I have been studying AFLAC (AFL) for nearly ten years. So impressed by my studies, I have written reports recommending the purchase of its shares of stock for three years. When I saw the 40% price drop in its share price recently, I imagined that AFL must be an outstanding purchase. Not necessarily.
Stock analysts have pointed out AFL's nearly $8 billion exposure to "European hybrid securities" represents a significant capital exposure risk. The size of AFL's exposure is nearly the size of AFL's entire equity capital base.
When I saw this information, I thought I had not adequately read last year's annual report and 10K. I dislike hybrid securities enormously, as they seem to be a "heads you win, tails I lose" proposition (not at first, of course, but in due time). I pulled out these highlighted documents and did not find one single reference to the concept of "hybrid securities." Then I reviewed the first and second quarters of 2008 for a reference to "hybrid securities." Again, nothing.
Finally, in the third quarter of 2008, a short discussion about the SEC's opinion on impairments created a conclusion of a small write-down which AFL considered "immaterial." Nowhere was there any discussion of the size or characteristics of these investments.
AFL has always quacked about their investing prowess built on value principles. Here, it appears that they are ducking the issue. The earnings report next week will be very interesting.
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