Aflac Adds Rate Hedges as Bond Slump Hurts Japan Ratio

Aflac Inc. added interest rate hedges on dollar-denominated bonds after higher yields reduced a measure of solvency used by regulators in Japan, the company’s top market.

The largest seller of supplemental health insurance started this quarter using contracts to guard against interest rate fluctuations on some bonds backing obligations in Japan, Chief Financial Officer Kriss Cloninger said yesterday during a presentation to investors.

“We haven’t done that with the whole portfolio at all, but we have done it on a portion of the portfolio and we continue to investigate other alternatives,” Cloninger said at the presentation, sponsored by Raymond James Financial Inc.

Chief Investment Officer Eric Kirsch said in July that Aflac was exploring strategies such as hedges to guard the solvency margin ratio in Japan, after a bond slump reduced the measure to 585 percent on June 30 from 669 percent at the end of 2012. Columbus, Georgia-based Aflac has also shifted the accounting treatment of a “significant portion” of its Japanese government bonds to bolster the ratio, Cloninger said.

“These actions are exactly what we’ve been looking for,” John Nadel, an analyst at Sterne Agee & Leach Inc., said in a research note yesterday. Guarding the ratio “provides for the confidence in ongoing profit repatriation from the Japan branch to the parent” which is used to buy back stock.

Aflac rose 1.5 percent yesterday to $59.92 in New York. The stock has gained 13 percent this year, compared with the 18 percent rally of the Standard & Poor’s 500 Index.

The yield on the 10-year Treasury gained 64 basis points in the second quarter to 2.49 percent, and the yield on Japanese government debt also jumped. Bonds lose value when interest rates rise.

Cloninger didn’t specify the size of the hedges or the insurer’s counterparties. Laura Kane, a spokeswoman for the insurer, had no additional comment.

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