Rating agency, A.M. Best, reiterated its credit and insurance strength ratings on Aflac Inc. (AFL) and its operating divisions, on Friday, maintaining a stable outlook. This came in despite the fact that almost 77% of the company’s operations are based in Japan, which was struck by devastating tsunami and earthquake in March this year, resulting in a challenging operating environment for the company.

Accordingly, the rating agency affirmed an issuer credit rating (ICR) of “a-” on Aflac’s senior unsecured debt and “bbb+” rating on subordinated debt. Subsequently, A.M. Best also asserted its financial strength rating (FSR) of “A+” (Superior) and ICR of “aa-” on all the subsidiaries of Aflac, which includes American Family Life Assurance Co of Columbus (Omaha, NE), American Family Life Assurance Co of Columbus (Japan Branch), its wholly owned subsidiary, American Family Life Assurance Co of New York (New York, NY) and Continental American Insurance Co.

The rating agency also maintained “a-” rating for Aflac’s senior unsecured notes worth $300 million with interest of 3.45% due 2015, $850 million with interest of 8.5% due 2019, $396 million with interest of 6.90% due 2039 and $448 million carrying interest of 6.45% due 2040.

The “a-” was also restated upon Aflac’s Samurai notes due in 2012 and Uridashi notes, $35 billion of which is due in 2011 while $8 billion notes are due 2016.

The ratings are based on Aflac’s significant improvement in the US operations owing to increase in agent production amid the weak sales environment. In Japan, its premier position led to a healthy performance in the first quarter of 2011, despite the substantial catastrophe losses.

The company still manages to retain a sizeable position in the supplemental health market although its key mortality-based products and cancer-related products are areas of concern.

Moreover, the company’s unsecured debt is aiding in improving the financial leverage without posing much risk to the capital. The company already has sufficient fund sources for meeting its debt maturities in 2011.

With an estimated financial leverage below 25%, Aflac enjoys a healthy risk-adjusted capital position along with reduced asset impairments. Further, the rating agency believes that Aflac has the potential to withstand any write-offs in its bond portfolio. These factors provide ample confidence for long-term growth.

However, the catastrophes have hit in the eye of Japan’s economy and would weigh on the sales growth and expenses. Moreover, Aflac’s realized investment losses have escalated due to its ongoing de-risking activities. The company’s substantial exposure in the European sovereign debt and hybrid securities risk future impairments in Aflac’s investment portfolio, which can adversely impact its earnings and capital strength.

Overall, we believe that Aflac has fairly weathered the storm, given the strong position in its Japan wing, the CAIC acquisition in 2009 and the improving markets that are favourably affecting the dollar/yen exchange rates while providing investment opportunities.

Moreover, despite challenging economic conditions that have marred the insurance industry, Aflac continues to enjoy a modest liquid position.The company’s investments and cash position is experiencing a steady growth. Cash position increased to $88.2 billion in 2010 from $73.2 billion in 2009, $68.6 billion in 2008 and $57.1 billion in 2007, thereby providing ample operating leverage to the balance sheet.

Going ahead, Aflac’s strong capital and surplus position is expected to mitigate balance sheet risk and provide liquidity cushion to its long term growth, while efficiently returning wealth to shareholders.

 
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