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Aflac’s Kirsch Returns to U.S. Bonds With Japan Cash

Aflac Store in Japan
The Aflac Inc. logo is displayed in a window at one of the company's stores in Tokyo, Japan, on Feb. 3, 2014. Photographer: Kiyoshi Ota/Bloomberg

Aflac Inc., the largest supplemental health insurer, resumed a push into U.S.-dollar denominated bonds with cash from the company’s Japan operations after slowing the investments last year to cushion capital levels.

Volatility in credit markets in 2013 caused Aflac to retreat from a strategy of adding U.S. corporate bonds to back liabilities in Japan, its largest market. Instead, the insurer turned to lower yielding Japan government bonds to reduce risk. Columbus, Georgia-based Aflac now plans to deploy at least 40 percent of cash flow from the Asian nation into dollar investments.

“We’ve turned on the program,” Chief Investment Officer Eric Kirsch said yesterday on a conference call with analysts. “Given the higher capital levels that we have and all of our modeling, we can sustain, if rates should increase, that negative impact.”

Aflac hired Kirsch in 2011 from Goldman Sachs Group Inc. to retool the company’s investment strategy after it was burned by privately negotiated securities in European banks that issued debt in yen. Since then, Kirsch has hired staff from Deutsche Bank AG and BlackRock Inc. to add sophistication to how the company manages its $108.5 billion portfolio.

Kirsch said yesterday that Aflac will favor shorter durations to guard against rising interest rates. Previously, he had targeted a 10-year duration for the portfolio.

Building Protection

“We’re, in essence, building up protection for the event that rates rise so that our unrealized losses won’t be as great,” he said.

Insurers hold bonds to back obligations to policyholders and to generate profit. Regulators monitor companies’ investments to make sure they will have the money needed to make future payments.

Aflac also has currency risk, because about three-quarters of its business is written in Japan. The company uses hedges to mitigate the effects of fluctuations in the yen, which tumbled 18 percent against the dollar last year.

Cash flow from Japan is projected to be about 771 billion yen ($7.6 billion) this year, Kirsch said. The U.S. initiative was designed to focus on corporate bonds and could also include Treasuries, depending on market conditions, Kirsch said.

The insurer gained 0.5 percent yesterday in New York trading to $61.76.

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