Shares of Aflac (AFL) dropped to their lowest level in seven years Thursday after an analyst said the insurer's exposure to hybrid securities issued by European banks, including Royal Bank of Scotland Group PLC (RBS), is a "rapidly escalating concern."

Aflac shares fell 39% to $22.12 in morning trading after Morgan Stanley analyst Nigel Dally told the firm's clients to avoid Aflac's stock due to its $7.9 billion of exposure to securities that have been sharply marked-down after European financial firms announced large losses this week.

"If even a small portion of these losses are realized, the hit to Aflac's capital ratios could be substantial, and their overall capital adequacy could be significantly less than most investors believe."

Dally said that securities issued by Royal Bank of Scotland, which said Monday its losses last year could be the largest corporate losses in the history of the U.K., and other European banks have declined 30% or more, to in many cases well below 50 cents on the dollar.

An Aflac spokeswoman wasn't immediately available to comment. The company is scheduled to report its fourth-quarter earnings on Feb. 2.

-By Ed Welsch, Dow Jones Newswires; 201-938-5244; edward.welsch@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary. You can use this link on the day this article is published and the following day.