Aflac Sells Holdings in Greek Debt and Cuts Exposure to ‘Hybrid’ Securities

Aflac Inc. has sold its entire holdings in Greek sovereign debt and reduced its exposure to hybrid securities in two separate transactions that slash its exposure to perpetual securities by $725 million of par value.

The company said its Greek sovereign debt totaled $270 million of par value at March 31 and that it would incur a $67 million realized investment loss, after tax, on a GAAP basis, in the second-quarter, as a result of the sale. Par value is the dollar amount that is assigned to a security.

Aflac also exchanged a perpetual, Upper Tier II security of a European issuer for a higher-rated, fixed maturity, senior debt instrument and reduced its perpetual Upper Tier II holdings through a transaction with another European issuer. These transactions will result in an $80 million realized gain in the second quarter.

The company still has exposure of $7.9 billion to hybrid securities at par value, said Laura Kane, a spokeswoman the Columbus, Ga.-based Aflac (NYSE: AFL) in an e-mail.

In April, A.M. Best Co. said the group maintained considerable exposure to European perpetual preferred investments heavily concentrated in the financial sector, and more specifically in troubled European financial institutions, which have declined considerably in value. More than one-quarter of the group's perpetual preferred exposure was designated Tier 1, representing the highest risk securities (BestWire, April 9, 2010).

A.M. Best also said it was concerned with Aflac's high concentration of investment exposure within a number of single counterparties. However, given Aflac's strong earnings capabilities and sources of cash flow, and its favorable risk-adjusted capitalization, A.M. Best believed the organization could potentially withstand additional write-downs in its investment portfolio.

The company "believed it was prudent to trim our exposures to Eurozone sovereign debt," said Kriss Cloninger III, president and chief financial officer of Aflac Inc., in a statement. The transactions will result in losses on a statutory accounting basis but will add about 20 points to the company's risk-based capital ratio, he said.

American Family Life Assurance Company of Columbus currently has a Best's Financial Strength Rating of A+ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])