Phoenix It (LSE:PNX)
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U.S. life insurers got a lift Thursday as a major U.K. bank announced plans to strengthen its capital base, which eases fears around the security of its equity and debt offerings.

Shares of Aflac Inc. (AFL), an investor in hybrid securities issued by Royal Bank of Scotland Group PLC (RBS), shot up 19% recently after the U.K. bank outlined its plan to commit over GBP300 of troubled assets it owns to the U.K.'s asset protection program.

The U.K. Treasury will cover any losses on the assets after RBS covers the first GBP19.5 billion, relieving pressure on the bank's capital.

Aflac's heavy investment in perpetual debentures issued by U.K. and E.U. banks earned the insurer negative attention from analysts and contributed to a credit rating downgrade from Standard and Poor's in January.

At the end of 2008, Aflac held about $8 billion in hybrid securities, around 11.8% of its consolidated investment portfolio of $68.6 billion. About $275 million of that was invested in securities issued by RBS.

A report in January from Morgan Stanley (MS) cautioned investors that Aflac had too heavy an investment concentration in the securities. Investors worried that a government takeover of troubled banks could wipe out hybrid securities such as perpetual debentures, which are similar to preferred shares but typically do not have a stated maturity date.

After the report, Aflac shares dropped more than 30%, but regained some of that loss in early trading Thursday.

Aflac draws the most attention because of its outsized exposure to the securities, but the issue could come up on a smaller scale for other insurers with investments in bank-issued hybrid securities and preferred shares, said UBS AG (UBS) analyst Andrew Kligerman.

Other insurers with substantial exposure to hybrids as a share of their book value are Principal Financial Group (PFG), Protective Life Corp. (PL) and Phoenix Cos. (PNX), according to a report by Kligerman.

In terms of third-quarter adjusted book value after AOCI (accumulated other comprehensive income), these three companies' exposure levels are at 9%, 8% and 7%, respectively, compared with 63% for Aflac, Kligerman said.

Shares of Principal were up 4.8% recently to $10.83, Protective Life traded up 16% to $5.09, and Phoenix Cos. was down 3% to 96 cents.

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