Frederick J. Crawford
President and Chief Operating Officer at Aflac
Thank you, Dan. Before commenting on our results, let me start with some perspective on how we're positioned when considering current U.S. economic conditions. We have not witnessed this level of inflation in the U.S. in many years, and we are closely monitoring conditions. Wage inflation and full employment is generally supportive of growth in worksite benefits. However, when considering voluntary product, there is a question, as to how much of any increased income is available for supplemental products, as real wages are likely neutral to down. Our benefits are defined at time of purchase and do not adjust for healthcare inflation. Therefore, we do not expect any measurable impact on claims.
In terms of recruiting and retaining agents, it can be more of a challenge, as agents are commission-only, they need to keep pace with any increase in costs. When looking at enterprise margins, the impact of inflation does apply upward pressure on expenses. However, this is mitigated by rising rates and additional investment income, having built a significant floating rate loan portfolio.
In terms of the risk of economic slowdown and recession our business model is generally defensive in nature with low asset leverage and exposure to risk assets. Profits and cash flow are driven largely by morbidity margins that tend to remain stable during periods of economic volatility. While employment levels may decrease, we often benefit in the recruiting side during an economic slowdown versus today's tight labor markets.
Max spoke in his recorded comments to the work we have done to defend our cash flow from weakness in the yen, we have built a sizable unhedged U.S.-dollar portfolio in Japan, shifted most of our senior debt to yen for both hedging and cost of capital purposes and maintain a flexible hedging position at the holding company. It's important to understand what makes all this possible, significant economic value, strong capital ratios and predictable cash flow out of Japan.
Overall and recognizing the balance we have in operating in the U.S. and Japan, we like how we are positioned to defend our performance under today's U.S. inflationary conditions and the potential for economic slowdown. We see no interruption in our core margins and return of capital to shareholders, including dividend pattern and share repurchase.
Turning back to our businesses and beginning with Japan. COVID cases have surged again with daily new cases reaching 200,000, up significantly from already elevated levels earlier in July and considerably higher than levels experienced in the second quarter. However, hospitalization and deaths remain low. Based on commentary from the Japanese government, there does not appear to be plans to introduce a nationwide state of emergency, which are typically triggered by both increasing cases and declining hospital capacity.
We continue to experience elevated COVID-incurred claims, driven by its designation as an infectious disease and deemed hospitalization, which allows for payment of claims for care outside the hospital. We would expect the recent surge in COVID cases to apply pressure to near-term benefit ratios. While not guaranteed, this may be partially offset by other drivers of hospitalization and care, which have remained low during periods of higher COVID. Our data suggests this is driven by increased and less expensive outpatient treatments, as policyholders and their doctors seek to avoid going to the hospital with COVID cases on the rise.
With respect to COVID's classification under the Infectious Disease law, August 1st, a special committee of the Ministry of Health, Labor and Welfare started reviewing COVID's classification under the law. Revision of the classification requires amending the law, which is expected to be discussed at the extraordinary Diet session beginning in September at the earliest.
Having just spent a few weeks in Japan, the general population remains cautious with respect to the potential for COVID infection. With widespread infection, this is not simply a matter of customer behavior and face-to-face interaction, but also agents who are sidelined temporarily with COVID. As a result, we typically experienced reduced proposal volumes during periods of elevated cases, an early indication of potential sales weakness.
While COVID conditions remain outside our control, our work continues to position Japan for sales recovery in the second half of the year and as we move into 2023. These actions include items that Dan referenced in his comments, such as accelerating the launch of our new cancer product, direct marketing campaigns more closely tied to targeted TV advertising and adjusting our distribution model for better alignment with our third-party partners.
We continue to review our broader product portfolio, both first and third sector, for enhancements designed to increase the value proposition for our policyholders, offer a broad product lineup for our core distribution partners and secure our competitive position in the market. We have been making investments in technology and in working with our distribution partners to reduce launch costs associated with product refreshment and development. It's becoming clear that both the competitive environment and our broader product line creates a product refreshment cycle that is more continuous in nature.
Separately, our incubated businesses continued to develop. We are seeing favorable results piloting Hatch Healthcare, our provider of non-insurance support, to develop the ecosystem for both cancer and nursing care policyholders and expect to expand availability in early 2023.
Our short-term insurance subsidiary, SUDACHI, was launched in early 2021 and currently offers two products, a substandard medical product and a disability product aimed at the contingent or freelance workforce in Japan. SUDACHI serves two strategic purposes to grow and develop these specialized markets; and second, as a proof-of-concept platform for product innovation that may become more broadly popular in the future. We can't control COVID conditions, but we are not standing still. We will develop these themes in more detail at our financial analyst briefing in November.
Turning to the U.S., and as you are aware, COVID conditions are also elevated. This is not currently causing any issue in terms of either our operations or distribution in the U.S. We saw persistency recover to more normal levels when isolating results in the quarter and accounting for seasonality. Account persistency has remained stable through the year. So we believe this is driven by an increase in employee turnover with tight labor markets. There are moving parts when looking year-over-year, including the retirement of state mandates that serve to reduce lapsation.
As Dan noted in his comments, we continue to deliver a balanced performance. We see recovery in the small business market with growth in veteran average weekly producers, while also continuing to strengthen relationships with our broker partners. For example, split by product type, group voluntary was up 16%; individual benefits up 11%; split by channel, agent sales were up 11% and broker up 22%.
The combination of network dental and vision and premier life and disability were ahead of our plan, as we continue to see strong performance with our buy-to-build properties. We were up 175%, albeit off a smaller, but building base. Direct-to-consumer is down 7% and largely the result of the increase in costs associated with organically generating, purchasing and converting leads and meeting our return expectations.
In terms of the U.S. expense ratio, it's important to identify the impact of our build investments. We have three important business initiatives underway that are essential to the future growth of the Company. These investments include group life, disability and asset management, network dental and vision and having a digital direct-to-consumer platform to reach consumers that are outside the traditional workforce.
In the quarter, investment in these efforts impacted our expense ratio by 280 basis points, and we would expect this pace of investment to continue for the rest of 2022 and into 2023. Our 2021 outlook for a 3% to 5% compound annual growth rate in revenue through 2026 is largely driven by these three growth platforms and related halo impact of cross-sell and retention of core voluntary products.
In the next three years, we expect a natural swing in these platforms from contributing to an elevated expense ratio to being the principal driver of returning to more normalized levels. In the interim, we are navigating investment in the future growth, advancements in our digital platform, while maintaining strong profitability.
Turning to Global Investments, with the rise in short-term interest rates driven by Federal Reserve, as they combat inflation, together with deployment activity, net investment income generated from our $12 billion floating rate portfolio is currently estimated to increase approximately $160 million for the year, as compared to our original plan.
As mentioned last quarter, we have locked in the favorable LIBOR curve on a large portion of our portfolio and expect continued tailwinds to floating rate income going into 2023. Along with being an attractive asset class and strategic to our U.S. dollar program in Japan, our floating rate book acts as a logical hedge against inflationary cost pressure.
We maintain a book of foreign exchange hedge instruments on our U.S. dollar portfolio in Japan that is also impacted by inflation, as the cost of these forward contracts are generally aligned with short-term rates in the U.S. However, we have locked in those costs for 2022 and have offsetting hedge instruments at the holding company that serve to neutralize the impact to the enterprise.
Our alternatives portfolio continues to deliver strong results. We fully expect lower valuations of these portfolios in the second half of the year, as private equity marks track public equity valuations, likely resulting in giving back much of their 2022 gains. There is a well-understood lag in reporting numbers on private equity, and this is a natural expectation given private equities correlation to the public equity returns.
Naturally, we are closely monitoring economic conditions and the chance of recession. We maintain a defensive position to risk assets in terms of private and real estate equity, our investment thesis and risk appetite remains the same. We are willing to accept some equity market volatility to earn 10%-plus [Phonetic] over the long term, adding to NII or net investment income, on a risk-adjusted basis. We maintain a conservative allocation of under 3% of our invested assets with marginal growth expected over the next five years.
We closely monitor our middle market and transitional real estate portfolios, where recessionary impacts could be felt sooner. We expect these portfolios to perform well given their senior, secured, first lien structure, protective covenants, reasonable leverage and private equity sponsorship for middle-market loans, as well as a high degree of diversification. The portfolio has performed well during the stressful period of COVID, and we expect they will continue to.
I'll now hand the call back to David to take us to Q&A. David?