Aflac Targets Commercial Loans, Plans to Increase Equity Bet

  • Insurer plans modest investment in equities in coming weeks
  • Aflac to use external managers in some cases, CFO says

Aflac. Inc., the largest supplemental health insurer, is expanding bets on commercial loans and stocks to improve returns on its $100 billion investment portfolio.

“We added middle-market loans over the last year and are in the process of building out a commercial loan portfolio,” Chief Financial Officer Fred Crawford said in a conference call Thursday discussing the company’s 2016 outlook. The insurer “will initiate a modest investment in equities in the next few weeks."

Insurers including American International Group Inc. and TIAA-CREF have also wagered on commercial loans. The holdings can come with floating rates, making them an attractive option for the companies to guard against inflation with funds that can be held for decades to back policyholder obligations.

Aflac hired Chief Investment Officer Eric Kirsch from Goldman Sachs Group Inc. in 2011 to build an investing operation at the Columbus, Georgia-based insurer, which does most of its business in Japan. He sought in recent years to push into holdings beyond that nation’s bonds to boost yields. More than 90 percent of the portfolio was in fixed-maturity holdings as of Sept. 30.

Measured Approach

The insurer “will take a measured approach to adding growth assets, which include public and private equity, hedge funds and other alternative asset classes,” Crawford said. “This is a slow ramp-up with growth assets expected to reach roughly $3 billion in 2017.”

Aflac will bring in external managers to supervise investments where the insurer’s employees lack expertise, Crawford said.

The insurer dropped 3.9 percent to $63.01 at 3:20 p.m. in New York, the biggest intraday fall since August. Aflac predicted earnings per share will climb 3 percent to 7 percent next year, excluding currency fluctuations. Sales of health and cancer products in Japan will drop by a “mid single digits” percentage, the company said.

“Aflac’s 2016 outlook was slightly below our estimate on EPS growth, and significantly below our projections for Japan new sales growth,” Jay Gelb, an analyst at Barclays Plc, said in a note to clients.

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