Robin Y. Wilkey
Good morning. I'm Robin Wilkey, Senior Vice President of Investor and Rating Agency Relations, and I want to welcome all of you today to the event. The good news is, I'll only be up here a short period of time; and my colleague, Ichiro Murakami San, who is the manager of Investor Relations here. He and his team, have done a great job in organizing the event and he is going to be the emcee for today. So with that, I'm going to turn that over to him. But before he starts, I do have a bit of news. A couple of people have asked about Wi-Fi reception, and the hotel does not have Wi-Fi reception as of now. So they're working on it, but as of now, they do not have it and I apologize for that.
Thank you, Robin San. My name is Ichiro Murakami, general manager of IR department here in Tokyo. And good morning again, everyone. I'm glad to have so many of you can join today.
Before we start, though I just want to cover a couple of things to help make today run smoothly. This is important as our event is being webcast. Also, if you need assistance, Aflac employees will have all name badges are oranges on top and blue on the bottom to make them more easily identifiable.
First, in the morning session, we are going to focus primarily on marketing and sales activities of Aflac Japan. Additionally, we will have presentations representing 3 different distribution channels. Following these presentations, there will be a Q&A for the morning session. Please note that external speakers are only available to take questions in this morning's session. We will then break for lunch. Then, we will reconvene the afternoon session at 1:00 p.m. In the afternoon, we will cover Japan's public policy and regulatory environment, administration, investments, as well as financials. After that, we will have another Q&A conclude today's meeting. Although I'm sure you will probably have a lot of questions, please just hold them until those Q&A sessions.
Today, we are providing translation services. Please use the earpiece in front of you and turn it into Channel 2 for English and 1 for Japanese translation services whenever you find you need. In that regard, please note that all speeches, except for that of our agency, will be delivered in English. But in the 2 Q&A sessions, we probably be -- have more back-and-forth between the 2 languages.
Before we begin today's program, let me first remind you that some of statements you will hear today are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Our actual results could differ materially from those we discuss today. And please look at our latest 10-Q filing for some of the various risk factors that could materially impact our results. Also, please remember this presentation is being webcast. [Operator Instructions] Also, there will be 2 Q&A question today, so there will be ample time to get your questions answered.
With those announcements out of the way, we will begin this morning's program with a few words from Aflac Incorporated President and CFO, Kriss Cloninger. Kriss Cloninger graduated from the University of Texas at Austin with Bachelors and Masters degrees in Business Administration. He joined Aflac in 1992 as Senior Vice President and Chief Financial Officer. In 1993, he was promoted to Executive Vice President. In 2001, he was appointed President of Aflac and elected to the Board of Directors. He's primarily responsible for overseeing the financial management of all company operations. He has been named Best CFO in the Insurance Life Category in America by Institutional Investor magazine 3 times. Chris also serves on the Board of Directors for Tupperware Brand Corporation and Total Systems Inc. So Kriss San, give us a few words. Thank you.
Okay. Thank you, Murakami San. And let me add my welcome to you. Because of the presentations that follow are specific to Japan, I wanted to take the opportunity to make a few opening remarks about the overall status of things within the corporation and I'll be available during the Q&A sessions too, but they'll be primarily focused on Japan, so I'm going to make a few opening remarks about our sales in the U.S. and Japan, our capital management activities and our expectations for EPS growth. I'll first touch on our expectation for sales in the U.S.
For the first half of the year, total new annualized premium sales rose 3%, which you'll recall was at the low end of our 2012 sales target of a 3% to 8% increase. As we've discussed, achieving the high end of the range was based on an improvement in the economic landscape in the U.S. And as most of you know, while some aspects of the U.S. economy have shown slight signs of improvement this year, the business environment continues to be difficult, especially for small employers where over 90% of our business is written. As we think of the third quarter, we may see U.S. sales down slightly, though we do expect an improvement in the fourth quarter. And at this point, we still believe our objective of a 3% to 8% increase is achievable. However, it's more likely to come in at the low end of the range.
You'll also recall from our second quarter conference call, we've recently made changes to the sales and marketing structure at Aflac U.S. to enhance our overall sales efforts. And we're also continuing our efforts at enhancing broker sales in the U.S. We believe our new marketing structure and expanded distribution will position us for stronger sales growth in the future. I'd also note that the persistency of the U.S. business remains very strong and continues to help drive our revenue and earnings growth in the U.S. operation. Overall, we believe Aflac U.S. will have a very good year in its financial performance.
Now, a few words about Aflac Japan, which you'll hear more about shortly. Sales here continue to be strong, especially through the bank channel. For the third quarter, we expect sales to be up significantly over last year. While Ariyoshi San and Shinkai San will give you more details later, I want to reiterate that we expect to achieve a sales increase of 20% to 25% in 2012. I'd remind you that this represents a significant increase from our original target of flat to up 5%. Of course, our very strong sales results in 2012 will cause difficult sales comparisons in 2013. But like Aflac U.S., we expect the Aflac Japan to continue to generate solid financial results for the year, reflecting both strong sales and persistency and new money yields that should exceed our original budget. With our operating segments performing very well, I want to reaffirm the 2012 EPS objective that we communicated in the second quarter conference call. We expect to see an increase in operating earnings per diluted share toward the low end of the 3% to 6% range, excluding the impact of the yen. I also want to reaffirm our 2013 EPS target. We expect operating earnings per diluted share in 2013 to increase 4% to 7%, again on a currency neutral basis.
Let me comment briefly on our thoughts on capital management. Our strong capital ratios show that we're committed to maintaining financial results -- financial strength for all concerned: Our policyholders, our bondholders and our shareholders. We need to be balanced in our approach to deploying capital. That means that first and foremost, we'll maintain strong capital ratios. We'll likely increase dividends in line with our EPS growth on the currency neutral basis and we'll look to repurchase our shares to enhance our EPS growth and returns. I want to stress that we will be prudent in my decision -- and any decision we will make, we'll certainly take into account challenges within the macroeconomic environment, especially as it relates to Europe. However, given the strength of our capital ratios and our Parent Company liquidity, we believe we can allocate up to $100 million toward the purchase of our shares in the fourth quarter of this year. Purchasing shares late in the year will not have much of an impact on this year's earnings growth, although it will benefit our 2013 per share results. As we have frequently discussed, profit repatriation remains the primary source for funding share repurchase. At the end of the second quarter, we communicated our profit repatriation outlook for 2013, reflecting incurred investment losses to date. You may remember from the second quarter call that our profit repatriation was likely to be around JPY 65 billion in 2013, and we still believe that's a reasonable estimate assuming that we have no additional material investment losses that would reduce Aflac Japan's operating income. If we continue to feel comfortable with our capital ratios and the overall macro environment, next year's profit repatriation could provide us with significant amount of capital that could be deployed for share repurchase.
I know this covers a lot of ground in a few minutes, but remember, we have a Q&A sessions at the end of the program. Let me end by saying, I think you can gain a lot of insight into our Japanese operations from the presentations you're about to receive. So I'm going to turn it back to Murakami San. And once again, let me thank you for traveling so far to join us today. Thank you.
Thank you very much, Kriss San. Our next speaker is Toru Tonoike. And Tonoike San is a former Aflac Incorporated board member, who joined our management team in 2007. He's President and Chief Operating Officer of Aflac Japan. This morning, he will offer an overview of Aflac Japan and its market. So Tonoike San, please.
Good morning. Today, I'd like to outline the insurance market in Japan and Aflac Japan's business management. After my presentation, our officers will cover the sales and operations of their areas of responsibility. I hope this discussion will give you a further understanding of Aflac Japan's current state, competitive strength and growth opportunities.
Still fresh in our memories is the great East Japan earthquake that hit Japan on March 11, 2011, causing enormous damage, particularly in the Tohoku region. As of July 25, 2012, the death toll stood at 15,867 and 2,904 people are still missing. According to the statistics of the Life Insurance Association of Japan, the amount of claims and the benefits paid for the earthquake damage by the Life Insurance industry as a whole totaled JPY 157.3 billion as of July 31, 2012. Tomorrow marks 1.5 years since the devastating earthquake and I thought it would be appropriate for me to update you on the state of Japanese economy. The lifelines and public services are largely restored and the industries in the affected areas are also seeing a gradual recovery. The graph on the slide shows the comparison of that indices of industrial production between the affected regions and the non-affected regions. The indices of industrial production are comprehensive indices of production, shipments and inventories in the domestic mining and production industries to indicate the state of industrial production activities in Japan. These indices are prepared by the Ministry of Economy, Trade and Industry every month. The indices of industrial production of the affected regions plunged in March 2011 when the earthquake happened, but have almost returned to the levels before the earthquake. Meanwhile, however, the regions severely struck by tsunami and the evacuation zone around the Fukushima number 1 nuclear power plant are in the midst of its recovery from the earthquake. Only 15.5% of the earthquake debris have been cleared and 341,235 people are still evacuated. Striving toward restoration and reconstruction of the second [ph] area, the Japanese government has allocated a special budget of JPY 3.8 trillion for reconstruction for 2012. The great East Japan earthquake had a huge impact on the Japanese economy.
Before the earthquake, exports and industrial production were picking up and we were gradually recovering from the slow economy; however, the earthquake caused a significant decline in industrial production in some areas due to supply chain disruptions and the power supply restrictions. A [indiscernible] significantly pushed down personal consumption and recovery quickly lost its momentum. The graph shows the real GDP growth rates and the contributions of our domestic and foreign demands to the growth rates before and after the earthquake. As you can see, GDP and domestic and foreign demands substantially declined from the January to March 2011 period. For the October to December 2011 period, exports temporarily decreased because of the slowdown in overseas economies and the strength in yen. However, supply-side restrictions were gradually eased, both household and the business sentiment improved and the reconstruction needs became clear. As a result, some areas of our economy, such as domestic demand, are showing modest signs of returning to levels seen prior to the disaster.
Now, I'd like to update you on the insurance market here in Japan. The number of life insurance policies in force in Japan increased last year due to strong bank sales and the growth in the policy count of subsector products, including cancer and medical insurance. The total number of policies in force for all life insurance rose 5.3 million from March 2011, to 127.2 million at the end of March 2012. Of that 127.2 million, 48.4 million came from third sector products. Aflac Japan's number of policies in force has been steadily increasing over the past 38 years as a result of growth in new business and high persistency of our in force business. We established a solid position as Japan's #1 life insurance company in terms of the number of individual policies in force in fiscal year 2003 and have remained #1 since then. Aflac's number of policies in force at the end of March 2012 exceeded 21.8 million and accounted for 17% of total number of individual policies in force of all the life insurance in Japan.
The total number of new standalone life insurance policies in Japan, including first sector and third sector products, declined from fiscal year 2003 through fiscal year 2006. However, this number turned upward in fiscal year 2007. The increase reflects the fact that life insurance statistics began including new policies sold by Kampo, previously known as Japan Post Insurance. Kampo, a company that exclusively sells first sector-based policies took over the postal life insurance operation following the start of a privatization process in October 2007. Although the inclusion of Compo in the total life insurance new business increased the overall first sector contribution, thereby reducing the overall third sector contribution, the third sector still accounts for around 40% of combined sales. We believe consumers continue to find value in products that provide living benefits such as cancer and medical.
One major reason consumers choose living benefits centers around Japan's rapidly aging society. According to the latest results of the national census, which is carried out every 5 years, it was in 2010 that Japan's population peaked. Currently, the number of deaths has been exceeding the number of births resulting in a population decline. Japan's population was 127.63 million as of February 2012 and is anticipated to drop below 100 million by 2050.
To support this forecast, let me share with you some results of population estimate conducted by Japan's Ministry of Internal Affairs and Communications as of October 1, 2011. According to this estimate, 40 out of Japan's 47 prefectures saw a decline in population. As a large portion of the baby boomers began reaching retirement age, the population aged 65 and older surpassed 30 million, accounting for more than 23.5% of the Japanese population by the end of February 2012. What's more, the primary reason for Japan's shrinking population is its low birthrate. The birthrate was 1.39 in 2011, far below the estimated level of 2.08 that is required to maintain a stable population size. The population in Japan is expected to continue to decline because young people represent a decline in percentage of the total population, as the birthrate remains very low. As shown in the graph, national medical expenses are rising every year with the rapid aging of the Japanese Society. Japan has a national healthcare system that covers all Japanese citizens; however, as fiscal resources are tight in all areas, including medical, nursing care and pension benefits, it is clear that the difficult fiscal situation will persist going forward. According to the government's estimate, the nation's medical expenses will increase by JPY 6 trillion by 2015 and JPY 21 trillion by 2025.
As you can see, the growth of medical expenses is significantly outpacing GDP growth. Under the circumstances, the government has been pursuing a comprehensive reform of the Social Security and taxes systems to ensure a sustainable Social Security system even in such an aging and low birthrate society. The related bills to the reform passed the Diet on August 10 this year, but there are still many issues to be discussed with respect to the specific of the Social Security system. Therefore, Japanese citizens continue to require to make self help efforts preparing for their life after retirement. Against this backdrop, the market for third sector products has been steadily expanding and this trend is expected to continue. As a natural consequence, the competition among private insurers in the third sector market has intensified; however, we believe we can expand our leading position of the [indiscernible] market continues its growth in the future.
When Aflac began its operations in Japan in 1974, we were the first life insurance company to sell cancer insurance in Japan. However, mid-sized insurers and other foreign insurers followed suit and entered the market in the early 1980s. This market was open to all life and nonlife insurance in 2001. As of July 2012, Japan had total 39 competitors selling standalone medical products and 26 selling standalone cancer products, including both life and nonlife companies. While this represents slight declines from previous years in the actual number of competitors, it doesn't mean the threat from competitors is lessening. The margin of some nonlife insurers result in the merger of their subsidiary life insurers, thereby reducing the total number of competitors. Given a series of new products launches and product revisions in the pipeline from our competitors, we believe the market for third sector products will remain very competitive.
Amid this competitive market, newspapers reported in June 2012 that the financial services agency is planning to lower the assumed interest rate of standard reserves or a standard interest rate in April 2013 from 1.5% to 1% for the first time in 12 years. The standard interest rate is an interest rate used to calculate appropriate levels of policy reserves which life insurers maintain in accordance with changes in the investment environment. The life insurers determine their assumed interest rates based on the standard interest rate. Every year, the standard interest rate is calculated by the FSA based on average 10-year JGB yield as of September using the lesser of the 3-year average or the 10-year average. This graph shows the yields on JGBs for the October 2009 to July 2012 period, which are taken into account in the computation of the standard interest rate to be applied from April 2013. JGB yield has been at ultralow levels of around 1% since the beginning of 2012 after the European debt crisis emerged. Given the yields to date, it is considered virtually certain that standard interest rate will be lower in April 2013.
If the standard interest rate is lowered, life insurers have to make additional provisions for their policy reserves under the insurance business act. In order to secure funds for additional provisions, it is necessary to consider raising assumed interest rates or insurance premiums. With this FSA move in mind, we are currently considering revisions to product design and premium rates. The impact on overall profitability will be discussed by Sue Blanck in the financial results update session to be held in the afternoon.
Next, I'd like to show you some data related to Aflac Japan's core lines of business: Cancer and medical products. These slides reflect FSA-based fiscal year data and include products sold only by life insurers. The data reflects the latest figures based on each life insurance financial statements for fiscal year 2011. Additionally, some nonlife insurers also sell medical insurance products. Because third sector sales data is not disclosed by nonlife companies, we are not able to include it in the statistics shown on these slides. The graph on the left side shows that a number of policies in force for standalone cancer products in the life insurance industries growing each year. The graph on the right side illustrates Aflac Japan's share of in force business for cancer insurance. Aflac Japan remains the market leader with a market share of 74% of in force cancer business as of March 31, 2012. As shown in the graph on the right side, AFLAC's share of new business for cancer insurance remains high at 49.4% for April 2011 to March 2012 period. Aflac's share in the cancer insurance market rose in 2011, thanks to the strong sales of DAYS. This enhanced product has benefits that provide extensive coverage for outpatient treatments in light of the latest advances in cancer treatment and the changing demand of cancer patients. This product certainly serve as a culmination of AFLAC Japan. DAYS attracted a lot of consumers and further solidified our presence in the market. At the same time as I mentioned, we vigorously promoted partnerships with local governments in cancer prevention and education and we have partnership agreement with all of the 47 prefectures in Japan. Following the enactment of the Cancer Control act, local governments and the consumers are increasingly aware of the necessity for cancer prevention and insurance. Because Aflac is a pioneer of cancer insurance coverage, consumers have placed their trust in our company and our products. We work hard each day to be good stewards of that trust. We do not only continue our never-ending efforts to create superior products that remain relevant to diverse consumer needs, but also focus on cancer education activities, providing the latest information on cancer prevention and cutting-edge medical treatment through the network of local governments. I believe that these activities are our social responsibility of the insurer who has supported the largest number of customers fighting against cancer in Japan. This slide illustrates the growth of policies in force for standalone medical insurance and Aflac Japan's share of the market. Aflac has a 19% share of in-force business at the end of March 2012. Although we are not the first insurer to enter the medical insurance market in Japan, we quickly became the leader in that market when we launched EVER in 2002 and we are committed to remain in that position.
Aflac Japan's share of new business for standalone medical insurance was 16.2% for the April 2011 to March 2012 period. As we have previously discussed, competition in this market remains high. In 2009, we revised our EVER medical product to include enhanced surgical benefits and gender specific premium rate. In January 2012, we further strengthened our medical portfolio with an upgrade to our new EVER product, improving it to include even more advanced medical treatment options than its predecessor. Most recently, on July 23, 2012, we released more Gentle EVER, a revision to the existing product for customers who are less confident about their health. This product also provides advanced medical treatment options and reasonable premiums to support more customers than its predecessor. Mr. Ariyoshi will cover the benefit of this product later.
We will continuously offer product lines to meet the needs of such a broad customer base and maintain the position as a leader in the medical insurance market. This slide illustrates market penetration rates for various insurance products in Japan. In 2010, 79.2% of Japanese citizens were covered by some type of a life insurance. Although the market penetration for cancer insurance has increased over the last 10 years, it is still only 33%. With cancer being the leading cause of death, combined with the fact that cancer is a disease of age and Japan's population is aging, the need for cancer insurance will intensify. Meanwhile, medical insurance penetration stands at 72.3%. Although this number is much higher than cancer, we see opportunity for further growth. While the national healthcare system provides some level of coverage for citizens, it does not cover all expenses. Over the last 3 decades, Japanese consumers have been required to pay more out of their own pockets towards their health care. As I stated earlier, because of Japan's rapidly aging population, low birthrate and the likely increase in national healthcare expenses, I believe there is opportunity for expansion in the medical re-insurance market. Under search market conditions, in the medium-term management policy covering for the 3 years from 2011, we set the medium term goal of becoming a company recognized by all of our stakeholders as an insurer who supports customers' way of life. To fulfill this goal, we placed a top management priority on establishing a strong management base that enables us to achieve sustainable growth over future years despite any environmental changes. In order to achieve this top priority, we have established 7 priority measures shown on the slide.
This year will be a quite important year for us since we needed to implement a strategic measures which we have already examined and planned and have to make solid progress. We are also striving towards the establishment of new channels in addition to timely new product development with an eye on consumer needs and enhanced support for our existing channels such as traditional channels and the bank channels to solidify our presence as a leading company in the third sector market. Along with these sales enhancements, we also focus on stepping up efforts in that further improvement that financial standing and strengthening the internal management system to meet the expectations of the society. To improve the financial soundness, we are reviewing invested assets in order to construct a highly risk tolerant portfolio, aiming at securing stable investment income in the increasingly uncertain market conditions in the aftermath of the European debt crisis. Further, to enhance policy services, we will press ahead with business process improvement and IT infrastructure enhancements to further ensure the efficient and accurate policy administration for customer convenience. By doing so, we drive to provide higher quality services for customers amid increasingly fierce competition in the third sector market. I believe that passing these efforts in a robust manner will enable us to achieve our sales and profit goals and thus further improve our competitiveness even in the tough third sector market. As was mentioned at the beginning, our officers will give you detailed explanations on specific efforts at each area. Thank you for your attention.
Thank you, Tonoike San. Next we will here from Koji Ariyoshi. Ariyoshi San joined Aflac Japan in 2008 after working for Alco and AXA in Japan. He's Executive Vice President and Director of Marketing and Sales at Aflac Japan. This morning, Ariyoshi San will discuss Aflac Japan's marketing and sales activities. So please, Ariyoshi San.
Good morning. Thank you for joining us. Today, I will provide an overview of our distribution network, key products, promotion and the strategy for growth. I would also spend some time covering how our ability to adapt to the changing environment in Japan has been critical driver of our success.
Let me begin with our distribution network. Our extensive and diversified distribution system in Japan is key competitive strengths. We strive to develop distribution networks that sell our products where consumers want to buy them and we have been very successful in staying true to this simple philosophy. In doing so, we have learned how to adapt to the ever-changing environment under many factors that influence where potential policyholders prefer to buy insurance products. It is this adaptability and expansion that is the foundation of our success.
Let me walk through our brief history of our distribution evolution. In the mid-1970s, virtually all of our sales came from affiliated corporate agencies that predominantly sold our policies in the work site and were particularly successful at large business. Since that time, our distribution system has steadily evolved to include diversity of sales outlets.
During the 1990s, as more consumers chose to purchase their insurance away from the work site, we developed an extensive network of individual independent corporate agencies. These agencies focus on providing more face-to-face sales and reaching consumers outside of the work site. In 2001, Japan's fully [indiscernible] allowing large Japanese domestic insurance companies to sell third sector products. Dai-ichi Life, the second largest life insurer in Japan, chose to sell Aflac's cancer policies rather than developing a policy of their own. Due to the value proposition of our cancer products, Aflac's strong and trusted brand. In 2008, we began selling our products through post office across Japan. Since the 1990s, Aflac has developed extensive longstanding relationships with the majority of Japan's banks, stemming back to when banks sold Aflac's products through affiliated corporate agencies to their employees at the work site.
In late 2007, the approval of over-the-counter insurance sales through the bank channel took effect. And the banks began selling our products to their customers in and outside of the bank's branch. At the end of the second quarter 2012, AFLAC Japan was represented by more than 90% of the total number of banks in Japan and the Shinkai San's presentation includes more detail on this topic. More recently, we are responding to the evolving consumers environment by using Aflac consultants, our direct face-to-face channel, specializing in consultative sales targeted towards the 20th and the 40th demographics. I believe this progression of our distribution expansion shows that we have developed the ability and the distribution network to better serve potential customers where they want to purchase our products. We have been successful in managing our diverse distribution channels to tap into the strengths of each networks as consumer needs and the demographics evolve. For example, at one time, sales of Aflac product through Dai-ichi Life accounted for about 11% of our total new our total new annualized premium sales. As Dai-ichi Life exhausted their existing policyholders base and focused more on selling their own products, the contribution from Dai-ichi Life decreased to about 1%. Yet, in that same time, total annualized premium sales grew from JPY 91.9 billion in 2001 to JPY 161 billion in 2011. Because we have established the various channels, including those that specialize in face-to-face consultative sales, we were able to meet consumer's preference for more customized sales. This shows our ability to develop, manage and tap into our various distribution channels to meet the needs of consumers. We will continue to keep our fingers on the pulse of offering Aflac products where consumers want to purchase them.
This slide shows sales result by distribution channel. As you can see, sales contribution by channels have changed dramatically. As I mentioned, 38 years ago when Aflac became licensed in Japan, we began exclusively with affiliated corporate agency distribution channel. Through the second quarter of 2012, that channel accounted for 18.7% of the total new sales and the sale through the bank channel accounted for 46% of our total new sales.
Now, I'll provide an overview on our key products. When Aflac began our operations in Japan in 1974, we pioneered the creation and the sales of cancer insurance. Ever since then, we continued to update out product line to ensure our product remain relevant to consumers and our distribution network does sell them. Our cancer product remains an important part of our overall product portfolio. Aflac continues to be the #1 seller of cancer products in Japan, which are famous of our reputation as a strong product innovator and trusted brand. We remain committed to maintaining our status as a number [ph] of seller of cancer insurance. As I mentioned, we continually update our cancer policy to reflect the needs of consumers. In addition to benefits, value is an important factor to consumers as they consider their insurance options. With this in mind, we introduced cancer DAYS in 2011 which has a premium that's about 15% to 20% lower than the previous base cancer policy, thus, responding to consumers who are cost conscious while also providing them with relevant coverage they seek. I want to point out that we typically measure our product success based on growth in new annualized premium sales. Looking at the new annualized premium growth for DAYS does not adequately reflect its success. Rather, the popularity of this product is exemplified by the increased number of policies sold in 2011, which exceeded our cancer policy sales in 2008 and 2009. We view DAYS as success story as a product that gives consumers what they want to buy providing benefits they need and at a good value. I believe this is an important reason we remain the #1 cancer seller today.
In the late 1990s, we built on the success of our cancer product through the introduction of various medical products, one of the most successful product launches in the company's history was Rider Max, an all cause medical rider we started selling in 1998 as an add-on to our base cancer policy. While consumers like the features of Rider Max, we received feedback they'd prefer medical coverage on a standalone basis. To respond to this evolving preference, we introduced the EVER as standalone whole life medical product in 2002. Soon after EVER's introduction, Aflac became the #1 seller of medical insurance in Japan and we've remained #1 ever since.
We leveraged the popularity of our brand and further segmented the medical market with the 2007 introduction of Gentle EVER. Gentle EVER is an option for consumers who cannot qualify for a standard medical policy. In July of this year, we introduced the More Gentle EVER, our revision to our nonstandard products that features increased benefits, including coverage for advanced medical treatment. Initial results shows that More Gentle EVER has been very popular with consumers. This is important because our comparison to our competitors with the medical category. Sales of our nonstandard medical products are low, suggesting there is a great potential for us to further penetrate that market and solidify our position with products like Gentle EVER.
As I mentioned, almost immediately following the introduction of EVER, we shot to the #1 position in medical policies sold. While the market is very competitive and it's becoming increasingly competitive on a cost basis, we remain #1 in medical sales. EVER remains with our pillar products and we continue to create variations of EVER to appeal to new market segments and achieve greater market penetration and maintain our #1 position.
More recently, we have enhanced the product portfolio with the introduction of child endowment and WAYS to first sector products. This have also proven to be very popular. Child endowment is a popular product in Japan that is designed to help parents and the grandparents prepare for the expense of children's education. As we have discussed, this type of products is sold by most life insurance companies in Japan and by Kampo. Our sales success with this product exemplify our strong brand.
Our most popular first sector product is WAYS, which has been tremendously successful especially through the bank channel. WAYS is our unique hybrid whole-life products that can be converted to our fixed annuity medical coverage of announcing care from [ph] when the policyholder reaches a predetermined age. WAYS was the primary driver of Aflac Japan's remarkable sales growth in 2011 and 2012. Consumers and the bank channel looked to Aflac's for wants [ph] of a strong brand and a trusted reputation. The appeal of WAYS to banks and the consumers alike has resulted in the phenomenal growth story. We will continue to update our products to respond to changes in current medical treatments and to further identify opportunities to respond to the needs of consumers and our distribution channels. Our ability to adopt the ever-changing environment is critical in remaining successful with our distribution and the product portfolio. Our successful expansion of the first sector products has provided us access to consumers who we may not have been able to reach before and also helps us further penetrate our consumer's base and build on our brand.
This graph shows annualized new premium sales in recent years. I would like to reiterate that during our Second Quarter Earnings Call, we upwardly revised our annual 2011 sales target from an increase of 10% to an increase in the range of 22% to 25%. While third quarter sales are coming in a bit stronger than we expected, we continues to face tougher sales comparison in the fourth quarter. With that, we believe we will achieve sales growth for 2012 at the high-end of the 22% to 25% range.
Next, I'd like to talk about the Aflac brand in Japan and our promotion efforts. Aflac's branding is an important strength that helps us stand out in what has become a more crowded and competitive market. While Aflac has maintained brand awareness of more than 90% for decades, capitalizing on popularity of the Aflac Duck has allowed us to achieve brand awareness around 97%. Aflac's success in creating and maintaining our strong brand image is largely attributable to our promotional strategy. Our connection with consumers through effective product promotion is a vital competitive strengths for Aflac and we will continue to focus our efforts on our marketing strategies.
On the product front, we strategically market our products with various advertising campaigns to grab the attention of the Japanese consumers and we have driven the success leveraging our strong brand in our efforts to drive sales. Historically, we've created product specific commercials to market our products. Currently, we are also expanding on a diversifying our promotional outreach which enables us to target specific consumers demographics. This is especially important as we strive to have greater presence in population segment of our consumers aged 20s to 40s. AFLAC Japan continues to hone its ability to take the Aflac Duck and create a separate and unique characters to market specific products. For example in 2009, we continued the Aflac Duck with the traditional Japanese character, Maneki Neko, to promote our new EVER products. Our commercial featuring the cat duck combination soared to #1 status beating out every other commercials in every other industry. The success of the Maneki Neko Duck campaign surpassed our greatest expectations and become an advertising phenomenon.
More recently, as a part of our sales promotion for More Gentle EVER, we launched a campaign featuring the Maneki Neko Duck and a cat named Tama. Tama is the 13 years old elderly cat who lives at the local train station and works as a station master. Tama has been the subject of various television programs including documentaries on CNN and Animal Planet, both of which have been very popular with Japanese consumers. This advertising campaign also featured [indiscernible], a famous TV personality who is highly popular among middle age and senior consumers in Japan. Tokumu San has experienced the heart attack, which helps consumers recognize and appreciate the need for our medical products. We utilize the popularity of both Tama cat and Tokumu San to maximize our sales opportunities. We will continue to look for new ways to connect with consumer through innovative marketing campaigns for our product portfolio.
Now, that I've given you some background on our advertising campaign for More Gentle EVER. Let me show you our TV commercial we launched in July, featuring Tama the cat. I hope you enjoy it.
Let me talk about our strategy for growth. Aflac's strategy has focused on maintaining action [ph], operations and creating a product that provide excellent value to consumers while paying a competitive commissions to our salespeople. For our future growth, we were leveraging these core elements to further enhance our penetration and reach in the market.
As you can see by this graph, our penetration rate is lowest in the population segment of the consumers in their 20s to 40s. This age demographics is a more technological savvy and tends to prefer face-to-face consultative meetings prior to making a purchase. As such, we enhanced our website to allow consumers to make an appointment online with an Aflac sales agent, especially in competitive urban areas we believe we can better connect with younger consumers using this enhanced consulting skills when they visit the shops. We are also using diversified products promotion such as the Tama marketing campaign to help us reach different consumer demographics. In fact, by advertising through the Internet and the [indiscernible], such as Facebook, we enhanced our reach to younger consumers, which is an underpenetrated segment of the market for us.
Now, let me discuss how our operational [ph] sales channels will expand their reach in the future, especially as they focus on the underpenetrated market that I just discussed. First, let me start with affiliated corporate agencies. Historically, affiliated corporate agencies primary sold through the work site where most consumers in their 20s, their 40s, purchase their insurance. However, over the last 10 years, following the personal privacy act for the personal information protection law, the ability to gain access to the work site has lessened and negatively impacted work site marketing. Therefore, we are changing our approach first to expand our reach outside of the traditional work environment; and second, to be more consultative. We will also be targeting the post baby-boom generation through consultative service techniques.
Next, let me cover the sales strategy for individual, independent agencies. We have been focused on increasing these agencies' consultative abilities and will continually enhance our training to improve their success in selling Aflac products face-to-face. This includes being able to effectively address the various stage of a person's life and the insurance needs that corresponded to those stages. Currently, there are about 500 retail insurance locations where Aflac service shops across the nation. We are modifying our approach in some of those service shops to include more consultative skills especially in other areas where consumer expect a comprehensive consulting skills. This enhanced approach includes contacting consumers and scheduling an appointment for them to come into the insurance shops. At that point, we will be prepared to consult with them very skillfully to customize our approach according to their unique needs.
As you heard me say throughout my presentation, we are pursuing many initiatives to expand our reach and improve our sales results. We believe the Japanese citizens [indiscernible] medical costs have already increased. We'll continue to look for solutions to protect their physical and financial well-being as we design our products and distribution initiatives for the future. We believe the competitive strengths that have driven Aflac Japan's success over the years will continue to benefit us in the future. Thank you for your kind attention.
Thank you very much, Ariyoshi San. Well, Hiroshi Takeuchi is our next presenter. Takeuchi San joined Aflac in 2003. He currently serves as Vice President of Aflac Japan. This morning, Takeuchi San will cover sales activities of Aflac consultant. Takeuchi San.
Good morning. My name is Hiroshi Takeuchi. Today I will introduce you to Aflac Consultants, Aflac Japan's new face-to-face sales channel. Based on what Ariyoshi San briefly mentioned, I'd like to begin my presentation by outlining the benefits of our new distribution channel, Aflac Consultants, or ACs.
This is a new distribution channel created to serve 3 major market segments. First, ACs will deliver comprehensive, face-to-face consulting services to consumers in their 20s to 40s that reside in urban areas of Tokyo, Osaka, Nagoya. Second, ACs will also support some traditional sales agencies through an alliance whereby AC assists them with face-to-face sales association -- face-to-face solicitation. Finally, management skills gained from ACs' experiences will help Aflac Japan's marketing and enhancing the capability and the powers of traditional sales agencies.
Launched in January 2011, AC is an internal distribution channel that specializes in face-to-face consultation. As of August 31, there were 159 consultants, and the number is expected to exceed 180 by the end of the year.
We started out with an Aflac Consultants office in Tokyo, followed by an office in Osaka this January, And we'll also open a Nagoya office next month. Our general [ph] agencies, ACs are employees of Aflac Insurance Services, or AIS, our subsidiary in Japan. This channel provides an effective and adaptable means Aflac can use to create loyal customers. Importantly, ACs are very efficient in the way they operate.
Many of our ACs gain sales experiences from other industries prior to joining Aflac. We focus our recruiting on younger people because, as Ariyoshi explained, the young to middle-aged consumers present an underpenetrated segment of the Japanese market. Having a distribution channel that can better connect to these -- those demographic segments is an advantages. The average age of the -- of ACs is 35.8, which is younger than the average age of the sales force of other major Japanese life insurers. This is also younger than the average age of the traditional [ph] associates.
We initially focused on establishing Aflac Consultant office in Tokyo, Osaka and Nagoya. These cities were chosen because about 55% of the population of 20s to 40s live in these cities.
We believe the AC channel shares similar generational characteristics with these demographic and, therefore, they identify common ground. Once recruited, ACs immediately begin training to become effective sales representatives. Subsequently, ACs take the industry exam to be licensed and registered to sell our insurance. Once this is completed, they begin their sales activities. In order to better equip our ACs with necessary skills and knowledge, we also provide a 2-year training curriculum for them, which I will discuss later.
As this slide illustrates, ACs' initial compensation is composed of both monthly-based pay as well as commissions. The monthly base pay decreases in the beginning -- the first 6 months of employment and is ultimately eliminated after 24 months. This gives them time to build up their book of business. ACs are compensated using a 5-year term commission packages, with higher first year commissions and lower linear [ph] commissions for the [indiscernible] years.
In addition, we provide performance bonuses every 6 months based on sales results to motivate the ACs. Our [indiscernible] model indicates that the overall compensation for ACs will compare favorably to the average wage of a Japanese worker.
This graph shows how we have grown the number of ACs and the production from this channel. Although it is -- has been less than 2 years since the launch of this channel, we can already see steady growth. We believe this rate of growth is among the highest in the insurance industry. I believe the success of this model is based on several factors, including the support system that generates leads and seizure [ph] and the seizure [ph] appointment with potential customers. This support system minimize the time ACs spend on administrative activities and maximizes the time they can devote directly to the customer. In addition, ACs would like to be associated with Aflac's strong brand.
This slide shows the hierarchy within the AC channel. The foundation of the channel is the individual ACs. The next level is the position called the unit manager, who manages the unit of about 10 ACs. Unit managers are managed by the next level of management, branch manager. Branch managers typically manage about 5 unit managers. Just like ACs, unit manager compensation is composed of fixed pay, which decrease over time and other commissions linked to the sales performance of the ACs they manage.
With our AC channel, unit managers and branch managers are not responsible for recruiting new ACs, and it is centralized at the AIS head office. Since recruitment of new ACs is not the responsibility of managers, they are able to concentrate on training the ACs reporting to them. In addition, unit manager will be able to effectively provide the feedback to ACs regarding their performance in a timely manner. This clear division of roles has enabled the rapid build-out of the AC channel.
Now let me turn to the actual sales activities conducted by ACs. Three -- there are 3 areas from which they generate sales: base, leads and alliance. For any AC, the base source of sales is their own leads, which may -- what many in the United States call their centers of references. This may include the above, dry cleaners, or other groups, they often have close interaction with.
The second source of new businesses for ACs is incoming leads. These leads come from consumers having contacted us through our call center or website. As you can imagine, Aflac is a strong brand which generates a steady stream of leads, and the AC channel helps Aflac capture these leads and more effectively turn them into sales.
Let me provide you with productivity levels of our AC compared to telephone calls only on this -- generated through the Internet. This slide shows the closing rate per leads for ACs versus telephone calls only. On average, ACs' closing rate are twice as successful as telephone phone calls only with ACs having a closing rate of almost 50%. Additionally, the AP per closing for ACs is much higher than call only at JPY 175,000 per closing. Also, the average number of policies sold per closing is 1.5x greater than that of the telephone calls only.
These tremendous results reflect how successful the AC model is. We believe conducting face-to-face solicitation, which is sustained by effective supporting measures leads to enhanced sales results.
It is important to note that supporting measures include prompt contact with the potential customer to set up an appointment for a face-to-face consultation for our ACs. Normally, this contact is made within 30 minutes of the web inquiry.
The source also for new business for ACs is the alliance with existing agencies. Aflac's number of individual policies in the force stands for 21.8 million, the largest in the life insurance industry in the Japan. Though -- through that alliance, ACs will help support the traditional agencies' customer base. Therefore, this type of arrangement is especially effective for agencies with a large in-force group but have small number of sales associates which serves their existing customer base.
To start this alliance process, the traditional agency contacted the existing and new customers through direct mailing or other means and note for them that an Aflac consultant will be calling on them. It is the responsibility of the AC support group to make them an appointment and the AC will follow with a face-to-face consultation. This arrangement can benefit the agencies because they can share a portion of the commission generated through this alliance. Beyond commissions, however, these agencies and ultimately Aflac benefits from increased customer satisfaction and the loyalty as ACs help provide meaningful services [ph] to customers.
Using the ACs to access our existing policyholders provides a great benefit not only to policyholders but also other agencies and Aflac as well. As you can see in this slide, although we have over 21 million policies in force, 85% of our policyholders only have one of our insurance products. This provides us with a large potential customer base for future sales. In addition, many customers have older version of our policies, and it may be beneficial for them to upgrade the latest product version, which normally provides better coverage. Therefore, cross-selling and policy upgrades are 2 areas with potential for the significant growth.
This chart shows the product mix on a policy basis for the AC channel from January 2011 through June 2012. We are pleased with the fact that the sales of third sector products accounts for about 60% of policy sales.
As I mentioned, ACs provide face-to-face insurance consultations to determine plan that meets the specific needs of individual customers. As a result, they are better positioned to sell much per policy as they address comprehensive coverage needs that include both third sectors as well as life products.
As we continue to expand the AC channel and enjoy the initial success, long-term success of individual ACs is very important to Aflac Japan. As I mentioned earlier, we also provide a 2-year training program. The program includes training to prepare for different levels of life insurance industry exam and financial planner qualifications. It also provides expanded level of -- levels of training. The ACs gain more experiences. Since the AC channel is internal, it also helps Aflac Japan develop and accumulate the critical sales skills and the knowledge that will ultimately be passed down to other agencies.
Two important tools used to assist the ACs with their daily sales activities, which include an appointment system called White Board, and a system that helps manage the daily sales process called the Sales Process Management System or SPMS. The White Board system is essential to the initial process of setting up an appointment for the face-to-face consultation. We have a team of telephone operators who are specialized in making appointments for these consultations. Instead of sending customers' -- customer information directly to ACs and manage on their own, these operators contact customers and [indiscernible] while looking at the availability of each AC through the White Board system. As a result of the White Board system, ACs can focus on actually making the visit and conducting face-to-face sales. White Board also enable the real-time sharing of certain customer information, making it possible for ACs to efficiently prepare for each face-to-face visit.
The SPMS System helps [indiscernible] keep contact records with customers and share seizure [ph] results. ACs enter their sales activities updates into SPMS, and it provides a quick way for managers using the AC hierarchy to monitor ACs' overall progress and the status of each. This also enables managers to provide ACs with follow-up or additional training as needed.
Aflac Japan's distribution channels and its focus have changed over the past few decades in response to changing customers' needs and the enrollment preferences. Payroll group marketing has shifted to personal enrollment. More and more customers, especially the younger generation, proactively collect information through different sources. Additionally, we saw many products in the market. We saw many products in the market, making an insurance decisions not an easy task, and many consumers need support and the need for -- from specialists. The AC channel was established being all that to respond to such changes in the environment and the evolving needs of customers, while making the most of the -- most of our large existing customer base and our strong brand.
As this channel continue to grow, it not only helps reach underpenetrated market segments for Aflac but also helps to revitalize our existing distribution channels, creating opportunities for further growth of Aflac. I hope my presentation helped you understand our new AC channel. Thank you for your attention.
Thank you very much, Takeuchi-san. Next, we will hear from Mr. Yoruichi Sugiyama. He is the Director and head of the insurance business of Enshu Railway group. He was born in Hamamatsu City where Enshu Railway Company is located. He joined the company in 1979. He started his career in the insurance business in 1998, and since then, he has been mostly engaged in Enshu group's insurance business. Sugiyama-san will discuss sales activities at the corporate agency, and he's going to make his presentation in Japanese language, so please use your earpiece on your desk.
[Japanese] Good morning, ladies and gentlemen. I'm Yuichi Sugiyama of Enshu Railway Company Limited, and I'm responsible for managing matters related to our insurance business at the company. Today, I would like to briefly explain our business model and our business relationship with Aflac as an affiliated corporate agency. I hope my presentation will be of some help to you to deepen your understanding of our Japanese insurance business.
As the name indicates, Enshu Railway was originally established in 1943 to engage in the railway transportation business. Since then, the company has diversified its business operations, which now includes insurance. Currently, on a consolidated [ph] basis, the total revenue of the Enshu group is over JPY 150 billion, and it has about 7,000 employees. We primarily operate in the Shizuoka Prefecture with the a population of 3.7 million people under our corporate philosophy "To contribute to the betterment of society by keeping in step with our community and addressing ranging needs of its people." We became an Aflac sales agency in August 1975, 1 year after Aflac's establishment in Japan. Since then, we have shared a strong partnership for the last 37 years. The Enshu Railway group's business has expanded from train and bus transportation to include retail business, such as department stores and supermarkets, housing and travel and hotel business. Our insurance business is regarded as the core of our living services segment. Customers of all other business segments make up our strong customer base, and we strive to contribute to our community and meet the needs of people in this region by providing excellent insurance products and services.
At the end of March 2012, the Enshu group has 254,000 Aflac policies in force, which accounts for more than 1% of Aflac Japan's 21.8 million in-force policies. Our high-quality policy maintenance service, long-term marketing activities and large-scale business contribute to the higher persistency we've achieved compared to other sales agencies.
Aflac is our largest insurance partner, generating an annual premium income of JPY 12.3 billion and a new AP of JPY 909 million for us in the fiscal year 2011. For the 37 years we have been selling Aflac products, cancer insurance has always been our focus and remain a very important part of our Aflac insurance business. Cancer has been the #1 cause of death in Japan for many years, and it is very expensive disease to treat. We take our cancer sales very seriously since we believe it helps people in our community by providing sense of security. Our customers have received a JPY 53.5 billion in cancer benefits from Aflac, and Aflac cancer policies represent 78% of all of our in-force business. We are proud that the products we sell are helping our people in our community.
As shown on this slide, the most recent fiscal year 2011, medical insurance products accounted for 43% of total new AP earned, cancer insurance products represented 34% and ordinary life products represented 22%. Within this ordinary life product line, WAYS accounted for 8.2% of new AP, and child endowment made up 7.8%. Third-sector products represented nearly 80% of all sales in fiscal year 2011. When conducting face-to-face sales, most of our sales associates are trained to -- are trained well to offer cancer, medical and ordinary products simultaneously.
We continue to strengthen our sales associates' training so that they can make the most of any customer contact to secure sales opportunities and maintain stable growth in new sales. We believe our business model is so -- methodically create insurance sales opportunities through the implementation of integrated marketing strategies.
This chart illustrates our strategy. To develop insurance markets, we deploy the most appropriate sales channel for each customer segment and mobilize our highly trained and skilled employees, who can provide quality consulting in face-to-face settings most efficiently. In order to make this work most in our organized and effective manner, we have implemented sales support system to coordinate business activities 6 years ago.
Now let me explain our business activities by channel. This slide shows percentage of new AP contributed by each distribution channel from September 2011 through March 2012.
As you can see, sales to groups at various locations, including work sites, is our largest sales channel, generating almost 30% of total new annualized premium from September 2011 through March 2012. Outbound telephone sales is the second largest channel, followed by inbound telephone sales, service shops and direct mails.
With respect to selling through groups, we target business corporations, government or municipal offices and voluntary groups of small- and medium-sized enterprises that gather under Hoshinkai [ph] Association. Currently, we do business with more than 3,600 groups. Our group clients consist solely of outside third parties with the exception of Enshu -- one Enshu-related group. We conduct approximately 100 group solicitations per month, and they are tailored based on our segmentation of the groups in accordance with their characteristics or size of each group.
As shown here, our priority groups include bank-related companies, government and municipal offices and companies with 300 employees or more. We assign managerial staff called leaders to these groups. Other groups are considered general groups that we assign teams of 2 to 3 salespeople to these groups. Additionally, there are groups that do not allow on-site solicitations. To reach individuals at these groups, our outbound call center contacts each member of the group and contact -- conduct individual solicitations. In order for us to conduct any work site sales solicitations, we need to obtain permission from each group. Because this process requires high negotiation skills, we have assigned certain skilled veteran sales associates to specific purpose. Currently, 800 groups are attended by such veteran employees.
Now this slide is about our call center. Let me explain about sales through our call centers. We have 12 operators in the inbound call center and another 12 at outbound call center, a total of 24 operators. The most important mission of the outbound call center is to make appointments for our sales associates to visit with customers. And for the customers at remote locations, our operators conduct allied sales calls with external third parties' insurance agencies so that they can conduct face-to-face visits. In addition, the operators conduct telephone sales to as many as 450,000 customers who hold a credit card or a [indiscernible] card of our group companies. Inbound calls consist primarily of those related to maintenance services such as changes of names or addresses, requests for cancellation of policies and payment of benefits. Although inbound calls are usually viewed as merely policy services, we make the most of these calls and convert them into new sales opportunities whenever possible.
Now this slide shows the process of outbound telephone sales within the Shizuoka Prefecture, where Enshu group primarily operates. Our operators call customers to set up an appointment for one of our sales associates to visit. The sample results represented here are achieved in January 2012. Our operators made 9,000 telephone calls in a month that's resulted in 1,080 appointments. This represents a success rate of 12% in terms of securing appointments. One of these appointments, we were able to close 216 new policies or approximately 20% of the number of visits. We think this method is highly efficient.
Now this slide, as a unique sales method of our own, let me introduce a structure of telephone sales to existing customers in remote locations. We have alliances that conduct the joint sales with 175 third-party insurance agencies nationwide. Our -- once our outbound call center obtains an appointment with our existing customer in a relevant location, this lead is shared with our allied agencies near that location through a local Aflac sales office in the region from them to conduct visit. If a deal closes, the commission is equally divided between third-party agencies and our agencies. During the period from July through September 2012, we conducted calls to 3,436 existing remote customers, and about 10%, or 341 cases, led to actual visits. Of those visits, 177, or 52%, resulted in new sales. We have found that the overall results of this process to be 18x higher than the traditional direct mail. Even with a 50-50 split of the commissions with the other agencies, their result are 9x higher than direct mailing. Based on experience, 12% of calls lead to a visit, and 40% of visits result in new sales on average. Through this experiences of outbound calls, we found that although many cardholders are not interested in a face-to-face visit by a sales associate, some indicated that they would be interested in buying insurance products through a different method. In order to capture such needs, earlier this month, we launched a special team, which will handle applications processed or through postal mail.
Now next, let me discuss inbound telephone sales. We receive inbound calls when customers want to make changes to their name or address, cancel coverage or file claims. When receiving these calls, we try to make a face-to-face visit with customers as often as possible rather than completing the process by mail. Often, name or address change requests are results of life change -- life-changing events for a customer such as marriage or an addition to family. Meeting the person allows us the best opportunities to ensure we are capturing the current needs of the customer and pursue new sales opportunities.
When the calls are to request cancellation of a policy, face-to-face meetings also help us understanding -- understand the situation the customer is in and provide us with an opportunity to offer alternate solutions. As experienced during April 2011 through March 2012, we were able to prevent 42% of cancellation requests. Further, for request for payment of benefits, specialized employees respond to the policy holder and find additional sales opportunities.
Another sales opportunity comes from claims and benefit payment process because when we sell insurance, we sell a promise to be there for customers when they need us most by paying claims fairly promptly. In living up to that promise, we call our special team of employees, who are dedicated to do the claim and benefit payment process, missionaries of love, as coined by Otaki-san [ph], Aflac Japan's founder. Our missionaries of love take care of customers who are filing claims and benefits. We believe it is vitally important for us to be available when the policyholder needs us most. When -- that is when they need to file a claim. In return, the customers show their appreciation for our support, and we are able to build a good relationship with customers and reputation for our company. Happy customers often introduce us to their friends and family as new customer. The process also provides us with the direct contact with the insured, who can educate us on the latest medical treatment information. To monitor the quality of our services and capture less obvious needs of customers, we follow up with a survey asking their opinions about their satisfaction levels with our service.
In 2011, we had 3 staff who were our missionary of love, and they visited 1,000 regional customers who contacted us to submit claim and benefit request. As a result of their visit, about 30% of policyholders, or someone very close to them, bought an additional policy, which led to new business in 2011 of JPY 38 million in AP. We believe this is a solid and proactive sales method to expand our sales base by leveraging our relationship with our existing customers who need products and services of Aflac the most. In the call center-based marketing, we realize the importance of prompt response to customer inquiries and issues, of the importance of responding in the method customers prefer.
Our operators are trying to find out that customer preferred method, whether we can visit their home or if they prefer to visit our service shop by careful questions and do -- and to offer the best solution for each individual.
We currently have 9 service shops, all of which exclusively sell Aflac insurance products. We believe that service shops provide an excellent service to policyholders and potential customers. We plan to open one new shop next year and one more in 2014. We also seek to maintain and create close ties with the customers by providing friendly communications, such as our service shop blog by posting several female sales employees who respond to customers' inquiries about Aflac products. Also, we will soon introduce a new function on our website where our customers can make an appointment with our service shop. We believe that while the younger generation is experienced with the use of the Internet, they are not knowledgeable of our insurance. Many of them will continue to prefer face-to-face meetings to discuss their insurance needs in more detail, and this new system will become an important and popular tool for the younger generation as a first step in purchasing of insurance products.
I have explained our business model for insurance sales and some of our results we've achieved. As I conclude my presentation, I would like to touch upon where we expect to go from here with Aflac and what to expect from Aflac.
Well, from our long-standing experience marketing through various sales channels, including on-site solicitation of groups, direct mail, telephone sales, home visits, call centers and service shops, we became aware that there are certain customer segments that we do not have close contact with. We find this is particularly true with the relatively younger generation in their 30s and 40s, especially the ones who have the small living accommodations.
We believe one of the challenges is that the private information protection law enacted 10 years ago that prevented us from meeting with people who we used to see at their work site. I believe the most important information source of this demographic is the Internet, and the most convenient place for them to consult with someone on insurance is at a service shop. I believe this view is just the same as Ariyoshi-san previously shared. Though it can be costly for a sales agent to establish an Internet site to promote their services, once it is established, the website can help promote business with anyone who live anywhere.
I do hope Aflac will establish and manage a splendid Internet site for sales agencies like us and make a win-win situation among Aflac major sales agencies and their service shops. In addition, I do hope Aflac will continue developing products which will appropriately respond to the changing medical system and services of Japan. Looking from the frontline of the field, I think the keywords for the future business are aging society and changing medical systems and services. We believe the more Gentle EVER product introduced in July is a great response to such circumstances. I do believe continuing the introduction of such products shall lead to prosperity of both Aflac and sales agencies like us. Thank you for your kind attention.
A detailed and very insightful presentation. Well, Hisayuki Shinkai will make a presentation next. The Shinkai-san joined Aflac in 1999 after working for the Long Term Credit Bank of Japan Limited. He's presently a Vice President, and he's responsible for all departments related to bank sales. This morning, Shinkai-san will discuss Aflac Japan's bank channel sales. So please, Shinkai-san?
I'd like to provide information about the sale of insurance products through the bank channel. As of August 2012 this year, Japan had a total of 403 banks, including mega banks, regional banks and the Shinkin banks. These banks represent our target market and have a total of about 21,000 branches that employ more than 400,000 people in Japan. The mega banks include the Mizuho, Tokyo-Mitsubishi UFJ and Sumitomo Mitsui. We have also included Resona as a mega bank due to the -- its large and extensive nationwide sales network. With an average of 550 branches per mega bank, these 4 mega banks offer a wide range of mega banking services throughout Japan.
As of August 2012, there were 106 regional banks in Japan. Regional banks use the over-the-counter sales method as a primary means to sell insurance products to their customers, followed by door-to-door sales.
Shinkin banks are cooperative financial institutions, specializing in services for small- to medium-sized businesses and individuals. Their sales activities are deeply rooted in local communities, and door-to-door sales make up a significant part of their retail business.
In December 2007, restrictions on bank sales were removed [ph], and banks were permitted to sell all insurance products, including those in the third sector. Since then, we have secured agreements with 374 banks, which is more than 90% of all banks currently operating in Japan. We believe this number is significantly greater than any of our competitors'.
Within this extensive reach, both the number of bank branches and salespeople selling our products have significantly increased. For example, we had 54 banks selling our third sector product as of March 2008, and the number has grown to 299 as of August this year. These 299 banks had 17,000 branches and -- as of August 2012.
This slide shows quarterly bank sales growth going back to 2010. As you can see, sales in the second quarter of 2011 declined slightly due to the impact of the earthquake and the tsunami. But sales had recovered and gained momentum since then. In the second quarter of this year, new annualized premium sales, or new AP sales, set a new record for the fourth straight quarter. This success is largely attributable to WAYS.
In looking at banks' new AP sales contribution by product, WAYS is a primary driver of sales in the second quarter of 2012. Child endowment represented 12% of new sales, which was a significant decline from a year ago. During same period, WAYS accounted for approximately 83% of new AP sales. WAYS dominates new AP because the premium of WAYS is 10x as large as third sector products. I will elaborate on this later.
WAYS has been a popular product with banks and their customers. One key reason is many customers keep a significant amount of money at banks to prepare for retirement and are looking to place their money in safe and dependable products sold through banks. WAYS provides the insurance safety of life insurance but also provides future protections through its converging [ph] options. Banks find selling WAYS appealing because its [indiscernible] higher premium generates attractive commissions. Additionally, the extensive and effective training we provide to bank employees who are selling this product differentiates us from our competitors.
In looking at the number of policies sold in the second quarter over this year, WAYS represent 50%, child endowment represented 21% and third sector products, such as cancer and medical, represented 24% of all policies sold by banks.
This slide shows results of survey conducted by the weekly financial paper, Nikkin. With respect to cancer and medical products, Nikkin asked banks which insurance companies' respective products contributed more to sales from October 2011 through March 2012. As you can see, out of the banks that replied to the survey, for the cancer category, 78% of banks answered it was Aflac's cancer product that contributed most to their sales, and 58% answered the same regarding medical products.
WAYS is a unique hybrid whole-life [ph] product that can be converted to medical coverage, nursing care benefits, a fixed annuity or combination of these at a predetermined age. This slide shows different premium payment variations of the WAYS product.
There are 2 general premium payment types of WAYS, age paid-up and year paid-up. For age paid-up, premiums are paid until a predetermined age. For example, if a policyholder bought WAYS at the age of 50 and the predetermined age was 70, the policyholder will pay premiums for 20 years. Year paid-up is best suited for consumers under 50 years of age. These consumers pay cumulative premiums over a 10-year period. As you'll recall, we previously offered a 5-year paid option, but we recently implemented a cap on sales to mitigate the possibility of this intermediation risk. Most banks have now reached the agreed upon cap amount.
WAYS customers can choose to pay premiums in 2 formats: One is level payment that accepts monthly, semiannual or annual premium payment. The other is a discounted advanced premium payment, or DAP, which is a lump sum payment of cumulative premiums at a discount.
As shown on this slide, we introduced year paid-up WAYS through banks in the second quarter of 2011, and the sales of 5-year pay grew rapidly during the period of the third quarter of 2011 through the first quarter of this year. As I mentioned, we have capped sales on 5-year pay, and in the second quarter of 2012, almost all banks reached their cap. We do not expect meaningful sales of the 5-year pay WAYS in the third quarter of this year and after. However, as you can see, age paid-up has shown a solid sales and the 10-year pay had shown strong demand. We believe that sales momentum of WAYS will be maintained by 10-year pay and age paid-up types going forward.
This slide shows the average new annualized premiums per policy sold at banks. As you can see, WAYS has the highest average annual premium among our products, accounting for more than 10x the premium of our third sector products such as cancer and medical. Although the commission percentage paid per premium on WAYS is less than that of our traditional third sector products, the higher premium on WAYS provides banks with very attractive commissions.
Like WAYS, consumers possessing child endowment products may opt for different payment options. Most customers choose the DAP for both products. This is primarily because many banks' customers have a large amount of money available to make a lump sum premium payment and they receive a discount on the total premium paid. This provides value because a discount is more than what consumers can earn from the most saving accounts at banks in Japan. In the second quarter of this year, the discount advance premium payment DAP option represented 50% of new annualized premium from sales of child endowment and more than 90% of WAYS.
Our profit margins are significantly enhanced when policyholders elect to pay premiums upfront using DAP. Currently, the discount interest rate for this DAP is 1.0% and will be reduced to 0.5% starting next month. This will further enhance product profitability.
Bank sales results in the second quarter were solid and produced another sales record, slightly surpassing their first quarter result because of WAYS. Because we expect sales of 10-year pay WAYS and age paid-up WAYS to grow, we foresee significant sales growth in the third quarter on a year-over-year basis. We expect to see flat sales in the fourth quarter due to the scheduled reduction of the DAP rate I mentioned earlier, coupled with the tough -- coupled with tough sales comparison from fourth quarter 2011. Overall, our revised sales projection for the bank channel is to see a sales increase of 80% or more for the full year 2012.
Although we have seen tremendous sales growth in the bank channel, we still believe there's a lot of potential there. Let me discuss our initiatives to further grow bank sales in 2013 and beyond.
We categorize the banks in 2 ways: the first stage and second stage. In turn, banks may classify their customers into 2 classes. One is the asset management class. The category [ph] of wealthy millionaire [ph] whose average age is 55 and beyond and with a financial asset of JPY 20 million or more. The other is the asset building class in their 20s to 40s with financial assets of less than JPY 20 million.
Banks in their first stage sell mainly saving-type insurance products. They solicit WAYS with the DAP option through the asset management class. Additionally, they recommend their level payment WAYS and a child endowment option through the asset building class. These products have a high level of affinity with banking products such as deposit. Therefore, it is easy for salespeople at banks to explain products and to close deals. Currently, most of the banks selling our products are in the first stage.
Banks in their second stage have gone through their first stage and implementing consulting sales in accordance with life events of their customers such as family changes. Those banks will be such needs from both the asset management and the asset building class customers to provide them with the consulting services -- services such as review [ph] of existing policies they hold.
In addition to WAYS and the child endowment, banks in the second stage are selling third sector products as requested to the 4 [ph] customers to protect themselves against respective risks.
Only mega banks and certain large [ph] regional banks have progressed to the second stage, and The Bank of Fukuoka, who will give you a presentation after me, is a bank in the second stage. We believe we will also secure sustainable sales growth of third sector products if we can succeed in upgrading the number of banks currently in their first stage to the second stage, as The Bank of Fukuoka experienced.
In order to achieve such goals, we will focus on implementing 5 key strategies, namely enhancement of customer awareness, productivity, cross-selling, product features, and training. According to a customer survey we conducted in June, roughly 1 out of 3, or 37% of customers consumers, were aware that banks are selling insurance products. In addition, of those who visit the bank branches for banking transactions, only 1 out of 8, or about 12%, were solicited with respect to insurance products. Of those who bought insurance products at banks, 74% were satisfied and have indicated they plan to buy insurance products at banks next time because of this satisfaction. This survey result have deepened our confidence in the growth potential over the sale of the -- our products through banks. We intend to increase customer awareness through more promotions. This includes newspapers or posters at bank branches and salespeople who are well trained to the in force [ph] bank's goal of providing a broader range of products and services.
We are monitoring the productivity of banks using a metric that measures the number of policies sold per branch per month on an aggregate basis. This slide shows the trend of productivity by comparing the average of all banks with the most productive mega bank and regional bank. As you can see, their productivity has been steadily increasing. Looking at these comparisons, their productivity is approximately 5x better than that of the average of all banks. Metrics like this suggests significant future growth potential for us.
While we have shifted our focus away from child endowment, this product remains attractive to banks as it provides them with opportunities to gain new customers. In addition, 80% of customers acquired through banks are brand new to Aflac.
WAYS and the child endowment products have been enabling us to build a new customer base by attracting customers whom we could not reach through existing channels. In 2013 and beyond, we'll strengthen measures to achieve more cross-selling with child endowment and WAYS, thereby increasing the sales of more profitable third sector products. We will train sales people at banks to promote cross-selling using a turnkey approach, including brochure and application forms that contain both child endowment and our third sector products together as a bundled product offering. We have also started sending direct mailings on cancer and the medical products to existing policyholders of the child endowment product. In fact, new annualized premium, AP, sales of third sector products in the bank channel has grown by 10.3% in the first half of this year, reflecting the benefits of the cross-selling initiatives we have implemented.
As [indiscernible] mentioned, in April 2013, most Japanese insurance companies, including Aflac, will reduce their assumed interest rate and will likely reprice ordinary products. We anticipate these actions will also enhance the profitability of WAYS.
While pricing increase may have an impact on sales volume, we anticipate countering the potential impact by enhancing the product features of WAYS. We are deploying 280 employees at our 17 bank sales office nationwide. Their responsibility is to hold training sessions at the bank's branches, covering 20,000 bank branches, to promote sales. On average, one of our staff members is conducting at least 1 training session and 2 banks calls per day. In looking at more detailed results from January through June this year, banks calls are concentrated on branches, on mega banks or major regional banks. Branches of 50% of other regional banks, or Shinkin banks, are called on less than 1x per month, and 40% of branches were never called on during this period.
On average, only 10% of the branches are being called upon 1 or more times per month. Therefore, we believe we can improve productivity of bank branches if we increase the number of the banks calls or training sessions by deploying more staff.
Additionally, as we look to the longer term, our flow of retail JGB redemptions presents further opportunities within the bank channel. In this low interest environment, we expect that most of the proceeds from the maturing retail [ph] JGBs will be invested in assets other than JGBs. And these retail JGB holders typically want principal-guaranteed, long-term, fixed-income instrument, and our WAYS products can meet their needs. These redemptions present great potential for many years to come, and we are confident that our great relationship with banks will aid us in capitalizing on this opportunity.
We believe the bank channel still has a potential for growth and it is an excellent channel to sell our products. While the speed of growth for this channel will decline as we have penetrate it further, we believe growth will continue through this channel in the coming months and years. Thank you very much for your attention.
Thank you, Shinkai-san. Now we'll hear from Mr. Koji Yokota. He is the Executive Officer and General Manager for Business Promotion at The Bank of Fukuoka. Yokota-san joined The Bank of Fukuoka in 1982. He has had various assignments, including U.S. Corporate Finance at The Bank of Fukuoka's New York branch and Investor Relations at his headquarters.
Additionally, he handled the establishment of Fukuoka Financial Group, a bank holding company, as well as the acquisition of Kumamoto Family Bank and Shinwa Bank. Since 2010, he has been supervising planning and marketing activities of business promotion area in The Bank of Fukuoka and its group banks. Yokota-san will cover sales activities at a regional bank. So that will be today's morning session final remarks. So Yokota-san, please?
My name is Koji Yokota from The Bank of Fukuoka. Today, I'd like to briefly explain our strategy and the business model as well as our business relations with Aflac. The bank sales now -- bank sales now represent nearly half of Aflac Japan's new sales, and I'd like to provide you with detailed information on what bank's actually doing.
This slide shows the corporate structure of the Fukuoka Financial Group or FFG. FFG is a bank holding company established in 2007 with an initiative of The Bank of Fukuoka to acquire Kumamoto Family Bank and Shinwa Bank. The Bank of Fukuoka has been the core bank since the establishment of the group, while the other 2 banks are regarded as area banks.
FFG consolidate -- considered one of the top-class regional financial group in Japan. As of March 31, 2012, FFG's total consolidated assets were about JPY 12.9 trillion, which is the largest among all Japanese regional banks. Areas such as strategic planning, business administration and internal audit are consolidated among the 3 banks and managed by FFG. Additionally, these 3 banks are establishing strong brands by promoting business in their respective regions. We call this structure or management style Marchman's [ph] single platform system.
Next Page. That's regarding our mother market. Kyushu region, as the primary market for FFG, has a population of 13 million people, and the GDP in the region is JPY 44 trillion or USD 550 billion. This size of GDP is similar to that of the Switzerland, which ranks 19th in the world. Kyushu also has a large banking market. Kyushu's outstanding loan balance is JPY 34 trillion, or USD 425 billion, of which, 22% is held by FFG. And total deposit, JPY 71 trillion, FFG hold 15%.
In the seizable [ph] market, FFG operates a network of 325 branches with a retail account -- sorry, with approximately 5.4 million retail accounts and 250,000 corporate account.
In the retail market, our goal is to offer financial products and services based on our customers' life cycle. And we have strengthened our consultation-based business. In order to provide a comprehensive consulting, we have expanded our offering of insurance products and medical and cancer products are now sold at all of our branches.
As you can see, we have been increasing our financial product sales, including insurance, by using financial planning simulations tools. This provide customer with future cash flow analysis based on the life [ph], and that we can propose appropriate financial products, including various insurance products. In addition, we have reinforced our network of 325 branches. At the same time, we are strengthening our Internet channel. Currently, we have 700,000 Internet banking subscribers, and we believe it to be a solid channel.
At FFG, we have been strengthening our strategies for the insurance business since 2010. In addition to single premium insurance products we are already selling, we first adopted product such as level pay child endowment and whole life -- ordinary life product that's compatible with saving-type financial products that were already sold at banks. Then we added medical and cancer products in the first half of 2011. And earlier this year, we have started selling various insurance products at all branches.
As I mentioned, our goal is to provide product and services to our customers based on their life cycle and supporting the customers' life as a whole. Major life events include joining the workforce, marriage, birth of children, retirement and inheritance. And through consultation, we offer various products based on where they're at their life cycle and their goals.
Adding insurance product to our banking services, such as deposit term loans, significantly enhanced our capability to respond to the customers' various needs and offer appropriate solutions during our consultative services.
In the retail business, we historically focused only on wealthy customers who are what we call Asset Management class, and provided them with products, such as mutual funds, single premium annuity or other single premium whole-life products.
On the other hand, the market segment with younger working people has been underpenetrated for FFG. People in this market segment, or what we call asset building class, generally do not have large sums of money like asset management class people. But they do have their own financial needs that we could service.
In terms of insurance, level-premium products are provided a better suited solution to this segment, and we have added them to our offering to broaden the scope of our retail business. This level-premium insurance products are selling well to this segment.
This slide represents the demographic of the customers who bought our single premium products and those who bought level-premium products in fiscal year 2011.
As you can see, the single premium products appeal to the older population, and the average age of those customers was 61 years old. On the other hand, the level-premium products were purchased by the younger population, and their average age was 39 years old.
Reaching out to younger asset building class with level-premium products allows us to start building relationships with customers about 20 years younger than the asset management class, thus enabling us to build longterm relations with these customers.
This is -- this will create more business opportunities for sales of additional financial products, thus, potential for future growth for FFG.
We have built a solid sales organization and support insurance sales. As of March 2012, the end of fiscal year 2011, a total of 318 branches actually are all of the branches of 3 banks and the FFG that have insurance sales capability, were selling annuity, child endowment, whole-life, ordinary life, medical and cancer insurance products.
Currently, we are expanding branches, which are designed as consulting branches. These branches are equipped with highly skilled salespeople who can provide the customers with consultative service, such as household income analysis and through review of their existing insurance portfolio. In fact, the Bank of Fukuoka has implemented consultative sales activity at its all branches since this April.
We have been selling Aflac cancer, medical and child endowment products, and we introduced WAYS in April this year, with regard to Aflac products as core to our insurance offering, and we are using them to expand the customer base of the banks and the FFG.
Aflac has strong brand recognition, especially as a provider of medical and cancer insurance. Aflac products are simple and easy to understand for both customers and our sales people.
In addition, Aflac has been providing us with comprehensive trainings, which covers basic to advanced training programs. Finally, we appreciate Aflac's leading position in cancer-related models [ph], not only in products but also in social and educational activities.
Supported by Aflac, we have been holding these exhibitions or seminars for our customers, aiming to increasing awareness of -- for cancer. These activities are well-accepted and appreciated by our customers.
Also, Aflac-sponsored events related to cancer have been motivating our salespeople to promote cancer sales. We have been achieving steady sales of Aflac products and have been pleased with our partnership.
Working-class families with children are eager to prepare for educational expenses, and child endowment products are very appealing to them. Aflac's child endowment products, in particular, is competitive against the Tampo [ph], which has long been the most popular product in this segment. This is the reason why we adopted Aflac's child endowment product first among other Aflac products. And we decided to strategically using this -- use this product to prompt transactions with working-class customers, marking the beginning of what we hope to be lifelong relations. We have adopted other Aflac products. And as you can see, the product mix is more diversified in recent quarters. Child endowment accounts for less than 50% of total Aflac policy sales at FFG in the recent quarter.
Additionally, in the spirit of supporting the customer life as a whole, we can also cross-sell Aflac's medical and cancer products to those who purchase child endowment.
This chart shows the number of level-premium insurance growth policies provided by all insurance companies and sold by the Bank of Fukuoka in fiscal year 2011. As you can see, the product mix differed between our 137 general branches and our 24 consulting branches.
At our general branches, the proportion of saving-type insurance products, such as annuity, is relatively high. On the other hand, protection-type insurance products, such as medical and cancer, are higher at the consulting branches.
In April this year, the Bank of Fukuoka sent out a direct mailing to 4,000 existing policyholders of child endowment. This direct mail contains a list of Aflac insurance products we offer, brochures of each product and a coupon that they can present this, visiting one of our branches and exchanging for Maneki Neko Duck, which is on your desk as a souvenir.
As of the end of June, the hit ratio, which was measured by dividing the number of newly acquired policies by the total number of direct mailings, was 3%. We consider this result a success, and we believe we can effectively cross-sell to child endowment policy holders using direct mailing.
We believe the key to success in insurances sales business is the training of our salespeople. We have been implementing 3 levels of training programs as shown on this slide. The first level is basic training. During this level, salespeople acquire a basic knowledge on products to obtain their license for insurance sales.
The second level is called middle training, which salespeople enhance their skills through role playing or sales talk training and gain useful information related to insurance, such as pension and the medical system. This training helps our associate better serve the customers and be more efficient in insurance sales.
The third level is advanced training where our salespeople acquire practical skills for consultation and making proposal to customers. In addition, we also hold voluntary training sessions called Saturday Courage [ph] for our salespeople to further enhance their skills.
While we put our efforts into enhancing the knowledge and skills of our salespeople in order to grow our insurance business, we also know that our business strategy and numbers are not the only things that drive our salespeople to increase sales. They can get greatly motivated by knowing that their services is actually helping people.
Being able to offer insurance products provides our associates with the satisfaction that they are helping our customers by providing protection against unexpected events.
As we strive to support the customer life as a whole, our goal is to provide an integrated and convenient one-stop place to offer 3 pillars for our product line of banking, securities and insurance products to address the various financial needs of our customers.
Level-premium insurance products, such as Aflac, makes our product proactive offering of products and services more complete. They can also be offered to a wide segment of customers and younger worker -- working-class population, in particular, enabling us to expand our customer base. Our partnership presents growth opportunity for both Aflac and the Fukuoka Financial Group. Thank you very much.
Well, thank you very much, Yukota-san, for your detailed presentation. I do believe all of you have understood the -- what is going on the sales front of major regional banks or we call it a second stage bank.
I think we are ready to take your questions. And we will now begin our Q&A session for marketing and sales.
[Operator Instructions] Okay, please.
In the front. Will you raise your hand again? Yes, please.
Thomas G. Gallagher - Crédit Suisse AG, Research Division
Tom Gallagher, Credit Suisse. My one question is just on the graph that showed you're losing market share in new cancer insurance sales in 2011 and 2012. I'm just wondering if you could comment on who do you think you're losing market share to. Why do you think you're losing market share? And do you expect that to continue?
Well, basically, the share of cancer insurance has been taken by our competitors, and the reason is because the number of competitors has been on the increase. And in terms of the new entrance to accounts and market, the subsidiaries of nonlife insurance companies, as well as ORIX, has -- have entered the market. However, Aflac still dominates the market at its #1 position and is selling large number of policies. So in order for us to increase the number of cancer policy sales, what we need to do is to expand the market itself. And as a part of the market expansion activities, what we are currently doing right now is to tie up with all the prefecture and municipalities around Japan to increase awareness on cancer screening so that people will be taking exams for the cancer. And by doing, so we plan to increase the recognition of -- or the awareness of cancer. So our plan, in summary, is to increase or expand the market, and then also increase the number of policies that we sell. Another thing is that as we have done with our medical product this time, we needed to appropriately revise our product at appropriate timing so that we will be able to maintain and increase our competitive advantage or competitiveness.
And just to be precise, I think our market share in the new business, cancer, is declined in the -- as of March 11, but increased much to 2012. So that we took some major, including the introduction of the new cancer product last year. We were able to increase our share in that cancer market with a new policy sold, as you saw in the presentation of mine.
Other questions, please. In the middle. In the middle row.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
Jimmy Bhullar from JPMorgan. I had a question on the bank channel. If you can discuss your profitability on third sector business sold through banks versus through agents. And then what's the risk that as banks become more -- larger and larger as a percentage of the overall market that it opens up the market for more competition, either on prices or on commissions and hurts the long-term profitability of the industry?
Your question is the kind of competition or competition between the banks and other channels? Is it the -- quite the understanding?
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
It's the gist of it, but basically are your margins on business sold through banks better, worse than margins on business sold through agents? And then as banks become a bigger part of the overall Japanese insurance market, could they cause more competition either on prices or on distribution -- or commission, sorry.
Yes. Generally speaking, the products we are selling through the banks channel is the same products that we sell through the traditional channel. So therefore that the margins on the products are basically the same.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
Even on the expense side, the expenses of servicing the banks are similar?
Expenses, what do you mean? I'm sorry.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
The margins you're implying, the benefits ratio, right?
Yes, including everything.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
But what about expense ratio and just the cost of servicing the channel?
The cost of servicing. Again, that -- we generally pay a similar level of commissions to the banks as we are paying to the -- present of [ph] our agents. And in terms of the -- some expenses related to helping that they sell the policies, we don't see any measured differences in both channels, the one traditional and the banks. We tend to spend more on the training to help banks than that our -- and we try to spend more, say, campaign-type expenses to the traditional channels. But again, the difference is relatively small as compared to the overall expenses. So even if the bank -- that the shares of the bank channel in our total sales growth, that doesn't, say, change our profit by itself. Okay, does it answer your question?
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
Yes, the other part is just longer term, is there a possibility that these banks are bigger as a part of the overall market that they could cause more competition on prices or commissions on the products?
In my speech, the 80% of the new policy sold by banks are brand new to Aflac. So actually, there's very little competition of overlapping of the -- our customers. And I accept such kind of trend would be continuing. So in terms of the competition, I'm not worrying about that. We could get the new customers through bank channel sales. It's quite important for us.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
The question was more on competition between various companies. Could the banks ask insurance companies to pay more commissions or the one that pays more commissions, they sell more for them versus someone who does not?
Anyway, so it depends on the future market. But because of our strong relationship with the product, I think we could keep up the current commission level.
Other questions? Back, side please.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Mark Finkelstein, Evercore. My first question is can you just talk about the traction with the new Gentle EVER product? I think it's been selling for roughly 2 months, if I have that right. What are you seeing? And how is it affecting sales of the medical and the traditional product?
[Japanese] Well, first of all, Gentle EVER has had a very good start. We have been able to record a level of sales that we have never experienced through this type of product. Well, since we had announced that this new Gentle EVER will be launched before the product has actually launched, our agencies might have withheld some of the policies, so that when we actually launched the product, they can all sell at once. And that might have contributed to a very good start. Although we will have to wait a little bit more to see the overall trend of the medical, including standard type and nonstandard type, it seems that since our sales of the new Gentle EVER is so good that our Gentle -- sorry, our normal EVER, the standard type, might be slightly affected.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
And then just a second question on trends and getting a second sale out of the bank channel, kind of cross-selling, what is that ratio, roughly, of the kind of cross-selling? And how has that trended as the bank sales have substantially increased?
As I mentioned in my presentation, most of the banks are still the first stage. So we have really started from the cross-selling effort from last year. And the result, as I've mentioned in my speech, more than 10% increase over the third sector products for the first quarter of this year. And also, this trend is continuing July or August sales. So I think the result is very clear. We could improve the sales with cross-selling because of the effort of our cross-selling training. And I think this trend will be continuing to us to 2013 toward the end.
Eric N. Berg - RBC Capital Markets, LLC, Research Division
Eric Berg from RBC Capital Markets. Given what would seem to be a very heavy price tag on the WAYS product, I think a family has to earn about, it looks like USD 10,000 pretax and pay that every year to buy WAYS. I think that's what the numbers work out to, about $10,000 per year. I mean, that would be a big ticket in the U.S., and I presume it's the same here in Japan. So my one question is, how penetrated is the WAYS market at this point? And should we infer -- should the main take-away message from today's presentation be that because this product is seemingly expensive for most middle and upper middle income Japanese, that you really need to sell the full product suite at this point because WAYS is sort of far along. Am I reaching the right conclusion?
[Japanese] As Mr. Shinkai mentioned in his speech, there are 2 types of customers who purchase WAYS. And this is common to both general agency channel and bank channel. And the customers who are around age 60 who already have assets, these people purchase a larger amount or high amount WAYS. However, on the other hand, the younger generation in their 20s to 40s, these people or these customers purchase WAYS with a level-premium payment mode. And these people are not paying all that large amount of premium. And since these are the people who are currently building the assets for their future, they are paying the amount of premium that is affordable to them.
Other questions? Here, in the front. Okay.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Steven Schwartz, Raymond James. For Shinkai-san and Yokota-san, with the change in GAAP, the DAP, the discount advanced premium, the likely change in the valuation rate for next year, I think the question would be, are there other products, other traditional products, that banks outside of Insurance that are going to be very, very competitive with WAYS?
You're talking about reducing it, DAP rates?
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Reducing the DAP rate and then repricing, yes.
Yes. Compared with the other products like a mutual fund or...
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Mutual funds, CDs, savings accounts, whatever they got there.
But actually, if you take a look about the -- our WAYS at some of the interest rate, the current assumed interest rate is pretty much higher than actual interest rate is. So if you are thinking about the Japanese government bond, the individual 3-year time bond if you buy a 3-year time bond of the -- from the -- I mean, this month, the rate would be less than 0.1% right now. So right now, it's very low interest environment right now. And this trend might be continuing to 2013. So even that change of the DAP rate and also in pricing, I think, we are quite competitive to sell WAYS. Of course, we are thinking about enhancing features always to cope with the change of such kind of rate. But if you think about kind of very low interest environment in Japan, so other, the products, mainly, say, DJB, we expected retention of individual DJB next year to maybe JPY 1.5 trillion per quarter. It's a huge amount. And so the DJB both 5 years goal, say, got 1% to a 1.5% interest per year. But right now, if the new issuing DJB for individual, the rate is 0.5% for 5 years -- I mean, 0.3% or 0.4% for 5 years, and less than 0.1% for 3 years time. So every products is very low interest environment right now. That's my point.
Scott Russell - Macquarie Research
It's Scott Russell from Mcquarie. The Japanese life market is extremely competitive, yet if we're to compare your market share gains and ROE with that of the domestics, Aflac in Japan is straight ahead. So my question is what areas of your business would you highlight against the domestic life companies as being a competitive advantage? We've heard a lot of different things. But I'd just be interested in what sort of 1 or 2 areas would you identify the domestics do so poorly?
I think we have -- from the inception, we have been the market leader of the what we call the third-sector market. And whereas the big Japanese insurers tended to be more active in the first-sector market. So we think that we have a competitive advantage, a very strong competitive advantage over the major Japanese insurance companies in the third-sector market, either cancer or medical. And we have been building operations in that way, and we have excellent distribution channels, which are very focused on the third-sector market. So I think that -- and also our products. So we think that is our, say, advantage we have.
Scott Russell - Macquarie Research
Would you expect the domestics -- is there anything preventing your competitors from catching up to you and innovating their products, copying your products to generate similar returns and take market share back?
I know that they are very interested in the third-sector market today. And they are working very hard to catch up with us in that market. And however, we have that more than 30 years experience in that market, which they do not have. So they can introduce a similar product as we are selling today. But we will make more improvements going forward to our products. So we will stay -- we plan to be -- we plan to stay ahead of them at any time going forward.
Scott Russell - Macquarie Research
If I can just ask one other quick question. The Bank of Fukuoka, is that exclusive to Aflac? And if it is, how common are exclusive arrangements between banks and insurers?
Yuko-san [ph], please use your microphone.
[Japanese] The insurance products that we sell are from 13 providers. So we do not have an exclusive like contract with Aflac nor we have any investments from Aflac either to our bank.
So I think we are reaching the top of the schedule. So for the morning session, one question -- two more questions, please. Okay.
My name is Stephan Petersen. I'm from Thrivent Financial. Just a very quick follow-up question to Mr. [indiscernible]. Of the 13 carriers, how many offer WAYS kind of whole-life product that's similar to what Aflac is selling? And among those products, do you think that people primarily purchase on feature or price? Or if -- help me sort out kind of the primary thing that kind of drives the sale one way or another.
[Japanese] Well, actually, 3 insurers are providing similar product to WAYS. So in terms of level-premium payment-type of products that has near -- same feature as WAYS is provided from 3 companies. And then there are other insurers that are providing similar feature products; however, the payment is similar to discounted advanced premium. But these products are single-premium products that have, like 3 years, 5 years or 10 years term. And so after these 3 or 5 or 10 years, the customers are able to get a -- have a return of the principal plus just a slightly additional amount. In the WAYS case, discounted advanced premium product is for 10 years. And WAYS product is no inferior to any other single premium type of products that we sell. So they actually -- our customers are very attracted and actually purchase this WAYS product.
So final question for this morning session, please.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Chris Giovanni from Goldman Sachs. If we go back maybe 3 or 4 years ago, there were a lot of questions in the market around sort of cannibalization of products across your different distribution channels. The banks then came along, and obviously, new products within the WAYS product, the child endowment, which has led to a lot of growth. As we think about the pricing changes, the changes in DAP, I guess the lower commissions on the child endowment products as we move forward, the push to kind of cross-sell products, is there a risk that cannibalization questions could come back in the marketplace as we look forward here over the course of maybe the next year or 2?
Again, the -- our research clearly shows that 80% of the customers from bank channel as of the second quarter of this year and also previous quarters, 80% is brand new to Aflac. So really, we are creating new customer bases right now through child endowment and WAYS products. I think this trend will be continuing towards next year and beyond. So personally, I don't think we could see a serious confrontation or a channel confrontation between banks and other traditional channels. This is my expectation.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
And do you have a sense, the 80% that are new customers, do you know why they haven't previously purchased a cancer product?
Yes, traditionally, like a traditional channel, they are selling our insurance products through corporate. So most of the customers are working people. The companies, that main customers, the bank, main people who are visiting the banks, housewives or the people who are in the house doing their own business kind of thing. So because on the daytime, the working people don't have any time to visit the banks, actually, except the ATM. So selling the insurance products with a face-to-face consulting service through the bank branches, mainly customers, historically, we have not solicited business through a corporate work site or other channel, I mean, other areas. That's my answer to you.
Okay, thank you very much. To start off our afternoon session, Charles Lake will make a presentation. Lake has joined Aflac International in February 1999 and Aflac Japan in June 1999. He became President of Aflac Japan in 2003, and he serves as Chairman of Aflac Japan since 2008. Lake-san will give you an update on Japan's public policy and regulatory environment. Please, Lake-san.
Charles D. Lake
Good afternoon. Before I delve into recent political developments and the policy environment, please allow me to take a moment to give a quick overview of the Japanese political system and how it works. I realize this may be familiar ground for many of you, but I hope you will find it useful.
Japan is a constitutional monarchy with a parliamentary government. Sovereignty is vested in the Japanese people with the emperor defined as the symbol of the state. Japan's government is a parliamentary democracy with a House of Representatives, or Lower House, and a House of Councillors or Upper House. Executive power is vested in a cabinet which is composed of a Prime Minister and Ministers of State, all of whom must be civilians. The prime minister must be a member of Parliament, which is known as the National Diet in Japan, and is chosen by his or her colleagues. The Prime Minister has the power to appoint and remove ministers, a majority of whom must be Diet members.
The Lower House has 480 members elected for 4-year terms. The Lower House can be dissolved in an election called at any time by the Prime Minister, which means that its election schedule is not fixed. The last Lower House election was held in August 2009 and resulted in a landslide victory for the Democratic Party of Japan or DPJ. The next Lower House election must be held no later than summer 2013.
The Upper House has 242 members elected for 6-year terms. Upper House elections are held every 3 years, during which 1/2 or 121 of the Upper House seats are contested. The last Upper House election was held on July 11, 2010, and resulted in significant losses for the DPJ and its coalition partners. The next Upper House election will be held in the summer of 2013.
The lower house has several powers not given to the Upper House, making it the key to gaining control of Japan's government. For example, if a bill is passed by the Lower House but voted down by the Upper House, the Lower House can override the decision by a 2/3 vote. In the case of treaties, the budget and the selection of the Prime Minister, however, if the 2 houses reach different decisions that cannot be resolved, the decision of the Lower House becomes the will of the Diet. As a result, the party that controls a majority of seats in the Lower House holds the reins of power, and the President of that party generally serves as the Prime Minister.
Japan has 2 major political parties: the Democratic Party of Japan or DPJ, which is now in power; and the Liberal Democratic Party or LDP, which held power nearly uninterrupted from 1955 to 2009.
There are a number of other political parties that vary in size and influence, including New Komeito Party, the Japan Communist Party, the Social Democratic Party, the People's New Party; and the newly-formed People's Life First Party.
In addition, as voters seek alternatives to the political status quo, regional political movements such as the Osaka Restoration Association or Osaka-Ishino Kai, led by Osaka mayor, Tooru Hashimoto, have been gaining in popularity and will likely have an important impact on national politics.
Political parties in Japan's parliamentary system often form partnerships or coalitions, including in cases when they need to gain a majority in 1 or 2 or both houses of the Diet for the purpose of passing legislation. Now ruling DPJ currently has a coalition with the People's New Party.
In the August 2009 and general election, the DPJ won an overwhelming majority of seats in the Lower House, resulting in a historic change of government from the LDP's more than 5 decades as the ruling party. The people of Japan voted for change with high expectation for results.
In the months that followed, funding scandals and weak leadership related to making an uncharted transition from being an opposition to actually governing contributed to a decline in public support and, ultimately, a major defeat in the July 2010 Upper House election.
This defeat created difficult political circumstances, including a divided parliament or so-called Twisted Diet, whereby the DPJ has a majority in the Lower House but not in the Upper House.
Following the Great East Japan earthquake, the people of Japan expected the 2 major political parties to overcome their differences and the problems associated with the Twisted Diet. But both the DPJ and LDP failed to come together to execute the broad reforms and policy initiatives that would provide breakthrough changes to address long-standing structural problems.
The then Prime Minister, Naoto Kan, the second Prime Minister under DPJ administration, resigned, taking responsibility for his handling of the March 11 crisis, hoping to reenergize support for the ruling party.
After taking office in August 2011, Prime Minister Yoshihiko Noda, laid out his administration's highest near-term policy priorities. As a former finance minister and a tax-hike supporter, Mr. Noda has been trying to balance the need for fiscal austerity with economic revitalization, which is one of his administration's top priorities.
However, implementation has not been easy, given the Twisted Diet where the ruling DPJ no longer holds the majority in the Upper House. This situation makes it necessary for the DPJ to gain the cooperation of the largest opposition party, LDP, in order to have legislation pass the Diet.
For the most part, except with regard to measures specifically related to post-March 11 disaster recovery, the opposition has taken a largely obstructionist stance, refusing to cooperate in a policy-making process, and at the same time, consistently calling for the Prime Minister to dissolve the lower house and call a general election, which they have nearly succeeded in doing.
In a deal to secure the support of the LDP in the passing of Prime Minister Noda's top policy priority, the integrated social security and tax reform, which I will discuss in further detail later, the Prime Minister has agreed to dissolve the Lower House and call a general election "in the near-term," but refused to be pinned down on what that means.
The ongoing policy paralysis has long -- has not only been the consequence of an obstructionist opposition but of disparate policy position within the ruling DPJ, which had ultimately led to a number of Diet members leaving or even being expelled from the party, significantly reducing the DPJ's majority in the Lower House.
As such, the Prime Minister is now in a precarious position and will likely stay away from trying to introduce controversial policies in order to avoid losing more party members and, as a result, the DPJ's Lower House majority.
The uncertain political environment has driven down public support rating for major political parties and will likely lead to a major political realignment at the next general election or thereafter.
A recent GG Press opinion poll shows that large majority or 69.3% of voters do not support any of Japan's political parties, a statistic which for the most part had been consistently rising over the past year.
The ruling DPJ has been -- has seen support gradually declining over the past 9 months from 12.6% in November 2011 to just 6.9% in the most recent poll taken in August. Meanwhile, support for the opposition LDP remains low as well, although higher than that of the DPJ at 13.3%.
Given the low political support rates for both major parties, a possible outcome of the impending election, if held in the fall, is that neither major party would win enough seats for a majority. Therefore, a new government could be a coalition between one of the major parties and a regional party or perhaps even a DPJ and LDP coalition.
Before giving an explanation on how the domestic political situation has been shaping Japan's business and regulatory environments going forward, I would like to first discuss the other factors, including the global financial regulatory environment that also plays a role.
In light of lessons learned from the global financial crisis, countries are working in international settings to develop financial standards with the aim of strengthening the global financial system and ensuring financial stability.
In this context, Japan is working to make sure that its domestic financial regulation is in line with current international standards and to play a relevant role in the development of the global financial regulatory regime.
Developments on the international stage are being led by the G20 and the Financial Stability Board. The International Association of Insurance Supervisors or IAIS is tasked with setting, implementing and assessing international standards in the insurance industry and promoting cooperation among supervisors.
That IAIS last fall revised its insurance core principles and is currently in the process of formulating a common framework for the supervision of internationally active insurance groups or ComFrame as it is known.
Aflac is watching global financial regulatory developments closely. The company is an observer at the IAIS, and I currently serve as the Chair of the American Council of Life Insurers International Committee, which also monitors developments.
Japan's financial system has changed dramatically in the past 2 decades. The old Ministry of Finance emphasized maximum control, domestic industry protection and the use of informal administrative guidance based on its convoy system philosophy.
In the late '90s -- 1990s, FSA began to replace this philosophy with a rules-based regulatory approach, which relied on transparency and the notion of self responsibility by financial institutions.
This trend culminated in the 2007 launch of the better regulation initiative, wherein the FSA fought to take further steps to achieve the best mix of principles and rules-based regulation.
Following the global financial crisis and the change to the DPJ-led government, the FSA maintained its better regulation initiative in principle as an official policy. However, in light of the political dysfunction which now characterizes the Japanese political environment, the FSA has been forced, for the most part, to set aside its pursuit of a far-reaching reform designed to boost Japan's competitiveness as a global financial center.
Nevertheless, as the international regulatory regimes involve, the FSA has needed to maintain a fairly active policy agenda, if nothing else, simply to keep up with the fast-changing developments in international standards and global best practices led by the FSB and other organizations.
In the absence of clear policy direction from the political leaders -- from the political leaders in the government, bureaucrats have increasingly relied more on discretionary authority through administrative guidance, guidelines and business improvement orders and so on, less on rule-making processes to achieve regulatory objectives.
Having said that, Aflac has established a strong track record of good communication with the government of Japan and maintains active leadership roles in trade associations, such as the American Chamber of Commerce in Japan, the American Council of Life Insurers and the U.S.-Japan Business Council and so on.
We are accordingly very well-positioned to understand how this shift affects the business environment and are able to position the company for continued success in the Japanese market. Furthermore, should it be necessary, we will not hesitate to raise any specific concerns with senior FSA and other Japanese government officials.
On July 31, 2012, the Cabinet approved the comprehensive strategy for the rebirth of Japan. The government's mid- to long-term strategy to promote growth and repair the country's fiscal health through the implementation of policies to speed up reconstruction from the March 11 disaster and achieve an average economic growth rate of 3% nominal or 2% real economic growth.
The strategy outlines 38 policies in 11 areas, including environment, energy, finance, medical and nursing care, tourism and trade. Given the uncertain political environment, it is unclear how fully these 38 policies will be implemented.
In 2005, legislation aimed at privatizing Japan post system, Japan Post, was enacted into law. The privatization law split Japan Post into 4 operating entities that began operations in October 2007. However, on April 27, 2012, a new law which amends the postal privatization law was enacted.
The new legislation will, for example, merge 2 of the postal operating entities: the one that delivers the mail, and the one that runs the post offices; remove the requirement to fully privatize the postal financial institution, Japan Post Insurance and Japan Post Bank, and mandate the universal and integrated provision of postal delivery, banking and insurance businesses through the Japan Post network.
In regards to business expansion, until 50% of the shares of JPI, Japan Post Insurance, are disposed of or sold, the exact same approval procedures that we've lived under since October 2007 will remain intact.
That is, in addition to product approval procedures that all companies, including ours, have to follow, JPI must seek additional approval from the Prime Minister delegated to the FSA Commissioner and Minister of Internal Affairs and Communication in charge of the post office.
In other words, in terms of the scope of Japan Post business, the new legislation will not immediately or definitively change the scope of Japan Post presence in the market.
Once 50% of JPI's shares are disposed of or sold, however, the product approval procedures would become simpler. The FSA Commissioner and Minister of Internal Affairs and Communication would have to be notified, but the other extra pre-approval requirements would be eliminated.
It is unclear if or when that 50% threshold will be passed, particularly since the new legislation will eliminate the deadline for selling shares, and some experts believe that the shares will never be sold.
Moreover, as a practical matter, before it could sell a single share, the Japan Post holding company would have to first go through an initial public offering, IPO process, which will require significant work to prepare with an uncertain timeline even the regulatory approval process -- given the regulatory approval process enlisting requirements.
The postal legislation that passed in 2012 was strongly opposed by the Life Insurance Association of Japan, the Japan Association of Corporate Executives and other domestic groups. These groups are strongly opposed to expansion by Japan Post into new product areas, as is the case, for example, a group of 17 services and insurance trade associations from Europe and the Americas.
Given the strong domestic and international opposition to expansion by Japan Post as well as other factors mentioned, including the numerous steps required before any new product could be approved, we do not expect that Japan Post Insurance will be able to expand into new business areas in the immediate term.
As you likely know, Aflac's cancer products are sold through 1,000 post offices around Japan. Japan Post has historically been a popular place for consumers to purchase insurance products.
At the current time, it is not possible to predict with any degree of uncertainty, what impact, if any, the new legislation will have on Aflac Japan's operations. Regardless, we believe that postal reform is unlikely to change Aflac Japan's relationship with the post office company.
Next, I would like to discuss one of the key policies of the Noda administration, a comprehensive and integrated reform of the social security and tax systems.
The government plans an overhaul of the social security system and, as one of the primary funding mechanisms, an increase of the consumption tax. Legislation passed on August 10, 2012, authorizing the government to raise the consumption tax from 5% to 8% by April 2014 and to 10% in October 2015.
The legislation, however, contained a best efforts condition, making 3% nominal growth, 2% real growth, a weak requirement for implementing the rate hike.
Japan's failure to achieve this macroeconomic growth could provide an escape hatch. Therefore, this issue will like be hotly debated as the time for the first rate hike nears, and means that even with the passage of the legislation, a consumption tax hike is not 100% certain.
The legislative package includes reform of social security system, such as boosting the availability of nursing schools and providing pensions for low income seniors and part-time workers. Nevertheless, many of the details regarding social security reform are still to be decided, pending the work of a yet-to-be-established national council for overhauling the social security system, which will conduct a national debate on the feasibility of mid- and long-term systemic changes in the current social security system.
As I have noted in previous briefings, a declining fertility rate and aging population are among the most difficult challenges that Japan faces on the path to sustained growth and prosperity.
As these trends progress, Japan's publicly funded social insurance program will continue to come under ever increasing financial pressure, thus, the work of the national council will be important.
As observers agreed that given the Japan's aging population and declining birthrate, even with the doubling of the consumption tax rate, the social security system is unsustainable without major restructuring.
As such, in addition to direct funding of the social security system through the consumption tax, the government is looking at other ways for the nation's economy to cope with the increased burden Japan's demographic situation poses. One such measure has been to raise the mandatory requirement age from 60 to 65.
The new legislation that passed on August 29 gives employees to option to stay on in the company until the age of 65 if they wish. The law is supported by the major parties and is in line with the government's plan to eventually raise the pension age to 65 in stages.
Japan has a compulsory and universal public health care insurance system. The system's costs are covered by premiums paid by insured and their employers, as well as taxes and copayments paid by patients.
Given Japan's demographic situations, however, the system has been under great financial strain, and copayments for salaried workers under 70 are 60%.
In April 2008, recognizing that the national healthcare system will be unsustainable as the cost of providing medical care for the elderly swell, the government introduced advanced elderly health, a system that separates medical treatment fees for advanced elderly from that of the younger population.
Although the DPJ-led government began designing a replacement system in November 2009 and intended for it to be part of its social security reform agenda, other priorities were such that this legislation was not submitted to the Diet before the session ended on September 8, 2012.
In light of the political situation, it is impossible to say exactly how this issue will develop. However, we anticipate that the government will undergo a fair -- far-reaching review of policies in this area as a result of the passage of the integrated social security and tax reform legislation in August 2012. And we believe that any resulting reforms will lead to enhanced consumer interest in the health care sector, including supplemental medical and cancer products -- insurance products.
I have mentioned the government is in the process of conducting a comprehensive review of the Social Security system, including pensions, healthcare and nursing care. However, because Japan's declining birth rate, aging population and related need for fiscal discipline will not change, it is unlikely that the government will -- government's final Social Security plan will bring about, for example, an expansion of national healthcare insurance coverage. Related to this, much of the need for our products will continue to arise because of the many expenses that are not covered by Japan's healthcare system. Patients will have to continue to bear significant expenses while in hospital, including extra charges for private or semi-private rooms, special treatment, treatments or medicines not covered by the national healthcare system, transportation cost for family members and daily necessities. According to the most recent survey by the Japan Institute of Life Insurance, roughly 1/4 of patients had more than JPY 20,000 of daily out-of-pocket hospitalization expenses. Given Japan's aging population and declining birth rate, the government of Japan faces tight financial conditions and many people worry that additional increases in out-of-pocket expenses will be necessary. Some worry, not only that their burden will increase, but that the scope of government coverage may be reduced as well. In this environment, Aflac's products are well-positioned to meet changing customer needs.
With regard to government payments to families with children, in March 2012, legislation making the child benefit program permanent passed the Diet. Under the law, a monthly allowance of JPY 15,000 or $180 will be given for each child under 3 years old. JPY 10,000 or $120 each for the first and second child aged from 3 up to their last year of elementary school. JPY 15,000 each for the third and subsequent child -- children in the same category and JPY 10,000 for each middle school student.
Any family with 2 children, in which the combined household income is JPY 9.6 million or more annually, will lose eligibility. However, as a temporary measure, they will receive JPY 5,000 or $50 per month for each child. For families with 1 child, the income cap will be JPY 9.18 million. The government began making these child benefit payments last October under a special measures law, so families will not notice a change in the current practice. However, the income cap started from June of this year.
In closing, I firmly believe that in the current public policy environment, the companies that prevail will be those that are customer centric, agile and proactive. Aflac is such a company. We will comprehensively prepare for any environmental changes and continue to closely interact with our public policy stakeholders as we have always done so, to anticipate change and to advocate for constructive solutions. Aflac is well-positioned to take advantage of the opportunities presented, and we believe that we will continue to be a successful company in the Japanese market. Thank you.
Thank you very much, Lake-san. Next we will hear from Jun Isonaka. Isonaka-san joined Aflac in 1980, and he is the first Senior Vice President and Chief Administrative Officer. This afternoon, Isonaka-san will discuss Aflac Japan's administration. So please, Isonaka-san.
I'd like to share information with you regarding Aflac Japan's efforts to provide the best customer service while at the same time, maintaining local's operations from an administrative perspective. Let me start by showing you a couple of statistical comparisons between Aflac Japan and our competitors. As you know, Aflac has sustained the #1 position in the life insurance market in Japan in terms of the number of individual persons in force. As you can see, the policy per employee column shows that Aflac Japan produces 5x larger [ph] productivity compared to other major life insurance companies.
This means that we are operating in a considerably more cost-effective manner than these other companies. To further improve efficiency, while maintaining quality service, Aflac Japan is actively improving IT solutions. As one of the examples of initiatives in this field, let me turn your attention to our benefit and premise payment worker system which was implemented at the end of February 2011. In this worker system, letter claims documents received from customers are internally scanned and then examined without physically transferring real documents. The system enables paperless administration, eliminates the risk of losing documents and it reduces the time for the cross departmental handover of documents. This has led to a more efficient claims operation. This worker is also effective in improving customer service as transforming paper-based data into electronic records make it possible for us to retrieve information easily and responding queries from customers promptly.
Next, let me discuss Aflac's inbound call centers, which play an extremely important role in serving our customers and our associates. Currently, we have 3 centers for inbound calls and they are separated according to the type of call. One is the Aflac call center, which receives inquiries from existing and prospective policyholders. This call center is receiving about 1.7 million calls a year. Another is the associate support center, which takes calls from our sales associates. The third one is the alliance support center, which takes calls from our large-sale channels such as banks, the Japan Post network and Dai-ichi Life.
Aflac call center operators not only respond quickly and accurately to customers' inquiries, but they also provide their sales associates with the information about changes in our customer's lifestyles. This allows the sales associate to appropriate rapport [ph] of his customers, which increases the opportunity to win new sales. We believe offering high-quality service through the call centers is a very important in contributing to improve the customer service, it also builds strong relationships with all stakeholders, including the customers and sales associates, as well as banks, Dai-ichi Life and Japan Post.
In September 2011, Aflac Japan's alliance support center won of the Most Outstanding Contact Center Award in the strategy category. This is the only award of this kind, evaluating all contact centers in Japan. The strategy category awards are call centers strategic plans and results based on its contributions with the company's operations and the valid preparation for the customer.
Winning this award means that Aflac Japan's alliance support center, developed over the first 4 years, has reached a level of excellence recognized by the industry. I believe, winning this award has increased the trust of our clients.
This slide exemplifies our continuing efforts to preserve in-force business. As an index to measure our performance in preserving the in-force business, Aflac Japan places particular importance on the surrender and lapse rate. As shown on this slide, Aflac Japan's surrender and lapse rate for fiscal year 2011, which ended March 30, 2012, was 1 percentage points lower than the industry average, which shows our competitive edge with respect to persistency.
To grow our business, it is certainly important to encourage our policyholders to keep their policies for a long period. As a primary point of contact between Aflac Japan and our customers, it is equally important that our sales associates conduct timely and the appropriate follow-up actions. To support our sales associates in taking such actions, we have been emphasizing the importance of maintaining the in-force policies. We do this by educating our sales associates and providing them with the information, including surrender and lapse rates, as well as successful initiatives executed by other sales associates.
By doing so, we can create an environment where our sales associates are in tune with how their follow-up activities directly impact policy persistency.
This chart shows the actual claims payment in yen made during 2002 through 2011. As you can see, the actual payment demand has been growing steadily. In 2011, we paid about JPY 313.1 billion on about 300,000 cancer claims. The total amount paid on medical proceeds in 2011 was about JPY 97.4 billion, while we made approximately 530,000 payments which was greater than the number of cancer insurance payments.
The most important service an insurance company can provide is to live up to its promise of paying benefits promptly when policyholders need them the most. Aflac Japan remains dedicated to providing quick and accurate claims payments. We are taking the measures to further enhance the accuracy in our claims payments by further enhancing our quality management system and stepping up our employee training efforts. As for claims turnaround time, Aflac Japan is paying claims in approximately 3 business days on average. In fact, many customers voice their amazement and appreciation about how quickly Aflac pays their claims.
I would like to explain our disaster readiness plan. Aflac Japan has maintained 2 administration bases since 1996. Tokyo in Eastern Japan, and Osaka in Western Japan. This dual-site administration structure has been built as part of our disaster readiness plan which enables Osaka to undertake the overall operations in the event Tokyo is affected by a disaster. The earthquake and the tsunami disaster last year taught us many lessons that strengthened our focus on disaster preparedness. We are committed to being ready for potential disasters in order to be there for customers in their greatest time of need. In other words, we must achieve a mission of paying claims and benefits accurately and speedily, and we must secure a reliable customer-servicing system where our customers can always reach us when they need us the most.
When the earthquake hit Japan last year, we continued our operations without interruptions. However, due to the damage to the power plants, our administrative operation in Tokyo was significantly constrained in terms of business hours by energy conservation efforts by the community as a whole. To overcome the constraints, we took several measures such as sending staff to Osaka, and setting up a temporary call center in a location unaffected by the power-saving plan.
To ensure a seamless operation between Tokyo and Osaka in the event of a disaster that may occur in the future, we focused on enhancing the call center operation and claims payment operation. As part of this initiative, in February of this year, we enhanced the call center in Osaka by creating a team dedicated to addressing inquiries from financial institutions. This enables us to respond to inquiries from financial institutions across the nation even when Tokyo is affected by a disaster. As for the claims payment operation, since April, we have shifted our staff from Tokyo to expand the volume of processing in Osaka in the event of disasters in Tokyo. These enhancements strengthen our operational structure in case Tokyo is affected by a disaster.
Aflac Japan has a corporate culture where operational efficiency is always pursued with a focus on improvement and innovation. This corporate culture has been fostered through the effective implementation of business process improvement activities. We believe our low-cost operation is one of Aflac Japan's greatest competitive strengths. This efficiency is a source of pride for our employees at Aflac Japan who are all dedicated to pursuing ways to improve our business operation and better serve our customers.
Aflac Japan will continue and make efforts to us maintaining its low-cost operations while also enhancing services to customers to strike the balance that benefits everyone with whom we do business. Thank you for your kind attention.
Thank you Isonaka-san. Now, we'll hear from Eric Kirsch. Eric-san joined Aflac in 2011 and is Executive Vice President and Global Chief Investment Officer. He is responsible for Aflac's Global Investments and the investment teams. Today, he will review our global investments by covering strategic transformation program, asset allocation and Europe-related issues. So Eric-san, please.
Eric M. Kirsch
Good afternoon. I'm Eric Kirsch, Aflac's Global Chief Investment Officer. It's a pleasure for me to be here today in Japan with all of my colleagues in front of all of you, where we obviously have a significant part of our operations and a significant part of the investment function. Today, with me, representing Global Investments is Hitoshi Oda, who will present information in detail with respect to our investment activities. I'd also like to take the opportunity to introduce you to the newest member of our team, Aflac Japan Chief Investment Officer, Issei Sasaki, who I'm delighted to say is here with us. The next time we hold our financial analyst briefing, he'll certainly present to you as well. I invite you all to say hello and welcome aboard to Sasaki-san.
What I'd like to cover with you today is to review, on a macro level, some of the key strategic initiatives you've heard me talk about in the past and give you an update on the accomplishments we've had, the milestones we've reached, as well as touch on some of the challenges we still see with respect to the European crisis. I will keep my comments at a macro-strategic level, and Oda-san will fill in the details with more specifics.
As you recall, when I started here at Aflac, I identified 2 major strategic initiatives that I thought were critical to our mission of creating a world-class investment organization: First, I had mandated that McKinsey would be our partner to do a very strategic review of our investment business on a global basis to help define our future and help give us a perspective on how to become world-class.
The second major initiative was to identify how we would invest our money in the future. For that, we partnered with Goldman Sachs Asset Management or GSAM to conduct a strategic asset allocation review that would help us define our future investment program.
I'm pleased to let you know that we met and exceeded our objectives in terms of timing and content for both of these programs. In March of this year, the McKinsey strategic review concluded with a presentation to our Board of Directors and our senior management. Specifically, it defined the organization that we want to be to create world-class investment results for our policyholders and our shareholders. That study touched on everything from people, investment process, technology and organizational structure.
It also identified the current capabilities of our organization and the capabilities we would require in the future. This included looking at our front, middle and back offices and determining the budget we would need to accomplish that. By way of example, as I previously mentioned, we currently spend about 3 basis points on the investment function, and that is expected to increase to 9 basis points over the next 3 years or so.
Finally, the McKinsey strategic review identified that this transformation would take time, given the impact we expect to have on the organization over the next 1 to 2 years.
We then worked with GSAM to do our strategic asset allocation project, the first phase of which was completed by the end of the second quarter. The results were presented in early July to our finance and investment committee as well as our Aflac Japan Investment and Executive Committees. That study primarily focused on the Aflac Japan portfolio, which is very relevant for our visit today.
The second phase will include our Aflac U.S. portfolios and perform analyses at the product level, such as for our WAYS and child endowment program.
In summary, Phase 1 showed us that there are optimal portfolios that are very unique to our liabilities and capital considerations that can, in fact, earn higher returns in the strategies we have been pursuing while doing it at lower levels of risk. One of the very first initiatives coming out of that program, that both Oda-san and I will touch on, is the new U.S. corporate bond program, hedged back to yen. This program was initiated in July.
We have also been working on substantial efforts to implement some of the changes we anticipated. For example, these strategic reviews have been presented to our Aflac U.S. and Aflac Japan Internal Governance Committees and at the board level. We have full support from these committees, management and the Board of Directors to move forward. We have also designated that New York and Tokyo will be the front office centers of excellence. That's where we think we can hire and retain the best talent, which is critical to our future success.
While we've been doing all of this, we've been moving aggressively with respect to new hires with 20 new investment hires to date.
Let me touch on a few of the senior strategic roles we filled. I already introduced you to Sasaki-san, who is the CIO of Aflac Japan. With credit, particularly publicly-available credit playing a big part in our future, we also hired a Global Head of Credit in our Aflac global investments office in New York and a Global Head of Trading who will support the trading function for the large allocation to publicly-available assets. Additionally, we hired both a global, as well as a U.S. Chief Operating Officer. My partners there will help me manage the infrastructure and technology platforms to ensure we have the appropriate tools to meet our objectives.
With the McKinsey and GSAM reviews completed, we now need to move into implementation phase or what we like to call the transformation roadmap. As we continue to build out, most of the implementation will take us about 18 to 24 months. As I mentioned earlier, the GSAM study concluded with major recommendations. We need to take the GSAM information and create a strategic asset allocation policy on behalf of Aflac Global Investments. Those, in essence, will become our guiding principles for investing the balance sheet of Aflac. We then need to amend our policies and guidelines to be consistent with that strategic allocation policy, so we again have roadmaps and guideposts with respect to our daily investing activities. At the same time, we need to ensure that our capabilities allow us to implement these strategies and these capabilities go from the front, to middle, to back offices. We need to assess that and enhance it as we move forward and define process and responsibilities along with that.
Finally, as I mentioned earlier, because our product portfolio evolves over time, examples being WAYS and child endowment, we need to perform even more detailed strategic asset allocation studies by those product types, and GSAM is working with us as we speak.
Very importantly, as we go to the transformation stage, we will continue to partner with McKinsey who did a fantastic job with us in Phase 1, to work with us in Phase 2 and 3 of the actual build out. The build out will touch upon everything, including investment processes, policies and procedures, governance structure, risk management, infrastructure support and technology. These are all major components of being a world-class investment organization. And over the next 2 years, you'll see a major transformation here at Aflac.
Now, what's the benefit of all these? Why are we doing it? Because Aflac Global Investments will be world-class, and we have defined our investment objectives as maximizing risk-adjusted performance subject to our liability profile and capital requirements, we're moving forward into a more sophisticated, economic-based world with respect to managing the balance sheet of Aflac. We are also working on putting risk controls and processes in place as we become more sophisticated.
Finally, as Dan has said, he views Aflac Global Investments as the third business unit of Aflac. Our goals are clear, to achieve higher returns, with less risk for our policyholders and shareholders. But at the same time, we need to earn that in order for the company to have the confidence to reinvest in our divisions' human capital, infrastructure and technology.
Let me touch a little bit more on the GSAM project and specifically, next page -- and specifically, what the results from the asset allocation review mean for us. As I mentioned earlier, GSAM spent significant time with us quantifying our assets, our liabilities and our capital requirements, both from a Japanese regulatory perspective, as well as from a U.S. regulatory perspective.
During the 6-month project, GSAM helped us identify multiple optimal portfolios with varying levels of risk and return that we can implement. Along those lines, I want to share with you directionally what these recommendations may mean for Aflac's investment strategies of the future.
Let me start specifically by talking from an asset-class perspective as well as from an accounting perspective about what you should expect to see. Historically, we primarily put our credit investments into yen-denominated private placements. However, going forward, most of our new investments will be focused on publicly-traded global corporate assets, but hedged back to yen. We also expect to invest in alternative type of assets beyond investment-grade fixed income such as public equity, alternative investments, which would be entirely new for Aflac, but not new to insurers. Additionally, we expect to use the mortgage markets such as U.S. non-agency RMBS. We expect to increase our allocations to bank loans, which we had already previously done as well as emerging market debt.
With our new investment strategy, obviously, other things will change. We will decrease our allocation in private placements and reverse dual-currency bonds. While we do not anticipate increasing our exposure to this asset class, I would not totally eliminate it from our strategy going forward. As you know, during our derisking activities over the last 3 years, we invested significantly in JGBs, and I believe we're at the high end of our allocation range. Oda-san will cover specific details on this later.
Now that new money is being allocated to new asset classes, I expect our new money allocation to JGBs to decrease. I would like to point out that our exposure to European credits will continue to decrease as we have stopped investing new monies in private European assets, as our investments will expand more geographically.
Finally, from an accounting standpoint, we would expect all new investments that are credit-oriented or alternative-oriented to be classified as available for sale. The held-to-maturity classification will continue to be used, but more for longer-term noncredit assets that are used for duration management purposes. Going forward, we would expect a proportion of assets classified as held to maturity to decrease, while those classified as available for sale, will increase.
Now, let me cover the benefits of this strategy. From the standpoint of risk and return, these portfolios have demonstrated that we can expect higher returns than our current investment strategies which have primarily focused on JGBs. Our new money yield will substantially increase versus the existing strategy of JGBs and our surplus risk will decrease. All of these strategies have been back tested against our capital ratios, the ratios you've heard us say we're trying to achieve. These strategies meet our stress tests, and they meet key regulatory tests, both from a Japan-regulatory perspective, and a U.S.-regulatory perspective.
These new strategies also provide the benefit of liquidity, portfolio flexibility and diversification. So unlike our previous strategy that focused on private placements, our new corporate strategy involves publicly traded bonds that allow us to underweight or sell positions if or when our credit views change.
Please keep in mind, that with our policy liability needs, our focus will continue to be long term. Also, because of the additional portfolio flexibility and liquidity, we'll be able to do a better job of asset liability management.
You've heard us say that we've recently launched in parallel with the GSAM project, a new hedged U.S. corporate investment program. Specifically, this mandate is for Aflac Japan's new money investments. We've initially targeted 2.5 billion, which we expect to be primarily allocated by the end of the third quarter.
Going forward, one of our objectives is to increase our participation in the largest corporate market in the world, primarily focused on the U.S. dollar market for this first pilot program. These assets will be hedged back to yen because that's where our liabilities are. By getting exposure to U.S. interest rates and public corporate markets, we'll be able to enhance our new money yield versus the high JGB allocation we had in the past. We expect to use currency forwards to hedge back the U.S. dollar risk into Japanese yen. Overall, we anticipate this will improve the liquidity, diversification and our credit opportunities in our portfolio. We've targeted duration of 7 to 12 years which is consistent with the overall duration of the asset -- of our asset portfolio. It's focused on large global corporate names that have high capitalizations while we continue to avoid Europe and financial issuers. This program significantly improves our portfolio flexibility, exposures and returns versus the JGB yields we had been achieving.
I'd like to briefly talk about Europe. Europe is still a major concentration risk for us. Because of the nature of our portfolio of private placements, we will continue to closely monitor our European investments. I wanted to give you a few minutes of my macro views of the European market and what those implications may mean for us.
You're all familiar with the European story, the volatility of 2011. Though the first quarter of 2012 was relatively calm due to the ECB liquidity program, Europe has become quite volatile as seen in the second quarter of this year with particular focus on Spain and Italy. As such, Europe continues to face both monetary and fiscal issues. Currently, European monetary and fiscal policy makers are addressing these issues and we hear some progress is being made. But here is my view looking out 3 years from now. From a political standpoint, I believe there will be a Euro. However, from a tactical standpoint, as the politicians take their time to figure out these answers, the financial markets aren't as patient. So, I expect us to remain vigilant as we navigate what I expect to be stormy financial markets in Europe. But we've already reacted. Last year, we stopped making any new investments in Europe. We eliminated our exposure to sovereign and financials in Portugal and have no direct exposure to Greece. As you can see from this table, since 2009, we've made substantial improvements in decreasing our European exposure. At the start of 2009, our total European exposure was 39% of our investment portfolio, and at the end of second quarter of 2012, declined to 26%. The percentage of our portfolio's exposure to European financials has been reduced by half. Going from 20% at the start of 2009, to 10% at the end of the second quarter of 2012.
I'll reiterate what I said earlier this year, we don't have any specific derisking program that we intend to -- on doing at this time. However, we will continue to be vigilant in monitoring our holdings, and opportunistic in transactions where we think it makes sense in reducing our European exposure. In fact, we've done that during this quarter and I'm going to leave it to Oda-san to cover this in his speech.
So let me close by making a few comments. Since I've been here, we've reached many milestones and have had significant achievements. Those milestones and achievements, by any measure, have exceeded all expectations and are under the purview of what Dan, our CEO, has conveyed in his vision for Aflac investments. That vision is for Aflac to be a world-class investment organization. I have the privilege and the honor to lead that effort and I'm very proud of our milestones and achievements, thus far, which set forth our strategic roadmap.
Having said that, we have a road ahead of us, so you will continue to see achievements that equal or exceed the first set of achievements we've already made in the first 10 months. All of this will add substantial value for our policyholders, our shareholders, and our mission of having a world-class investment organization on behalf of Aflac Global Investments.
Thank you very much and I'll now turn it over to Oda-san.
Thank you, Eric-san. Next presenter is Hitoshi Oda. Oda-san joined Aflac in 2001 after working for Toyo Trust and Banking, now Mitsubishi UFJ Trust and Banking. He's Vice President, Investments Aflac Japan. Today, he will discuss Aflac Japan investments. Please, Oda-san.
Thank you, Murakami-san. My name is Hitoshi Oda. I'm very honored to give you a presentation this afternoon on Aflac Japan's investments. Our investment objectives are primarily driven by careful consideration of our liabilities and capital requirements. With this in mind, our investment strategies are designed to achieve the highest attractive risk-adjusted returns with an eye toward quality diversification and liquidity. In Japan, our liabilities are yen-denominated, have long durations and are typically not very interest-rate sensitive. Our investments are generally focused on longer duration, yen-denominated, fixed-income securities. These have included both government securities such as Japanese government bonds or JGBs -- sorry, as well as well as credit investments which are primarily privately issued. As of local business changes, we will fine tune our investment strategy. I will discuss this in greater detail later.
This past year, our primary focus has been on risk management. We have been investing our significant cash flows in assets of relatively higher quality and liquidity. We have also analyzed the impact of rising interest rate on our portfolio and capital ratios. Additionally, under the leadership of the Global CIO, we completed a global strategic review and we expect the result will provide significant long-term benefits to our investment organization and strategies we deploy in the future. Aflac Japan's investments are approximately 91% of their consolidated portfolio and are predominantly invested in fixed maturity debt securities. In the past, we made some investments in perpetual securities primarily issued by European banks. However, our last purchase of the perpetual securities was in 2005. Additionally, beginning in 2009, we begun reducing these exposures to our proactive derisking activities.
Since 2009, we have increased our investments in JGBs. We have a small allocation in securitized flowbacks such as CMBS, RMBS, ABS and CDO, but those products remain a very small percentage of the total investment portfolio at 1.3%.
Beginning last year, we started investing in U.S. bank loans to obtain attractive yields while seeking portfolio diversification. To date, we have invested $300 million in the bank loan program and currently plan to invest $200 million more in that asset class. The Global Chief Investment Officer has responsibility for all investment activities, including those made in Aflac U.S. and Aflac Japan under the global investment policy and this table represents Aflac Japan's investment team located in Tokyo. Our investment organization in Japan has grown significantly over the past 5 years. The risk management and credit analysis functions, in particular, have been enhanced considerably through the addition of personnel and other resources. We label as best practices to further enhance the investment function in coordination with the investment teams in Columbus and the newly-created New York office.
You can see from this chart that the amount of cash flow to investments has grown tremendously, especially in the last 3 years. This increase stems from 2 major sources: The first source is from the increase in sales of the child endowment and WAYS products which have significantly higher premiums than our traditional third sector products. The second source is from the proceeds we received through our proactive investment derisking efforts.
Now let me cover some of the strategic challenges that we have faced in investing these large cash flows. As I mentioned earlier, because Japan does not have a well-developed corporate bond market, Aflac Japan primarily invested in yen-denominated private placement bonds in countries other than Japan from the beginning of 1990s to 2009. This strategy met our liability characteristics and generated a higher return than that of other companies in the industry. For many years, this strategy also contributed to Aflac's overall financial strength as these financial institutions typically had high credit ratings. Additionally, they were willing to issue the bond in yen and put the currency risk on their books. However, material changes in the market environment caused by the financial crisis drove Aflac Japan to adapt by changing our strategy. These market changes resulted in significantly lower interest rates on yen-denominated investments, tightened credit spreads and increased cost of currency swaps.
With changes in the macro environment, credit diversification has become more difficult to achieve. First, we already hold about 500 insurers in our portfolio. Second, due to the European financial crisis, we suspended new investments in Europe beginning last November. We recognized the necessity to change our asset allocation and are undertaking initiatives to increase our portfolio's flexibility and liquidity. Our historic investments in private placement bonds created a larger exposure to Europe. However, private placement bonds are generally less liquid than public bonds and, therefore, it negatively impacts the flexibility in the portfolio.
I'd like to give you more details related to our portfolio strategy. First, let me update you on our investment portfolio derisking activities. As you know, Aflac Japan had been actively taking derisking measures mainly to reduce our exposure to European private placement bonds in the financial sector. I'd like to highlight our achievements to date.
Over the past 4.5 years, our portfolio exposure to Europe has decreased from 42% to 27%, which is an early 40% decrease. Importantly, we lowered our exposures to subordinated bond in financials which is a segment that we consider to have high potential risk from 21% to 6%. In the meantime, we have also reduced our peak's exposures from nearly 7% to less than 2%, which is almost 1/4 of what it was prior to derisking. During the first half of 2012, Aflac Japan sold JPY 150 billion of European banks subordinated bonds. After entering the third quarter, we also sold a total of about JPY 57 billion in book value of 2 European banks private placement bonds to buyback by the issuers and posted a loss of about JPY 2 billion on the U.S. GAAP basis.
We will continue to be opportunistic to further reduce the European securities in our portfolio. Europe still remains a concern and we continue to closely monitor developments there. However, our derisking activities to date have positioned our portfolio to better accommodate future European market volatility.
Since 2009, Aflac Japan has significantly increased its asset allocation to JGBs. Our desire to invest in high-quality yen-denominated securities in the low-interest rate environment, led us to invest more in JGBs. Additionally, as I mentioned, investable cash flows significantly increased while our investment universe was contracting. This slide shows the significant difference in yield between JGBs and dollar-denominated corporate bonds fully converted into yen using cross currency swaps. When comparing the yield of A-rated corporate bond with the yield of AA-rated JGBs, we see that the spread has actually reversed for the 10-year and have narrowed for the 20-year. As a mentioned, this is because the swap cost has reached a historically high level. As a result, the yield we can receive on a yen-denominated bond issued by a foreign entity has significantly dropped and hence, JGBs has recently been attractive investments for us.
This slide illustrates the proportion of total assets allocated to JGBs. The percentage of our portfolio invested in JGBs is still at a relatively low level in comparison with the average of other companies in our industry.
So far, I have discussed why Japanese life insurers, including Aflac Japan, have increased JGB positions in their portfolio. However, as Japanese interest rates have continued to decline, portfolio profitability had been pressured across the life insurance sector. As we mentioned on our second quarter conference call, Aflac Japan initiated a program to enhance yield while also keeping in mind our risk tolerance. This program calls for an investment of $2.5 billion in U.S. dollar-denominated public-traded corporate bonds which will be hedged back to yen while achieving hedge accounting. We anticipate using currency for the contract to hedge currency fluctuation risks.
Now I'd like to provide you with an update the progress we've made with this program. Through Friday, September 7, we have executed more than 75% of the program, or about $1.9 billion. We purchased about 50 bonds at an average yield of 3.66%, excluding the cost of the hedge, which we estimate to be about 50 basis points. If the program is completed by the end of September, we would expect that the third quarter new money yield, including the hedge costs, to be between 2.5% and 2.6%, which is about 60 basis points higher than the first quarter -- sorry, first half of this year.
We also believe we will be better positioned to service our budget to the new money yield for 2012 of 2.05%. In fact, based on current cash flow investment projects shown on current yield should be able to achieve a new money yield for 2012 of around 2.1%.
The hedge cost of using currency for the contract is significantly at the same level as the spread between U.S. and Japan's short-term interest rates. As the yen and the dollar are both at extremely low interest rate levels, the hedge cost of currency for the contract is considerably less than that of cross currency swaps. Therefore, investments in U.S. dollar-denominated bond using currency-forward contracts enables us to secure higher yields than if we invested in JGBs or yen-denominated private placement bonds.
In addition to profitability, this investment strategy also benefits Aflac in other ways. It will allow us to further diversify geographically. We also achieved better diversification by issuer as the investment amongst our issuer will typically be smaller than that of private placements. Further, we are purchasing bonds with higher liquidity. So if we choose to adjust our portfolio asset allocation in the future, we should have more flexibility to trade those securities. After the completion of the $2.5 billion investment program, we will evaluate the success of the program and markets and make sure the structure and processes we have established, especially with respect to hedging, are appropriate going forward. We will then revisit our new money investment plan for fourth quarter and beyond.
As a result of pursuing a suite of strategic initiatives to broaden our investment universe, the proportion of private placement bonds in our portfolio jumped from 74% at the end of 2009 to 47% at the end of second quarter of this year. The proportion of JGBs rose from 15% to 40% during the same period. So our portfolio has been transformed from being concentrated on private placement bonds to our portfolio balancing investment-grade credits and JGBs. At the same time, we have seen country decrease our concentration risk to specific regions and industries such as Europe, as well as the financial sector. We will continue to analyze and research new asset-class investment opportunities to improve the credit quality, liquidity and profitability of our portfolio.
This chart shows Aflac Japan's overall portfolio yield versus the industry average on a FSA reporting basis. These portfolio yield include interest and dividend income. Note that in 2011, even when including realized gains and losses, our portfolio yield was slightly above the industry average.
As I conclude my presentation today, I hope you have a better understanding of the various initiatives we are deploying to become a world-class investment group. As a particularly important change, we will establish an investment management process focused on economic return instead of net-investment income. And we aim to maximize risk-adjusted returns within the constraint of our liability and capital requirements. Additionally, the branch has been actively involved with the McKinsey and GSAM project as a part of the global investment review. We look forward to working towards implementing them in the future. By doing so, I believe we can improve our competitive advantage and enhance value for policyholder, shareholder and other stakeholder.
Thank you very much for your kind attention.
Thank you, Oda-san. Our last speaker today will be Sue Blanck. Susan joined Aflac in 1993 and the Executive Vice President Aflac and Aflac Japan, and Corporate Actuary. She is responsible for product development and the strategic marketing initiatives in Japan. Susan will discuss Aflac Japan's financials. So, please?
Susan R. Blanck
Thank you. At our May Analyst Meeting, you'll recall that Chris and Ken covered our financial results in capital management initiatives in great detail. Today, I would like to give you an update on some of the metrics they covered. In addition, I'll touch on other items affecting our financial results in Japan.
As you're aware, Japan's Financial Service Agency or FSA, requires all companies to submit financial reports and disclosures on an FSA accounting basis. You may find the FSA-based numbers to be quite different than our U.S. GAAP accounting. But I'll use the FSA-based financial reports in many of the slides that follow to allow for better comparability with other life insurers in Japan.
As you can see from this chart, premium income for the life insurance industry as a whole has been on a downward trend for years, although it has increased slightly in recent years. Aflac has experienced a much larger surge of premium income growth over the last 3 years as we generated strong sales results from our higher premium products, particularly child endowment and WAYS. Both of these products can be purchased using the discount advanced premium payment method or DAP. As we have mentioned, more than 80% of all WAYS products utilize DAP or DAP.
The strong usage of DAP has intensified the surge in our premium income growth rates. This is because on an FSA basis, all premium received, including DAP, is designated as premium income. This FSA accounting treatment of DAP contrasts with GAAP and U.S. statutory accounting practice, stipulating that premium income only reflect premium earned in the reporting period, not premium received in advance.
For the fiscal year ended March 31, 2012, premium income increased 27.9%, to approximately JPY 1.8 trillion. The high persistency of our in-force business has meant that historically more than 90% of our premium income has been derived from renewal premiums. However, in recent years, this has shifted as we've seen higher sales, especially of our ordinary products and greater utilization of DAP, particularly in the bank channel.
As of March 2012, Aflac Japan's total assets increased 13.1% to JPY 7.8 trillion over the prior year, placing us 6th in the Life Insurance Industry in total assets. Keep in mind, the amount of invested assets fluctuates in response to changes in the financial markets. However, even with the impact of the financial crisis and our proactive investment portfolio derisking efforts, we have achieved a steady growth in total assets over the years.
In September 2004, Aflac Japan became the largest life insurance company in terms of individual insurance policies in-force, a position we have maintained ever since.
And in 2009, we became the first life insurance company in Japan that reached the milestone of 20 million policies in-force. This slide shows that new sales on a premium basis have increased strongly over the last 3 years, rising from JPY 122.3 billion in 2009 to JPY 161 billion in 2011. As we've discussed, Aflac Japan's revenue composition has evolved over the last 3 years, primarily driven by changes in our sales mix. Until 2009, cancer and medical were the primary drivers to sales, both on an AP and policy basis. In 2011, new sales from these core products declined to just over 45% of total sales on an AP basis. However, it is important to note that our cancer and medical products represented over 75% of sales on a policy basis during that same period.
Sales of first sector products grew from just under 30% of sales in 2009 to nearly 55% of sales in 2011. In the first half of 2012, first sector sales accounted for almost 2/3 of total sales, as the bank channel continued to show strong results.
The shift in new sales has also impacted the composition of our in-force premium. It's interesting to note that we've doubled our in-force business in 13 years and at the same time, the makeup of that in-force book of business has changed dramatically.
In 2007, cancer, medical and WAYS accounted for 52%, 29% and 1% of total in-force premium, respectively. As of June 2012, cancer, medical and WAYS accounted for 42%, 28% and 10% of total in-force premium, respectively.
When looking at this chart, I would note that the core health and other category includes cancer and medical, along with several other products that are not actively marketed. Importantly, the other component of this category represents less than 10% of total revenues for all years presented. The ordinary category includes WAYS, child endowment and other life products.
As you can see, Aflac Japan's revenue composition has changed over the last 3 years with the contribution of the ordinary product line having grown significantly. In 2009, the ordinary life category was almost 10% of total revenues. In the first half of 2012, the ordinary category more than doubled to just over 20% of total revenues. Japan's benefit ratios steadily declined from 2007 through 2010, due primarily to improvement in claims experience in cancer and medical, our block of core health insurance. With the significant increase in production of our child endowment and WAYS product, the benefit ratios flattened out and started to increase slightly in 2011. For the first 6 months of 2012, the benefit ratio was 21.2%. -- I'm sorry, 61.2%. Total annual operating expenses as a percentage of revenues have remained in a fairly narrow range for the last 5 years, but over the most recent 2 years have trended downward. In part, reflecting influence of lower commission expenses for child endowment and WAYS. In addition, Aflac Japan's low expense ratio reflects efficient operations and a strong and stable persistency rate. As a result, our pretax profit margins steadily increased from 2007 through 2011, where we ended the year with the pretax profit margin of 20.9%. Through the first 6 months of 2012, the pretax profit margin declined slightly to 20.6%, which was in line with our expectations.
You may recognize this chart from our Analyst Meeting in May. We provided this information to give you greater insight into the assumptions supporting the EPS objectives we communicated for 2012 and '13.
Each product category shown in this slide reflects ratios for benefits, expenses and profit margins to total revenues as reflected in the corporate profit model we used to develop our guidance. The ratios represent the projected 2-year average ratios for 2012 and '13. There will be seasonality reflected in our actual quarterly results, but at the end of 2013, we expect the actual results for these ratios to fall within these ranges for 2012 and '13. Actual results will also vary based on differences between our assumed mix by product category, so you can use your own judgment in estimating our aggregate results. Total profits are anticipated to increase, as we expect higher revenue growth due to the larger premium per policy on the lower margin life products.
Now I would like to comment on profit emergence. On an FSA basis, profits typically emerge more slowly than on a U.S. statutory basis. Unlike U.S. statutory, which provides relief for initial acquisition costs, FSA-based reserves do not provide relief for acquisition costs. In addition, the reserve requirements are typically stronger on an FSA basis than on a U.S. statutory basis. It's important to note that over the life of the contract, total profits that emerge will be the same, but the timing will vary with FSA profits emerging later in the contract period than U.S. statutory profits.
As you may be aware, the standard interest rate for reserving in Japan will change effective April 2013. The Japan standard interest rate is the rate required for the determining reserve values. The rate is set for each FSA reporting year and applies to all business issue from April through March in that fiscal year. The rate is based on the average 10-year JGB rates over a period ending in September of the prior year using the lesser of the 3-year average and the 10-year average. Due to continued low yields related to 10-year JGBs, this Japan standard interest rate will fall from 1.5% to 1%, effective for business issued on or after April 1, 2013.
Based on previous industry experience, this event will likely prompt the repricing of most products in the Japanese life insurance market to avoid potential surplus strain from the higher policy reserves required related to the lower assumed interest rate. Aflac is repricing some of our products, particularly WAYS and child endowment.
Now I will discuss the impact that product repricing will have on the anticipated profitability of our new business. First, I will review the expected product profitability of our core health products and WAYS under various investment yield assumptions using current premium rates. As we discussed in May, when WAYS became a larger part of our new business, new many rates in Japan were higher than the rates we're seeing today. The profit margin for the WAYS product was about 20% of premium when investing WAYS cash flows at 2.5% new money and 15% at 2.25% new money. At 2% new money, the profitability is approximately 10%. At 2.5%, which we experienced roughly through the third quarter of 2011, WAYS profit margins compare favorably to our core health profit margins. But I would like to point out that WAYS profitability is more sensitive to investment yields than our core health products.
With the product repricing, we anticipate restoring the profit margins of WAYS and child endowment to a level similar to what we anticipated when we first introduced those products. WAYS profitability is expected to be high teens to low 20s at 2% new money. Child endowment profitability is anticipated to be single digit to double digit at a 2% new money rate.
While we are also repricing some third sector products, we anticipate the repricing will have a modest impact on the overall profitability of those product lines. Following the repricing, we do not expect the surplus strain related to new business to be any greater under the revised standard interest rate than under the current standard interest rate. The revised premium rates will be in place for ordinary life products in April 2013.
The repricing of our product portfolio to reflect the continued low-interest-rate environment is the most important step in improving profit margins. However, we've also taken other actions to combat the challenging investment yields. These actions include discontinuing the 5-pay WAYS product, capping child endowment sales through the bank channel, lowering the interest rate credit for DAP from 1% to 0.5% that will be effective in October this year and cutting commissions in half for child endowment policies issued after July 2012. We've also excluded 5-pay WAYS in child endowment from receiving contest credit, and additionally, we suspended non-face-to-face sales of child endowment through traditional channels including Aflac Insurance Services.
In addition, as Eric and Otis san discussed earlier, our investment division is moving forward with plans to implement investment asset allocations that are product specific and are designed to generate better investment returns on our strong cash flow.
Now I will cover a topic related to future revenue growth and profit emergence for limited pay plans such as WAYS under U.S. GAAP accounting. U.S. GAAP requires premiums for limited pay products to be earned over the premium paying period. Premiums are used to pay current period claims and defend policy reserves that are established to support future claims. However, a portion of the premium also goes into a profit deferral reserve. This reserve is designed to allow profits to emerge over the lifetime of the policy, similar to how profits emerge if premiums were paid over the life of the contract. This is important to understand, as in future periods, there will be no more premium income reported for limited pay policies, such as 5-pay WAYS, that have reached a paid-up status. However, profits will continue to emerge over the remaining life of the contract. So while the impact of the sales of these products currently improves revenue growth and dampens the profit margin, once these products become paid up, we will see the profit margin enhanced and revenue growth will be lower.
As I mentioned previously, we're no longer selling the 5-pay version of WAYS but continue to sell other limited pay products including the 10-pay version of WAYS.
Finally, I would like to discuss surplus strain as it relates to first sector products including WAYS and how that compares to the surplus strain on our core health products. On both U.S. statutory and FSA accounting bases, the surplus strain from first sector products is lower than that of third sector products. There are 2 primary reasons for this: First, the commission rate is lower for most first sector products we sell including WAYS. Second, FSA reserving requirements typically result in more conservative reserves than reserves based on U.S. statutory requirements, and this makes the surplus strain more significant on an FSA basis than the U.S. statutory basis.
Now I will focus my comments on several matters related to our operations. This slide shows persistency has improved across the life insurance industry. Facing a more competitive new sales environment in recent years, Japanese life insurance companies have put greater emphasis on maintaining their existing customer base. I would note that for many years, Aflac Japan has consistently maintained the highest level of persistency within the industry. We believe that our strong persistency rate is an indication of high customer satisfaction levels and consumers' confidence in Aflac's overall financial strength.
Let me briefly discuss operating expenses. As can be seen from this slide, our maintenance expense per policy in force is considerably lower than that of our competitors. Our time-tested expense management is structurally embedded in our business model. Aflac Japan remains the low-cost producer in the industry.
To further our discussion of FSA-based performance metrics, let me cover the 3 financial indicators that are most widely used to gauge capital adequacy and profitability of a life insurance company operating in Japan: First, the solvency margin is a Japanese version of the risk-based capital ratio requirement in the U.S. We have maintained a fairly high solvency margin over the past several years. Unlike the RBC ratio, Japan's solvency margin ratio includes unrealized gains and losses on invested assets. The real net asset ratio is similar to the solvency margin ratio in concept, but it uses total assets as the denominator rather than the risk the company bears. Both the solvency margin and real net asset have minimum regulatory levels as required by the FSA. Insurers in Japan must maintain their solvency margin at 200% or higher and a net asset ratio at 0 or greater.
Basic earnings indicate earnings from core insurance operations. Aflac Japan's ratio of basic earnings to assets was 2.6%, one of the highest in the industry. This suggests that in comparison to our peers, Aflac Japan's earning power is strong. Aflac's financial strength is also reflected in our ratings from the major credit agencies. Our ratings from S&P and Moody's compare favorably with other large Japanese life insurers. Financial strength ratings are important to our policyholders and our various distribution channels, so we will continue to work very hard to maintain our reputation for superior financial strength.
Earlier today, Charles discussed recent tax changes in Japan, and I will now briefly comment on the financial implications of these tax changes to Aflac Japan. In November 2011, a corporate tax rate reduction was passed in Japan's Diet. The first phase of that rate reduction occurred in April of this year with the tax rate being lower from 36.2% to 33.3%, effective January 1, 2013. The corporate rate in Japan will decline once again in April 2015, decreasing to 30.8%. Since Aflac Japan is a branch of the U.S. subsidiary, taxes paid in Japan generate foreign tax credits for the consolidated U.S. tax return. As you'll recall, because Aflac Japan is a branch, taxes paid in Japan are used to offset our U.S. tax liability. Taxes paid in Japan flow through as tax credits on the U.S. tax return but do not impact the overall taxes on a consolidated GAAP basis. This corporate tax rate change is anticipated to result in additional U.S. cash payments.
Another tax change that Charles mentioned earlier was the consumption tax, also referred to as the tax hike bill. The consumption tax will increase from 5% to 8% beginning April 1, 2014. Then, beginning April 1, 2015, it will rise to 10%. Like every other company in Japan, our general operating expenses will increase because the consumption tax will be assessed on goods we purchase. Additionally, consumption taxes are levied on commissions paid to associates, which also impact Aflac Japan. We have taken steps in the past to mitigate the effect of the consumption tax on our commission structure, and we will continue to evaluate options for further minimizing its impact in the future.
Now let me conclude my presentation today by discussing profit repatriation and our expectations for 2013. As you probably are aware, profit repatriation is directly related to Aflac Japan's net income on an FSA reporting basis. However, our principal consideration when determining the portion of Aflac Japan's profits we will repatriate is the level of our solvency margin ratio. Assuming we view our ratio as appropriately strong, we generally remit up to 80% of Aflac Japan's FSA-based net income, although it has varied somewhat from year-to-year. In July of this year, we repatriated JPY 37 billion, which slightly exceeded our estimate. We took a portion of this in securities from Japan's dollar portfolio to somewhat reduce the currency risk element in the solvency margin calculation.
With respect to our profit repatriation expectation for 2013, considering the investment losses we've incurred thus far in Japan's fiscal year, we believe profit repatriation will likely be around JPY 65 billion. You'll recall our initial estimate called for JPY 90 billion. However, given the investment losses incurred in the quarter ending June 30, 2012, that estimate has been reduced to JPY 65 billion. This JPY 65 billion estimate assumes no significant additional losses.
I hope my presentation has given you a better understanding of our strong financial position in Japan's insurance industry. And now I'll turn the program back to Murakami san. Thank you.
Thank you, Susan. Well, it's time [ph], and here are all the participants except for the external presenters here today. And we will now begin our second Q&A sessions. Once again, please be reminded of the following rules for Q&A. First, please tell us your name and firm. Second, please wait for the microphone before you ask a question, and third, we'd like you to limit yourself to one question, so everyone has a turn. And so please, raise your hand, please.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Jeff Schuman from KBW. Sue, you've given us this illustration of what the ratios and margins might look like over 2012 and 2013. I'm thinking, in order to do that, that must embed some assumptions about repricing and about new money rates. And I'm wondering if you can give us a sense of what's kind of baked into that.
Susan R. Blanck
And if you don’t mind, I'm going to open Kriss' speech. That's slide came right out Kriss' speech in May, and it also did have some assumption for new money rates. So if you look at Page 12 of the FAB book, we were looking at new money rates in the 2% to 2.5% range.
Well, it didn't have an effect to repricing.
Susan R. Blanck
Repricing, even though it happens in 2013, won't really affect 2013 profits all that much. It takes about a year for things to kind of get into the mix. And that's one reason we're able to give 2013 guidance, because the 2013 repricing won't have a big impact on 2013 profits. It really starts to kick in 2014.
I don’t know if this on, but let me [indiscernible]. Just another comment or 2 related to that, the material we presented in May had kind of conditions as they were in May, and we didn't know whether the repricing was going to be effective or not. So in doing our 2013 guidance and modeling, we didn't assume any changes in pricing and the like. On the other hand, we didn't put a tremendous amount of additional expense in for the cost of expanding the investment function and the like, and we didn't put any increase in yields in from the results of like reallocation of assets and everything. So there are a couple of things in the guidance that aren't in there, but I'll tell you I expect the net effect for 2013 to be relatively immaterial in that some of these things are going to offset or, as Sue says, it takes 12 months to get -- 12, 18 months to get some things rolling through the system. So I'll stop there, but I'm going to pop in if I need to periodically.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Sure. I'm sorry. Just one clarification, Sue -- so when you say it takes a while for it to kick in, is that because the price increases aren't implemented instantaneously? Or the accounting takes a while to catch up to it?
Susan R. Blanck
It's sort of both. Realize, this is effective for issues in April and later, and so even if it's issued in April, you've got 3 quarters of premium. If it's issued in the third quarter, you've got 2 quarters of premium, that sort of thing. So it's sort of both.
Suneet L. Kamath - UBS Investment Bank, Research Division
Suneet Kamath from UBS. I guess a question for Eric on the dollar bond portfolio. If I look at that slide that shows the 10-year and the 20-year and the swap and the forward rates, I think it's Page 53. So I guess, is the takeaway here like the real pickup that you're getting in terms of yield is sort of the move from swaps to forwards? And so that exposes you to some, I guess, repricing risk on the forwards versus the swaps, which you kind of locked in at inception?
Eric M. Kirsch
It's not entirely because some of it is spread on the underlying assets we're buying, particularly in the BBB category. But with respect to the hedging, absolutely, there's a pickup by going to forwards, so if you'll look at the available tools in the market that we could use as hedging instruments, they go from forwards of different maturities to cross-currency swaps. A cross-currency swap would entirely take out our risk at a simplistic level bond by bond for the entire period, but we pay substantially more for it, and we lose flexibility. Because if we ever do want to make a change to the assets, that means unwinding the swap. Well, swaps are not as liquid as forwards are. Having said that, in today's market, as we look at where interest rates are, which are very, very low, and the differential between U.S. and Japan is low, and we look at the cost of the forwards, we think that's better economic value. But over time, as this program expands, we will use a variety of different hedging tools based on our views of the markets, interest rates and the underlying risks that you're pointing out. So at any given point in time, while those risks will exist, I don’t expect them to expose us to a major risk. It's not to say that if the cost of forwards go up, it won't cost us more. But as a risk bucket, it won't cause us to have undue risk relative to our investment results or our financial results. But certainly, that forwards and the rolling exposes us to some reinvestment risk, if you will, when we have to roll the forwards.
Suneet L. Kamath - UBS Investment Bank, Research Division
Okay. And then I guess the follow-up is as we think about this change in strategy and how it shows up on the income statement, are there going to be any differences in terms of which line items are going to be impacted? Or are we going to see kind of like we have been seeing in the past sort of everything roll through net investment income and then through benefits?
Eric M. Kirsch
Yes. That's a question better for the accountants than me, as it relates to financial statements. But what I would say is we're not the first insurer to use forwards and currency contracts to hedge U.S. investments on a Japan balance sheet or a global balance sheet if you will. So we'll be using the accounting conventions for hedge accounting that other insurers would use, and that's the buckets or the line items that you expect these costs to show up on. They're definitely different than the privates because the privates, it was all packaged. But any more specificity on that would require really our accounting professionals to address that.
Okay, Mr. Gallagher.
Thomas G. Gallagher - Crédit Suisse AG, Research Division
Tom Gallagher, Credit Suisse. Eric, just to follow up a bit on the currency forwards, do you have a max in mind? I know there's a, what, $2.5 billion initial allocation to this program. Is there a maximum that we should think about where you bump into a constraint, where you believe the risk would be -- outweigh the benefit in terms of allocating money to this program? And then secondly, you talked about buying equities, private equity, non-agency RMBS. Should we think about those being in non-yen terms? And then also using this program to use a forward to match it? Or if you could expand on that as well?
Eric M. Kirsch
Sure. Let me break that up into buckets, and if I lose 1 and 2, you'll just remind me. But with respect to the first question, the answer is yes, over time, we're going to look at buckets of risk. So as it comes to currency, our intent is to have our assets hedged back into yen. That's where our liabilities are for the Japan balance sheet. Doesn't mean we won't have some things unhedged. We can have a small bucket of unhedged assets because it actually provides diversification. But as a matter of principle, the goal is to hedge the majority of our liabilities. Having said that, we will look at buckets of -- gee, if we have this much in forwards and this much in cross-currency swaps, what kind of exposure does that give us if the market should change. That's really not a big issue though for us today. With $2.5 billion as the initiation, that's a very, very small amount of risk. Over time, as it grows, we would want better controls and metrics around that. Now let me give you a perspective on that though because we've done the work through the GSAM project in terms of -- at least based on today's markets, and a strategic asset allocation over the next 3 years, where these asset classes may go. So as a reminder, with respect to our private placements, beyond any de-risking activities we might choose to do or opportunistic transactions that Oda san mentioned, the privates are going to be around. We're not going to intentionally try to reallocate privates into public bonds because that would be quite expensive for us to do. And the majority of those privates, even though they're in Europe and will go through on -- some duress, particularly the non-financials, are good assets. So really what you're talking about is the new money that comes in every year and how we're going to allocate that. The majority of that new money, particularly as we have more success with this initial program, will go to the U.S. corporate -- or the global corporate bond program, though primarily U.S., and these other asset classes over time. From an investment-grade perspective, if you look out 3 years, in terms of a maximum, assuming that's all we did, you might be looking at 20% or 25% of the overall portfolio 3 years from now, being in this corporate program hedged back to yen and perhaps, 3% or 5% in these different alternative investments. That's from a strategic policy standpoint. But we have to make the tactical decisions if we want to do it. So if we don't think equities are an attractive asset class, we don't have to do it. But we do know from a strategic standpoint, when we look at risk and return in capital markets terms, that kind of portfolio has less risk and a higher return profile than the existing strategy of privates and JGBs that we have been pursuing. And that includes the underlying risk of the potential currency exposures and how we intend to hedge them.
Thomas G. Gallagher - Crédit Suisse AG, Research Division
Just one follow-up. How far out are these forward contracts -- in other words, how often will you have to roll these? And can you talk a little bit about what the risk is interest rate related or otherwise with -- from a currency standpoint if the yen substantially strengthens or weakens, how will that compare to the normal currency swaps you used to use?
Eric M. Kirsch
Sure. With the currency forwards, generally speaking, you could do 1 month, 3 month, 6 month or 1 year. And over time, we'll use a variety of those that will be based on our macro views of the market, our risk that we perceive and the cost ultimately. But again, I do anticipate that we'll also use cross-currency swaps when we think the cost is appropriate or it's the right balance of hedging instruments for us. So that will evolve over time as the program expands. But in terms of the risks, you have it exactly right. It's really interest rate differentials. So should we see a big spike in rates and if you go back in time, it happens occasionally. I always think about 1994 and 2004 when U.S. interest rates spiked or there were time periods when Japan interest rates spiked. That change is a swift change in the cost of the forwards, but again, our program, over time, will have rolling forwards and cross-currency swaps in it. So I can't say today with precision what exact bucket of risk that would represent except to say, we'll manage it so that none of these risks in and of themselves when they should happen would cause a major disruption to our income stream or our particular quarterly results.
Edward A. Spehar - BofA Merrill Lynch, Research Division
Ed Spehar from BofA Merrill. Question I have is about free cash flow. And I guess, starting with, Sue, your slides on product IRRs, it looks like everything you're going to be selling after the repricing is a low to mid-20s internal rate of return the way you measure it. But if we look at profit repatriation, if we look at what you've planned to do in '13, it's probably about a 30% payout ratio relative to Japan, U.S. GAAP, Aflac Japan earnings. And even if you think about the normalized, what you talked about the JPY 90 billion, that's about a 40% payout ratio. So the question is when does that distributable earnings number go up a lot? Because it seems that if it doesn't, your real returns are much lower than these low to mid-20s that you talk about.
Susan R. Blanck
I'll just make a comment and then probably turn it over to Kriss and Ken. The biggest hit to profit repatriation in the last several years has been the investment income losses, and I think that really has been the driver in how those are treated on an FSA basis and then -- but really to speak to the future, I think I need to hand it over to Ken.
Edward A. Spehar - BofA Merrill Lynch, Research Division
But let's just -- even putting those aside though, the JPY 90 billion is without losses, and that's only a 40% payout ratio. And I think we would look at most companies that we cover that have much lower ROEs and much lower targeted returns than what you talk about and probably think that 40% payout ratio is a potentially reasonable number between buybacks and dividends. So how do you get that number higher, forgetting about the investment losses?
Let me help with that, I guess. You're talking about 40% of GAAP. Unfortunately, there's no direct correlation between GAAP earnings and FSA earnings other than you've got your premiums and you've got your investment income. What you don't have is the difference in the accruals, the difference in the benefit reserves, which under FSA are net level, with no expense adjustment on GAAP, they're net level also based on different assumptions. But under GAAP, you do get a benefit for the deferred acquisition cost adjustment. So we have repatriated a pretty consistent 80% of FSA earnings. Now when do FSA earnings start to approach or exceed GAAP is the question, and the answer is when the growth slows down, just like you U.S. statutory. People went to GAAP because they thought U.S. GAAP was going to produce better earnings than U.S. stat. And earnings would go up when new business went up. And under statutory, earnings went up when new business went down because you didn't have the strain associated with expensing the commissions and the like. So as Sue pointed out, the profits over the life of the block are the same. They've got to be. So they've got to reverse at some point in time, but it's only when growth slows down that you get them approaching there.
Edward A. Spehar - BofA Merrill Lynch, Research Division
But hasn't growth slowed? Hasn't Aflac's top line growth rates slowed over the last 20 years? 10 years?
No. Well, it was slowing until we really got into the first sector products. We'd gone down from roughly, I think, we were as high as 6% or 7% growth maybe around 2000. And then it slowed down to about 3% until the first sector business started coming in, and now we're up to about 8.5% or 9% increase in revenue because the first sector additional premium income and the like. And earnings aren't growing as fast because we haven't had the margin expansion that we talked about that in May. But we can't target, Ed. We can't target a payout of -- as a percent of GAAP earnings because we have to be very cognizant of what our FSA basis earnings are, and that relates to the solvency margins and whatnot. So that's...
Edward A. Spehar - BofA Merrill Lynch, Research Division
Is -- the 80% profit repatriation, that's not just a self-imposed limitation is it [ph]?
Yes, it used to be. Years ago, when we first started making earnings on a regulatory basis in Japan and we didn't make earnings on a regulatory basis until the late 1980s, believe it or not. At least, we didn't have any tax basis earnings. And finally, we got fully reserved up, and the rate of growth of the business and all was such that the FSA earnings overwhelmed things, and we had to start recognizing profits. And at the time, the Ministry of Finance had more control over things than the FSA does today in terms of direct regulatory determination as to what you could take out. And Dan Amos had to come over here and beg them to let him take some money out. And for a couple of years, they let us take out 40% of our regulatory earnings, and then when I started, I came over and convinced them, we ought to be able to take out 80%, so and maintaining appropriate solvency margins in capital ratios. So we marched along with 80%, and then we got the change in regulation between Ministry of Finance and FSA. FSA says, you can have a self-determination as to the rate of profit repatriation, consistent with sound management judgment and the like and with an eye toward maintaining acceptable solvency margins for the policyholders. So technically, we aren't subject to an 80% limitation now. Over the last 5 years, we've taken out as much as 100%, and as little as somewhere around 40% to 60%. If we wanted to build our solvency margins, we left more profits in. In 2008 early on, I thought we could afford to take out 100%, so we did. And then the financial crisis hit and things have changed.
Edward A. Spehar - BofA Merrill Lynch, Research Division
Could you give us any sense of what percentage of earnings you could take out or even if it's above 100% and still maintain a solvency margin where it is today?
Right off the top of my head, it'd be hard for me to say that. I think it would depend on the rate of increase in FSA earnings and how much earnings we were actually generating relative to our required capital in Japan, so I'd have to kind of think that through. But at some point, it could be the case that we could take out 100% and still maintain appropriate solvency margins compared to the industry and the like.
Okay, please, on the back.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Mark Finkelstein, Evercore. Just thinking about these IRRs a little bit. It seems to me that the FSA is the more conservative of the accounting, and it's really the arbiter of capital. We talked about IRRs in -- against U.S. statutory. I'm curious why do we talk about it against U.S. statutory versus an FSA basis, which seems to be the more kind of important for capital. And how different would the IRRs be if you looked at it on that basis?
Susan R. Blanck
I think the main reason we do them to U.S. statutory is that is the most comparable measure to other insurers. We do look somewhat at them on an FSA basis. We also look at FSA breakeven year, but as Kriss pointed out, it's -- the -- it's been the influx of new business that has certainly hurt the FSA earnings on the operations side for the last few years. But the first sector strain is lower than third sector strain, and you actually do not go down as low for those. So the IRR, I think, on an FSA basis, it's just not as comfortable -- comparable to what we see for other companies, so that's why we publish statutory basis.
Well, there's another -- one other issue that really made me decide, I didn't want to present them on an FSA basis, and that is if there's a disconnect between the policy reserve value used in determining FSA earnings and an adjustment between sort of earnings reserves and capital basis reserves because for capital, you're allowed to recognize the difference between the policy reserve you book on an FSA basis and the cash surrender value. So you get more capital credit on an FSA basis and FSA solvency margin than you have that goes through earnings. So there's a disconnect between the earnings you would use and the capital you would use on an FSA basis that makes things incomparable, whereas, U.S. statutory, you don't have that disconnect, same reserves in determining capital and earnings. And I thought the analyst community, in general, would be more familiar with U.S. statutory internal rates of return and capital measure. So that's why we didn't present it on an FSA basis.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
I guess, just when you price the products, are you pricing them on a U.S. statutory basis?
Well, we look at it all 3 ways. We price products a lot of times just on a GAAP percent of premium basis, what's the rate of return as a percent of premium. We look at internal rates of return and so-called asset share analyses on both U.S. statutory and an FSA earnings basis, but we don't generally make the kind of adjustments that you would have between FSA capital measures and FSA earnings measures when we're doing profit testing. I never felt the need to. And what I just told you is pretty -- it's not well recognized in actuarial pricing circles or at least in the discussion between actuaries and investment communities about internal rates of return, but it is a factor in my mind.
Thank you for waiting.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Steven Schwartz, Raymond James. Kriss, maybe you can help here. Sue alluded to the -- [indiscernible]. Sue alluded to the consumption tax, and that you've done things in the past. Before we start getting all worried about what 2014 is going to look like because of the consumption tax, maybe you could talk about some of the things that you can do or some of the things that you've done in the past.
Okay, we've had a lot of internal discussions, and over time, we have evaluated whether or not our commission schedules should be deemed to be inclusive of consumption tax or exclusive of consumption tax. And generally, our newer commission schedules are schedules that are explicitly include the provision for consumption tax. Is that the correct term?
Susan R. Blanck
Well, and it might be beneficial to let me walk you through a little bit of how consumption tax's applied in Japan. It is a tax on goods and services, and so certainly, like every company, we pay more consumption tax on the water we buy or the paper or anything like that. That's as a good. But it is also a tax that applies to services and the agent's service to us, in selling and maintaining the policy is considered a service. And we do have various commission contracts, some of which say the commission is inclusive or exclusive of consumption tax. And one means one thing, and one means the other, and honestly, it's incredibly hard to remember which is which. It almost doesn't matter. The bottom line to us is we have done things to help mitigate the impact of consumption tax increases in the future. And part of that is we've gone away from lifetime commission scales. So future commissions, if they end, obviously won't be subject to a future consumption tax. This is an issue that doesn't really impact new business that much because you can price the impact of additional consumption tax into your premiums. So it's really something more isolated to renewal business. We have done things in the past few years. We've actually included an amount in our pricing to fund an anticipated increase in consumption tax, again, the item with going away from lifetime commissions, different contract things with the agents. But I think the key right now is we're not 100% sure what our action will be as far as implementing the new tax. And we have evaluated what the impact will be to us at a maximum, but I think it's outside of the guidance that we've given as far as 2012, 2013. But Kriss, I don’t know if you want to comment. If not...
Well, just based on the estimates I've seen, I'll tell you that I think the impact of the worst case scenario on consumption tax is immaterial to the rate of change in earnings. I think it'll be less than 1% of the rate of change in earnings impact, so that's kind of my feeling right now. I don't consider 1% or less a significant change in the rate of increase in earnings, so that's where I am.
Eric N. Berg - RBC Capital Markets, LLC, Research Division
Eric N. Berg - RBC Capital Markets, LLC, Research Division
Eric Berg from RBC. Does the reduction in repatriation that you've announced, I guess, today JPY 65 billion versus JPY 90 billion on the one hand and the capital losses that you've had year-to-date, which we know as well, does that provide a rule of thumb for how future capital losses would affect -- would lower repatriation further? In other words, since we know what the loss is that you've booked year-to-date and we know how you'd lowered repatriation year-to-date, does that provide an indication of how future losses would affect [ph]...
Yes. It's basically 80% of the additional loss because capital losses are charged directly against Japan net income as a base for repatriation. So whatever you lose, your repatriation goes down by 80% of that additional loss. The only thing -- well, I was going to say there's a different between impairment losses and actual, but that's not true. Impairments and actual both get counted.
Okay. Yes, please.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Chris Giovanni, Goldman Sachs. Eric, a few questions for you on the portfolio. Obviously, you guys indicated you're about 75% of the way through the initial $2.5 billion authorization on the corporate side. So curious if you get it done this quarter, where do we go from here because you talk about sort of 18 to 24 months until you implemented the full strategic asset allocation, and I assume that includes the high -- sorry, the alternatives, et cetera. So as we think about the remainder of the year into 2013, do we just think of sort of sizing up the $2.5 billion? And then around counter-party risk, how are you thinking about that? My understanding, certainly, most of the insurance companies use European banks as probably their biggest counterparties. So as you guys look to reduce your exposure to Europe within the investment portfolio, how should we think about that in terms of counterparties?
Eric M. Kirsch
Sure. First, on the first part, as we implemented this program, if you remember back in March at FAB, while I couldn't share the results of GSAM because it hadn't been completed yet, I had indicated that it was most likely new investments would be corporate bonds hedged back to yen. So that enabled us to initiate the program in July more or less simultaneous with the closing of the GSAM work. Having said that, part of our buildout is capability because Aflac historically had -- our investment staff were focused on privates. It's a different capability when you're focused on publicly traded bonds around the world. And secondly, operationally, where the private placement is not much of an operational risk, it's documentation with the banks and issuers. So those 2 things are the risks that we think about. From a capability standpoint, as you heard me say, we've hired 20 people globally, but a good portion of those are in New York, focused on credits, credit analysis and transactions trading. And from a market capacity standpoint, there is plenty of capacity with corporate bonds, particularly since for us in the Japan portfolio, it'd be relatively new index-like corporate bonds in the Barclays Indices. So we're a little bit more focused on the operational risk of the program, making sure that we have the appropriate infrastructure to do trade settlement and of course, the currency hedging because historically, we didn't do that. And so far, everything is going fine. But that's why when we initiated the program, we focused it on a dollar amount, a limit, with also a time period for success. So we'll be sitting down during this month, myself, the investment teams, management of the Japan operation, to look at how are those risks being handled. Are we satisfied with those risks? Do we have the market capacity and the people to implement more? And we'll make a decision for the fourth quarter of how much we'd like to expand the program and continue it. So those dialogues will happen this month. But consistent with that, the GSAM work has now given us our roadmap for the future, and we'll be doing things like changing our investment guidelines and policies that enables us to do that and continuing to build out the infrastructure, so we can do those investments. So it's hard for me today to say to you in 2013, X percent of all the new money will go into X. But directionally, that's where we're heading, and that's why from a budget standpoint, from a financial standpoint, we've been able to give to management, both here and Japan, as well as to the gentleman there, how much this will cost as that 3 basis points to 9, so we can continue to fund out and build that platform. And we've got McKinsey working us -- working with us. We're aggressively hiring in all those buckets so that we'll have the capability and be able to invest. Having said that, there's also market considerations. If it's not a good time to buy alternatives or public equity, then we won't because that's going to be part of our investment success, to make a judgment on the markets. So those would be the parameters upon which we'll make those decisions, but generally speaking, you should hope and expect that we'll be doing more non-JGB investments in the future. But if we should feel that our operational risk isn't up to our capability to do that, then we'll also slow it down because we don't want to take on undue risk on the operational side.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Okay, but it's not like the 2.6% that you're getting in 3Q all of a sudden is going to back to 2% in the beginning of 2013 because you just have no more capacity on the corporate side?
Eric M. Kirsch
Correct. And it shouldn't be from a market capacity standpoint. If we don't do more of those investments, it'll mean our infrastructure isn't up to the support and we felt uncomfortable. But from a market standpoint, we have the capacity and we have the capability to execute.
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
And in terms of the counterparties?
Eric M. Kirsch
Okay, thank you. In terms of the counterparties, a few different things: firstly, on the currency forwards, counterparty risk is not that great unless there's a substantial move in the currency. But we perhaps have an advantage in that we have agreements with Japanese banks, being these contracts are being done through the branch's portfolio and assets. So that gives us diversification, and there certainly are American banks that we could do with it -- do this with as well. So I think we're good over the next couple of years in terms of capacity and counterparty risk.
Ryan Krueger - Dowling & Partners Securities, LLC
Ryan Krueger with Dowling. Sue, you showed the reprice product profit margins based on a 1.75% to 2.25% new money rate. And Eric, you talked about a 2.50% or 2.60% new money rate in the quarter, and I think you -- it seems like you expect it to remain in that range going forward. I'm just curious why you showed the lower new money rate range or if that's just conservatism?
Susan R. Blanck
I'll give the beginning, and I'm sure Kriss will chime in at the end. But the key for us with the repricing was to be sure we had the product priced in the event rates do stay where they are or possibly could go lower. And so that's why we've shown this range in this format. We do have actions we could take if rates were to go higher, but it's important to know that, right now, we're working with the rates that we're getting and the rates that we're seeing, and that's how we're building our plans. Other things will happen if rates do go up, and that would have other management actions to take place to make us more competitive or do other things. But as Kriss pointed out, when he talked about the earnings guidance, over the next few years, we are going to have additional expense associated with the investment transformation and things like that. And Kriss, I don't know if you have other things you want to add to that answer.
Not too much, that really kind of says that I don't have enough in the way of specifics to add additional color at the moment, but that's the question. I will say, when I first saw the slide, I had the same question, why did we change the rate range? But rates have been down to about 25 basis points since last May when we did the initial presentation, and we didn't want to go crazy in terms of optimism and I still don't. So that's why we felt like it'd be adequate to show what the lower rates are and the higher rates give us higher results. But I do want to stress that those are lifetime -- life of the policy profit measures. They're not the profits that are going to emerge in 2013 or 2014 because the ramp-up of expense associated with generating the net investment income is going to take a lot of the additional yield for some period of time, so it'll be a little bit deferred getting into profits.
Ryan Krueger - Dowling & Partners Securities, LLC
Okay. And then, Sue, can you give us some sense for how much of a premium increase this contemplates and if you expect competitors to follow?
Susan R. Blanck
I can't give a lot of detail on the premium increase amounts because of competitive considerations. I mean, the key there, it varies a lot by age. And at this point, we do expect certainly in the first sector that competitors with regular premium-paying products such as these will be repricing.
Sean Dargan - Macquarie Research
Sean Dargan from Macquarie. I have a question for Charles, actually, about Japan Post and Kampo Life. So if I understand it correctly, today, Kampo Life does not sell its own cancer insurance products. But under a specific set of circumstances, perhaps at some point in the future, it could be able to do so, and you and other insurers would be at a disadvantage because Japan Post is perceived by the Japanese public as is being backed by the Japanese government?
Charles D. Lake
Let me first state that in theory, the process that I explained potentially opens the possibility for that discussion to take place. But in reality, in front of us, I don't see it as an immediate issue. And that is the cancer product being offered by Kampo. And the reason is this, because of the debate that took place and because of the strong opposition by domestic trade association as well as the international concerns expressed, the President of Japan Post Holding Company, Mr. Saito Jiro, has stated in an interview that for the time being, they're not going to be offering a cancer stand-alone product. So I'm not putting words in his mouth. It's in the public domain that this statement is made. So normally, when the CEO of the holding company states a policy position in any company, that's what is honored and implemented, so I take his word in that regard. So I think going forward Japan Post would like to expand business. I would think that they will look for immediately modification of existing business because, again, the controversy's so strong that to try to go into new product area, will be, again, so not only domestically but internationally a major issue. So that's not coming, in my view, in an immediate near term. Mid to long term, there will be another policy debate about this. When the bill was passed, one of the senior leaders of the LDP that helped pass the bill said this bill has some bad things in it. Therefore, we need to come back and revisit after the election. So that means mid to long term, I don't see that issue not being a problem for them in terms of expansion. What I'm saying is that to restate immediately in front of us no cancer product, mid to long term. Yet to come, policy debate will occur again. After that, we'll see. But I will keep you certainly informed of where things are in that regard down the road as well.
Other questions? Yes, please. Mr. Schwartz?
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Steven Schwartz from Raymond James again. I want to revisit that Page 58, those 2 slides. And Kriss, I know you're talking about the overall profitability of the business, but let's back that out, okay. Same-store basis here. If just looking at the slide, the second slide, if the new money investment rate was 2.50%, I mean, you could correlate this to say that WAYS with the discount advance premium could be 26 to 28, if you were just drawing that line out. Does that make sense?
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
And then my assumption would be that the profitability would be so much that maybe you could give a little bit back to the policyholders in some way, shape or form.
Well, I think, we've had discussions inside Aflac Japan about what would happen if interest rates went up.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Well, I'm not talking about interest rates going up. I'm just talking about Eric doing his job here.
Yes, okay. I see. Okay, well, I second that, okay. Good comment, Steven. But clearly, we're going to have to be -- I mean, Ed, kind of asked this on the second quarter conference call, like what happens if you guys -- margins get too high and I think the implication was and you become uncompetitive. Clearly, we'd have to adjust. For one thing, the first way to adjust would be to increase the discount advance premium rate back from 0.5%, back up to 1% or 1.5%, something like that. I mean, that does serve to bring in some of the new money. And that'd be something immediately visible to the consumer even before you are able to change the underlying premium rates. And I think I said in response to Ed's question at the end of the second quarter call that I wasn't too concerned about making too much money right now because I'm trying to restore some of the investment income to the levels we previously had, another thing that we would have -- we'd have a measure to mitigate solvency margin reductions because when the interest rate increases, the market value of available-for-sale assets is going to decrease, and you need some offset there. So there's a lot of moving pieces in these insurance company financial statements, and you have to take it as a whole, and you have to look at general market conditions before you decide what you're going to do. But it would give us some flexibility, and we do have a priority is taking care of providing value to the policyholders because that -- we know that's what keeps us in business. We try to play our claims well. We try to give them good value through the premiums. We try to run an efficient expense process, and we try to attract agents by putting in market competitive commissions. And those are the fundamentals of the business.
Other questions? Seems like we've all done. Okay. Thank you. It's on time, and I hope you gained valuable insights from the presentation. And thank you very much. And let us make -- have Robin Wilkey to make a final comments or remarks. Thank you.
Robin Y. Wilkey
Thank you, Murakami san. Thank you very much, and we appreciate everyone attending today. If you want to follow up on any issues with any questions, as always, please e-mail us in IR or give us a call. Like many of you, of course, we'll be on a 14-hour flight back to the U.S. at different times this week. But please, e-mail or call. And when you leave today, in the outer hall, we have a small token of appreciation of you coming today, that's a very small value, so hopefully, most of you can pick it up. And again, thank you, and arigato gozaimasu.
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