UPDATE: Aflac Nears 9-Year Low; Fears Over European Securities
January 22 2009 - 11:53AM
Dow Jones News
Shares of Aflac Inc. (AFL) dropped to their lowest level since
mid-2000 Thursday after an analyst said the insurer's exposure to
hybrid securities issued by European banks, including Royal Bank of
Scotland Group PLC (RBS), is a "rapidly escalating concern."
Aflac shares fell as much as 39% to $22.08 in morning trading
after Morgan Stanley analyst Nigel Dally told the firm's clients to
avoid Aflac's stock owing to its $7.9 billion of exposure to
securities that have been sharply marked down after European
financial firms announced large losses this week.
"If even a small portion of these losses are realized, the hit
to Aflac's capital ratios could be substantial, and their overall
capital adequacy could be significantly less than most investors
believe," he said.
A spokeswoman for the Columbus, Ga., company wasn't immediately
available to comment.
Dally said the value of securities issued by Royal Bank of
Scotland, which said Monday its losses last year could be the
largest corporate losses in the history of the U.K., dropped as low
as 15 cents on the dollar this week, while similar securities
issued by other European banks have declined 30% or more to well
below 50 cents on the dollar in many cases.
About 80% of Aflac's $7.9 billion hybrid securities come from
European financial institutions including RBS, Dally said.
He estimated that if Aflac was to take a hit from its exposure
to these securities of more than 15%, its capital ratio would
decline to a level where its credit ratings would be at risk and
the company might need to consider taking steps to raise more
capital.
Dally said Aflac's rationale for holding the securities was
based on the idea that the European banks would be viewed by the
governments as too large to fail. "Faced with a distress scenario,
Aflac believed the respective governments would step in to provide
support," he said.
So far, the U.K. has backed that idea up, injecting GBP37
billion ($51.3 billion) into RBS, HBOS PLC and Lloyds TSB Group
PLC.
But after RBS said Monday its loss during 2008 would be between
GBP22 billion and GBP28 billion, it became clear that the U.K.
government would have to commit more to prop up its failing banks,
and investors feared it would have to go so far as to nationalize
them.
Dally said Aflac's bet that the U.K. will backstop RBS and other
banks is risky, because if it and other banks are nationalized
outright, all classes of stock, including the preferred shares
Aflac holds, could be wiped out.
Aflac is scheduled to report its fourth-quarter results on Feb.
2, in which it will announce losses, if any, on its hybrid
securities portfolio.
Aflac shares were down 30% to $25.31 in recent trading. Just
over $5 billion of the company's market value has been wiped away
so far Thursday.
-By Ed Welsch, Dow Jones Newswires; 201-938-5244;
edward.welsch@dowjones.com
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