New Articles

A Lesson in Hedging

merchandise aflac

A Lesson in Hedging

Who doesn’t love that Aflac duck? In the insurance world, the Aflac duck is on an island (or a marshland, perhaps) of its own. The Michael Jordan of mascots, the American Pekin duck has been a staple with the Georgia insurance firm for over 20 years. While Aflac and its feathery companion appear as American as apple pie, a little-known fact about the insurer is it generates nearly 70% of annual income not in the States, but in Japan. 

One of the most difficult jobs of running a multinational is currency hedging. International business typically involves more than one currency, and to mitigate the impact of foreign exchange risk, Chief Financial Officers (CFOs) engage in hedging. Aflac is no different, and while the yen is currently sitting at a two-decade low against the dollar, the company’s hedging program has implemented some novel strategies that are garnering attention outside of just insurance. 

The Aflac strategy is grounded in three areas. The first is a dollar-denominated portfolio that is part of the fully owned Japanese subsidiary. This investment portfolio held approximately $26 billion in assets as of April 2022. The second is yen-denominated debt – roughly $4.5 billion to be exact. This debt is held by the US holding company and represents nearly 60% of Aflac’s total debt. The debt is marketed to Japanese investors and when the yen declines, the dollar also loses value. Aflac’s leverage decreases whenever the yen depreciates, but when this occurs Aflac can take on additional debt to invest back into the company over time. 

Third, Aflac has structured $5 billion in forward contracts. This gives them the room to convert yen to dollars on specific dates at specific rates. The contracts are designed to be long on the dollar and short on the yen. When the yen depreciates the value of the forwards increase. Disbursed over a 2-year period (24 months), once existing contracts expire they immediately open new ones. Moreover, there are also forward contracts flowing in the opposite direction – converting dollars into yen at present rates. Yet, the cost of this hedge (dollar to yen) has gone up principally due to interest rate differences in Japan and the US. 

Aflac registered $5.3 billion in revenue and net earnings of $1.03 billion during the first quarter of 2022. The average exchange rate between the yen and dollar was 8.9% weaker than in 2021. Sales volumes are down compared to pre-pandemic, but this is a reality across most industries. The currency exchange certainly reduced first-quarter earnings, but on a macro level, the company is considered to be very well hedged. 

A significant number of Aflac’s investors are US based. As such, converting their Japanese earnings to dollars is a reality. Aflac’s CFO does not rule out expanding on its 3-point strategy. Currency fluctuations are impossible to predict. At the end of the day, smoothing volatility is the name of the game.  


Your Business Needs Insurance

Many startups perceive insurance as a luxury, shelving it until they are further along in the company’s lifecycle. However, any business serious about sustainable growth should not postpone this decision.

There is always a risk is involved in the process of starting and growing a company. Having adequate insurance is key to the success of your business and an issue every business owner needs to consider. Business insurance for startups provides valuable protection against the unexpected. Without coverage, threats like theft, fire, data breaches, or lawsuits could disrupt or damage your business.

Once you understand how insurance is vital to your business, you will be better positioned to determine how much of it you need. Business owners must weigh the cost of insuring against various risks and the economic impact of an uninsured loss.

Running a business comes with inherent risks. Protecting your assets is important, yet many new companies often have insufficient insurance. How much insurance should a new business owner secure, and what are the liabilities for being uninsured? That all depends on the needs of the business.

The startup ecosystem is diverse and may or may require different types of coverage. For example, startups that work in the software area will have to protect themselves most from client lawsuits alleging professional liability. Startups working in biotech, proptech, or fintech face constantly changing and often unclear regulatory requirements may need to focus on compliance first.

Thoughtful diligence is needed during the process of deciding on the type of business insurance your startup needs. What kind of insurance best fits your startup? What is the appropriate amount of coverage? Do I need insurance this early in the game? Below are a handful of reasons your business should have insurance:

The Law Requires it

The Law requires businesses with employees to have certain types of insurance: Unemployment, workers’ compensation, and disability are a few.

Failure to carry required coverage could result in fines, penalties, and “cease and desist” orders.

You Could Get Sued

If a liability claim or a lawsuit is filed against you and your business is without insurance, there could be serious and very costly implications. Even winning could cause you to go out of business due to the cost of legal defense. Liability insurance allows you to concentrate on what you do best, running a profitable business.

Insurance Keeps You Up and Running

What happens if your business is affected by an earthquake or flood? P&C insurance covers loss of property, equipment, etc., income lost during a business closure. Business Owners Insurance (BOP) can play a critical role and help a company survive protecting against income loss. BOP also compensates for everyday operating expenses you may have otherwise incurred during that time. Some companies choose to insure lost income and include protection to pay employees for up to 12 months.

Required in Contracts

Some variables come into play when it comes to insurance and contracts: If you lease or rent, the landlord’s policy may not cover you, and you may need to carry insurance. The loan agreement likely contains an insurance requirement if you borrow money to finance buildings, equipment, or operations. Client contracts could specify that you carry insurance.

Common types of insurance businesses should consider:

Workers’ Compensation Board (WCB)

Your business is growing. How do you know if it is time to protect it with workers’ compensation insurance? Most business operations will be required to have workers’ compensation coverage. This covers workers’ medical and wage-loss costs if an employee is injured or contracts an occupational disease while on the job.

Directors and Officers Insurance

D&O insurance is for businesses that are incorporated. In general, D&O insurance provides coverage against the wrongful acts committed by directors and officers. Are you looking to raise money? Many institutional investors, such as venture capital firms, stipulate that a D&O policy must be in place as part of the term sheet before the financing is complete.

Employment Practices Liability Insurance: As your company begins hiring, consider EPLI Insurance. EPLI protects your company from employment-related lawsuits such as sexual harassment, discrimination, wrongful termination, and more.

Technology Errors & Omissions Insurance: A startup providing professional services based on professional expertise should consider E&O insurance which protects against claims that allege damages arising from technology services you have provided. Your customers and partners may even require it.

Fiduciary Liability Insurance: If your company offers employee benefits such as health insurance, stock options, and other benefits, you probably have a person responsible for handling these benefits. FLI protects your company and your employees if someone responsible for these benefits makes a mistake for which they can be held liable.

No company owner can predict what might happen down the road. In a perfect world, natural disasters, injuries on the job, or lawsuits never came to pass, but there is no guarantee that such things won’t happen. For that reason alone, it’s best to have your company insured.


André Thiollier is a partner with Foley & Lardner LLP


Protecting Your Assets: Easy ways to Ensure your Money is Kept Secure

What would you say are the biggest risks facing your business? Increasingly strong competition? The possibility of a global financial crash? The threat of global terrorism? Or the ever-present threat of cybercrime?

Some of these ‘risks’ might sound somewhat unlikely or implausible, but even the most optimistic entrepreneurs know that future success is never guaranteed. In order to safeguard future prosperity, proactive planning is absolutely essential, especially when it comes to protecting your assets.

But in spite of a growing list of business threats, sometimes the old ways are the best. More often than not, you can protect your assets with simple habits and age-old strategies.

Pick the Right Business Entity

The first step in protecting your assets is choosing the right business entity. For example, an S corporation or limited liability company provides more protection and will safeguard your money more than a proprietorship.

“There will certainly be multiple tax-planning considerations, but operating as a sole proprietorship definitely isn’t your best choice for asset protection,” says Mark J. Kohler, author of The Tax and Legal Playbook. “As a sole proprietorship, your personal assets are completely exposed to a potential lawsuit.”

Abide by Corporate Principles

From maintaining a separate bank account and checkbook for your business to maintaining records and logging annual meeting minutes, you need to uphold corporate professionalism at all times. 

Locking away the entity’s articles of incorporation in your drawer is all well and good, but it won’t save you if and when you’re subject to a lawsuit. 

Use Correct Procedure 

“One of the easiest ways for creditors to pierce the corporate veil and attack your personal assets is if you act negligently or fraudulently,” says Kohler. This can be avoided by:

-Having lease agreements for rentals

-Putting property and equipment titles in the company name

-Having subcontractor agreements in place

-Never hiring people under the table

-Only using licensed, bonded, and/or insured professionals

-Not relying on emails for terms

Define your Payment Terms

Getting paid and having a healthy cash flow is the lifeblood of every small business. Unfortunately, many invoices are paid late which can have an adverse effect on your business. 

When defining your payment terms, make sure to include details like accepted forms of payment (e.g. yes to business checks, no to credit cards) and late-payment penalties. This will go a long way in protecting your assets and keeping money secure. 

Purchase the Right Insurance

“Insurance is an important part of your business and should be included in your startup budget,” notes Kohler. “Insurance gives you the ability to take care of an incident in your business and gives plaintiffs another target.”

You should also look into umbrella insurance, which can be personal or business and provides $1-2 million in coverage for just $300-500 a year. Just bear in mind that it doesn’t protect you or your assets in every instance including fraudulent, criminal, reckless, or negligent action.