our yen life portfolio is largely made up of recurring premium products. As Chris and Toby have mentioned, yen whole life products lead to A&H packaging. A simple rule of thumb we use is that every three to four JPY of yen whole life leads to one JPY of A&H. As you can see, our wide product offering and well-balanced mix give us a steadier growth profile, better risk diversification than our competitors who are focused on a more limited product set. Let me remind you that we tightly manage assets and liabilities.
All of the foreign currency liabilities are matched with similar maturity assets in the same currency. As both Chris and Toby have mentioned, in 2014, we have been making a shift towards higher quality sales and better customer retention. First, as low interest rates in Japan have continued, the FSA changed the industry standard reserve rate last year. As a result, profitability on some of our yen life products fell below our hurdle rate. In response, we repriced certain yen life products, which were generating significant volumes in our face-to-face channels to meet our hurdle rate. Additionally, we rebalanced our commission schemes to reward both new business growth and customer retention. That is, we reduced first-year commissions and increased renewal commissions. This change, while difficult, was to ensure our agents and distribution partners were better aligned to our strategic priorities, customer centricity, and value growth.
As a result, as the table on the left side shows, yen life sales declined significantly. While we are ordinarily not happy with such steep volume decline, in this case, we took the appropriate action to manage the trade-off between volume and value. As Chris has mentioned on prior earnings call, the decline in yen life sales has had a knock-on impact on A&H sales. In the first half of 2014, A&H sales declined by 20%. There are two main reasons for this. First, medical sales packaged with yen life products declined as a result of the yen life repricing I just mentioned. This is a primary factor in the decline. Second, as the market has become more crowded, we have not launched any new medical products since 2009.
Importantly, during this period, sales from other, more profitable products, including foreign currency life and annuities, as well as cancer, continue to perform well. This clearly demonstrates the value and power of our diverse distribution and broad product portfolio and reinforces the point that we do not have to chase growth. I'm also very excited to report that we launched two new medical products earlier this month. As a result of this and the other actions we have taken, we expect strong sales growth in Q4, creating a fast start in 2015. Going forward, we expect annual sales growth to be mid to high single digits across our portfolio. While overall volume is down, we are very pleased to report that our shareholder value creation is significantly improved, and perhaps more importantly, we are now focused on accelerating profitable growth.
Let me repeat, this month we launched our first new medical product in five years. This new product will launch with new product marketing bundles that offer more attractive pricing for younger consumers and competitive new riders focusing on coverage-oriented customers. These new products, which we have named Flexi and Flexi Gold, were developed by extensively surveying consumers on what they want from medical insurance in a crowded market. We believe these products are among the most comprehensive in the market, providing consumers with flexible pricing and coverage options, hence the new name, Flexi. The key differentiators are new riders, including extension of hospitalization, three dread disease premium waiver. The three dread diseases are cancer, cardiac, and cerebral vessel diseases. Three dread disease lump sum benefit. We believe we have more comprehensive coverage options than our competitors.
Importantly, profitability of these products is about the same as before, as we have introduced more segmented age-based pricing and marketing. Another important note, unlike many of our competitors, when we talk about packaging or cross-sell, we do not count riders. We focus on ensuring that our distributors sell base policies and riders reflecting the customer's needs, not our marketing. When we talk about packaging, we're talking about the sale of a standalone whole life or the sale of a standalone A&H, cancer or medical. Riders are part of the way we go to market, not the way we cross-sell. We're very excited about these products and as I mentioned, expect strong sales momentum going into 2015. In the cancer segment, we launched an innovative product last year, GuardX.
That is one of the most comprehensive products in the market and has helped our cancer sales grow by double digits this year. While some of our competitors' cancer sales have declined, ours are growing, and we expect that to continue. How did we achieve this? Traditional cancer products, which focus on hospitalization coverage, typically do not cover or work well with modern cancer treatment, which is increasingly becoming focused on outpatient care. When developing GuardX late last year, we spoke to nearly 2,000 cancer patients and their families. They told us they want a product that provides a lump sum payment so they do not have to worry about filing multiple claims, and they're free to focus on their treatment during a time of difficulty. With riders, GuardX also provides coverage for advanced cancer treatments such as proton therapy.
In addition, GuardX provides coverage for stage 4 cancer when the focus shifts to palliative care rather than treatment. This focus on lump sum benefits enables us to more easily package GuardX with medical insurance as it does not duplicate hospitalization coverage, which is the core benefit of our medical product. To better manage long-term cancer claim risk, we've implemented tiered reinsurance arrangements on this product. Let's turn to another important key differentiator, our foreign currency denominated life and annuity products. We are a leader in these segments, and we have a broad product suite with US dollar and Aussie dollar currency options, single premium and level premium payment options, and whole life and fixed annuity chassis. Our solutions cover various customer needs in foreign currency, including protection, savings, retirement, and inheritance.
Our foreign currency product sales in the first half of this year grew by 61% versus prior year due to the recovery in the economy driven by Abenomics, a relatively stable FX rate, and an increasing need due to inheritance tax law changes coming in 2015. Our global investment in risk management capabilities allow us to source more attractive investment options in the U.S. and Australia within our risk appetite. Our multiple distribution platform provides customers choice in accessing foreign currency solutions from banks, independent agents, or MetLife agents. To reiterate what I said at the beginning, we see significant opportunities for long-term growth in Japan and our diverse distribution capabilities and broad product portfolio ensure that we are well-positioned to capture these opportunities. We have made the difficult shift to emphasize value as well as volume, and we are now focused on accelerating profitable growth.
Thank you for your time today. I look forward to the Q&A. I'd like to introduce Yamaguchi-san, who will now talk about our distribution footprint in more detail.
Thank you, Sachin. Good morning, everyone. Today, I'd like to explain why multi-channel distribution is our competitive advantage. As Sachin said in his presentation, Japanese consumers are increasingly seeking multiple ways to access advice and solutions. This changing behavior is leading to a channel shift in the Japanese insurance industry, creating growth opportunities that are well-aligned to our distribution platform and capability. Many consumers now start their journey on the internet. Some end up completing directly online, and according to BCG analysis, direct marketing is one of the most rapidly growing areas. Still, majority of consumers are looking for professional advice, and as a result, choose the face-to-face channels. The independent agency and bank insurance channels are growing the fastest among the face-to-face channels, as consumers are increasingly demanding the ability to compare among multiple insurance products.
According to BCG's analysis, the career agency channel is in decline across the industry. Sales lady type distribution, which we don't have, is shrinking faster than life planners, which remains an important part of our business model as they deliver larger ticket sales with A&H package ratio. To be successful in this market, we have to have multi-channel distribution. This change in consumer behavior makes it difficult for one single channel to cover a wide segment of customers. We are well-positioned to meet these diverse preferences. The strength of our distribution footprint is clear when we look at this slide, which shows how different customer age segments access A&H and retirement products. As you can see, our independent agency channel covers broad range of consumers with A&H products. Our direct channel is very strong in the senior age spectrum for A&H products.
For retirement products, the bank channel is the main provider. When we think about our distribution strategy, we are not prioritizing one channel. To grow all of our channel to give consumers choice in how they access and buy insurance so that we can capture growth opportunity in the market. We are well-positioned as each individual channel has strong competitive advantage and scale. Independent agencies are our largest channel, with approximately one-third of our sales. Brokerage general agent, which makes up 25%-30% of our independent agency channel, have been growing at over 10%, attracting consumers looking for independent advice and product choice. Performance is enhanced through our unique Federation model, which I will explain in more detail in a moment. Our proprietary MetLife agency force accounts for approximately 25% of our sales. Driven by consultative need-based sales model, MetLife agency generates high productivity and strong cross-sell ratio.
I'll go into more detail on MetLife agency channel later. Our strength in face-to-face distribution combined well with bank distribution, where our more than 100 bank partners connect us with 92% of individual bank deposits in Japan. We are further leveraging these partnerships to grow our business in the middle market consumer segment. We have a strong, mature platform in direct channels, including direct response and digital. Direct channel contributes 10% of our sales and also provides valuable productive leads to MetLife agents. We are the fastest-growing player in the digital channel, which also acts as important gateway for information gathering before customers seek face-to-face advice. Let me take deeper dive on independent agency. In addition to the high-growth BGA segment, which we talked about on the last page, we have a unique affiliation of agents called MetLife Federation, which was established in 1992.
The Federation consists of one national representative body, 56 regional Federation organizations, and about 5,000 members. It is an advisory body that offers collective voice to MetLife with regards to market conditions, competitors' products and strategies, compensation, marketing, and product support. In this way, they are one of our most valuable resources. As a result, they get time and attention from MetLife management. Federation also provides support similar to MDRT in promoting an array of activities to enhance motivation and sales skills of their member agent. In return, they sell MetLife product with higher productivity and A&H ratio. It is an organization truly unique to MetLife, and we enjoy larger share of their business. We provide preferential service as well as award and recognition programs to the Federation producers. The Federation members are extremely loyal.
Around half of Federation agents have been doing business with us for more than 10 years. 15% of those are in the highest-ranked group of agents in terms of productivity. The member of Federation account for 54% of our independent agents and generate 70% of A&P for the channel. Productivity for Federation agent is around 45% higher than non-Federation agents. Federation agents tend to have a higher A&H production at 30%, compared to 19% for non-Federation agents. We also have a group of exclusive agencies within the Federation which are highly loyal and have an even higher A&H production share. Let's look at our face-to-face channel in more detail. Next is MetLife agency channel. Since a couple of years ago, we launched a project to professionalize MetLife agency network. As you can see, we have seen strong productivity gains to JPY 8,600 per agent per month.
This consists of a more profitable product mix than many of our competitors as it includes approximately 24% A&H sales. Driven by consultative needs-based sales model across our agency force, we generate high rates of product packaging and a strong policy cross-sell ratio of approximately 70%. We are further strengthening this channel by focusing on recruiting higher quality MetLife agents and retention. As you can see, our rookie 13-month retention rate has increased by 840 basis points compared to 2010. This is important because average productivity goes up by 150% after the first three years. While our net new force has declined as expected, we expect that decline to bottom out over the next four months, after which we expect modest NFS growth going forward. Our strong partnership with more than 100 financial institutions connects us with over 90% of the individual deposits in Japan.
These partners include all three mega banks and 75 regional banks. We focus on the top 100 financial institutions in Japan to maximize our access to deposits and the productivity of our partners. Our operating model is different from that of many of our competitors in that we have strong multilayer relationships with the head offices and branches of the financial institutions, but also have separate and distinct sales training teams. We promote a needs-based sales approach targeting profitable segments such as family assets of high-net-worth and mass affluent customers. In addition, we are working with banks to penetrate their customer base more effectively by providing an outbound call sales business model. Much of the industry growth in recent years is coming from the single premium whole life and fixed annuity segment in the bank channel.
These are mostly JPY-denominated products, which as Sachin mentioned earlier, are subject to margin pressure due to low interest rates and aggressive competitions. We are focusing on the more profitable foreign currency fixed annuity and foreign currency life products. We are a leader in this segment. In recent years, we have also rapidly grown the sales of level premium protection products, including A&H. Our direct marketing has the longest history in the Japanese insurance DM market since 1976. We have a broad presence in DM in both traditional media and digital through our own direct approach, and also through sponsor agencies. In the direct space, in addition to leveraging traditional media, we launched online binding functionality from 2012, and now we are a leader in web-related sales in the industry.
While monoline online players have recently struggled with sales growth, our own growth trajectory in online sales has continued to increase. We believe the market will grow rapidly in the future, so this remains an important focus area for us. For sponsor direct, in addition to traditional sponsors like credit card companies and catalog shopping companies, we maintain leading share of A&H products at one of Japan's largest digital comparison sites. As I mentioned in my opening, the broad reach of our multi-channel distribution enables us to address the changing needs of Japanese consumers while also diversifying our revenue base. Each channel has its own unique strengths: steady growth and cross-sell potential from direct, our unique independent agency federation, the professionalization of MetLife's agency force, access to the growing senior affluent markets via our bank channel.
I'm going to hand over to Atsushi Yagai, our Chief Customer Marketing Officer, who will talk about our branding and our customer relation efforts. Thank you.
Thank you, Yamaguchi-san, and good morning, everyone. I will talk about how we are enhancing our brand and customer-centricity activities with the aim of gaining trust from customers and eventually driving persistency improvement. What is a key factor for consumers in Japan when choosing a life insurance company? We have been asking this question in our bi-monthly survey, and at every survey, the top factor is trustworthiness. At the same time, as Sachin mentioned earlier, 70% of Japanese consumers say that they don't trust their current insurance company or advisor. Japanese consumers are looking for an insurance company that they can truly trust. MetLife is aiming to be that company through branding and customer centricity. Our vision is to be the customer's number one choice life insurance company in Japan.
One of the advantages of rebranding to MetLife in the Japanese market in July this year is that we are now better positioned to leverage our global brand assets. As you know, MetLife is one of the most trusted life insurance companies in the U.S. In fact, majority of U.S. customers say that they trust MetLife. By fully utilizing this global brand asset, we believe we can accelerate the strength of our brand in Japan. The right bottom picture shows Japanese MetLife logo signage at Major League Baseball games. When Yankee players Tanaka and Kuroda pitch, this signage appears, and these games are gaining large viewers in Japan through national TV broadcasting. Also, in the right field stands of Yankee Stadium in New York, there is a big Japanese MetLife sign, which also gains the attention of Japanese consumers, especially when Ichiro makes a wonderful catch.
As you know, baseball is the most popular sport in Japan, and MetLife's brand presence at the center of baseball's home country has a significant effect on our brand in Japan. MetLife's sponsorship of the U.S. LPGA, Bolshoi Ballet, and the Badminton World Superseries are other global brand assets that we are leveraging in Japan. Snoopy is also another global brand asset that is very powerful. You may be surprised to hear that Japan is the world's number one market for Snoopy and Peanuts-branded goods by revenue. Japan loves Snoopy. We are fully leveraging this charming beagle in Japan. The picture on the right is our newspaper advertisement on July 1st, announcing our rebranding to MetLife. This full-page size advertisement appeared in major national newspapers. The picture in the upper left-hand corner shows our new blimp design after rebranding, which is flying in Japan from this month.
This design was selected from the consumer campaign, which more than 2,000 consumers applied their original blimp design. MetLife has the only blimp in Japan, and now attracting more than 13,000 followers on Twitter. MetLife's history and global scale are also important points for us to communicate to consumers to enhance the MetLife brand in Japan. This includes the fact that MetLife was established in 1868, which is the year of Meiji Restoration, when the Shogun period ended and imperial rule restarted. Most Japanese know this year, and they are always impressed to hear that MetLife has such a long history. No insurance company existed in Japan at that time. This is another example of the utilization of Snoopy in our TV advertising. As Sachin mentioned, we have launched two new medical insurance products from this month, and Snoopy has supported this launch to attract consumers' attention.
I will show you two 30-second ads. One is for Flexi, a fully hospital medical insurance, and the other for Flexi Gold, a simplified issued fully hospital medical insurance. The product name Flexi was created with an aim to express its flexibility of designing each customer's own coverage plan, which is enabled by offering a wide variety of riders. Since this is the first medical product launch in the past five years, we focused the tone and the manner of both ads to be festive so that it will get large attention. Flexi ad is featuring a Peanuts music band on stage celebrating this new product launch. Please watch the ad for Flexi.
MetLife Seimei. MetLife Seimei.
Flexi Gold is targeting senior customers. We aim to express that it is a quality product for mature customers. Flexi Gold ad is featuring a grandmother's birthday party scene. Please watch the ad for Flexi Gold. I hope you like it.
MetLife Seimei. MetLife Seimei.
We understand that only advertising is not enough to gain true trust from customers. Eventually, the customer judges an insurance company based on what they experience from the company. We are improving the customer experience at critical customer touchpoints. The agency notification systems for unpaid policies and the promotion of credit card usage for premium payments helps to prevent lapse and improve persistency. We strengthened orphan customer management. This not only improves customer satisfaction and persistency, but also generates additional upsell business. In 2013, we redesigned our agency commissions and shifted more importance on policyholder maintenance, which also makes customers stay longer with us. Net Promoter Score surveys implemented since 2013 is enabling us to improve customer experience at key moments of truth, which are sales process and claim payment process. Later this year, we plan to expand Net Promoter Score survey to the policy owner service transactions.
Lastly, but not least, we plan to utilize advanced data analytic methods in order to prevent lapse and surrenders. Currently, pilots are in progress. We plan to fully utilize this method from 2015. As a result of all these efforts, our persistency ratio has improved by 110 basis points and 120 basis points for life and A&H products, respectively, in first half 2014 compared to first half 2012. In the most recently available industry data, comparing 2011 and 2013, our persistency improvements are outperforming the industry. To reiterate, we are seeing improvements in our persistency through intense focus on various persistency initiatives. We see room for further improvements going forward. We have been strengthening our brand strength in Japanese market by utilizing MetLife's global brand assets, with also Snoopy helping us to generate strong affinity from Japanese consumers.
I'm going to hand over to Greg Brennan, our Chief Financial Officer, who will talk about our financial performance as well as our efforts to increase value creation. Thank you very much.
Thank you, Yagai-san. Good morning. As Sachin said, and Yagai-san also said, last but not least, what better way to end this set of MetLife Japan presentations than to take a more detailed look at the financials? That's what I'm going to do. Firstly, we'll review the key financials and show you that the core business is performing solidly. We'll provide some detail on medical revenues and illustrate the impact of improving persistency. Expenses, to show you how expense ratios have been declining and how we'll continue to drive them down. Solvency, which is sound and well above minimum requirements, and finally, the solvency margin sensitivities to changes in interest and foreign exchange rates. Here are the key financials. As you've heard, we're undertaking a process of transformation to improve the value of both new business and the in-force portfolio.
Although the transformation has been progressing well, we have seen disruption in our top line, which is evident in the financials you see here. Going first to the bottom line, first half reported operating earnings declined by 7% year-over-year on a reported basis, without factoring in the impact of foreign exchange rate changes and one-off items. The change in FX accounts for $38 million of the $43 million difference you see here, meaning that the half-year results this year were basically flat against last year after the FX was taken out. However, if we adjust for the noteworthy items which Toby described earlier, variable investment income, fixed annuity surrender fees, and one-off tax adjustments, and take out the FX impact, the year-over-year change is actually an 8.4% increase. The underlying core business is performing solidly.
Premiums, fees, and other income was flat after FX for the half-year, mainly due to the lower sales. I'll drill down on the medical business PFO in a few moments. As Toby mentioned, statutory premiums were well up by 26% over the half-year, reflecting the strength in our retirement business sales, which is not reflected in PFO. We repriced our main JPY life product in October last year and in February this year to reflect the lower reserve rates, and at the same time, we restructured commissions, lowering initial commissions and increasing renewal commissions. We did this in order to adopt a more customer-centric approach and improve new business persistency, and to improve cash flows and reduce statutory new business strain.
As expected, sales of these life products and the related A&H packaged sales were impacted, and here you see that year-over-year sales were down 14% for the first half 2014, as Sachin showed you in the breakdown of sales by type of business. While sales volumes were down, the lower commission ratio drove a better business mix, and so value was well up, and our own internal measure of new business value has increased significantly. Furthermore, we expect sales volumes to recover next year and to grow in the mid to high single digits going forward. I will address the operating expense ratio in a following slide, and I will also speak to the SMR and sensitivities in turn a little later.
I am pleased to say, as Toby signaled, that MetLife Japan paid a dividend of $236 million in June this year and has comfortably financed its own capital requirements since the acquisition of Alico. This slide shows a further breakdown of the medical business, which Sachin showed you earlier, showing premium fees and other income split between single, first year, and renewal premium. You can see from the table our renewal premiums are driving PFO growth in medical business between first half 2013 and first half 2014, and that PFO is more sensitive to persistency than it is to sales. Based on these half-year results, a 1% improvement in persistency generates an additional $15 million of PFO, whereas a 1% improvement in sales over the first half of 2013 would generate an additional $5 million of PFO.
The single premium significantly impacted the PFO, as lower margin, single premium, fully in-hospital whole of life business, which is predominantly sold through the bank channel, was substantially down. This was because the bank market shifted to FX-related products, as Sachin described earlier. However, we have taken a meaningful share of bank FX retirement business this half year. The majority of our medical business revenues are from recurring premium products. Excluding single premiums, our medical revenues grew by 3%. Expense efficiency. Expense efficiency is an important lever for MetLife Japan. We are targeting to close the performance gap with our key competitors and are taking a number of important strides in that direction to improve our efficiency in Japan. Multiple cost saving initiatives are already in flight.
Through the Scale and Simplicity initiative, which Steve Kandarian announced in 2012, we have identified run rate savings opportunities of well over $100 million, which are being created through transformational projects across our organization and which are leveraging our global scale. We expect to start generating run rate savings from these projects from 2015. A portion of the savings we are generating is applied to fund new investments in technology, and over $25 million of incremental IT investments has been set aside in 2014 to support efficiency initiatives. These include web- and mobile-based interface technologies to make new business acquisition in the call centers and the front and back offices much more efficient. Operational efficiencies have been developed through process reengineering, workflow systems development, and by managing headcount through outsourcing, attrition, and hiring control. Post the Alico acquisition in 2010, our net expense ratio has improved by 470 basis points.
This represents a gross cash expense reduction of over JPY 500 million since 2011, this is after savings reinvested in IT projects. We'll be investing further in IT projects in 2015 and beyond and expect to yield further run rate efficiency gains. In addition to the programs which are currently in flight, we've already identified further opportunities to take cost out of the business. Expense and efficiency management is an area of strong focus for us. Finally, you can see that the curve has flattened in the first half of this year and was up a little on the first half of 2013. This is mainly due to the impact of reduced deferrability under GAAP accounting, as deferrable initial commissions were replaced by non-deferrable renewal commissions. As a result, we expect the full-year expense ratio for 2014 to be fairly flat to full year 2013.
I want to take just a moment to describe to you the commission restructuring which we undertook in 2013 and explain why we can continue to grow the top line successfully with this revised structure. Here you can see what we did in December 2013. We systematically reduced initial commissions and increased renewal commissions, rewarding agents for balancing new product sales with longer-term customer retention. As well as improving cash flow and new business strain, this structural change aligns with our customer-centric strategy to retain customers for the long term and encourage the right behaviors that focus on the merits of our products. Sales compensation is now more balanced between new business acquisition and persistency, and we remain competitive in the market with top quartile total commissions. A strong financial position is an important element in building trust in our brand in Japan.
In recent research, consumers in Japan identified financial stability as their second most important factor, when the important factor is trustworthiness, as Yagai-san described. MetLife's capital position in Japan is strong, with a solvency margin ratio, or SMR, of 1,018% at 13th June 2014, which is in the top quartile and substantially above minimum requirements. Our target is to maintain our SMR above 600% under normal operating conditions and to mitigate volatility by the use of hedging and reinsurance overlays subject to appropriate cost benefit. We do expect interest rates to rise progressively over the next few years, and this would have a favorable economic impact. Rising interest rates will have an adverse effect on our statutory capital in the short term as unrealized losses in AFS securities flow into the solvency margin calculation.
Here you see the sensitivity of our SMR to Australian dollar, yen, and U.S. dollar interest rates. The SMR is relatively insensitive to movements in Australian dollar interest rates as the AUD exposure is relatively small, and the assets have a short duration. Sensitivities to movements in both U.S. and Japan interest rates are now fairly similar as exposure has evened out, as we have transitioned to a greater concentration of bond matched reserved, or BMR assets since March 2013. As we move further to the right of the graph, the impact of combining the rates becomes more than additive. A combined 200 basis point rate increase would be favorable to the enterprise overall on an economic basis, although it presents an accounting risk impacting the SMR.
We are actively managing the solvency margin exposure to interest rate rises and have progressively increased the BMR proportion from 34% in March 2013 to 43% in June 2014. We intend to drive this ratio further toward 50% by the end of 2014. The sensitivities shown here are based at 30 June 2014 but assume we are at our expected year-end BMR position. Beyond further increases in BMR securities, other actions to mitigate balance sheet risk are reinsurance on selected portfolios to protect the SMR under stress, optimizing asset allocation, and hedging using swaptions and other derivative instruments. We are actively exploring these options and expect to further mitigate interest rate risk to the balance sheet over the coming year. Finally, here is the sensitivity of the SMR to changes in FX rates.
You can see from the graph that the SMR is basically insensitive to FX rate movements. This is because the net exposure of our unhedged foreign currency assets is only a modest amount in the context of the total balance sheet, whose assets exceed $90 billion. In fact, the total net FX exposure represents only 2% of the balance sheet. However, as FX gains and losses are recognized for statutory accounting purposes, a large fluctuation can have an impact on Japan's capacity to pay dividends. We protect our dividend capacity against a weakening of the US dollar by managing FX risk using a range of derivative instruments. US GAAP earnings are also hedged against the weakening yen out to the end of 2016 using options opportunistically. These hedges are executed from the U.S. in coordination with our own local hedging program.
Let me conclude by repeating that while there are some sales challenges in our transition to enhance shareholder and customer value, the core business is performing solidly. We expect sales to recover next year and to grow in the mid to high single digits going forward, as Sachin has already mentioned. Medical revenue growth is being driven by persistency improvements. Expenses are well managed, expense ratios are improving, and we are driving further improvements. The key focus area for us. Our solvency margin ratio is sound, in the top quartile, and well above minimum requirements. Nevertheless, we are focusing on further mitigating the potential impact of interest rate rises on the SMR. Our ultimate goal is to create shareholder and customer value through optimizing total economic returns and by managing capital efficiently to protect our balance sheet.
These in turn will drive higher cash flow, which translates into stronger statutory capital and builds dividend capacity over the long term. Let me hand you back to Chris for his closing remarks. Thank you.
Thank you, Greg. I just have a few comments, and we'll break for coffee before we take Q&A. First and foremost, I just want to thank you all for, again, for traveling so far to see us and for your time and attention this morning. Secondly, I'd just like to thank our team here in terms of a job well done in terms of telling our story. Thank you very much. I have one minor correction to make. I think I said earlier that our Indian business, we had a 26% market share. That was not a forward-looking statement. In fact, we have 26% ownership of our joint venture partner, which is what I'd intended to say. I apologize for that. Our aim this morning, as I outlined to you, was really to demonstrate performance in four key areas.
We have given you an awful lot of data and proof points, and our intention was to make that useful for you in terms of demonstrating those four key areas, and hopefully we've managed to achieve our objective this morning. Wrapping up, I think we have done a reasonable job in articulating the Asia growth story to you, which is built around a number of social, economic, and demographic changes, both impacting Japan and the rest of Asia. I would argue that we're very well positioned to take advantage and across the rest of the region, particularly in our key markets. The Japanese business is very well positioned, and I think Sachin and the rest of the team have articulated to you the various levers we've got to pull, both in terms of product and distribution to make our business effective to changing consumer behavior over time.
Please remember that whilst Japan will outperform the market in terms of growth and performance overall, it's not all about Japan. John made this point right at the start, and I just reiterate a couple of data points to you. Firstly, the point I made about sales. I said that sales outside of Japan and Korea would account for 25% of our business in 2014, and that number will grow going forward. Secondly, Nirmala Menon mentioned that of that $980 million of A&H business we've got, where we make very good money, that 40% of that comes from outside of Japan. These are really good proof points in terms of what we're taking from Japan and spreading as leverage across the rest of the region. We've also got investments in a number of key capabilities.
These are not just our global capabilities of employment benefits and the brand, which you guys done so eloquently articulated, but also it's in new capabilities that we're building here in Asia, such as digital, such as health, such as data analytics. All of these will help to fuel and support growth around the rest of the region. I close by saying I'm confident in terms of our solid financial performance going forward. I'm confident that we can improve our cash generation going forward exactly as Greg and Toby have articulated. I think you will see there's a real focus in terms of shareholder value creation going forward from the team here today. Again, thank you, and let us now break for 5 to 10 minutes whilst we set up for some questions, and then we'll get you out of here as we said, by 12:30.
Thank you very much.
The angel closes their eyes. The long-lost love too. Baby, just wonders. Old love feeling coming back again. Like a rolling thunder. Chasing the wind. On the morning runs. Sister of the other again. I can feel it. I think I'm crashing. All the crying. This moment she's been waiting for. The angel opened her eyes. Pair of blue-colored eyes. Presents the sun with the glory of new life. Old love feeling coming back again. Like a rolling thunder. Chasing the wind. On the morning runs. Sister of the other again. I can feel it coming back again. Like a rolling thunder. Chasing the wind. On the morning runs. Sister of the other again. I can feel it Back again like a rolling stone. Keeps me going. Foot to foot and thumb to thumb, yeah. I can feel it.
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Ladies and gentlemen, please take your seats. Please make sure your personal electronic devices are turned off. Our meeting is about to resume.
I said, "What about breakfast at Tiffany's?" She said, "I think I remember the film." "As I recall," I said, "it looked kind of hokey." I said, "Well, that's the one thing you've got." I see you, the only one who knew me. Now your eyes see through me. I guess I was wrong. What now? It's plain to see we're over. I hate when things are over. So much is left unsaid.
Okay, if everyone could please find their seat.
I said, "What about breakfast at Tiffany's?" She said, "I think I remember the film.
Ladies and gentlemen, please take your seats. Our meeting is about to resume.
I said, "Well, that's the one thing you've got.
The lights are pretty bright up here, so if I don't recognize you, don't take it personally. I will direct the Q&A, let's try to keep it to Scratch that. Let's keep it to one question and one follow-up. We have plenty of time. We can come back to someone if you have a third or fourth question, but at least for the first go around, let's be considerate of everyone else and get one question, one follow-up. With that, I think I saw Tom's hand up in the back. If you could wait for the mics, and also please say your firm name. Thank you. Both your name and firm name.
Thanks. Thomas Gallagher, Credit Suisse. First question is for Sachin. Just in terms of the medical business in Japan, to understand what's driving it. I guess if you look at the fact that total A&H sales are down 20% through first half, but cancer was up 15%, it would imply medical has really fallen off a cliff from a sales volume standpoint. Can you walk us through a little bit about what's going on in that market? I know you mentioned that you haven't launched a new product in several years. Was that a deliberate statement on competitive conditions in that market, in that particular end of the market, that you deliberately have stepped aside for a little bit? Just some color for what's driving that.
Great. Thanks, Tom, for that. You're right. First and foremost, we indicated on that sales slide, I don't have the number in front of me, but it's in your deck, that A&H sales in total, which includes both medical and cancer, were down 20% for the first half of this year versus first half 2013. If you peel that back, cancer is up, as we demonstrated on the subsequent slide. A&H is down 25% if you pull that out. First half 2014 versus first half 2013. That just sort of decomposes the numbers for you just to break it out clearly. What's driving that? Two principal factors, just to repeat what I said. We do a significant amount of packaging of A&H, particularly medical, more so than cancer, with our Yen Life products.
As we said, our JPY Life business was down about JPY 200 million, roughly, if you think about it. As I mentioned, our rule of thumb is somewhere between three to four JPY of JPY Life sales leads to about one JPY of A&H. If you do the math, it kind of works out to roughly the differential that we're off by, particularly in medical. The second factor, and it's obviously not easy to attribute these things absolutely one to one, is the fact that we've been out of the market or have had stale products in the market for quite some time during a period which the market has gotten more crowded, particularly with some of the domestic players entering the market on a standalone coverage basis. The primary reason for that was we had other priorities in the business.
A few of those years, obviously, AIG was dealing with its crisis, and so new product launches were not high on their list of things to worry about during that period. Post our acquisition, as we said in prior, I think, investor days, we were very focused on integration and the subsidiarization of the local incorporation of our business. That really took away a lot of our IT capacity to do new product launches. If you look in general across our portfolio, we didn't do a lot of new product launches in the first two or three years post-acquisition.
Last year, we came back to the stage first with cancer because penetration rates are low and we saw an opportunity to innovate in what we thought was a real space that we could take both from a customer point of view, but just it needed some innovation. We then moved to medical, which we just launched here, and you can expect us, as I said in my opening remarks, that we're back to where we now think we can have a regular cycle of competitive products leveraging on what we bought when we bought Alico in terms of that being a core strength of our business.
Just a follow-up, do you feel that the changing commission structure, while it's helping your free cash flow, has that put you at a competitive disadvantage at all?
As Greg Brennan mentioned in his piece, total commission. We were top quartile in first-year commissions in the industry, and we shifted to being top quartile now on total commissions in the industry. For agents who write good business and who persist that business, which by the way, is the majority of our distributors, they are going to get the same income, and in fact, they are going to get a more stable income stream because of the way we have shifted here. Like any transition, when you are making the winners and losers at the point of change, and we have had to manage through that. It is a difficult transition to manage because you do have some agents that are impacted more than others here.
We felt that it was the right move in terms of ultimately what we are doing, both in terms of value growth, but as well as customer centricity here. We do not view our commissions to be out of the marketplace. As I said, we are top quartile on a total commission basis today.
Scott?
Hi, thank you. Seth Weiss, Bank of America Merrill Lynch. Chris Townsend, this question is probably most appropriate for you. Just to talk about growth opportunities outside of Japan, maybe specifically in China, very big opportunity. Foreign players have a small share of that market. Maybe you could talk about the regulatory environment that you see there in terms of foreign players perhaps being able to expand that market share and then specifically MetLife's place in that market.
First of all, China is a very significant market. As I said, it is number 5 at the moment, will move to number 4 by 2016. Very significant in terms of the size. Foreign players are about 5%. What is encouraging from the regulatory environment there is the commitments made in the Third Plenum meeting, which was held recently to really open up the financial services sector. You see this in a number of areas in terms of deregulation of some of the pricing components. You have seen it across other parts of financial services. What has happened recently is that the main bodies in China are putting a fair amount of pressure onto the CIRC, the regulator, the China Insurance Regulatory Commission, to drive greater innovation in that market. We firmly believe that with time, that market will open up in terms of financial reform.
In terms of driving innovation, we're very well placed in terms of the digital componentry that Kathy mentioned because that will explode across the China market. It will open up. We're well positioned in terms of our existing telemarketing business, and we'll support that in terms of digital business going forward.
Maybe one follow-up. In terms of the goal to get to 20% emerging market per share, that's overall business. How much does China play into that in the near term? Is that really a longer-term story for that to have meaningful contribution?
That was an enterprise level target, 20%. I think we started at 14 with Provida. We're at 17, and we're well on track to get to that 2016 target of 20%. China, I think Toby mentioned, is positive on a China GAAP basis now. I think the 2013 number was $67 million of China GAAP. Remember, we're 50/50 of that, and it will just take time for that to flow through into U.S. GAAP earnings. We believe that China will become U.S. GAAP positive in 2015.
Toni?
Thanks, Ed. Toni Hammer from UBS. Just in terms of the new cancer and medical products that you're offering in Japan, can you talk about any changes to pricing? The reason I ask is Aflac told us yesterday that on their new cancer product, they're reducing pricing by, I think, 5% across the board to take advantage or to factor in some improved morbidity. Just wondering if you can talk about your new product, how it compares to what you used to write, and any data you can provide on IRRs or something like that would be helpful.
Okay, let me start with the first half of that question on product pricing. I'll work backwards with our medical products that we launched two weeks ago or actually 10 business days in now with those product launches.
We introduced what we call more age-based segmented pricing. That really aligns to our own experience in morbidity in those products. For certain ages, the younger ages, the products are cheaper than the products we're replacing. For certain other ages, the products are about the same price. Then particularly for older ages, the products are slightly more expensive. Net-net, as I mentioned in my comments, profitability is about the same between the product that's replacing and this new product because of the way we've essentially, call it more finer pricing bands based on age. That obviously also leads, given the whole of life aspect of the product, to the morbidity experience that we expect in that product line. That's the change we made there on the medical products.
On the GuardX product, it's very hard to do an apples-to-apples for you because the product profile or chassis is completely different than existing products in the market, including some of our competitors' products. The GuardX product, as I mentioned in my comments, is really a lump sum product. It's designed in a very different way than the traditional hospitalization type products that we currently still offer in the market, which is our prior product. It's still out there because there are those consumers that still prefer a hospitalization type product. We will tell you, the reason why we focused on lump sum is almost consistently every consumer we spoke to said this is where they want to go. You can see that in the actual slide, the share of our total cancer sales is dominated now by lump sum type product.
We think the market is moving here because consumer needs are going here. It's hard for me, Suneet, to give you apples to apples, how does the new cancer product compare to the prior product, because we're not really comparing the same type of risk profile, if you will.
Got it. Okay. Thanks.
You'll come up front, Eric. Raise your hand then, please.
Thanks very much. Eric Berg from Royal Bank of Canada, RBC. Just one question. When you raised prices here in Japan on your life insurance business, sales fell, as you would expect, and presumably you changed the commission structure as well. Now you're coming forward with a new life insurance product. Presumably it's priced to earn your targeted rate of return. Given your past experience, which suggests that competitors do not follow suit and are willing to work for less, why do you think the new product will sell?
Eric, thanks for your question. A couple of comments. One, to very clearly address the repricing. The repricing on the yen life products was primarily driven by the change in the industry standard reserve rate. Everybody repriced their products last year. Everybody raised the prices on their products last year. The relative competitiveness of our product for a while was actually more competitive until we repriced. The relative competitiveness of our product was about the same. After the repricing, we had gone too far in terms of moving the pricing to a point where the competitiveness of the product relative to the return profile just didn't match the value and volume trade that we wanted to make. In particular because of the packaging that our face-to-face distribution channels get out of this product.
The yen life portfolio, as Chris mentioned in his comments, is an important portfolio for us, obviously it's at the lower end of our profitability expectations. We watch the pricing and competitiveness on that very regularly around that and look to ensure that we can meet our minimum profitability requirements because it drives the A&H packaging that we've talked about here. Once we saw what happened, we took a much harder look at how we manage the risk in that product, how we think about the returns of that product and the investment profile of that product, and in particular, the interest rate risk.
We did quite a bit of work this year to come out with a more, I'm trying to think of the right word, a better profile around the investment strategy as well as how we manage the longer-term interest rate risk because it's a recurring premium product so that we could be more competitive in terms of what we offer the consumer, but actually improve the profitability from where it was, even after we repriced it once last year. That was just something that perhaps we could have done a year and a half ago. We had a lot in the pipe a year and a half ago, we were just looking to get to align with the reserve rate change. We came back this year with a much better risk management investment profile on the product.
Further side, Randy. We'll go in the back first. Randy, keep your hand up for the next one.
Sorry, Randy. Scott Russell from Macquarie Securities here. You painted a very positive picture around A&H. I'm interested in the 40% of that book that's outside of Japan. I think the business opportunity there is clear, I suppose the risks around that in the longer term aren't so clear. Cancer incidence rates are rising across the world, that makes it a difficult product to price, particularly in the longer term, it may even be worse in emerging markets like China. There isn't a lot of great data to help you there in terms of claims experience. My question is this: in thinking about that part of your book, what is it in your product design and your pricing that helps you mitigate the uncertainty around the claims outlook? I'm specifically asking around, is the product long-term?
Does it guarantee the pricing in the longer term? What data you have available to help you out with all of this?
Let me start with that, then I'll ask Nirmala if relevant, Toby to comment on that as well. The lion's share of that book outside of Japan is in Korea and in China. In Korea, it's very much a critical illness book, and it's more recently into cancer, and perhaps Nirmala can talk about that. In China, the products are lower risk. They return a premium critical illness product on the whole. They're the two key markets outside of Japan. Nirmala, do you want to comment any more on the product?
No, I think you covered it. I think it is correct.
Okay. Wait for the mic.
It is a large and growing market, it is those two countries that have the majority of the product growth. You are right, I think cancer awareness is growing, there is the issue of pricing and how we do that based on the data that we have. The one thing that I want to add, maybe Toby can say that these medical products are not guaranteed, in the sense that we are able to reprice it on a portfolio basis depending on the claims ratios, et cetera, which actually give us the comfort that we can look ahead and manage that portfolio better.
Having said that, I think we have to continuously look for data available from some of the reinsurers across the market, as well as look to some of the more mature markets where we see these lifestyle related diseases having a higher incidence and use that data to accurately manage or better manage the pricing.
Yeah. Let me just add onto what both Chris and Nirmala said. In China specifically, the product that we have there, as Chris mentioned, is a very simple product which offers critical illness coverage with a return of premium. That means we basically guarantee the premium rate. There's some interest rate sensitivity there. The spread that we have between what we're guaranteeing in the premium and what we actually earn is about 300 basis points. We've got a very comfortable margin there in China. In Korea, you're right. Incidence rates on cancer are a concern, we monitor that very closely for both Korea and Japan, where we sell a lot of cancer products. What we do in any new market where we're going into a new risk area is that we use reinsurance, as Nirmala mentioned, very carefully.
Especially at the beginning when a reinsurer maybe has a much broader view of the market because they've pooled risks from other insurance companies. We use their experience, we also probably allocate more of the risk to them in the beginning until we're more comfortable with it, then we'll gradually wind that back once we're clear on the experience ourselves. That's how we manage it.
We need to go to Randy over here.
Thanks, Ed. Randy Benner, FBR Capital Markets. I wanted to ask a question about reinsurance. This was a big topic yesterday with Aflac, and there's a lot of capital in global reinsurance markets, it seems there's good opportunities. You talked about executing transactions in 2011 and 2012. It didn't seem like that's something you're evaluating now. Other considerations are your SMR seems high. Maybe the holdco wasn't asking for as much cash because of non-bank SIFI concerns. Just trying to tie that all together. Quantitatively, what would be a reasonable SMR target? Is there good flow on reinsurance transactions out there? Could you accelerate cash coming out of Japan more aggressively if you got an all clear from the holdco?
I think you've answered-
I count as one question in one
I think you've answered your own question within the question. As I said in my presentation, these transactions remain an option for us. Right now, I think as John mentioned, there's no real need for us to send additional cash up to the holding company. As I showed you with the transactions we executed in the past, there is a cost to these transactions, which you have to pay for going forward as well. It remains an option for us. We continue to monitor it, but right now, we don't really see any need to accelerate cash flows up to the holding company.
What would be a reasonable SMR target?
Our stated target, as Greg mentioned, is 600%.
Could you minimize, I guess, the follow-up, and this is the last one, I promise. Yesterday you were talking about the market's changing, reinsurance market's tough. Could you minimize the cost? You say there's a cost. Could you get to a point where it's more accretive? Is the market that tight, or are you still looking at a significant cost to get the cash out?
In Japan especially, the costs are reasonable. The transactions that we executed in the past, as I mentioned, were a very low effective cost of capital for us, about 70 basis points. It's not prohibitive. It all depends on the various factors I mentioned before.
Next is Yaron.
Thank you very much. Yaron Kinar from Deutsche Bank. This question's probably for Toby. I'm trying to get a better sense of the cash flow generation and the trajectory there. You have the Japanese operations, I guess, moving to a conversion rate of about 50% from 30%. I'm assuming that at the same time, the rest of the Asian book will still serve as a bit of a drag, given the growth rate there. How much of a drag does it end up being as the Asian operations continue growing? What should we expect maybe for the next two, three years in terms of a cash conversion rate? Thank you.
If you remember the slide I had up between mature markets and then what we call growth markets. From the mature markets, including Japan, we expect the cash to grow over time. Japan, as we've stated, will grow over the longer term to 50%. We're also working very hard on Korea as well, which has been, as I said, it's been tough. We've got a dividend out this year for the first time in three years. Bangladesh, after 60 years of operations, gives us a nice cash flow every single year. I think you should expect those mature businesses to continue to grow and contribute higher amounts of cash. The other businesses, as I mentioned last year, we had to put money into three of our markets, Australia, China, and India.
This year, through some other capital management actions we've done, we haven't had to put in any capital into our growth businesses other than the two brand new ones, being the Malaysia acquisition and the Vietnam greenfield. That's our goal with those markets, to make them capital self-sufficient. In other words, no drag. Unless there's a significant new business growth opportunity, that's our goal for those other markets. The drag should reduce over time.
This side. Vaibhav.
Hi. Vaibhav Vish from Citadel Investment Group. Just on the Japan cash conversion rate of 30% going to 50% longer term. When I think about some of your competitors, I'm thinking chiefly about Prudential, who's been able to remit something like 60% of their adjusted operating income for a number of years now. I guess the first question there would be, why are you currently at 30%? Why aren't you already doing something like 50%? Secondly, why is 50% a natural cap? Why wouldn't you be able to do something like 50% or 65% over time?
I don't think 50% is a natural cap because I think as you saw from all of the discussions on cash flows, as the book matures, some of that statutory conservatism starts to accelerate and release. The timeframe for that is obviously slightly longer term than we've been talking to you about. I wouldn't have that stuck in your mind as a cap. Okay? Why others are higher than us at the moment? It would depend on the structure of their balance sheet, the different maturities of different blocks of business, I wouldn't like to comment on others. Our target remains to get to 50%. We think that's a good first target, and I'd happily take your question about how we get past that once we get to 50%.
In terms of your earlier point in terms of the why 30, just to refer back to Toby's point in terms of the local incorporation, where we released JPY 1.6 billion of special dividends. It was a reset to know when we started to build up from there.
The simple way I'll give you to think about our cash generation in Japan, the business in Japan is very capital generative already. About half of what we generate right now is being used to fund new business growth. That's a kind of natural, healthy situation for any growing insurance business. Then the other components, which I showed you elements of, one is this reinsurance drag from the transactions we did in 2011 and 2012. That will naturally dissipate. The other item, other than dividends, that you should bear in mind is some of the reinvestments in technology which we're making, which are to improve future efficiency and therefore future distributable earnings as well. They're the main buckets you should think about.
Just to follow up, to think about the potential for future reinsurance, you've said you're examining options. To what extent is an internal solution viable, either intercompany debt or something like that, which would be more accretive than, and probably lower cost than the 70 basis points you've been experiencing so far?
I showed you the example of the China subordinated debt. That's an option that can support capital. Internal debt, I think some of our competitors have done kind of intercompany loans. Is that what you're referring to?
Yes.
That's not really helping speed up cash flows. It's just moving cash from one place to another. Generally, it's going to get a double solvency credit in both markets. It's not something that we need to do. Our solvency margin's high in Japan, there's no need to give a loan from the holding company down to Japan.
Vaibhav, you want to just pass it back to Ryan? Thank you.
Thanks. Ryan Krueger with KBW. You guys talked a fair amount about the first year commission changes over the last year. Should we expect those to have a positive impact on GAAP profitability, or is it mainly designed to improve the timing of SSA profit emergence? I guess my follow-up would be, you talked about yen hedges in place. Can you remind us what your hedge is at for next year?
Yeah. We hedge our US GAAP operating earnings out, we're out through 2016 now. The average strikes we've got next year are around about 107, in 2016, they're around about 106.
97 this year, right?
Average of 97 this year.
Thank you.
Joanne?
Joanne Smith, Scotia Capital. We've heard a lot about sales, we've heard a lot about cash flow, we've heard a lot about opportunity, but we haven't heard a lot about return. I'm wondering where you are relative to the expected return that you had put on the acquisition of Alico when you originally made the transaction. If you're not there, where do you expect the progress to be over the next few years? Do you have a target? Do you have a target for improvement each year? Is there an absolute number that you can give us with respect to returns in the business? That's not multiple questions.
It is multiple questions.
Several parts to one question, I promise.
Well, Joanne, let me start. You've waited a long time to ask that question, let me have a crack at it, first of all. John, I think, did a nice job in terms of covering off the return profile of the Alico acquisition against the range of metrics we'd set ourselves and I think we've been fairly public with when we acquired the entity in the first place. We're very comfortable in terms of how we've achieved and exceeded a number of those metrics. In terms of our own operating earnings performance for Asia, we've given prior guidance in terms of the high single to low double-digit earnings growth over time on a constant rate basis, we're standing by that prior guidance.
I guess I'm looking for, as a follow-up. Sorry. Okay. I guess I'm looking for levers for improved ROE from Met overall. We all know that Asia is known to be a high return territory or region, and we know the returns that Prudential is generating in Japan. I'm just wondering, when are we going to start to see some positive benefit to the ROE, the overall MetLife ROE from your activities in Asia?
Go ahead, John.
Close the mic, John. You need a mic.
The one area that Alico was disappointing when we purchased it was we did issue $3 billion of equity units that we have not, $2 billion of which have flown through, and we're doing a share buyback now. I think when Alico was thought of, although I wasn't at MetLife at the time, was to be bought back for shares, which is a big part of the E that is in the denominator now, to have a more conservative position for potentially being systemically important. I think that's been the one thing that we haven't realized that has a big impact on E. Overall, we've been pleased with the return we're getting from Asia and the overall capital efficiency that we have there. Colin? Colin Devine.
I'm going to follow up on that question. I guess to start, in the first part, in assessing where we are on the Asian business right now, should I take or should we take from the number of check marks that John had on slide eight, that you're quite comfortable with the goodwill valuation on Alico? Then looking ahead, really for Chris and Sachin, you did provide a lot of information here, and it's deemed it helpful. What metrics would you suggest that we use to track the progress going forward as to whether you're achieving the strategies your team set out today?
Sachin, do you want to take that?
You let John take the first one.
Is this mic on, or actually could use this one? Okay. Well, obviously, if we were uncomfortable with the goodwill valuation in any quarter, there'd be an adjustment to it. We've not adjusted goodwill at all with Alico. I made a little adjustment when I joined as CFO to the variable annuity business. The goodwill, and as I said, the returns we're very pleased with across the board. I'll let Sachin answer.
Sure, let me take the first part.
That wasn't goodwill associated with Alico.
Right.
The second part of your question, in terms of the metrics, it's not for us to tell you how you should look at the business, that's for sure. I think hopefully what you heard today is a significant focus in terms of cash generation. We've outlined to you how we're going to look to go from the cash generation of where we're at now through to the 50% in Japan. You should hold us accountable and watch that. I'd refer you back to the prior guidance we've given in terms of operating earnings as well.
The third piece, I think Japan is such a key part of our business, A&H is such a key part of our business in Japan, you should watch the metric in terms of the third sector growth, the guidance that Sachin gave earlier in terms of how those new products are trending in the market. I would say they're the three key areas to look at.
I'm glad you said that. How would you suggest we do that?
Given the current disclosure that's provided in the quarterly supplement. Really the follow-up, I guess, I think where Joanne's going as well. Was there a reason, with that, in terms of recent trackings, you didn't provide any ROE goals?
Any what, sorry?
ROE objectives.
Well, I'm going to answer the last one, because we haven't given segment equity yet. That is something that I think it's reasonable for you to expect at some point, but we have not disclosed that as of yet.
For the specific details at this point.
Well, it's incumbent upon us to make sure we give you that information in a regular and timely fashion. It's upon us to make sure we do that and report as we make progress going forward. Feel free to prod Chris about it on the earnings calls.
I will.
Peter. Up front here.
Make a note of that.
Put your hand up Peter, please. Thank you.
Peter Roy, Fidelity. Given John's comment that regulatory uncertainty might reduce the need for cash at the whole co, can you discuss the attractiveness of M&A opportunities in the region and your ability to fund M&A? What's the size of deals you can do and your ability to fund from the resources in Asia, given you've been contributing capital?
Look, as you know, we're well-funded and well-capitalized right across the region and at the whole co level. I'd say first and foremost, that our plan is not predicated upon any significant M&A acquisition activity within Asia. We have been successful in a couple of areas. One was Malaysia, which was a relatively modest transaction, a little over $250 million. It was an opportunistic play for us to get into market, which is effectively closed to new licenses. Which is why we went into that market. High growth, high value. The business we've established in Vietnam is, you could call it an M&A transaction. Effectively it's a greenfield operation in a very immature market, which is 60/40, us having 60. With a great partnership with a bank which is spread right across the country. We didn't pay for that opportunity.
We're carry pursue in terms of investments going forward in this close alignment between us and the partner. They're probably the type of opportunities you'll see us do around the region. Our plan is not predicated upon a large M&A transaction.
Come over here to Erik.
Thank you. Erik Bass with Citigroup. Can you just talk about why the foreign currency denominated products are so much more profitable for you? Have you seen more competition there, and have you seen any of the domestic competitors start to offer those products?
Thanks, Erik, for your question. I think simply put, we can get a better spread on foreign currency assets, U.S. dollar and Aussie dollar, relative to what would be an attractive rate for the Japanese consumer. Essentially they're competing against JPY returns, which we know are relatively low. I think the 10-year JGB is 60 basis points or something like that. Beating 60 basis points against the U.S. dollar, Aussie dollar asset and making a reasonable or better spread than we would otherwise is not that hard, candidly, around that. Allows us to provide an attractive proposition to the consumer and also play in an important segment, and get access to distribution that we wouldn't otherwise have profitably there. That's sort of the simple mechanics behind why those segments are attractive. In terms of the competitive environment, we've been an early mover in this space.
It also fits very well with MetLife's investment and risk strength. We've greatly expanded our AUD capability over the last several years. That market has been a lot more attractive in terms of the interest rate arbitrage than the U.S. market in the recent few years here. Some domestics have been playing in this segment, and there's a couple notable. One of them, a former joint venture partner of ours. They continue to be very good competitors that we respect in this market segment. They clearly, I'm sure, are doing things to ensure that strength stays a strength for them as we are with our business as well. We have not seen a significant move of a lot of new entrants into that space.
I do think both the asset origination capability, the sales training, and wholesaling capabilities that are required are not things that you can move into very quickly and scale up fast. There is a huge or a much more greater risk management burden placed on your business when you're in these segments. It's much more aligned to foreign players or the existing two Japanese incumbents. One of them, as I said, a former joint venture partner of ours.
Stephen.
Steven Schwartz, James. I'm interested in the Flexi Gold product and the market that's marketed to the senior citizen market. It's been my impression over the years that A&H producers have mostly not had an opportunity in that market. I don't know if that's actual or not. I'm kind of interested in whether or not this is a nascent effort into that age demographic. Then how you deal with that, as we know, cancer is a disease of age.
Okay. Thank you for your question. The Flexi Gold product goes by our internal name, which is a simplified issue, full in-hospital, whole of life product. It's really what we call targeting substandard risk. People who have some preexisting condition. Product is priced accordingly. We have historically been a leading player in the substandard risk market. We're an early mover in this space. We have quite a bit of good underwriting experience in this segment. That product generally suits better to older age demographics simply because those demographics are more likely to have had a preexisting condition than the younger demographic, and allows them to get into a hospitalization-type product, even with the preexisting condition. Obviously, as I said, the premium is priced according to that. As Yamaguchi-san showed you, this is where our multi-distribution is a real strength for us.
We penetrate already today, this is not a new effort. We're very large in the, call it, the older age segment, the plus 50, plus 60 segment, historically through our direct marketing efforts. Kind of simple if you think about it. When you're calling out to people or people who are watching TV commercials during a day and calling into you or accessing your website, that means they're home, which means they're not working. That typically means it's a major demographic, and we've been very successful in penetrating that demographic with this simplified issue or substandard risk of product. We have a relatively large in-force in this customer base, good underwriting and claims experience that we can price against in this segment as well, and we reach it very actively through our direct marketing business today. We also reach that demographic through the bank channel.
Historically, we've reached the more affluent end of that demographic through the bank channel, given the product mix. As Yamaguchi-san mentioned in his talking points, we've been expanding our accident health business through our bank partners using direct marketing, where we're partnering with the bank to do outbound calling to their customer base. We're beginning to see also successful penetration of that demographic through our bank business now. It's not a nascent effort. It's one we've been in for a long time. We have good experience here, and that product is really designed for that segment.
Given the history then, should I assume that this is not one of those products that is heavily reinsured?
Medical insurance, do we have reinsurance on that product? No, that's cancer. Cancer is reinsured medical. I'm looking at my product team. We do not have any reinsurance on that product right now.
Thank you.
We go to the back.
Toshi Ono, the Goldman Sachs trying to cover in Japan life insurance companies. I've got a question about the commission scheme change over the last year. I was talking with a couple of independent agents, saying that actually, the commission getting from you has actually increased rather than decreased. I imagine the larger volume which they're making helped to have more commissions in the new scheme, i.e., the commission skewed towards the volume-rich independent agent. Am I correct? That's the question. Related to that, the scheme change was, of course, I think it's brilliant change and just ahead of the regulation change going forward again. I'm just wondering, could you just remind us of why you decide to make that changes last year? Thank you.
I'll start backwards on your question. As I mentioned in my comments, I think Toby's reiterated this, Greg and Chris as well in their comments. There were really two primary drivers around our commission scheme change, which is just the tighter alignment to the strategy we've been communicating around customer centricity. Ensuring that agents are aligned to not only selling new business but keeping that business on the books because the benefit to the customer comes over time. That's first. The second is value growth, finding the right balance between new business growth and overall value growth because of the customer retention factors in that business. It's just very simply those two reasons here. On the first half of your question, if I think I understood it correctly, clearly, if you sell more business, you get more commissions both first year and renewal.
We're not doing anything to take away the incentive to bring in new customers into the company and for the agent. Obviously, we are placing a lot more emphasis on making sure that business persists so that we get the value out of it, as Toby Brown showed you in terms of the breakevens, and the customer gets the value out of it ultimately here. That, again, aligns back to our strategy around customer centricity and value growth.
Anyone else who has a next question? Eric Berg.
My follow-up question relates to the politics of co-payments and deductibles, especially as they relate to senior citizens. In the U.S., efforts to tamper with Social Security and with Medicare have met fierce opposition from the elderly segment of the population. They have largely been successful in beating back efforts to change the cost to them or the benefits to them from Social Security and the cost to them of Medicare. We've already seen a doubling here in Japan, you just said from 10% to 20%. What do you think the outcome is going to be as we go forward? Will co-payments for seniors continue to rise both here and elsewhere, or will they be able to resist?
Eric Berg, thanks for your question. Let me just make sure I clarify. That doubling, the 10% to 20% was for segments from 70 to 74, so it's not an across the board doubling, and it's an example. I think the best way to answer your question here without getting into the politics of it, is to look at the trend. The trend clearly has been for more cost or risk shifting from the government to individuals, and we certainly believe over the long term that's going to continue. It's anybody's guess as to exactly how and at what pace that will play out, and what form fiscal austerity will take in Japan. That is essentially what the third arrow of Abenomics is attempting to battle, and balance well here. I'm not in a position to predict exactly how that'll play out.
As we've said this morning, and I think as we've said before and Chris has highlighted, we see that this will play out and create favorable opportunities as greater risk shifts from the government to individuals.
That's just a great example as to why we're investing so heavily in terms of leveraging those health capabilities around the rest of the region, because it's a great example of what's happening here in Japan, in the most mature market in the region. You want to see that right across the region. You've seen China come out with a universal healthcare, which I think touches about 90% of the population now, but it's wafer thin. There's tremendous opportunities if you're well positioned and you've got the right capability to take advantage of those health opportunities.
Steven.
I'll go again. Steven Schwartz, Raymond James. Chris, question on India. Is there anything regulatory wise coming out of Modi administration that would be a positive for MetLife?
Well, with the 26% we own in that joint venture company that I referenced earlier. Modi, as you know, I think, or Jaitley, the Finance Minister in the maiden budget speech, mentioned the fact that they were going to try to move the insurance bill and push that through Parliament. That's currently being reviewed by a subcommittee, and we fully expect it to come back to the two houses in the winter session of Parliament. One of the recommendations in there is to lift that 26% cap. It's encouraging because the Indian market longer term is attractive in terms of the scale and in terms of the rising wealth of that country, and it's attractive in the fact that the market overall is undercapitalized, but we've got to wait until we see the detail of the legislation or the regulation change before we comment further on it.
Thank you.
Tom. I knew you'd come back.
Thanks. Thomas Gallagher, Credit Suisse. With all the focus on free cash flow, I'm curious if you have a view on whether J-GAAP accounting standards, you ultimately expect those to change, and if there is a move to international accounting standards that are used, what that would do to free cash flow. Presumably, the reason why this is such a weak cash flow business is because of the conservatism in J-GAAP.
When you look at it, as I mentioned, I think the main reason you see the disconnect between US GAAP and J-GAAP is because of new business growth. You'll see that in any statutory regime, not only in J-GAAP. I think here the regulations are slightly more conservative. The reserve discount factor, the way that the regulations set that discount factor is very conservative because they take the average new money rate of a three-year look back and a 10-year look back, and they take the lower of the two. Even if rates start to go up, there'll be a disconnect there for a while before we see that discount factor go up.
There has been a lot of talk in Japan about moving to a more solvency to IFRS type approach, and I think we talked about it 2 years ago at the investor day we had here 2 years ago. In that 2-year period, we've seen very little movement. It would be positive for us, for sure. It would be very positive for MetLife Japan. I think for some of the domestic players, it would be much more difficult, and I think that's why it's really moving at a snail's pace.
Okay, Suneet.
Thanks. Suneet Kamath from UBS. A question on the whole idea of switching that you guys talked about. Over half the medical sales, I guess, are from these switchers. What does it look like for Met? In other words, when you report your sales, is there an element of those sales that are effectively reflecting exchanges of your existing customers?
Suneet, thanks for the question, and a couple comments. One, just to be clear, that data is broad industry data. It was our own primary research, but it's not reflecting just our business. It's sort of what's happening in the marketplace. I don't have the data. We have obviously some replacement activity. It's relatively small, like single digits right now, for a couple reasons. One is if we have clawbacks in place around our commission schemes, if the agent replaces the business within a certain period of time, the clawback varies by product and distribution channel. That's really to avoid or prohibit agents from just churning business to get commission income here. We don't see a lot of replacement activity because of that clawback that's in place as well. It is relatively small. We can follow up separately and get you the data.
It's not a big part of our business. Most of our new business, and we'll get you the data, but it's more than 50% of our new sales are capturing switchers. As I mentioned in my comments, we've been very successful at capturing switchers from both domestic and foreign companies. We see that as a continued source of strength for us. Primary reason is our distribution. We do a lot of face-to-face distribution, and in particular, many of our agents, be they career or MetLife agents or independent agents, have come from other carriers or have come from banks where they were bank sales agents. Over time, they're able to reach into their existing customer base and switch that business, both the medical and then in time, also the life insurance policy.
Thanks. There was a related question that came up earlier that I thought appropriate to address in this forum. On the switcher dynamic, Sachin made the comment about how we capture the accident health business as term riders increase in price and they go standalone medical, and it gives us the opportunity to capture some life business as well. The question came up, how is it attractive for someone to purchase a life product from us, switch out of an existing life product that they may have bought 10 years ago?
Yeah. This, again, gets to a couple important comments that we made that are really driving consumer behavior in this market. First, a lot of these policies that we're switching were typically sold at the work site. Many of these people, when we've done the research with them, say, "I don't know what I bought. I was pushed to buy it. I bought it. It's there." They really have no affinity to this other than it's in force, first and foremost. The second is, as we've shared in a couple of the comments this morning, the majority of Japanese consumers don't trust their current advisor, which means they don't trust the insurance company behind that advisor, which really allows them to readily move based on developing a new relationship or based on how they feel about the company.
This is trust is the number one factor in this market. The switching piece is equally motivated by they don't know what they have, they don't have an affinity to it, and they have a discomfort or feeling of, I'm not sure if I can trust who I have it through, as it is about the price competitiveness of what they're ultimately switching to. Secondly, as we've said before, we watch very closely the competitiveness of our products. Our life products are relatively competitive, whether they be foreign currency denominated, where we're in a more exclusive space and there's less choice for consumers, or they be the JPY whole life type product here. We offer a competitive value proposition at a point where consumers have less affinity to their current provider.
Okay. Well, we're at 12:30 P.M. Thank you very much for your participation. Lunch is served where? Sorry, we forgot to plan for that. There is food somewhere in the general vicinity of this room. Thank you.