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Fitch Affirms Aflac Inc.'s Ratings; Outlook Stable
[August 27, 2015]

Fitch Affirms Aflac Inc.'s Ratings; Outlook Stable


Fitch Ratings has affirmed Aflac Inc.'s (Aflac) 'A' long-term Issuer Default Rating (IDR) and the 'A+' Insurance Financial Strength (IFS) ratings of Aflac's insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings appears at the end of this release.

KEY RATING DRIVERS

The affirmation of Aflac's ratings reflect the company's extremely strong competitive position in the supplemental accident and health insurance markets in Japan and the U.S., its extremely strong earnings profile and very strong capitalization. The ratings also incorporate the impact of slow economic growth in Aflac's key Japanese market and its sizeable exposure to Japanese sovereign risk including significant concentration in Japanese government bonds (JGB).

On April 28, 2015, Fitch downgraded Aflac's IFS rating by one notch to 'A+', as a result of the agency's downgrade of Japan's sovereign rating to 'A' from 'A+'. Aflac Japan comprises more than two-thirds of Aflac's assets, capital and profitability, making Japan's economy a significant business and ratings factor. Factors contributing to the notch between Aflac's ratings and Japan's sovereign rating include Aflac's sizeable global diversification and its ability to generate strong financial results from its U.S. operations.

Aflac maintains a dominant market position in both Japan and the U.S. selling cancer and other supplemental accident and health insurance products. The company's key competitive advantages include its low-cost operations, continued product innovation and brand name recognition. However, Aflac faces growing competition in both Japan and the U.S.

Fitch views Aflac's capitalization as very strong with an estimated NAIC risk-based capital (RBC) ratio of 969% and operating leverage of 7.8x as of March 31, 2015. The company's total adjusted capital (TAC) increased 3% during the first half of 2015 to $11.6 billion as of March 31, 2015. Similarly, Aflac's Japanese Solvency Margin Ratio (SMR) remains strong at 898% as of March 31, 2015.

Aflac's financial leverage ratio remains within rating expectations at 28.4% as of June 30, 2015 and the total financing and commitments ratio (TFC) is modest at 0.6x. The company's debt servicing capability is extremely strong with GAAP interest coverage of 13.9x as of June 30, 2014.

Aflac has significant investment concentration in JGB and related agencies, which represent approximately 36% of total investments as of June 30, 2015. After derisking its portfolio over the last few years, in December 2014, Aflac began deploying alternative investment strategies to enhance yields. Aflac Japan increased the allocation of investments to a senior secured bank loan program, most of which have below-investment-grade ratings, and to a high yield corporate bond program. While Aflac has taken additional asset risk, the agency views its credit quality as acceptable.

Aflac's extremely strong earnings profile reflects the company's very strong underwriting performance over an extended period of time and limited exposure to market-sensitive products. The company reported a 13% decline in pretax operating earnings to $2 billion for first-half 2015, largely due to the weakening yen. When the impact of foreign currency translation is excluded, operating earnings declined by just under 1% during the period. Despite the deterioration, pretax operating margins remained extremely strong at 21.6% for Aflac Japan and 19.2% for Aflac U.S. in first-half 2015 compared with 21.9% and 20.6%, respectively, in the prior year period. Fitch expects the company's profitability metrics to remain with rating expectations over the intermediate term, despite ongoing headwinds associated with a continued weaening yen and low reinvestment rates.



Aflac Japan expanded the distribution of its third-sector (health) products through Japan Post Co., Ltd. (Japan Post) and Kampo (previously Japan Post Insurance Co., Ltd.) and subsequently introduced an exclusive cancer product for that channel. Aflac Japan also enhanced its medical product with new riders in June 2015, which is expected to drive higher sales during the second half of the year. Sales of third sector products are expected to offset the planned decline in first-sector (life) product sales. In the U.S., initiatives taken to improve sales are beginning to gain traction although Aflac faces growing competition in the worksite marketplace.

Fitch views Aflac's asset/liability management as adequate, as investments and liabilities are reasonably well matched. Aflac is exposed to material reinvestment risk due to its long duration liabilities in Japan, but has taken various steps to reduce volatility associated with interest rates. Aflac manages its currency risk by matching yen-denominated assets with yen-denominated liabilities and hedging the yen exposure to its net investment in its Japanese branch operations.


RATING SENSITIVITIES

A one notch upgrade of Aflac's IFS rating could result from an upgrade in Fitch's sovereign rating (local currency) of Japan to 'A+', or higher (currently 'A'/Outlook Stable).

The key rating triggers that could result in a downgrade include:

--A downgrade in Fitch's sovereign rating (local currency) of Japan to 'A-', or lower (currently 'A'/Outlook Stable);

--Significant investment impairments or losses in Aflac's capital position;

--A decline in Aflac's run-rate pre-tax operating margin below 17% in Japan or 15% in U.S.;

--A significant increase in either operating (greater than 16x) or financial leverage (greater than 30%);

--NAIC RBC less than 400%.

Fitch has affirmed the following ratings, with a Stable Outlook:

Aflac Inc.

--Issuer Default Rating (IDR) at 'A';

--1.84% Samurai notes due July 2016 at 'A-';

--2.26% Uridashi notes due September 2016 at 'A-';

--2.65% USD650 million senior notes due Feb. 15, 2017 at 'A-';

--2.4% USD 550 million senior notes due Mar. 16, 2020 at 'A-'

--4.0% USD350 million senior notes due Feb. 15, 2022 at 'A-';

--3.625% USD700 million senior notes due June 2023 at 'A-';

--3.625% USD750 million senior notes due Nov. 15, 2024 at 'A-';

--3.25% USD 450 million senior notes due Mar. 17, 2025 at 'A-'.

--6.9% USD400 million senior notes due Dec. 17, 2039 at 'A-'.

--6.45% USD450 million senior notes due Aug. 15, 2040 at 'A-'

--5.5% USD500 million junior subordinated debentures due Sept. 15, 2052 at 'BBB'.

American Family Life Assurance Co. of Columbus

American Family Life Assurance Co. of New York

Aflac Japan

--IFS at 'A+'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 14 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868367

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990035

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990035

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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