Aflac to Record $610 Million in Losses on European Investments in Second Quarter

Aflac Inc. will recognize $445 million in impairment losses pretax on investments in Portugal banks. It will also record a pretax loss of $165 million in the second quarter on the sale of investments associated with banks and other financial institutions in Greece and Ireland as it continues to reduce risks in its investment portfolio.

Aflac has said it would focus this year on getting rid of these investments, which include bonds, said Laura Kane, a company spokeswoman. The debt in Greece is now "gone" and Aflac has "significantly reduced" its debt in Ireland and Portugal, she said.

Overall, the investment community is concerned about European "PIIGS" -- Portugal, Ireland, Italy, Greece and Spain -- and wants companies to eliminate investments in financial institutions in these countries, Kane said.

In May, A.M. Best Co. said that while Aflac has lowered some of its largest credit exposures, the portfolio still maintains considerable exposure to European perpetual preferred investments heavily concentrated in the financial sector, and more specifically in troubled European financial institutions (BestWire, May 27, 2011).

A.M. Best said it was concerned with the negative impact that repositioning its investment portfolio will have on its net income. However, given Aflac's strong earnings capabilities and sources of cash flow, as well as its favorable risk-adjusted capitalization, Best said it believed the organization could comfortably withstand additional write-downs in its investment portfolio.

Steven Schwartz, an equity analyst with Raymond James in Chicago, said in an email that "relatively speaking, the other public insurers have relatively little PIIGS exposure, either to sovereigns or the banks. Aflac has the only real meaningful exposure."

In the first quarter, net income for the Columbus, Ga.-based Aflac (NYSE: AFL) declined 38% on significant investment losses related to selling its holdings in Greek financial institutions while its chief said earnings growth next year would be lower than 2011 due mostly to the "portfolio derisking" and the continued low interest rate environment in Japan (BestWire, April 29, 2011).

Net income dropped to $395 million -- hurt by $376 million in investment losses as Aflac sold its holdings in Alpha Bank at a realized loss of $115 million. Also, impairments of Aflac's two other investments in Greek financial institutions -- National Bank of Greece and EFG Eurobank Ergasias -- totaled $258 million.

Based on market conditions, Aflac will "continue to identify and consider additional derisking activities throughout the year," Kane said.

Aflac is the No. 1 insurance company in Japan in terms of individual insurance policies in force. In the United States, Aflac is the top player in the voluntary benefits market, particularly for disability and accident insurance (BestWire, April 29, 2011)

According to an A.M. Best Statistical Study on 2010 admitted assets for U.S. life/health writers, admitted assets for No. 19-ranked Aflac Inc. Group jumped 18.3% to $90.1 billion.

On the afternoon of June 24, Aflac Inc.'s stock was trading at $44.67, down 0.84% from the previous close.

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])