Aflac Inc. (AFL:US), the largest provider of supplemental health insurance, is adding traders and analysts from the biggest Wall Street firms as Chief Investment Officer Eric Kirsch increases bets on U.S. corporate debt.
“On the surface, you might say that’s no big deal, all the insurers do U.S. corporate investment-grade bonds,” Kirsch, 52, said in an interview. “But Aflac didn’t.”
Kirsch, who headed insurance asset management at Goldman Sachs Group Inc. (GS:US) before Aflac hired him last year, said he may add 15 to 30 people in 2013. Kirsch hired 26 this year as Wall Street firms contract, among them Brad Dyslin, who worked with Kirsch at Deutsche Bank AG (DBK), and Timothy “Chip” Stevens who was at BlackRock Inc. (BLK:US) Issei Sasaki was added as CIO in Japan.
“It’s a lot more risk and stress at some of the financial institutions than at a place like an insurance company,” said Paul Sorbera, president of Alliance Consulting, a New York-based search firm. At insurers, “the opportunities are seen now as being more enticing than they have been in the past, and also less volatile and longer term.”
Financial firms have announced the elimination of 300,000 jobs in two years. Citigroup Inc. said this month it would cut 11,000 positions. Total pay for traders and investment bankers is about half what it was in 2007, according to an October report from Options Group, a New York-based recruitment firm.
Lincoln National Corp., the Radnor, Pennsylvania-based insurer, turned to Wall Street when it hired Ellen Cooper as chief investment officer in July. Cooper had been global head of insurance strategy at Goldman Sachs’s asset-management business.
XL Group Plc said this month it hired Craig Wenzel from Deutsche Bank to become senior vice president of capital markets. MetLife Inc. (MET:US) hired Adam Hodes from Credit Suisse Group AG last year to oversee mergers and acquisitions, and American International Group Inc. added Morgan Stanley banker Peter Juhas as head of strategic planning in 2011.
Aflac, based in Columbus, Georgia, opened an investment- management office in Manhattan in May as Kirsch builds his staff. He said he’s close to hiring a chief risk officer and is looking to employees of Wall Street firms to fill additional roles including macroeconomics analysis.
Dyslin, 47, was hired as Aflac’s global head of credit in June. He had been head of research at insurer Hartford Financial Services Group Inc.’s investment-management business and previously directed U.S. credit research at Deutsche Bank’s asset-management unit.
Stevens, 43, is Aflac’s global head of trading. He’s former Americas chief of fixed-income trading at BlackRock’s investment-management unit and was a trader at Deutsche Bank.
Aflac, which sells most of its coverage in Japan (AFL:US), is shifting strategies after it was burned by privately negotiated investments in European banks that issued debt in yen.
“When I got here, I said, we’re done with that,” Kirsch said. “We’ve got too much.”
The proportion of the insurer’s portfolio in privately issued securities was 42 percent as of Sept. 30, down from 53 percent a year earlier, and 69 percent at the end of 2007. Aflac said it had about $1 billion in bonds from Greek banks and $750 million from Portuguese lenders in April of 2010, as Greece awaited word on a rescue package from the European Union.
About 92 percent to 94 percent of the portfolio, which was $124 billion as of Sept. 30, may eventually be in investment- grade bonds, Kirsch said, including a 30 percent to 40 percent allocation to Japanese government debt. Bonds denominated in dollars or other currencies will be hedged to the yen if they’re backing Japanese obligations, Kirsch said.
The rest may be invested in emerging-market debt, bank loans, high-yield bonds, residential and commercial mortgage- backed securities and hedge funds and private equity, he said.
The program is showing results. The yield on about $5.2 billion in new money invested to back Japanese obligations rose to 2.76 percent in the third quarter from 1.97 percent three months earlier, even as rates on Japanese and U.S. debt neared record lows. Aflac invested about $2.5 billion in corporate bonds and much of the rest in Japanese government debt. The hedges cost about 41 basis points.
“That was a tremendous shot in the arm,” Kirsch said. “From an investment standpoint, we went right down the fairway.”
Japanese insurers are also investing overseas to boost the income from their bond portfolios. Nippon Life Insurance Co., the nation’s biggest life insurer, is planning to add non- Japanese bonds hedged to yen in the six months through March.
“Until domestic bond yields hit the bottom and rise again, there is a certain amount we need to depend on investing in foreign bonds with currency hedges,” Yosuke Matsunaga, general manager of the insurer’s finance and investment planning department, said in October.
Aflac’s investment in dollar debt in the current quarter may rise to about two thirds of its Japanese cash flow, Kirsch said.
The insurer may hire outside firms to manage as much as 25 percent of its investments, and plans to add an external manager for investment-grade bonds early next year, Kirsch said. Aflac currently invests in bank loans via Octagon Credit Investors LLC and Apollo Global Management LLC.
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