Quack, quack!

Daily television reports of Japan’s continuing low interest rates had the grating sound of a duck quacking incessantly in Kriss Cloninger’s ear.

Well, maybe not a duck. Cloninger, the CFO, treasurer, and new president and board member of AFLAC Inc., the insurance company with the quacking mascot, would probably choose a different metaphor for his annoyance.

Nevertheless, he got so tired of the sound in 1995 that he decided to make those low interest rates work at least in part for his company, he tells CFO.com.

By 1999, after overcoming regulatory hurdles, Cloninger, 53, had a plan in place to fund the company’s existing share-repurchase program with yen-denominated debt.

The stakes of making Japanese interest rates work favorably for AFLAC are high, since the company does most of its business in Japan.

For instance, for the three months ended March 31, AFLAC Japan kicked in 78 percent of the company’s $2.03 billion in total insurance premiums and AFLAC U.S. accounted for the remaining 22 percent. (Net first- quarter revenues for the parent company, AFLAC, Inc., were $2.42 billion.)

The low interest rates have made it hard for AFLAC–which sells cancer insurance and other supplemental insurance products to employees in the workplace–to match its insurance claims payouts in Japan with investment returns adequate to fund them over the long term. (Like other insurers, AFLAC is required to invest heavily in bonds, which produce low returns if interest rates are low.)

That, in turn, has put upward pressure on the insurance premiums the company must charge—a hazard in Japan’s increasingly competitive insurance market.

At the same time, Cloninger’s yen-debt-financing program is using the low interest rates to exert a downward push on the company’s cost of capital.

The company is using the yen debt-financing program to fund the share-repurchase plan which Cloninger, along with Daniel P. Amos, AFLAC’s president, chief executive officer and newly named chairman, started in 1994.

In 1999 and 2000, AFLAC spent about $463 million to repurchase 18.9 million shares of its common stock.

Before 1999, AFLAC mainly paid for its share-repurchase program via revolving-credit agreements with banks.

But in that year, Cloninger adopted a less expensive way of borrowing. First, he launched the company’s first public debt offering in the United States, issuing $450 million in 10-year senior notes that mature in April 2009.

Then, by entering into currency swaps, AFLAC, in effect, turned the dollar-denominated principle and interest terms into yen-denominated obligations, according to Cloninger. The swaps have a fixed interest rate of 1.67 percent for the 10-year period of the notes.

In September 2000, Cloninger filed a shelf registration with Japanese regulators to issue debt of up to 100 billion yen. On October 25 of that year, AFLAC issued 30 billion yen of notes with a 1.55 percent coupon due October 25, 2005.

Cloninger says that when those yen-denominated financing moves are compared to direct dollar financing, AFLAC ends up saving over $35 million per year in interest costs.

Last week, AFLAC again entered the foreign debt market in Japan, issuing 0.87 percent senior yen-denominated bonds totaling 40 billion yen, or about $330 million at current exchange rates. AFLAC’s bonds, which it also expects to partly fund a share-repurchase program, were sold May 25. They will come due in 2006.

Issued in Japan under an existing 100 billion-yen shelf registration dated Sept. 27, 2000, the bonds received a warm reception from Standard & Poor’s. Assigning its single-‘A’ senior debt rating to the bonds, S&P cited AFLAC’s “[e]xtremely strong capitalization” and liquidity.

Cloninger sums up his yen-debt-financing efforts this way: “Interest rates hurt the operating side of the business, but we found a way to make them help us on the capital management side of the business.”

Strength on the Street

Cloninger refers to his recent addition of the president title as merely “a more formal designation,” for business-succession-planning purposes.

He admits, however, that the new title will “expand my recognition as a spokesperson for the company” to investors. Nevertheless, he asserts, “I already have a pretty strong presence with the Wall Street group,” adding that analysts have “always seen me as the number 2 person in the organization anyway.”

“The way it works here [is that] I have all the financial responsibility for the company,” he adds. “My job is to make sure that Dan [Amos] doesn’t have to worry about the financial side of the company… and pursue the brand-marketing role he’s suited for.”

Amos brought Cloninger to AFLAC as senior vice president and CFO in 1992. Cloninger had worked for the company for nearly 14 years as a consulting actuary with KPMG in Atlanta.

On the whole, the company’s reception from analysts has been warm of late. But Cloninger must deal with questions about the company’s ability to face up to stiff competition in Asian life and health insurance markets.

In early May, for instance, Lehman Brothers downgraded the company from strong buy to buy. “Competitors in general seem more confident than we had thought that they can compete against the giant of cancer insurance,” the Lehman research note said.

“Deregulation is clearly the challenge we face in 2001, and we have been preparing for the last two years,” says Cloninger. In January, Japanese regulators allowed eight of the biggest domestic insurers to sell the cancer life policies AFLAC offers.

At the end of last year, to “keep our competitors off balance,” says Cloninger, AFLAC offered a new cancer life insurance policy enabling custom-tailored coverage for such things as government-approved experimental procedures.

It also entered into a marketing alliance with one of the biggest carriers, Daichi Mutual Life Insurance Co., in which the carriers will sell each other’s products. Cloninger takes that as evidence that Japan’s insurers aren’t so hot to compete with AFLAC, the biggest foreign insurer in the country.

Cloninger feels that its huge distribution force, which consists of more than 43,300 licensed, independent agents, is one of its competitive advantages. And as AFLAC’s finance chief, he’s particularly enamored of the fact that they’re paid on a commission basis.

“It makes our expense structure very predictable as a percent of revenue,” he says, “because we don’t have direct expense unless we receive revenue. I love it.”

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