Aflac Offloads Greek Debt at a Loss - Analyst Blog

On Monday, AFLAC Inc. (AFL) trimmed its Greek sovereign debt holdings and cut its exposure to hybrid securities through two transactions, incurring an after-tax investment loss of approximately $67 million.

The company divested its entire cache of Greek debt, which was worth $270 million at par value as of March 31, 2010, to reduce the burden of further write-downs. The sale will lower earnings in the second quarter by approximately $67 million, which was realized after-tax on a generally accepted accounting basis (GAAP) basis.

Further, Aflac carried out two separate transactions to unburden its investment exposure to hybrid securities, which have characteristics of both stocks and bonds and was another area of concern for Aflac.

Firstly, the company exchanged a perpetual, Upper Tier II security of a European issuer for a higher-rated, fixed maturity, senior debt instrument. Secondly, the company further reduced its perpetual Upper Tier II holdings through a privately negotiated transaction with another European issuer.

Consequently, these two transactions have lowered Aflac’s exposure to perpetual securities by $725 million at par value, or 8.4% of total perpetual securities as of March 31, 2010. In addition, these are expected to generate a realized after-tax gain of approximately $80 million on a GAAP basis in the second quarter. Hence, the gain from the other two transactions will offset the after-tax investment loss of $67 million in the second quarter.

In addition, the company anticipates adding approximately 20 basis points to its risk-based capital ratio by managing investments in a prudent way and reinvesting into higher-rated debt securities. Furthermore, Aflac would be able to achieve its goal of increasing operating earnings per share by as much as 12% in 2010 and 2011, before the impact of currency changes.

Aflac is the only major U.S. insurer with significant Greek debt exposure, while its rival Unum Group (UNM) has no sovereign exposure to Greece. Aflac also had investments in sovereign bonds and securities of other indebted nations such as, $269 million for Italy and $355 million for Spain as of March 31.

As of March 31, 2010, Aflac’s risk-based capital ratio exceeded 525%, compared with 479% at the end of 2009 due to declines in realized investment losses. Total investments and cash were $74 billion, up from $61.7 billion as of March 31, 2009, resulting from improvement in the fair values of Aflac’s investments since the end of 2009.

The company has a strong capital position and we expect it to maintain the same in the long run. Given the uncertainty in the global economic environment and volatility in the capital markets, we believe that it is important to assess the company’s exposure to debt and distressed sovereign debt in particular, and its efforts in reducing its risky holdings.