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Aflac Inc. (AFL), the largest seller of supplemental health insurance, is expanding a program to favor U.S. corporate bonds over Japanese government debt in an effort to increase investment yield.
Aflac will invest about two-thirds of its Japanese cash flow into dollar-denominated corporate bonds for the remainder of the year, after buying $2.5 billion in the third quarter, Chief Executive Officer Dan Amos, 61, said today on a conference call with analysts. The U.S. bonds yielded about 3.6 percent in the period, not including the cost of hedging to the yen, Amos said.
Aflac hired Eric Kirsch, 52, from Goldman Sachs Group Inc. to revamp investing after the Columbus, Georgia-based insurer took losses on European holdings. Kirsch, Aflac’s chief investment officer, said today that the firm’s Japan yield will probably climb as more money is invested in the new allocation.
Kirsch “did an excellent job of changing Aflac’s investment mix and new money yields in Japan surged,” Eric Berg, an analyst at RBC Capital Markets, wrote in a research note today.
Aflac’s new money yield in Japan was 2.76 percent at the end of the third quarter, up from 2.48 percent at the start of the year, the company said. The insurer had $124.2 billion of investments and cash as of Sept. 30.
The average yield on U.S. investment-grade corporate bonds was 2.78 percent as of yesterday, according to Bank of America Merrill Lynch index data. Ten-year Japanese government debt yielded about 0.78 percent today, according to data compiled by Bloomberg.
The insurer yesterday reported that sales of Japanese government bonds added $192 million to third-quarter profit, which jumped 36 percent to $1 billion.
Still, the insurer’s Japan business faces margin pressure, Berg said in the note. Japan sales may be challenged for the rest of this year, Amos said on today’s call. Sales in the country will rise as much as 15 percent in the fourth quarter, the insurer said yesterday. U.S. sales will be little changed this year, missing a target for growth of 3 percent to 8 percent, Aflac said.
Aflac fell (AFL) 0.4 percent to $49.44 at 4:15 p.m. in New York. Shares have gained 14 percent this year, compared with a 15 percent advance in the 24-company KBW Insurance Index. (KIX)
Aflac boosted the quarterly dividend yesterday to 35 cents a share, 6.1 percent more than the 33-cent payout of the past four quarters. That missed the Bloomberg Dividend Forecast for a 3-cent increase to 36 cents.
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