Aflac Inc.'s (AFL) fourth-quarter net income dropped 48% on $262 million in investment losses - highlighted by losses on three nationalized Icelandic banks - and the company issued a cautious outlook for sales this year.

Aflac's shares, down about half this year, reached their lowest level since April 2000 last month, as analysts expressed concern about the supplemental-insurance company's exposure to hybrid securities issued by European banks. Aflac has defended its business strategy, saying it has a strong balance sheet.

Following the news Monday, shares rose 7.5% to $24.75 in after-hours trading.

For the quarter, Aflac reported net income of $197 million, or 42 cents a share, down from $382 million, or 78 cents a share, a year earlier.

The latest results included investment losses of $262 million, or 56 cents a share, compared with a loss of $1 million from a year earlier. About $117 million of the loss was from the company's investment in the Icelandic banks. The company also reported losses of $125 million related to certain collateralized debt obligations.

Operating earnings, which exclude investment gains and losses, rose to 98 cents a share from 78 cents. The stronger yen boosted operating earnings by 7 cents a share. Revenue rose 6% to $4.26 billion.

In October, Alfac projected operating earnings of 95 cents to 97 cents a share. Analysts polled by Thomson Reuters expected per-share earnings of $1 on revenue of $4.58 billion.

Premium income in yen grew 3.3% in the company's large Japanese operations. Reflecting the stronger yen, premium income in dollars increased 22% to $2.9 billion. Aflac Japan accounts for more than two-thirds of the company's total revenue.

Alfac U.S. posted a 7% increase in total premium income to $1.1 billion. Total revenue in the U.S. grew 6.2% to $1.2 billion. Alfac said the weak economy continued to pose challenges in the U.S., but said it was expanding its sales force, adding more than 6,000 new associates during the quarter.

Looking ahead, Aflac maintained it expected to boost its operating earnings for the year by 13% to 15% to $4.51 to $4.59 a share, excluding the impact of the yen. Aflac said it expects sales in the U.S. and Japan to be flat to up 5% in 2009.

Until recently, Aflac appeared to have avoided most of the subprime mortgage-related investments that have pulled down insurers.

But recently, the insurer has come under fire for its heavy investments in so-called hybrid securities called perpetual debentures issued by financial institutions in the U.K. and the E.U. that combine elements of equity and debt.

At the end of 2008, Aflac's holdings of such securities were $9.1 billion. At the end of the year, 92% of Aflac's total perpetual debenture securities were rated A or higher by ratings agencies, well into investment grade. Except for the Icelandic bank securities, all of Aflac's debentures were current on interest and principal payments at the end of 2008.

Worries have grown in recent months that a U.K. government takeover of a troubled bank there put a stop to coupon payments on the securities, wiping out investors.

Standard and Poor's cut Aflac's financial strength rating by one notch to AA- last month, and cut its debt rating to A-, due to their concerns about Aflac's investment exposure to global financial institutions through its hybrid securities holdings.

Insurance rater A.M. Best weighed in on Aflac's hybrid exposure Monday as it downgraded Aflac's subsidiaries' issuer credit ratings to aa- from aa Monday, but left its financial strength rating at A+.

A.M. Best also downgraded the issuer credit rating and debt ratings to a- from a on all the outstanding debt of the ultimate parent, Aflac Inc.

Aflac already recorded a write-down from its exposure to the Icelandic banks, and its ties to other banks, including Royal Bank of Scotland PLC (RBS), are a growing concern. Morgan Stanley said about 80% of Aflac's $7.9 billion hybrid securities come from European financial institutions.

-By John Kell, Dow Jones Newswires; 201-938-5285; john.kell@dowjones.com

-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141; lavonne.kuykendall@dowjones.com

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