Welcome to the December 19th investor conference call. Your lines have been placed on listen only until the question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Mr. David Young, Vice President of Aflac Investors and Rating Agency Relations .
Thank you. Good morning, and welcome to our call. This morning, we are hosting a short 30-minute call, the first 10 minutes of which will be prepared remarks from Dan Amos, Chairman and Chief Executive Officer of Aflac Incorporated, followed by Masatoshi Koide, President and Representative Director of Aflac Life Insurance Japan, and Fred Crawford, Executive Vice President and Chief Financial Officer of Aflac Incorporated. We will then open up our call for 20 minutes of Q&A with members of our executive management team in both Japan and the U.S., who are listed on this morning's press release. Before we begin, 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. This morning's press release and related Form 8-K are available on investors.aflac.com, where you will also find other financial materials and reconciliations of certain non-GAAP measures. I'll now hand the call over to Dan. Dan?
Thank you, David. Good morning and good evening from Japan. Let me start by saying how pleased I am to announce the strategic alliance between Japan Post Holdings, Aflac Incorporated, and Aflac Japan. This strategic alliance expands on our existing relationship that began a decade ago and represents an unprecedented opportunity. It is designed to create a sustained cycle of growth for our company so that Aflac's growth will contribute to Japan Post Holdings earnings. Our agreement does not include Aflac Incorporated or any of its subsidiaries becoming Japan Post Group companies. Our announcement and the framework of the alliance includes three important components. First, it includes an investment by Japan Post and Aflac Incorporated common shares. Fred will cover the details shortly.
Let me just say that I'm very pleased to gain Japan Post Holdings as a long-term investor that believes in the future growth of Aflac Incorporated. Second, we are reaffirming our existing cancer insurance distribution alliance and related sales initiatives. Today, Aflac Japan's cancer insurance is sold throughout Japan in more than 20,000 post offices and 76 sales offices directly managed by Japan Post Insurance. In fact, this year, we are on pace to achieve over JPY 20 billion in cancer insurance sales, which represents nearly 25% of Aflac Japan's third sector sales. This success would not be possible without the combined strength and scale of both companies and having earned the trust of our mutual customers and policyholders. Finally, when we consider the additional business expansion initiatives that could be mutually beneficial.
Now I turn it off to Koide to discuss the new aspects of the alliance in greater detail. Koide?
Thank you, Dan. I will focus my attention on the existing and expanded business alliance between Aflac Japan and Japan Post Holdings. First, this announcement is an important reaffirmation of cancer-related initiatives between the Japan Post Holdings, Japan Post, Japan Post Insurance, and Aflac Japan. To expand upon what Dan shared, our agreement includes a commitment to cancer insurance products and a customer-centric business management. Aflac Japan and Japan Post have committed to efforts to further develop cancer insurance as an important product in the three Japan Post Group companies' sales strategies and have pledged our mutual commitment to the alliance and importance of cancer insurance to our respective franchisees. It also includes positioning cancer insurance as an important product within the three Japan Post companies, setting sales targets and associated promotions.
Additionally, it includes agency services provided by Japan Post and Japan Post Insurance, as well as training support services provided by Japan Post Insurance. Furthermore, it includes a renewed commitment to the existing reinsurance agreement between Japan Post Insurance and Aflac Japan on cancer insurance. Finally, this agreement further expands our mutual commitment to join forces and build awareness of the importance of cancer education, cancer screening, early detection, and the sponsorship of cancer philanthropic efforts. While the expanded business alliance agreement also focuses on new initiatives, expansion, and growth, no specific business initiatives have been advanced to the point of disclosure.
Parties have identified areas of potential development and are committed to exploring joint expansion opportunities, which include leveraging digital technology to improve the customer experience, cooperating in new product development, investing jointly in third-party entities, expanding business in Japan and overseas, and utilizing Aflac Global Investments for certain asset management opportunities. While we do not have details to share regarding these areas of expanded focus today, we would expect the discussions to develop throughout the year and to share more in the future. I join Dan and the rest of our team in our enthusiasm for driving the business alliance forward and jointly creating value for our mutual shareholders. Let me now turn the call over to Fred.
Thank you, Koide-san. An essential part of our business partnership is aligning economic interests such that both parties can participate in the future success of the alliance beyond premium and commissions. Aligning economic interests is accomplished through Japan Post Holdings' intent to purchase, through a trust, approximately 7% of our outstanding shares in the open market beginning in early 2019. To be very clear, the investment of Japan Post Holdings in Aflac's common shares does not contemplate the issuance of new shares, is not a capital raise, and is not dilutive to current Aflac shareholders. The open market acquisition of shares by Japan Post Holdings will not disrupt our share repurchase plans and guidance for 2019, which remains an estimated range of $1.3 billion-$1.7 billion.
Recognizing Japan Post Holdings is approximately 60% owned by the Japanese government, Aflac shares will be purchased through a trust structure with an appointed trustee charged with voting the shares. As a partial state-owned entity, this approach creates separation between government ownership of Japan Post Holdings and owning and voting Aflac shares. The acquisition of shares by Japan Post Holdings is governed by a shareholder agreement, which contains provisions for a strategic minority investment in Aflac Incorporated. I would highlight the following. The agreement includes a cap on ownership of 10% of shares and a minimum holding level or lockup as certain target ownership thresholds are achieved. Once the independent trust holds the stock for 48 consecutive months, as with all of our investors, the shares qualify for ten-for-one voting rights.
Our shareholder-approved ten-for-one provision allows Japan Post Holdings to achieve a minimum of 20% voting rights in year five of ownership. 20% voting rights is important to Japan Post Holdings as they desire to achieve equity method accounting such that they can recognize a portion of Aflac Incorporated results in their financial statements. For example, in the case of owning approximately 7% of our stock, 7% of our financial results would be recognized in Japan Post Holdings results. The agreement includes certain standstill and voting guidelines that limit control. Pro rata voting, in other words, voting in proportion with other shareholders, is required for any votes above 20%. From vote number one, pro rata is required on matters related to change of control, among other affirmative restrictions on intervening in board or management matters of significance.
In all other cases, the ability to vote shares up to 20% of Aflac outstanding voting rights, including in board elections, remains. The purchase of Aflac shares and related structure is subject to regulatory approvals both in Japan and the U.S. Japan Post Holdings intends to purchase less than 10% of Aflac's common stock. However, the U.S. state regulatory Form A process in our states of domicile is still required, as the long-term intent is to hold the shares and qualify for ten-for-one voting rights. We believe we have an acceptable structure, but there can be no assurances until we are through the process, given the unique nature of the parties and the alliance. Let me now hand back to Dan for a few final comments on the announcement. Dan?
Let me close by saying that I could not be more proud to partner with such a well-respected company as Japan Post Holdings. I am deeply honored that Japan Post views Aflac as an attractive long-term investment poised for the future growth. I've spent quality time with Japan Post CEO Nagato-san, and I know he would share my view that the most important metric that defines the success of our alliance is the over 16,000 individual payments, totaling more than JPY 13 billion in claims paid to our mutual clients and policyholders. We look forward to supporting the many policyholders and customers of our respective organizations and building mutual shareholder value in the process. I'll hand the call back over to David for Q&A. David?
Thank you, Dan. Due to the shorter timeframe for today's call, please limit yourself to one question, after which your line will be placed on mute. You will then need to press star one to reenter the queue.
With that operator, we will now take the first question.
Thank you. We'll now begin question and answer session. Came from the line of John Nadel of UBS. Your line is now open.
Hi, good morning and congratulations. I guess if I'm limited to one question, it would be this. Last week, I think when the initial announcement, whether it was leaked or otherwise, press reports indicated that Japan Post was going to cap their investment in dollar terms at about $2.65 billion. This morning, the announcement talks about 7% of shares. Is there still a relationship between the dollar amount that they're willing to invest versus the percentage?
This is Fred. The way I would answer that is the intent is to purchase up to 7% of the outstanding shares. If you do the math on that, just assuming, for example, just around 775 million shares outstanding, then multiply by the share price and convert it to yen. Some of the news reports that I've seen have it about right. They've been pegging it at roughly a JPY 270 billion investment over time on the part of Japan Post. I think that would equate more in the range of $2.4 billion . Obviously, the most important thing to understand is that they'll be buying this in the open market, and they'll be buying it over a year's timeframe.
Of course, the total investment is yet to be determined as they'll be buying over a period of time, and the stock price will obviously move with that.
John, I'd just add, if you want another question, just hit star one and get back in the queue.
Thank you. Next question came from the line of Ryan Krueger of KBW. Your line is now open.
Hi. Thanks. Good morning. I was just hoping you could confirm, I believe this is the case from the 8-K, but will the open market purchases begin now or do they need to wait until the regulatory approval has been given?
Yes. It's a good question. The beginning of purchasing of stock needs to wait until the trust is put in place. Japan Post, as beneficiary owner intends to put the trust in place in the first couple of months of the new year. We would expect the trust to be in place by the end of February. After that trust is in place, they're free to begin buying the stock. Obviously, their ability to buy up to the 7% and hold the stock over the long term is subject to regulatory approval, but they can commence buying the stock once the trust structure is in place. They cannot begin buying the stock until the trust is in place, as that is the vehicle for regulatory purposes that will be owning and ultimately voting the stock.
Thank you. Next question from Suneet Kamath of Citigroup. Your line is now open.
Thanks. Could you just provide some detail around how this came about? Is this something that you guys went to Japan Post with, or did they reach out to you guys? Just any color there would be helpful.
Yeah, I'll answer that. We have an annual meeting with top management, specifically me and Nagato, as well as other top management people, Charles and Koide and Fred. He brought it up to me in May. So it came from them, and we liked it.
Thank you. Next question from Alex Scott of Goldman Sachs. Your line is now open.
Good morning. The question I had is just related to the commentary on global expansion and potential investments in JVs with third-party entities. I think in the past, you guys have talked about traditional M&A and maybe global expansion outside of the U.S. and Japan as something that wasn't necessarily a key priority. I mean, does this change that? Would you expect that that's the direction this is going, that you may try to expand out of the markets you're in currently and do something more transformative here?
I don't think at this particular time that's the case. Of course, we're always looking. We've said that. One of the things that this agreement does is puts in place a long-term relationship with us and Japan Post, which is the most important thing. Other aspects of it would be something that would fall under Fred's purview of looking on an international basis, and we'll have to take that later on, but that's not high on the agenda right now. Other products to expand to, other things to do within Japan are first, but certainly we'll be looking, but that will not be our strength, nor should it be.
Yeah. Alex, I would add that Dan's absolutely right. This does not change any of our filtering and framework and strategy around what we would be interested in and not interested in terms of expanding, whether it be domestically or overseas. All it really means is that there may be opportunities where the strategic expansion efforts and strategy of Japan Post Holdings and the same efforts at Aflac cross each other or overlap. If that's the case, we may be wise to work together to pursue opportunities. There's nothing identified. This is all going to be really in the planning stage as we move forward.
Thank you. Next question from Thomas Gallagher of Evercore. Your line is now open.
Morning. The 10% maximum position and the limitation to 20% voting rights after four years, are those permanent limits, or is there a timeline for that agreement?
Those guidelines are in place, as long as the trust is in place and the shares are owned. The only provision that you'll see in the agreement is that once the ten for one is in place and the four years takes place, because Japan Post desires reaching the 20% voting, there is flexibility in their ability to buy shares in order to satisfy the 20% voting, which gets them the equity method accounting. We think that's very likely to be at or below 10% of the shares regardless. The cap remains in place. There's a bit of flexibility at the end of the four years that's allowed, they remain in place while the agreement is in place.
Thank you. Next question from Mark Hughes of SunTrust. Your line is now open.
Yeah, thank you. Are there products that Japan Post now distributes that you could potentially manufacture yourself? Something you may not do at this point, but given the scale that Japan Post would allow you might go ahead and launch some new products, and the distribution would be shifted over to you. Anything like that contemplated?
Yes. The Japan Post itself is distributing various products. Of course, Aflac Japan has a capacity to develop those products as well. Under the new strategic alliance agreement, we agreed to consider new product development. At this moment, there is nothing specific products under the agreement.
Thank you. Another question from John Nadel of UBS. Your line is now open.
How about that? My second question was just going to be, now that there's a bit more formality to the relationship, particularly as Post builds its equity stake, I was just wondering if you'd given any consideration between the two companies, yours and Post, whether you would split out for us the actual contribution to your sales that's coming from the Post relationship.
I gave it to you. It's 25% of the total sales. A third sector sales came from Japan Post, and you can put a number to it and get what the cancer insurance is.
Yeah. John, what I would add to that too is that if what you're asking is of a more technical nature, for example, will we be breaking out Japan Post results, for example, in our statistical supplement or quarterly supplement? The intent would be not to do that, for the simple fact that we do not break out individual distribution arrangements. However, both parties have agreed as part of this alliance that we will be furnishing, if you will, and publicly commenting on the performance of the alliance in the way of sales results. You will get the results from us, we'll comment on it, we'll answer questions on it, but we're not likely to break it out at this time in our statistical supplements.
Thank you. Another question from Suneet Kamath of Citigroup. Your line is now open.
Yeah, thanks. I know it's early days, but as we think about kind of the long-term story at Aflac, are there any changes to your growth expectations or mix of capital deployment between, say, dividends and buybacks, as a result of this?
No, there is not. We have a 36-year track record of dividend increase. That is, in part, what Japan Post, in addition to the alliance, finds very attractive about the investment that they're making in our stock. Interests are certainly aligned there. It doesn't change our views on allocation of capital. We reaffirmed, if you will, this morning, our intent to buy back stock according to our outlook. Again, our decisions around allocation of capital remain the same as what we discussed on the outlook call. Ultimately, we're seeking the very best return for our shareholders with that excess capital.
Thank you. Another question came from the line of Ryan Krueger of KBW. Your line is now open.
Hi, thanks. I just had a question on medical. I believe Japan Post sells other companies' medical products. As part of the new alliance, is there the potential that they could start distributing Aflac's medical products through the post offices?
Japan Post is now selling the medical rider. Due to the Japanese regulatory framework, Japan Post Insurance cannot provide stand-alone medical insurance to Japan Post. As I said, under the new strategic alliance agreement, we agreed to consider to new product development. Nothing is specified at this moment. We will work together to consider the future opportunity to develop a new product.
Thank you. Next question from Alex Scott of Goldman Sachs. Your line is now open.
Thanks for taking the follow-up question. I was just interested in the timing. I understand the timing of how the 7% stake will come in over time. I guess the collaboration on products and some of the things that are going on, will that start immediately or will that need to wait until the investment's in place? Also, if you could provide any information on just the potential for asset management and any kind of incremental fees you could get from that.
It'll start immediately. Fred, do you want to take the asset?
Yeah. On asset manager, right now, both parties have just agreed to pursue mutual opportunities that leverage Aflac Global Investments. There's been no timeframe or specific mandates identified at this time. Just as Dan said, planning and strategizing will commence now with the closing of this alliance and signing today. There's no specific plans at this point.
Thank you. Next question from Thomas Gallagher of Evercore. Your line is now open.
Hi. Just a question on the cancer products that you are selling through Japan Post and how that might change over time here. My understanding is up until now, the main product being sold through Japan Post on the cancer side was small face amount with minimal coverage. Are you able to go larger face amount, larger policy size? Will anything like that change?
Yes. Japan Post is now selling a cancer product, which is the same the other agency is selling. Japan Post is now selling the full size of cancer insurance products. When Aflac Japan renewed cancer insurance, Japan Post adopted such new cancer insurance.
Thank you. Next question from Mark Mahaney of RBC Capital Markets. Your line is now open.
Yeah, good morning. Just kind of a mechanics question. I understand they'll start out at 7%, and I understand that they're capped at 10%. Won't there reach a point where Aflac would be somewhat precluded from doing further share buybacks because it would push their ownership above 10%?
Yes, that can take place. In other words, you'll notice that they are targeting 7% ownership, but the cap is at 10%. Part of that difference is to, in fact, absorb our ability to buy back shares over time, where they naturally will increase their ownership level. There are provisions in the shareholder agreement that if by virtue of our buyback activity their share ownership exceeds the ownership cap, then they are required to sell down to that cap to stay below it. There's mechanics as to the selling down. I should note that this is being done in the open market, as is mentioned in the press release, but also more specifically, there are volume restrictions as to how it's done. For example, Japan Post is limited to 15% of the daily volume in our stock as they acquire shares.
Over and above that, however, they can do block trades to accumulate the shares more quickly. On selling down, should there be a need to sell down to remain within the caps, there are similar guidelines for selling down, where the movement down in shares would be limited to 15% of the volume. It's meant to calm down, if you will, any movement in the stock by virtue of supply and demand of shares.
All right. I believe that is our last call. Just before we end, I'd like to remind everyone that while we have had preliminary dialogue with our U.S. state of domicile regulators, as well as the FSA in Japan, this strategic investment is subject to certain regulatory approvals. There can be no assurance of success. However, we believe we have an acceptable structure in place. With that, please feel free to contact our investor and rating agency relations department with any questions. I'd also like to remind you of our fourth quarter earnings release on January 31st and teleconference on February 1st. Until then, we wish you a happy holidays. Thank you for joining the call this morning.