Aflac's (AFL) Japan Business To Drive Long-Term Growth
Zacks Investment Research | Mar 18, 2019 11:14PM ET
Aflac Inc. (NYSE:AFL) is well poised for growth over the long haul on the back of its significant presence in Japan, which is an aging economy.
In fact, Aflac Japan contributed nearly 70% of the company’s total revenues in 2018, and is a major player in cancer insurance in Japan. It is anticipated to witness long-term revenue growth driven by changes in Japan's economy and an aging population which has put increasing pressure on Japan's national health care system. As a result, more costs have been transferred to Japanese consumers, who in turn have become increasingly interested in insurance products that help them manage these costs.
Aflac Japan has responded to this demand by enhancing existing products and developing new ones. Recently introduced products such as DAYS 1 and Health Promotion Medical Insurance have acquired a greater market share for Aflac in Japan. Moreover, as the company continues to focus on product innovation, its Japan product portfolio has expanded beyond traditional health-related products.
Along with introducing new products, Aflac started modifying its product portfolio since 2013 in an effort to respond to the low interest rate environment. In sync with this, it curtailed the sale of first sector savings-type products, such as WAYS, child endowment and fixed annuities, owing to persistently low interest rates in Japan. This meant relatively large capital commitment on such products but resulted in lower profitability.
Aflac also has a strong distribution network in Japan via its alliance with Japan Post, since a decade. Individual agents/agencies, banks, independent corporate agencies and affiliated corporate agencies are also part of its sales network.Further, Japan Post is in the process of purchasing nearly 7% of Aflac Japan, via Strategic Alliance Based on Capital Relationship. It is likely to be approved in the second half of 2019. We believe the investment by Japan Post will lead to business expansion in the region thus aiding overall growth.
Aflac Japan also has agreements with approximately 90% of the banks in Japan in order to sell its products. Aflac Japan's partnerships throughout the banking sector aid it to reach a wider demographic of potential customers. Last year, the company converted its Japan branch into a wholly owned subsidiary. This enhanced financial and business flexibility, particularly related to transparency and visibility of cash flows and capital management.
Aflac currently carries a Zacks Rank #2 (Buy). Shares of the company have gained 10.6% in a year’s time, compared with the Zacks Investment Research
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