Aflac Inc. (AFL) Chief Executive Officer Dan Amos, who hired dozens of Wall Street professionals to improve investment returns, lamented that they’re now buying some of the lowest-yielding debt: Japan government bonds.
About half of cash flow this year from the supplemental health insurer’s Japan unit will be invested in yen-denominated securities, the Columbus, Georgia-based company said yesterday on a conference call with investors. Next year, that figure could climb to 80 to 90 percent of cash generated in Japan, the company’s largest market, the insurer said.
“Is the staffing-up for us to buy 80, 90 percent of our business in JGBs? The answer is, ‘no,’” Amos, 62, said on the call. “Don’t take this as, ‘We like it.’ We would much rather be much more diversified.”
Aflac retreated this year from a plan that called for increasing yield in the investment portfolio by buying U.S. corporate securities and hedging them to the yen. The change in allocation is designed to lower volatility in a gauge of solvency monitored by Japanese regulators and free capital so that it can be brought to the U.S. and returned to shareholders.
Lower yields on JGBs and less cash flow from the Japan operations will reduce investment income by about 6.9 billion yen ($70 million), Aflac said on the call. Yields on 10-year Japanese government debt averaged about 0.77 percent in the third quarter. Similar maturity U.S. investment-grade corporate bonds averaged 4.24 percent in the period, according to Bank of America Merrill Lynch index data.
Speculation about when the Federal Reserve will begin to taper its record stimulus has caused interest rates to climb this year, lowering valuations for bonds pegged to the dollar. Yields on 10-year Treasuries (USGG10YR) have surged more than 70 basis points, or 0.7 percentage point, since Dec. 31.
Amos hired Eric Kirsch in 2011 from Goldman Sachs Group Inc. to oversee Aflac’s investment portfolio, after the insurer was burned by privately negotiated investments in European banks that issued debt in yen. Kirsch has since hired professionals from companies including Deutsche Bank AG (DBK) and BlackRock Inc. (BLK)
The team has been able to wind down European investments and is positioned to take advantage of new opportunities when they arise, Amos said.
Aflac has about $11.5 billion in its corporate bond program, Kirsch said on the call. Those funds are already helping boost investment income after including hedging and staffing costs, he said.
“If not for the build-out we probably would have had that money primarily in JGBs,” he said.
Aflac’s debt portfolio was valued at $103.3 billion as of Sept. 30, according to a presentation on the insurer’s website. The securities back obligations to policyholders. Since Japan is the insurer’s top market, the company works to minimize risks tied to fluctuations between the yen and dollar.
The return on average invested assets in the Japan unit’s portfolio was 2.88 percent in the third quarter, up from 2.78 percent in the same period a year earlier.
Evaluating results from the investment team doesn’t “boil down to, ‘Is your return higher than it used to be,’” Kirsch said. The group is also focused on “the health and the future of our balance sheet.”
The insurer dropped 3 percent to $65.02 in New York trading yesterday, the biggest decline since April. Aflac on Oct. 29 posted third-quarter profit that missed analysts’ estimates as net income slipped 31 percent to $702 million.
Aflac has advanced 22 percent this year, trailing the 47 percent gain in the seven-company Standard and Poor’s 500 Life & Health Insurance Index.
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