UPDATE: Aflac's Fourth Qtr Earnings Hurt By Icelandic Banks
February 02 2009 - 4:50PM
Dow Jones News
Aflac Inc.'s (AFL) fourth-quarter net income dropped 48% on $262
million in investment losses - highlighted by losses on three
nationalized Icelandic banks - and the company issued a cautious
outlook for sales this year.
Aflac's shares, down about half this year, reached their lowest
level since April 2000 last month, as analysts expressed concern
about the supplemental-insurance company's exposure to hybrid
securities issued by European banks. Aflac has defended its
business strategy, saying it has a strong balance sheet.
Following the news Monday, shares rose 7.5% to $24.75 in
after-hours trading.
For the quarter, Aflac reported net income of $197 million, or
42 cents a share, down from $382 million, or 78 cents a share, a
year earlier.
The latest results included investment losses of $262 million,
or 56 cents a share, compared with a loss of $1 million from a year
earlier. About $117 million of the loss was from the company's
investment in the Icelandic banks. The company also reported losses
of $125 million related to certain collateralized debt
obligations.
Operating earnings, which exclude investment gains and losses,
rose to 98 cents a share from 78 cents. The stronger yen boosted
operating earnings by 7 cents a share. Revenue rose 6% to $4.26
billion.
In October, Alfac projected operating earnings of 95 cents to 97
cents a share. Analysts polled by Thomson Reuters expected
per-share earnings of $1 on revenue of $4.58 billion.
Premium income in yen grew 3.3% in the company's large Japanese
operations. Reflecting the stronger yen, premium income in dollars
increased 22% to $2.9 billion. Aflac Japan accounts for more than
two-thirds of the company's total revenue.
Alfac U.S. posted a 7% increase in total premium income to $1.1
billion. Total revenue in the U.S. grew 6.2% to $1.2 billion. Alfac
said the weak economy continued to pose challenges in the U.S., but
said it was expanding its sales force, adding more than 6,000 new
associates during the quarter.
Looking ahead, Aflac maintained it expected to boost its
operating earnings for the year by 13% to 15% to $4.51 to $4.59 a
share, excluding the impact of the yen. Aflac said it expects sales
in the U.S. and Japan to be flat to up 5% in 2009.
Until recently, Aflac appeared to have avoided most of the
subprime mortgage-related investments that have pulled down
insurers.
But recently, the insurer has come under fire for its heavy
investments in so-called hybrid securities called perpetual
debentures issued by financial institutions in the U.K. and the
E.U. that combine elements of equity and debt.
At the end of 2008, Aflac's holdings of such securities were
$9.1 billion. At the end of the year, 92% of Aflac's total
perpetual debenture securities were rated A or higher by ratings
agencies, well into investment grade. Except for the Icelandic bank
securities, all of Aflac's debentures were current on interest and
principal payments at the end of 2008.
Worries have grown in recent months that a U.K. government
takeover of a troubled bank there put a stop to coupon payments on
the securities, wiping out investors.
Standard and Poor's cut Aflac's financial strength rating by one
notch to AA- last month, and cut its debt rating to A-, due to
their concerns about Aflac's investment exposure to global
financial institutions through its hybrid securities holdings.
Insurance rater A.M. Best weighed in on Aflac's hybrid exposure
Monday as it downgraded Aflac's subsidiaries' issuer credit ratings
to aa- from aa Monday, but left its financial strength rating at
A+.
A.M. Best also downgraded the issuer credit rating and debt
ratings to a- from a on all the outstanding debt of the ultimate
parent, Aflac Inc.
Aflac already recorded a write-down from its exposure to the
Icelandic banks, and its ties to other banks, including Royal Bank
of Scotland PLC (RBS), are a growing concern. Morgan Stanley said
about 80% of Aflac's $7.9 billion hybrid securities come from
European financial institutions.
-By John Kell, Dow Jones Newswires; 201-938-5285;
john.kell@dowjones.com
-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141;
lavonne.kuykendall@dowjones.com
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