Dyslin, Global CIO and President of Global Investments, discusses managing yen exposure, the role of private investments in the insurance giant’s $100 billion portfolio, and big insurance M&As.
Global Finance: You oversee Aflac’s investment portfolio of about $100 billion, the bulk of which is in Japan, where the company has a large presence. What big changes have you seen there in recent years?
Brad Dyslin: Roughly three-quarters of all things Aflac are Japan-related, as it pertains to my world—earnings, cash flow and investment assets. The biggest change we’ve seen over the last few years in Japan has been interest rates. They had been extremely low for at least the last 25 years, even before the financial crisis. Ten-year government bond interest rates were below 2%, and then they went negative in 2016. That also happened in a few places in Europe, but Japan kept its interest rates very low for a very long time as it tried to stimulate the economy and to rekindle inflation.
Today, we’re finally seeing that happen. Inflation has reignited in many parts of the world, including Japan. That’s caused the Bank of Japan to start moving interest rates up for the first time in at least a generation. In just the last two years, the 10-year bond has gone from 0.4%, or 40 basis points, to about 1.5%. We have a large amount of our portfolio and a significant amount of cash flow denominated in yen, and it’s obviously welcome news to have higher yields.
GF: What asset-allocation framework do you use for managing the portfolio in Japan?
Dyslin: I’ll highlight two things we have done to update our asset allocation in the last few years. The first one is how we’ve utilized U.S. dollar assets for the Japan portfolio. The second, like much of the industry, is how we’ve utilized private assets in the portfolio, notably private credit and private equity.
For the U.S. dollar assets, this is driven by our strategic asset allocation and our approach to asset-liability management. You can think of our portfolio in Japan as consisting of two big pieces. The first chunk is the amount of capital we set aside for future policy claims. Those claims will be in yen for our Japanese customers. We back that liability with yen assets. Supporting that is the capital of our owners—the regulatory and economic capital to make sure there is a strong financial base to support those yen liabilities. That belongs to our U.S.- based shareholders, so we hold that capital in U.S. dollars
To sum up, the money owed to policy holders is in a yen portfolio. The money that belongs to our U.S. shareholders is in a U.S. dollar portfolio. It sounds pretty simple today, but it gets a little bit more complicated when you start factoring in things like regulatory capital and all the regulations an insurance company needs to manage.
GF: What’s the impact of the tariffs being levied by the Trump Administration?
Dyslin: Tariffs are an issue that many business leaders, political leaders and investors are all grappling with. Every indication we’ve seen suggests that they will be inflationary, but the magnitude remains to be seen. As yield-based investors, generally we like higher yields but not at the expense of an economy that could be dealing with higher inflation.
We’ve seen the market respond to tariffs with lower yields. The market is telling us it’s more concerned about a slowing economy than they are about inflation coming from tariffs. So that’s one area we’re watching very closely. At the security level, some companies will be more impacted than others. Some have more ability to adjust to a tariff regime than others, and that’s where our team of around 20 professional credit investors comes in. They focus on understanding these companies. That entails understanding their management teams, their capital structures, and their cash-conversion cycles of all these individual credits. That level of analysis really makes the difference for us.
GF: There’s been some notable M&A activity in which asset managers are acquiring insurers. For example, KKR acquired Global Atlantic Financial Group last year. What’s your take on this trend?
Dyslin: This has involved some alternative managers buying insurers outright, as well as creating strategic partnerships. I’ve been an insurance money manager my whole career, so I find this all very fascinating. It’s gratifying to see these alternative managers taking an interest in insurance company assets, and I expect this trend to continue. It’s exactly what Warren Buffett has done with Berkshire Hathaway—using the stable cash flows and long-term nature of insurance capital to support an investment platform. We’ve seen an explosion of growth that has created some very large managers focused on these various alternative assets.
I expect alternative asset managers to continue forging partnerships with insurance capital. It’s much easier to invest when you’ve got regular, recurring insurance money from premiums and portfolio cash generation, as opposed to having to keep raising new funds. With an insurer, you’ve got an underlying business that generates recurring cash.
GF: How do you incorporate shifting macroeconomic factors into running the portfolio?
Dyslin: We don’t actively reposition the portfolio based on macro conditions like interest rates or currency fluctuations. The way we’ve tried to neutralize our yen exposure is by setting up these two portfolios. So, it’s a yen portfolio for yen liabilities and a dollar portfolio for dollar liabilities, or dollar surplus, which I view as a liability to our shareholders. That’s how we do it in our organization. Every investment manager is managing some sort of liability. It could be to perform against a benchmark. It could be a pension obligation. In our case, it’s future insurance claims. So, investing to meet or exceed the expectations of that liability is the key, and that’s what we really focus on when we set up our strategic asset allocation and making allocation decisions.
I know you’ve asked about how we change the portfolio based on movements in the yen or interest rates. If we’ve done our job correctly—and we have good, solid asset-liability management in place—a lot of that doesn’t matter, or doesn’t matter much. It’s not going to have a big impact on our portfolio. You’re not going to suddenly see the portfolio just shift around because interest rates are 50 basis points higher.
We do make tactical decisions, and aim to be opportunistic, but that’s done more at the security level than at the broader asset-allocation level.
GF: Are most of your holdings government bonds?
Dyslin: We do own a significant portfolio of Japan government bonds, or JGBs. Going back to that yen portfolio I mentioned earlier, we would prefer more yen-denominated credit holdings, but it’s very difficult to find acceptable investments that meet our needs. So we own a lot of JGBs, in part because we need an outlet for yen investments. JGBs also provide liquidity, and they are very long maturity assets, often 30 years. That helps us match our long liabilities against long assets. We also have a very significant corporate public bond portfolio, which provides not only liquidity but also additional U.S. dollar-based income.
GF: Do you have any exposure to high-yield bonds?
Dyslin: It’s about 1% of the portfolio. Most of our high-yield exposure is through private middle-market direct lending, which we believe provides much better value for the risk.
As far as maturity ranges of the securities we hold, it really is across the board and varies by asset class. For our primary outlet for below investment grade—middle market loans—those are generally shorter, often with maturities of five to seven years. Our JGBs tend to be longer, 30-year bonds. Our A-focused investment-grade credit portfolio typically has maturities of 10 to 15 years.
