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Aflac's (AFL) Minority Stake Being Eyed by Japan Post

Aflac Inc. AFL is in discussion with Japan Post Holdings Co., Ltd. regarding latter’s potential minority investment in the former through open market purchases.

The company also clarified that Aflac or any of its subsidiaries will not become a member of the Japan Post Group.

Sources have recently reported that Japan Post Holdings will spend about 300 billion yen or $2.64 billion to acquire 7% to 8% of U.S. insurer Aflac. Japan Post has plans to make it an affiliate after four years.

Japan Post Holdings hopes to approve the plan by the end of the month and complete the share purchase by the end of next year.

The news pushed up the Aflac stock nearly 6.6% in the day’s trading. Year to date, the stock has gained 4.2% compared with its industry’s decline of 12.8%.  

Through this minority stake buy, Japan Post intends to navigate the overseas market, at a time when its domestic market is constrained.

Aflac’s relation with Japan Post dates back to 2008. In 2013, the company expanded its agreement with Japan Post to be an exclusive distributor for its cancer insurance products. This partnership with Japan Post gave Aflac a wide reach in the region.

Aflac’s Japan business is a significant contributor to its consolidated earnings. Revenues from this business, including realized gains and losses on its investment portfolio, accounts for nearly 70% of the company's total revenues in 2017.

The company has sold its cancer insurance policies via Japan Post channels. Changes in Japan's economy and an aging population have put increasing pressure on the national health care system. As a result, more costs have been shifted to Japanese consumers, who in turn have become increasingly interested in insurance products that help them manage those costs. Aflac Japan has responded to this market potential by enhancing existing products and developing new products.

However, the company’s Japan business suffered declines in revenues in 2016 and 2017, which led the company to undertake a business mix change, which was exposed to low interest rates. The prevailing low interest rate environment led the company to deemphasize sales of first-sector (life insurance) products in the region and promote sales of third-sector products, such as cancer, medical and income support products, which were less or not exposed to interest rates.

The effect of change in business mix led to an increase in total revenues by 1.4% in the first nine months of 2018. We believe that the company’s underperformance in the segment has reversed and revenues growth should increase as new products are introduced. The company expects third-sector earned premium to remain steady in the 2% and 3% range for 2018.

We believe the investment by Japan Post will further lead to business expansion in the region thus aiding overall growth.

Aflac carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the same space are Ameriasfe, Inc. AMSF, Employers Holdings Inc. EIG and Unum Group UNM. Each of the stocks carries a Zacks Rank #2 (Buy). While Employers Holdings and Ameriasfe surpassed their earnings estimates in each of the last four reported quarters by 77.8% and 6.2%, respectively, Unum beat estimates in three of the four reported quarters with an average positive surprise of 3.3%.

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