Wednesday, January 28, 2009

Aflac (NYSE:AFL): Upgraded to Buy at Merrill Lynch

Merrill Lynch/Bac is upgrading Aflac (NYSE:AFL) to Buy from Neutral with a price tgt of $48 (down from $71).

Aflac has historically generated substantial excess capital and they expect that this trend will continue. In addition to estimated on balance sheet excess capital of $500 million to $1.0 billion, the firm forecast free capital generation (after common dividends and assuming no debt issuance to replace maturing debt) of $1.5 billion during the next two years. The statutory operating return on capital is 35% to 40%, which provides the flexibility to add a substantial amount to the regulatory capital base or, in today’s environment, offset material investment losses.

Hybrid risk is real, but ability to absorb losses over time
The stock has sold off dramatically during the past week on fears of exposure to hybrid securities issued by financial institutions. Merrill thinks elevated losses and ratings downgrades associated with these securities could cause the risk-based capital ratio to fall in the near term, but capital should build at a fairly rapid pace. They estimate that the risk-based capital ratio was 450% at year-end 2008. Under a bad case scenario, we could see the RBC ratio dropping to 320%, but then build to 380% in one year and 450% in two years.

Firm is raising their operating EPS estimates from $4.60 to $4.80 for 2009 and from $5.15 to $5.25 for 2010.

Notablecalls: Given the huge decline in AFL shares I think MLCO's blessing will drive the shares higher today. Would not be surprised to see 10% upside in AFL today.

The market seems hungry for some upside in the fins following yesterday's Bad Bank speculation on CNBC. People feel it will stop the slide in the space. Think they are right about this one.

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