Aflac’s Prospects Much Better Than What Traders Currently Believe

According to an article on Barron’s, Columbus, Georgia-based Aflac (NYSE: AFL) was once admired by investors for the rich returns generated by the company, especially in Japan. However, the company suffered a major blow, following the global financial crisis, as a result of which the company’s shares crashed to $13 in the first quarter of 2009, as compared to a previous high of $67.

Although Aflac’s shares are trading close to $50 currently, investors are dealing with fresh concerns regarding AFL’s investments in the debt and other securities of certain European banks. These banks are located in Greece, Portugal, Italy and Spain and may face suffering from troubles as their countries struggle with sovereign debts. However, bullish analysts and investors believe that the market’s concerns have gone a step too far.

James Tarkenton, a portfolio manager at Lateef Investment Management, said that "The market is overpricing the risk in the [investment] portfolio."

While Aflac has shareholder equity worth $9 billion, excess regulatory capital amounting to $1.5 billion and sufficient cash flow, the company is exposed to Germany's Hypo Real Estate bank that would have to raise capital to withstand a financial crisis in the future, according to European regulators.

However, President and CFO Kriss Cloninger told Barron’s that AFL’s earnings are more than sufficient to cover any losses and he doesn’t feel the need to raise capital in the future. According to analyst Nigel Dally of Morgan Stanley, the company can absorb roughly $2.5-$3 billion of pretax losses, although "that is well above any number we'd reasonably expect."

Investors are likely to refocus on Aflac's earnings power instead of possible risks, once their confidence in the company’s investment portfolio improves. The investors are then likely to find the insurer's prospects a lot more impressive than they've been made to believe.

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