Aflac Argues Its Holdings Of Bank Hybrid Securities Are Safe
February 03 2009 - 10:25AM
Dow Jones News
After worries over its holdings of bank securities drove its
share price down to its lowest level in nearly a decade last month,
insurer Aflac Inc. (AFL) scheduled an additional conference call
Tuesday to argue that the concern is overblown.
"If every single bank [whose securities] we own gets
nationalized," Aflac could weather the potential losses without
needing to raise additional capital, Chief Executive Daniel P. Amos
said during Aflac's call Tuesday. "One consistent pattern in those
nationalizations is securities with equity characteristics like
shareholder rights are the securities that have not been assigned
value by the nationalizing government," Amos said.
Aflac's holdings of the type of securities that include
shareholder rights would result in a potential loss exposure of
$100 million, Amos said. Expanding the definition of shareholder
rights more broadly would bring that potential exposure to only
$400 million in pre-tax losses, Amos said.
Even in that worst-case scenario, Aflac doesn't see a need to
raise capital, Amos said, even if the company were to be downgraded
because of the losses.
The conference call centered on the discussion of the securities
rather than on the company's fourth-quarter earnings, and helped
Aflac's share price hang on to its pre-market rise. Shares of Aflac
recently traded up 6.4% to $25.20.
After the market close Monday, Aflac reported net income of $197
million, or 42 cents a share, down from $382 million, or 78 cents a
share, a year earlier, on 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 three 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, just under the consensus
estimate of $1.00 a share.
During the sometimes-contentious conference call, Amos and other
Aflac executives went into detail about the $9.1 billion in
perpetual debentures the insurer holds in its $68 billion
investment portfolio, largely concentrated in European Union banks.
The so-called hybrid securities have elements of both equity and
debt. If the securities were to be considered equity similar to
preferred shares, they might be more likely to be wiped out in a
government takeover.
Amos and Chief Financial Officer Kriss Cloninger said that 72%
of Aflac's bank hybrid holdings were of upper tier two securities,
which were treated more like debt and were senior to tier one in
payment rank.
In the nationalizations of U.K lender Northern Rock PLC, Anglo
Irish Bank Corp. and Bradford and Bingley PLC, the banks continued
to make payments on their perpetual debentures, Amos said. However,
one analyst pointed out that at least one bank has pushed out the
maturity date on some debt.
Morgan Stanley analyst Nigel Dally, whose research note first
raised the issue, didn't raise the issue during the conference
call.
Both Standard & Poor's and A. M. Best Co. have downgraded
some of Aflac's ratings in the last few weeks, citing Aflac's
concentration of investments in the securities. S&P said it
might downgrade Aflac another notch if losses cut the insurer's
statutory capital by $400 million, but Amos said that, even if the
insurer were downgraded to single-A, it wouldn't need to raise
capital.
Some analysts questioned the current fair value of $8 billion
Aflac put on its portfolio of hybrid securities, which values the
securities at 88% of their $9.1 billion cost, but Amos said press
reports "exaggerated" the degree to which hybrid securities were
discounted in the market, and that he had seen prices rise in
recent weeks in some institutional trades.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front
page of today's most important business and market news, analysis
and commentary. You can use this link on the day this article is
published and the following day.