The Duck Ducks Greece

I haven’t made much of a secret that I think AFLAC’s (AFL) stock is absurdly low. I think the market is very nervous over what’s in AFLAC’s portfolio, especially in Europe, and that’ understandable. The most unnerving aspect of a financial crisis is that you never know who is exposed to what, until too late. The company, however, has made it clear that its portfolio is doing fine.
Today the company reports that it has dumped all of its Greek sovereign bonds. AFLAC got $270 million for the bonds, which is a loss of $67 million, or around 14 cents a share. That’s barely a dent.
AFLAC has also reduced its exposure to perpetual securities (also known as “hybrids”) through two separate transactions. This is how they describe the sales:

The company also exchanged a perpetual, Upper Tier II security of a European issuer for a higher-rated, fixed maturity, senior debt instrument. In addition, the company further reduced its perpetual Upper Tier II holdings through a privately negotiated transaction with another European issuer.

Hmmm. A bit murky, no? The important news is that those sales will bring in $80 million in profit to their Q2 GAAP earnings, or about 17 cents per share.
This is very good news and it shows investors how well AFLAC manager risk. Kriss Cloninger III, the president and CFO said:

Although these transactions resulted in losses on a statutory accounting basis, we estimate they will add approximately 20 points to our risk-based capital ratio by reducing investment concentrations and reinvesting into higher-rated debt securities. As we have repeatedly discussed, our primary focus is to maintain a strong capital position. That is especially true today, given uncertainty in the global economic environment and the volatility of capital markets. As such, we will continue to assess the creditworthiness of issuers in our portfolio and manage our investments in a way that reflects our risk tolerance and the objectives we’ve set for earnings growth. In that regard, we continue to believe our objectives of increasing operating earnings per diluted share 9% to 12% in 2010 and 8% to 12% in 2011, before the impact of currency translation, are achievable.

Last year, AFL made $4.85 per share. For this year, they said they expect to earn somewhere between $5.24 to $5.56 per share.

Posted by Eddy Elfenbein on June 28th, 2010 at 9:41 am

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