Aflac’s revenues are mainly in yen. Here’s how he reduces his currency risk.

Aflac Inc.,

a Columbus, Georgia-based insurer generates about 70% of its revenue in Japan. With the yen at a two-decade low against the dollar, that could spell trouble, but the company’s hedging program helps protect it, its chief financial officer said.

“Currencies can move quite dramatically,” chief financial officer Max Brodén said. “We have to be prepared for those kinds of scenarios, and that’s what we had in mind when we designed this program.”

The company, which sells health insurance to Japanese consumers and, to a lesser extent, to American consumers, has a wholly-owned Japanese subsidiary. Much of Aflac’s investors, including financial firms Vanguard Group, BlackRock Inc.

and Fidelity Investments, are based in the United States, requiring the company to convert its Japanese profits into dollars.

Max Brodén, financial director of Aflac.



Its business in Japan is fairly stable, with the average customer holding a policy for around 20 years, providing the company with a steady stream of income and a high degree of visibility into its future cash requirements in Japan. Although Aflac has no opinion on the yen or the dollar, it does have an inside view on what it sees as the value of its Japanese business, Brodén said.

While parts of the hedging program, which aims to protect that value, have been in place for more than two decades, others were added more recently in 2018, Brodén said.

The strategy consists of three parts, all of which focus on matching the risks on either side of the currency pair. The first is the Japanese entity’s dollar-denominated investment portfolio, which had $26 billion in assets at the end of the first quarter.

The second is a $4.5 billion yen-denominated debt held by the US holding company. Debt – around 60% of the company’s total – is marketed directly to Japanese investors and declines in dollars when the yen drops.

“Every time we see the yen depreciate, our leverage goes down,” Brodén said, adding that it allows the company to take on additional debt to invest in its business over time. Aflac, which is due to report its second-quarter results on August 1, saw a 0.6% reduction in debt in the first quarter due to changes in exchange rates, according to Brodén.

The remaining leg is made up of $5 billion in futures contracts that allow the company to convert yen to dollars at certain rates and on certain dates.

“The contracts are long in dollars, short in yen,” Brodén said. “In a scenario where the yen depreciates, these futures contracts increase in value.”

Futures contracts are spread over a 24-month period and Aflac enters into new contracts as existing contracts expire. The company uses these hedges to protect the value of dividend payments from its Japanese entity to the holding company.

Aflac also has $4.5 billion in futures contracts that allow it to convert dollars into yen at predefined rates. The cost of these dollar/yen hedges increased due to the difference in interest rates in the United States and Japan. They are used to cover purchases of US corporate bonds that are converted into yen-denominated assets of the same value.

“The corporate bond market in Japan is not very deep,” Brodén said, pointing to more lucrative investment options in the United States. Aflac uses the proceeds of these bond purchases for its commitments in Japan.

Aflac, which said the exchange slashed first-quarter earnings by 6 cents a share, or about $39 million, does not plan to make any changes to its hedging program other than a few tweaks here and there. Brodén said. “We are very well protected economically,” he said, adding that the program does what it is supposed to do.

Still, there will be near-term pressure on reported earnings due to the falling yen, he said.

The company reported first-quarter revenue of $5.3 billion, up from $5.9 billion a year ago. Net profit also fell, to $1.03 billion from $1.29 billion in the first quarter of 2021. The average exchange rate between the Japanese and US currencies, 116.18 yen per dollar in the first quarter, or 8.9% lower than in the previous year period, has increased further in recent weeks. On Friday, a dollar was worth 138.54 yen.

Aflac’s business, which relies heavily on face-to-face interaction with consumers, has been impacted during the pandemic due to Covid-19 restrictions. Reports of Improper Sales Practices at Japan Post Holdings Co.

a major distribution partner of Aflac Insurance, also weighed on new premium sales, analysts said.

“Sales volumes are still down from pre-pandemic levels,” said Mark Dwelle, director of insurance equity research at RBC Capital Markets LLC, a financial services firm.

The company’s hedging strategy is working, said C. Gregory Peters, managing director of Raymond James Financial Inc.,

a financial services company. “This is a well thought out and strategic hedging program,” Peters said.

The US dollar in 2021 saw its biggest increase in value since 2015. That’s good for many US consumers, but it could also hurt stocks and the US economy. The WSJ’s Dion Rabouin explains. Photo illustration: Sebastian Vega/WSJ

Write to Nina Trentmann at

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