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Aflac Inc (AFL) Q1 2019 Earnings Call Transcript

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Aflac Inc  (NYSE: AFL)
Q1 2019 Earnings Call
April 26, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Aflac's First Quarter 2019 Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. Please be advised today's conference is being recorded. I would now like to turn the call over to Mr. David Young, Vice President of Aflac Investor and Rating Agency Relations.

David A. Young -- Vice President, Investor and Rating Agency Relations

Thank you, and good morning, and welcome to our first quarter call. This morning, we will be hearing remarks from Dan Amos, Chairman and CEO of Aflac Incorporated about the quarter as well as our operations in Japan and the United States. Then Fred Crawford, Executive Vice President and CFO of Aflac Incorporated will follow with more details about our financial results.

In addition, joining us this morning during the Q&A portion are members of our management team in the United States. Teresa White, President of Aflac US; Eric Kirsch, Global Chief Investment Officer; Rich Williams, Chief Distribution Officer; Al Riggieri, Global Chief Risk Officer and Chief Actuary; and Max Broden, Treasurer and Head of Corporate Development.

We are also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan. Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and Principal Financial Officer; Koji Ariyoshi, Director and Head of Sales and Marketing.

Before we start, let me remind you that some statements in this teleconference 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. Actual results could differ materially from those we discuss today. We encourage you to look at our Annual Report on Form 10-K for some of the various risk factors that could materially impact our results. The earnings release is available on the Investors page of Aflac's website at investors.aflac.com and includes reconciliations of certain non-GAAP measures.

I'll now hand the call over to Dan. Dan?

Daniel P. Amos -- Chairman and Chief Executive Officer

Thank you, David, and good morning, and thank you for joining us. The first quarter of 2019 established a solid foundation as we set out to achieve our annual objectives. Let me give you more detailed. Beginning with Japanese operation, Aflac Japan, our largest earnings contributor, generated strong financial results that are in line with our expectations for the quarter.

For 2019, we continue to expect a slight decline in Aflac Japan's total earned premium, primarily due to the limited-pay policies reaching paid-up status. As you saw in the release, third sector combined with first sector protection sales were down low single-digit in the first quarter, but generally in line with our expectations for the quarter. Our traditional agencies have been and remain vital to our success as do our alliance partners.

While cancer insurance sales were up for the quarter with strength in our associates channel, results were weaker at Japan Post, as they achieved their 2018 fiscal year targets early, both Daido and Dai-ichi increased cancer sales in the final quarter of the Japanese fiscal year.

As for medical sales, we've focused on riders in the medical area to retain and attract new customers with mid-term riders. Policyholders can update their existing medical coverage by adding a rider to their existing policy. They also have the option to purchase a new policy with an income support rider targeting young and middle-aged segment, or nursing rider designed for the middle to older age groups. While this strategy is effective in driving better overall economics in earned premium, it's less beneficial to the sales versus replacement of the whole policy. As you know, we take a longer-term perspective.

Looking forward to the remainder of the year, let me just say that we anticipate making our annual sales objective. Last year beginning in the second quarter, we had a very successful launch of our new cancer insurance product, which drove a 16% increase and third sector sales for the second quarter 2018. This makes a very difficult comparison. We want to make sure you understand that we expect third sector and first sector protection combined sales to be down in the high-teens in the second quarter of '19. This means that we expect those sales in the first half to be down in the high single-digits.

Having said that though, we anticipate a strong second half. And more importantly, we expect to achieve our annual sales of objective of a mid single-digit decline in the third sector and first sector protection sales for the year. Ultimately, our focus remains on maintaining our leadership in the third sector products while complementing this core business with similarly profitable first sector protection products. To that end, we will continue to refine our existing product portfolio and introduce innovative new products that our policyholders want and need and where they will want to purchase them.

Finally, with respect to Japan Post in our launch, you may recall that at the end of February, we announced in the filing that Japan Post Holdings formed a trust that permits the trustees to purchase Aflac Incorporated shares. We continue to anticipate the completion of the regulatory approvals in the second half of 2019.

As we have mentioned previously, we view 2019, as more of a year of planning around opportunities for Aflac in Japan Post Holding companies to collaborate. When I was in Tokyo last month, I met with the CEO of Japan Post Holdings along with the Senior Executives of both companies. We had very productive meetings to work toward areas that are mutually beneficial to both parties. As we told you, 2019 is a year of planning and 2020 will be more of an execution on our plans.

Turning to Aflac US, our revenues increased 2.2%. At the same time pre-tax earnings continued to reflect ongoing investments in our platform, distribution and customer experience. US sales were up 1.5%, which was in line with our expectations for the quarter. Aflac is unique with respect to our peers and as the majority of our sales comes from independent sales agents. We are fortunate to be representative by such a strong field force, which is truly distinctive within our industry. These independent career sales agents are best positioned within the industry to assess, and therefore, succeed with smaller employers in groups with fewer than 100 employees.

Aflac agents have always enhanced their collaboration with local and regional brokers as we continue to grow broker sales. While our team of broker sales, professionals has taken and made great strides in enhancing our relationship with the large broker community. Brokers have recognized more and more that their clients need the types of products Aflac offers. This is increased the appeal and therefore the interest in doing business with Aflac. With the continued growth of our broker business, our sales have been increasingly skewed toward fourth quarter with the continued growth of the broker business and we expect 2019 to be no different.

We were also pleased with the continued improvement in productivity in the quarter. At the same time, net earned premium rose 2.4% and we continue to expect Aflac US to deliver solid results in 2019 with earned premium growth in the 2% to 3% range. Ultimately, we believe the investments we've made in our distribution and customer experience will promote increased productivity, stable persistency and improved long-term economics.

While, Fred will address capital deployment in more details, we remain committed to maintaining strong capital ratios on behalf of our bondholders, shareholders and policyholders. At the same time, we're balancing our financial strength with reinvesting in our business, increasing the dividend and repurchasing our shares. Through Aflac Incorporated subsidiaries in Japan and the United States, we have the privilege of helping provide financial protection to more than 50 million people. In both countries, we have earned our position as the leading supplemental insurer by paying cash fast when our policyholders get sick or injured.

Looking ahead, we believe that our strong earnings growth will reflect the underlying earnings power of our insurance operations in Japan and the United States. It will also reflect our prudent approach to deploying excess capital in a way that balances the interest of all stakeholders. At the same time, it will reflect our dedication to delivering on the promises that we made to our policyholders.

Now I will turn the program over to Fred, to cover the financial results. Fred?

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Thank you, Dan. We are off to a strong start to the year on the earnings front as results for the quarter exceeded our expectations. Adjusted earnings of $1.12 per share benefited from strong margins both in Japan and the US. Our reported results were modestly impacted by a weakening of the yen as compared to the 2018 period, reducing our earnings by approximately $0.01 per share in the quarter. The quarter's adjusted effective tax rate of 25.5% includes the tax treatment of equity compensation under GAAP that contributed roughly $0.01 to our adjusted earnings per share. When normalized our effective tax rate of 26.3% came in as expected and represents a blended rate based on our current mix of Japan earnings tax at 28% and US earnings tax at 21%.

Turning to our Japan segment results. Earned premium for our third sector products increased 1.8% and in line with our expectations. With continued headwinds from paid up first sector products, overall earned premium growth was down nearly 1% in the quarter. As we move through the year the earned premium impact from paid up policies will remain stable. The first sector ways paid-up impact will gradually reduce throughout 2019. However, a portion of our medical sales in 2017 was a newly introduced two pay product, which was popular in the bank channel and will have a slight impact to third sector earned premium growth for the remainder of 2019.

Overall, it's important to note that this strain to the top line does not impact profitability. Our total benefit ratio came in at 69.1% and at the lower end of our annual guidance range driven by a favorable third sector benefit ratio and the continued shift in business mix from first sector toward third sector, which carries a lower benefit ratio. Our expense ratio in Japan was 20.2%, consistent with our projected range. While year-over-year our expense ratio increased expenses came in below our forecast due to the timing of sales promotions and lower DAC expense as lapse experience was better than expected.

Our expense ratio outlook for the year remains in the range of 19.5% to 21.5%. Net investment income in our Japan segment contributed to our strong results, while no one area drove the outperformance, continued favorable returns in our floating rate loan portfolio, modestly lower hedge costs and variable income from our building alternative investment portfolio contributed to results. Overall in Japan, we recorded a very strong pre-tax profit margin of 21.9% with all key earnings drivers coming in better than our forecast.

Turning to the US results. Earned premium was up a steady 2.4%. Our total benefit ratio came in at 49.3% at the lower end of our annual guidance range and generally consistent with recent claims trends and our mix of business. Our expense ratio in the US was 36.3%. Breaking down the expense ratio further, DAC amortization was elevated in the quarter reflecting natural growth, mix of business and adjustments related to lapse experience in truing up previous estimates. In terms of general operating expenses this quarter benefited from timing of spend, which we expect to build throughout the year.

Our expense ratio outlook for the year remains in the range of 35% to 37%. Net investment income performance was in line with expectations and reflects our continued movement of excess capital out of the US to the Holding Company. In our corporate segment the main driver of improved earnings year-over-year is net investment income and amortized hedge income. Investment income benefited from the movement of capital and increased liquidity at the Holding Company. Our corporate hedging program reduces our economic exposure to the yen while lowering enterprise wide hedge costs. Amortized hedge income contributed $20 million on a pre-tax basis to the quarter's earnings with a notional position of just over $2.5 billion.

As you may have noticed, we have added disclosures in our financial supplement with additional detail on our corporate hedging program and associated amortized hedge income. Capital remains strong. Japan solvency margin ratio is estimated in the 950% range. In April, we issued JPY30 billion of hybrid debt out of our Japan subsidiary, which receives regulatory capital treatment at a very low cost of capital. We estimate that this will contribute approximately 20 points to SMR and is another example of financial flexibility stemming from the conversion of our Aflac Japan from a branch to a subsidiary. Our estimated US only risk-based capital ratio at quarter-end is now in the 700% range. RBC is a bit elevated as we have planned increases in operating dividends and the drawdown of $500 million of excess capital scheduled for later this year as we target 500%. We ended the quarter with nearly $2.5 billion of capital and liquidity at the holding company. Asset quality remained strong with very little in the way of impairments in the quarter. Following a solid recovery in pricing, we elected to sell our entire $146 million position in PG&E realizing a small gain in the quarter. We had previously impaired our position in the fourth quarter by $21 million. In the quarter, we repurchased 10.2 million shares for approximately $490 million. This amount was elevated as we tactically accelerated repurchase early in the quarter.

We are maintaining our current range for repurchase of $1.3 billion to $1.7 billion in 2019. In closing, we're off to a solid start, both in Japan and in the US, and I'll now hand the call over to David to begin Q&A session. David?

David A. Young -- Vice President, Investor and Rating Agency Relations

Thank you, Fred. Before we take your questions, let me just ask you to please limit yourself to one initial question and a follow-up. You can always get back in the queue. And we'll now take the first question. Operator?

Questions and Answers:

Operator

Thank you. First question is from the line of John Barnidge of Sandler O'Neill. You may now ask your question.

John Barnidge -- Sandler O'Neill -- Analyst

Yeah. So, productivity in the US was rather strong for a 1Q. What do you see as a driver for this and these digital investments that you're making already yielding in -- if that's what the driver of productivity is, can you maybe talk about some examples?

Teresa L. White -- President of Aflac US

Well, I'll start off. This is Teresa. What we're seeing, if, yes, so the digital investments are assisting us with especially on the broker side of the business with enrollment tools that allow to be more productive on that side of the business. We're also seeing additional productivity, based on product offerings as -- portfolio offerings that we have. If you recall, we introduced some life products and we expanded our portfolio with our life and disability to help us to improve some of the -- be able to see more people and also to be able to respond to more RFPs. And so we are seeing a number of the investments that we've done, not just in Digital investments, but also investments in product to help us to be more productive in the market. I'll let Rich talk, if you have anything else. Rich?

Richard L. Williams -- Executive Vice President and Chief Distribution Officer

Yeah, Teresa, I think you said that well. The only thing I would add to it is the engagement of our veteran associates has been very positive for us. They've adopted the training in our technology solutions with Everwell. And so I think part of the productivity is driven by our veteran associates.

Teresa L. White -- President of Aflac US

Absolutely.

John Barnidge -- Sandler O'Neill -- Analyst

And then my follow-up question sticking with US. We've just completed the first tax filing season post-reform. Can you talk about any behavioral changes either on individuals or business owners that stand out for distribution? Thank you very much.

Teresa L. White -- President of Aflac US

You'll take that, Rich?

Richard L. Williams -- Executive Vice President and Chief Distribution Officer

I think the short answer is, we have not seen any meaningful changes. And it's continued to be business as usual.

John Barnidge -- Sandler O'Neill -- Analyst

Thanks for the answers.

Operator

Thank you. Next question is from the line of Nigel Dally of Morgan Stanley. Your line is now open.

Nigel Dally -- Morgan Stanley -- Analyst

Great, thanks. Good morning. I had a question on Japan sales. Appreciate the color on Japan post being down, as I previously hit their budget. My question is whether this decline was anticipated, when you said the sales growth guidance, whether the results this quarter make any full year sales growth guidance has a little more challenging. Also you seem bullish on the prospects of the second half. Has anything changed there to drive that optimism? Or was that always your expectation?

David A. Young -- Vice President, Investor and Rating Agency Relations

Koji, Koide, you want to answer that.

Koji Ariyoshi -- Director and Head of Sales and Marketing

(Foreign Language)

This is Koji. I will answer your question.

(Foreign Language)

As Dan mentioned in his speech, because Japan Post or JP, as the January to March was there last -- at the very last quarter of the fiscal year and they focused on the sales of the proprietary product sales.

(Foreign Language)

From April of this year, this is the start of the new fiscal year for JP. So, now they are starting to sell more cancer insurance product.

(Foreign Language)

However, but it's different from last year is that, even though there quarter is at the fiscal year starting, they will be selling their cancer insurance and more in an equalized manner than compared with last year. I would say it was really focusing on just particular quarter.

(Foreign Language)

So as a result, we are expecting that JP will still be a negative at the end of the second quarter.

(Foreign Language)

However since last year, JP has been working on improving the productivity, such as to really strengthen their -- sales skill.

(Foreign Language)

And they have also been accumulating very efficient motivation increasing effort.

(Foreign Language)

And we do believe that their sales and performance will increase in the second half by leveraging all of these efforts that they have been working on.

(Foreign Language)

Now going onto the Associates channel.

(Foreign Language)

And the second quarter last year was when we had a very large increase in the third sector sales because of the new cancer product launch last year.

(Foreign Language)

And we are expecting that the second quarter of this year will be negative because of the reason that I have mentioned, as well as the long consecutive holidays for our Emperor's accession to the improvement of this year.

(Foreign Language)

However, at the end of the second quarter, there will be further revision of medical insurance, although we are not able to disclose the details at this point.

(Foreign Language)

However, we will have -- expecting that we will have an increase in our third quarter because we will be launching very effective commercial together with associated direct mail and then starting with that our activities, our associates, sales activities will increase as a result, we will have a good third quarter is our expectation.

(Foreign Language)

As a result, associated with the guidelines that we have -- our guidance that we have are indicated at the beginning of the year, we will end in single mid to -- mid range -- negative even the single mid-range negative figure and business units.

(Foreign Language)

That is the combined number of associates and JP channel.

(Foreign Language)

That's it from me.

Daniel P. Amos -- Chairman and Chief Executive Officer

Nigel, the one thing that you asked the question was I want to be clear is, is that nothing has changed. We expected this. So it just as we were preparing for the first quarter release, we realized we needed to make sure everyone else understood that. But when I saw the 16% coming in last year. I knew in 2019 it's going be a big hurdle, and how we are going to offset it, and the answer was even going back to the second quarter of last year, we're going to have a great second half of 2019. And so we're on plan to do that.

Nigel Dally -- Morgan Stanley -- Analyst

Okay. That's very helpful. Second question just on investments incorporating floating rate securities have been important part of the change in the portfolio mix now, future rate increases looking less likely, any implications of that expect this both positives and negatives, but I hope you can flesh that up?

Daniel P. Amos -- Chairman and Chief Executive Officer

Sure. Thanks, Nigel. And as a reminder, relative to Fed rate changes, it really impacts, not only the floating-rate assets, but the hedging strategy as well. Because that correlated with LIBOR, which obviously is heavily influenced by Fed action.

But to be specific to your question, I'll break it into two buckets. For 2019, we expect very little impact to our forecast in income from Fed action. And that's for two reasons. One, you recollect that our outlook call when we talked about hedge costs. We locked in about 85% of our 2019 hedge cost by terming them out. So in essence, regardless of what happens to hedge costs, most of our hedge costs will be locked in, if the Fed should lower rates for instance. Secondly, on the floating-rate assets, just from a mechanical standpoint if the Fed is lowering rates and LIBOR was going down that would certainly impact our coupons when they reset.

However, in late December we had put on an income hedged in essence of fixed for floating rate swap, because we had saw the change in the fed view going from hawkish to dovish. So about 75% of our floating rate income is locked-in as well, because we did the hedge. So that's why -- that's my first part of the statement. Regardless of what the Fed does this year, our income actually from the floating rate portfolio including the hedge costs will be relatively stable and within a tight range. The second bucket though is when you look out to 2020, obviously, when we redo our budgets at the end of this year to reflect 2020 at LIBOR continues to go down, the Fed should be cutting rates, that will get reflected in the floating rate income, but also get reflected in the marking to market of the hedge costs.

And if you recollect the whole concepts of the floating strategy is you should always think of those two buckets together, the floating rate, securities with the hedges. And in essence, we're earning a nice net spread. So there'll be some impact in 2020, if the Fed were to continue to lower rates and if LIBOR goes down, assuming no other factors change. And of course, the opposite is true. We don't know exactly what will happen. We just saw a good trend for GDP this morning. So if rates should be rising, we should -- we get the opposite impact which certainly we saw in 2018 in our results.

Nigel Dally -- Morgan Stanley -- Analyst

That's very helpful. Thank you.

Operator

Thank you. Next question is from the line of John Nadel of UBS. Your line is now open.

John Nadel -- UBS Investment Bank -- Analyst

Good morning. I have a couple of quick ones. First, it sounded in your opening remarks, Dan, like Japan Post actually doesn't yet have everything in place to begin purchasing Aflac shares. Did I hear that right, and if I did, when do you expect that they will actually get the approvals needed to get that process started?

Daniel P. Amos -- Chairman and Chief Executive Officer

I will let Fred take that, because he has been even working with them.

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Yeah. The way to interpret Dan's comments are as follows. One is, as we may have mentioned, I think, or made public a few months ago. Japan Post has established the Trust, which now allows them to move forward on the purchasing stock when they're prepared to do so. Dan's comment was related to ongoing regulatory approvals that are required, particularly in the US that will go on through into deeper into the year. This is essentially the form A process in various states that they need to go through. That however doesn't prohibit their ability to start the process of building shares. They simply needed to get the trust in place and then of course, it's entirely up to them and their tactics as to how and when they begin purchasing and we're sort of leaving that up to them, of course. So that's the way to interpret it, John.

John Nadel -- UBS Investment Bank -- Analyst

Okay. So can you actually tell us whether maybe you know, maybe you don't know, whether they've actually started the cost thing or no?

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Yeah, the answer is no, I can't tell you. No, I don't know. And that is somewhat by design in the sense that we -- other than the provisions of the alliance for example the one-year provision that starts from the beginning of them purchasing shares and building to the 7% ownership level. We're treating them as any other institutional investor, which means we're not in a position to either no and or report out on what they're doing relative to building the position. What I would say is this though, it's an obvious question that we would receive. And we know that. And so what we would do is refer you to any disclosures that Japan Post mix as part of their registered environment with the Tokyo Stock Exchange or any other disclosures they choose to make, and so we'll be paying attention to that. But otherwise, we are treating them as any other institutional investor in that regard.

John Nadel -- UBS Investment Bank -- Analyst

Got you. Thank you. And then my second question is just around expenses. It sounded also from your prepared remarks, like you're expecting that the pace of spending. I think both in Japan and -- but in particular in the US, we'll pick up as we move through the year. So I just wanted to confirm whether that's what you're actually foreshadowing. And then also specific to the US, you talked about DAC amortization being a bit higher, is that a level that we should expect now on a go-forward basis or was there some reason why that's unusual in 1Q?

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Yeah, let me answer both and give you more perspective, you and everybody else on the call and that is. So from the standpoint of expenses it is a timing related area and the quarter did in fact benefit from the timing of expenses which by default means that these expenses will start the process of building and running through in the latter part of the year. To be more specific in the US, our estimates are that expenses ran approximately $20 million better than we had anticipated and therefore we would expect the build of that or shift of that expense into future periods. There is nothing necessarily unusual about this. It's what I would call the normal timing related to the picking up of various initiatives and spend related to that.

Staying on the US and answering your DAC question, we did see elevated DAC expense in the quarter. It's not unusual for DAC expense to be elevated in the first quarter. You will see that in some of our supplemental information, and that's because you have a natural level of higher lapsation in the first quarter due to annual enrollment dynamics. And so each year, you'll notice that our benefit ratio tends to be a bit lower in the first quarter and our DAC amortization higher. And that's the result of increased lapsation particularly as we start to change the mix of business toward group and larger groups, you'll see that, perhaps a little bit more pronounced. And so that's what's driving DAC expense up.

We also had a little bit of what I would call clean up, if you will, related to estimates we made around DAC amortization on certain groups that we anticipated lapsing or that had lapsed in late in the year in December and we had to true up those estimates. That probably kicked up our DAC expense in the US by about $5 million. So back on the delayed expense issue to Japan, Japan also had that dynamic, it was largely revolving around promotional spend and we estimate that about JPY1.6 billion, OK, of delay, if you will. In other words, we had anticipated JPY1.6 billion more yen of expense related to promotion that will shift into the later quarters.

And then finally on corporate, corporate expenses were also a bit below our estimate and that actually has more to do with the pace of spend on the new accounting adoption. As many companies are doing in our industry we're having to adopt a new accounting and we're starting into the more significant project spend related to that. In fact, we anticipate that spend being pre-tax around $20 million to $25 million in 2019. And that will start to pick up as we go through the year. So if you want me to wrap it all in a bow for you, we would estimate that the quarter benefited by approximately $0.04 a share related to these expense timing issues.

John Nadel -- UBS Investment Bank -- Analyst

That's all extremely helpful. And I guess full employment DAC per accountants in (inaudible).

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Yeah. Right.

John Nadel -- UBS Investment Bank -- Analyst

Bye. Thanks.

Operator

Thank you. Next question is from the line of Suneet Kamath of Citi. Your line is now open.

Suneet Kamath -- Citigroup Inc -- Analyst

Thanks. Good morning. I wanted to go back to Japan sales, particularly the cancer product. I guess the drop -- the drop off from Japan Post, but I had thought that the second quarter '18 launch was sort of characterized as a new product. And it sounds like your second half '19 recovery is also tied to a medical products. My question is, is this sales cycle for a new product really that short that you get most of the sales associated with the new product in the first couple of quarters, sort of requiring you guys to refresh on that kind of annual basis.

Daniel P. Amos -- Chairman and Chief Executive Officer

I'm going to let Koji talk, but I want to remind you that part of the reason that it's changed somewhat is due to this new rider concept. We were -- we would write a new policy and they would then lapse their old one. And now, what is more efficient and better for the Company and for the policyholders is to add riders. So Koji, why don't you discuss that for a moment. And then I'll -- if there's anything else, I'll be glad to answer it too.

Koji Ariyoshi -- Director and Head of Sales and Marketing

(Foreign Language)

Well, first of all, in the second quarter, we were once again revised a medical insurance, which we also had in the first quarter.

(Foreign Language)

But as you know, compared with any other companies, Aflac has the largest number of medical policies.

(Foreign Language)

And so although the competition is very tough and it's important that we increased the number of new businesses, but then it is also important for us to protect our current existing policy.

(Foreign Language)

Especially because the most of the policies are whole life policy.

(Foreign Language)

And what that means is that depending on customers' life stage, the need change.

(Foreign Language)

And the customers health -- status of health also change.

(Foreign Language)

So what we are doing now is to considering all these factors, we are developing these providers that the customer really wants to buy depending on their life stage. For example, thinking of their health state of particular age customers.

(Foreign Language)

And this is why their strategy is a part of this positive thing for customers and this also aligned with our core value of Aflac.

(Foreign Language)

And when the new power -- when the existing policy is lapsed and a new policy is purchased, the premium normally goes up.

(Foreign Language)

And with this new rider strategy, what we are able to do for customers is that the customers will be able to maintain their policies and also just add whatever the coverage is needed with lower premiums.

(Foreign Language)

So in the long term what we are thinking is that, we are actually responding to what the customers are wanting.

(Foreign Language)

And because of the fierce competition, it does cost a lot of money to change product.

(Foreign Language)

And I would like Todd to really follow-up on the economics of what we're doing. Todd?

Todd Daniels -- Director and Principal Financial Officer

Thank you, Koji. Yeah, as Koji mentioned, we're doing this for benefiting not just the customer but it benefits our economics. We developed these riders that with the mid-term rider addition, they're able to add these riders to existing policies that have been issued many years ago. And so with that, we don't have to incur another acquisition expense, if we were to issue another based policy.

And I know you mentioned earlier asking about product lifecycle, we have seen shorter product lifecycles on the medical, particularly because there is lots of competition. But we maintain this past round with issuing the riders that the customers want withholding the base policy premiums consistent with what we had with the prior version of the product. For years we have been repricing product as interest rates change in competitors come in the market to keep up with different benefits and features that customers need. But this time, we decided to keep those premiums consistent with the prior version, so policyholders would not want to lapse the base policy and buy a newer one which would have a higher premium. So they're able to enjoy better economics. At the same time, we're able to enjoy better economics by having riders that are cheaper per unit to develop.

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

One -- one thing I do want to step in and make a comment about, this is Fred. That entire discussion with surrounding the very important strategy related to our medical product. But when you first asked your question, you were somewhat pointing to cancer product and be very careful about looking at the pattern of sales in cancer over the last several quarters and think of it in terms of the life cycle of the product.

Last year in the second quarter and that was the first time that we refreshed the cancer product, of course, in four years, which means there is substantial advancements in the quality of the product in coverage because of advancements in cancer treatment. It also included a very attractive premium waiver feature, which was particularly attractive in the Japan Post channel. And importantly, it was the first time that we meaningfully revised the cancer product in the Japan Post channel. And so, you saw a big spike in sales in the second quarter and then continued strength throughout 2018. You can't look at the first quarter results in cancer sales in JP in particular and in their fourth quarter and think of that as the end of the product cycle. That has more to do with them, having reached all of their goals and so they naturally pivoted toward their proprietary product. They're going to pivot back to this very attractive cancer product as we go throughout the year and that's what's going to give the recovery. So just to be careful about looking at those patterns and assume there some sort of shorten cancer product cycle.

Suneet Kamath -- Citigroup Inc -- Analyst

Got it. And then just my follow-up and that was all very helpful is -- you have data that you can share with us in terms of what percentage of your sales are to existing policyholders in Japan versus new policyholders?

Masatoshi Koide -- President and Representative Director

Yes, Koide speaking. Roughly speaking the 50% and the 50%. The proportion will depend on the timing of launch of the new products, of course, but generally 50% and 50%.

Daniel P. Amos -- Chairman and Chief Executive Officer

I'll just add one thing real quick to on the cancer block, you'll recall that we're developing new cancer policies to keep up with treatments for cancer. And it's in our best interest to offer this to existing policyholders. So part of our marketing campaigns over time, had been through direct mails and follow up by our agents to offer them the latest cancer coverage, which we think is the best interest of the policyholder.

Suneet Kamath -- Citigroup Inc -- Analyst

Got it. Thank you.

Operator

Thank you. Next question is from the line of Tom Gallagher from Evercore. Your line is now open.

Tom Gallagher -- Evercore ISI -- Analyst

Good morning. Also a few questions on Japan sales. Any product enhancements or product expansion in terms of the relationship between you and Japan Post, that you're planning or are you just still selling the same initial cancer product that you launched there?

Daniel P. Amos -- Chairman and Chief Executive Officer

What I would do is to ask Koide to talk about the four different groups that have full warmed within Japan Post, Koide, you want to talk a little bit about that?

Masatoshi Koide -- President and Representative Director

(Foreign Language)

This is Koide from Aflac Japan.

(Foreign Language)

As we all know in this strategic alignments within December last year.

(Foreign Language)

The third pillar of the three pillars of the strategic on this.

(Foreign Language)

Is to work on a new collaborative work with JP.

(Foreign Language)

We will be working on both teams.

(Foreign Language)

And leveraging business technology.

(Foreign Language)

A new product of development Corporation.

(Foreign Language)

And during investment in the third party or the domestically, internationally at business expansion together.

(Foreign Language)

And cooperation with investments.

(Foreign Language)

And for all these four stage that we have already launched working group and have started to have discussions.

(Foreign Language)

That's all from me.

Daniel P. Amos -- Chairman and Chief Executive Officer

And so, what I would say is this that, we are proceeding in a very methodical and cautious way to where we can have products and services that will enhance not only our business but also enhanced dependent those business. And it never moves as fast as any other's launch, but I'm very pleased with the cooperation of both Aflac Japan's management team and also what they're doing with Japan Post. Though, as I've said 2019 is a year of planning, 2020 will be part of execution and moving forward. So we are working toward that end.

Tom Gallagher -- Evercore ISI -- Analyst

Okay. That's helpful. And then my follow-up is just, did I hear correctly in one of the responses that you're revising the medical rider again in 2Q after revising it in 1Q? Or did I not understand that correctly? The reason I ask is, there -- are you changing something relative to what you did initially with the launch of that product? Or is that -- can you a little bit elaborate on that?

Daniel P. Amos -- Chairman and Chief Executive Officer

Let's have -- Koji.

Koji Ariyoshi -- Director and Head of Sales and Marketing

(Foreign Language)

Well, what we are going to do is that there are some things that we would nicely able to incorporate some of the changes incorporated in the January change of revisions.

(Foreign Language)

And I'm not able to elaborate on the details, because it has not been announced yet.

(Foreign Language)

As we try to provide a very good product based on the needs.

(Foreign Language)

We would likely providing these kind of benefits and coverage depending on the status of our customers health, because our policy life is very long.

Daniel P. Amos -- Chairman and Chief Executive Officer

Yeah, let me just say that this is not unusual in that, when we're dealing with our sales people they come up with ideas and thoughts and we look back to see if there's anything that we can ultimately make it more sales appealing. So I wouldn't take into this anything major. This is a minor adjustment and -- but if it will help our sales people, then we try to work toward that end.

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Just to be clear though this has always been our plan. We're not redoing anything in June or second quarter in response to our result in first quarter. This has been our plan all along.

Tom Gallagher -- Evercore ISI -- Analyst

Got you. Thank you.

Operator

Thank you. Next question is from the line of Jimmy Bhullar of JPMC. Your line is now open.

Jimmy Bhullar -- JP Morgan Chase -- Analyst

Hi, good morning. First, I had a question for Eric on just the new money yield, it was up a lot. I think 3.29% in Japan and a lot higher than the portfolio yields. So, to what extent is this a better rate environment or what I suspect it is just the decision to allocate more money, I guess to US dollar investments. And would you expect the new money yield to drop as the year goes on versus the 1Q level?

Eric Kirsch -- Global Chief Investment Officer

Thanks, Jimmy. It's definitely not a function of the rate environment because the rates are lower. All around the globe. But it is more reflection of asset allocation. So you're right on that part. And perhaps like Japan approximately half just a little bit under half went into US dollar assets and a good portion of that went into our loan portfolio, transitional real estate and middle market loans and those are having average yields from 5.5%, 6% up to 7% on middle market loans. So that's really the driver of the higher new money yield. It's really asset allocation. Because from a new money perspective as you know, yields have been coming down, spreads have gotten tighter.

Fortunately for us relative to our income objectives for the year, that's not a big driver of whether or not we would make our numbers and the asset allocation I described is within our plan. So there's nothing that deviated. And for the loan portfolio, we start to receive prepayments on those loans. And therefore, they get reinvested back into dollars. So our asset allocation is very much in line with our strategic asset allocation and how the underlying loan portfolios are performing.

For the rest of the year, I wouldn't expect big deviations necessarily subject to of course, market yields and any tactical actions we might take if something were to present itself in the market.

Jimmy Bhullar -- JP Morgan Chase -- Analyst

And then, maybe a question for Todd on the -- just the whole -- full policy versus the rider dynamic. Can you sort of give us an idea on what's the premiums per policy are if you sell the rider versus selling stand-alone policy, and that just to be able to assess how much is that weighing on your sales this year?

Todd Daniels -- Director and Principal Financial Officer

Yeah, I'm going to hand it to Koji, they had some numbers and will came refer to this.

Koji Ariyoshi -- Director and Head of Sales and Marketing

(Foreign Language)

The rider versus the base policy is 15% to 16% premium.

(Foreign Language)

In the case of the income support rider 15% to 16%, in the case of care riders 15% to 20%.

Todd Daniels -- Director and Principal Financial Officer

So I think it varies greatly by which rider you're looking at versus a base policy. And one thing to keep in mind is these riders are limited benefits versus buying the entire base policy for our income support rider. It's covering long term being out of work and supporting your income where this rider that we've developed is a lump sum one-time payment. So it's a limited benefits to try to make it more affordable for the customer to purchase this as a rider. Same thing with the care option for the older-age people, it's sold as a lump sum benefit. So the premium is going to be quite a bit less than if we were to design and develop a true nursing care policy.

Jimmy Bhullar -- JP Morgan Chase -- Analyst

Okay. And just lastly for Fred, will the Post be required to file with the SEC once they get to 5% stake. I'm assuming they will be. But...

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Yeah, we would expect them to after obviously follow all of the guidelines associated with the reporting.

Jimmy Bhullar -- JP Morgan Chase -- Analyst

Okay. Thank you.

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

The NYSE.

Operator

Thank you. Next question is from the line of Greg Peters of Raymond James. Your line is now open.

Greg Peters -- Raymond James -- Analyst

Good morning. I was wondering if we could just step back from a big picture perspective. And I guess I got to say upfront. I realize your US business has a different focus, but I was hoping you could comment on all the recent political rhetoric around the possibility of Medicare for all and what your perspective is on that?

Daniel P. Amos -- Chairman and Chief Executive Officer

I'll say something. And then, I'll see if Teresa. Our Medicare for all is nothing more in my opinion than some form of what we see in Japan with their national healthcare system. Granted they've gone from no deductibles to 10% to 20% and to 30%. But we have been selling it in environment since inception that consumers would own some type of major medical insurance, whether it be Blue Cross, Blue Shield to Obamacare to anything that might be out there. Because there are costs associated with unexpected expenses that are not covered by any type of Medicare, Medicaid, whatever it might be.

So from our standpoint, I don't think it's going to change how we address these issues. I do think it will -- we will hear a lot about it with the election in 2020. But I don't think when it all boils down that it's going to change anything in terms of the way we are selling now. So I really don't worry about that from that standpoint. I'm paid to worry, so I do watch it carefully, but there is nothing on the horizon that makes me nervous about that. Teresa?

Teresa L. White -- President of Aflac US

I think you've pretty much summed it up. At the end of the day, I think it becomes more apparent to the consumer about their risks and gaps when they have whichever coverage, whether it's Medicare for all or it's Blue Cross, Blue Shield, as you mentioned. So from that perspective I think the value of our product, the value of what Aflac offers continues to be apparent which ever major medical you have as a consumer.

Daniel P. Amos -- Chairman and Chief Executive Officer

And let me say this is a company we want everybody to have health insurance.

Teresa L. White -- President of Aflac US

Absolutely.

Daniel P. Amos -- Chairman and Chief Executive Officer

We're absolutely for that, we think it's in the best interest. The cost associated with it are going to be through the route. Because as you know in other countries, they have -- they limit medical access on different things and we would be the first country that would go to a period of where you would have unlimited access with unlimited calls. So the cost associated with it is another issue, political one in my opinion. But just know we as a company want people to have it because we think we've got the product that will help build those gaps that are going to be created in today's society.

Greg Peters -- Raymond James -- Analyst

Thank you for that answer. I guess, staying on the same theme of politics, there's also been rhetoric around share repurchase activity. And I'm curious, Dan, at the Board level if you guys are starting to change your thinking around capital allocation is ready to share repurchase versus perhaps possibly a dividend or a special dividend or anything like that?

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

Yeah, this is Fred. I'll answer and then -- and then Dan can pickup from the Board level. But I think just in terms of capital allocation, obviously, after a 36-year track record of increasing the dividend and certainly intending to continue that track record. We feel like we're in good shape on balancing the dynamics of investing in our business, buying back stock and paying out a common stock dividend. In terms of stock repurchase, it remains a very good investment of the company, particularly on a risk adjusted basis. And it also is the basis upon which we measure up other opportunities, the degree to which other nonorganic, for example, opportunities can come into play.

I think from the political perspective, the only thing I would generally agree with, because I think it's just good management and that is you don't have the company, you don't deserve to be significantly buying back your stock and frankly paying a high dividend until you first and foremost secure your balance sheet and secure your capital ratios in such a way that you can meet all the promises of your policyholders. And frankly meet any obligations you have to your employees that includes pension obligations and so there's elements of it I agree with. However, I don't see any need to regulate that type of dynamic. I think frankly good management and governance self regulates those issues in my view. So that's my thing.

Daniel P. Amos -- Chairman and Chief Executive Officer

And I think our position all along has been a very moderate position. We haven't been extreme on any area, and it's the extremism that brings on the most criticism. And so, I think we're very well positioned, I think we will continue at this pace, the Board will, of course, constantly review that to see if there's any areas that they think we should be looking at. But I think there is anything you know about our company is we try to look ahead of what the trends are, no matter what they might be political, consumer activism, or whatever it might be to make sure we're on top of what's taking place. Though I can assure you, this is a top of nine subjects that we will continue to monitor, but we feel we're well positioned right now.

Greg Peters -- Raymond James -- Analyst

Again, thank you for your answers.

David A. Young -- Vice President, Investor and Rating Agency Relations

And that brings us to the top of the hour 10:00 AM. I appreciate everybody joining us this morning. If you have any other follow-up please feel free to reach out to the Investor and Rating Agency Relations department, we'd be happy to help you out as we can. And before we end, I want to just remind you that we have our Financial analyst briefing in New York on September 25th, and I hope you'll consider joining us then. And we look forward to speaking to you soon. Thank you very much.

Operator

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 61 minutes

Call participants:

David A. Young -- Vice President, Investor and Rating Agency Relations

Daniel P. Amos -- Chairman and Chief Executive Officer

Frederick J. Crawford -- Executive Vice President and Chief Financial Officer

John Barnidge -- Sandler O'Neill -- Analyst

Teresa L. White -- President of Aflac US

Richard L. Williams -- Executive Vice President and Chief Distribution Officer

Nigel Dally -- Morgan Stanley -- Analyst

Koji Ariyoshi -- Director and Head of Sales and Marketing

John Nadel -- UBS Investment Bank -- Analyst

Suneet Kamath -- Citigroup Inc -- Analyst

Todd Daniels -- Director and Principal Financial Officer

Masatoshi Koide -- President and Representative Director

Tom Gallagher -- Evercore ISI -- Analyst

Jimmy Bhullar -- JP Morgan Chase -- Analyst

Eric Kirsch -- Global Chief Investment Officer

Greg Peters -- Raymond James -- Analyst

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