TEXT-Fitch rates Aflac debt issuance 'BBB'

Fri Sep 21, 2012 11:03am EDT

Sept 21 - Fitch Ratings has assigned a 'BBB' rating to Aflac's  
recently announced $450 million junior subordinated debentures issuance. 
Fitch also affirmed the 'A' long-term Issuer Default Rating (IDR) and the 'AA-' 
Insurance Financial Strength (IFS) ratings of Aflac, Inc. and its insurance 
subsidiaries. The Rating Outlook is Stable. A complete list of ratings appears 
at the end of this release.

Fitch expects proceeds from the new debentures to be used for general corporate 
purposes. At June 30, 2012, Aflac's financial leverage and total financing and 
commitments (TFC) ratios were 22.4% and 0.3x, respectively. Fitch also notes 
that on July 31, 2012 Aflac issued $250 million of new securities under 
flexibility available to increase the size of a Feb. 15, 2012 issuance 
previously rated by Fitch. Pro forma for the new issuances, Aflac's financial 
leverage and TFC of 25.6% and 0.36x remain consistent with its rating category.

The affirmation of Aflac's ratings reflects the company's strong and steady 
earnings, leverage ratios that are consistent with expectations for the rating 
category, strong balance sheet, and high regulatory risk-based capital (RBC) 
ratios. The ratings also incorporate Fitch's view that Aflac's GAAP basis 
shareholders' equity is comparatively highly exposed to interest rate risk as 
well as the impact of overall low economic growth in the company's key Japanese 
market. 

While the sovereign rating on Japan is now 'A+' with a Negative Outlook, Fitch 
believes Aflac's strong financial profile allows the company's ratings to be 
higher than the sovereign rating. However, future negative rating actions on the
sovereign could result in adverse rating actions on Aflac. Currently, the 
Japanese market represents over two-thirds of Aflac's profitability. Further, 
Japanese Government Bonds (JGB) and agencies represent approximately 35% of 
total investments. 

As a result of maturities, divestitures, and write-downs within Aflac's 
investment portfolio, Fitch believes that Aflac has the ability to absorb 
potential impairments in the company's fixed maturities and perpetual preferred 
securities portfolio despite the evolving situation in Europe. The agency's view
reflects general improvements in corporate credit quality as well as steps Aflac
has taken over the last two years to reduce its investment exposure to perpetual
preferred securities and financial sector investments. Gross unrealized 
investment losses on Aflac's perpetual preferred and financial sector 
investments were $1.9 billion at June 30, 2012 compared to $2.2 billion at Dec. 
31, 2011. 

Fitch believes Aflac will continue to generate strong operating earnings in the 
near term sufficient to offset likely investment related losses. Recent earnings
have been solid; the company generated $2.4 billion of GAAP business-segment 
pre-tax income (before net realized losses) in the first half 2012 (1H'12), 
which was a 5.4% improvement over 1H'11. On a statutory basis for the 1H'12 
operating earnings were $2.2 billion, a 25% improvement over 2011. While GAAP 
interest coverage still fits into Fitch's median guidelines for an 'AAA' level 
rating, coverage has fallen in 2011 and 2012 due to higher interest expenses 
from increased debt.

Statutory-basis total adjusted capital (TAC) totaled $7.8 billion at June 30, 
2012, a 22% increase compared to year-end 2011. Fitch estimates Aflac's 
consolidated NAIC RBC ratio increased 82 basis points (bps) to 575%. 

 

Fitch notes that due to the long duration of Aflac's investment portfolio the 
company's GAAP shareholders' equity is susceptible to significant mark-to-market
volatility from changes in interest rates, particularly in JGB bonds. Fitch's 
concerns in this area are tempered by Aflac's liability profile which limits 
liquidity risks and, in Fitch's view, enhances Aflac's ability to hold long 
duration investments to maturity. Additionally, the agency believes Aflac's 
investments and liabilities are reasonably well matched. 

Fitch believes that an upgrade in Aflac's ratings over the next 12-24 months is 
unlikely due to potential market value volatility of the company's investment 
portfolio.

  

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

--A negative change in the fragile investment climate in Europe or Japan that 
could lead to significant investment impairments or losses in Aflac's investment
portfolio; 

--A decline in Fitch's estimate of Aflac's run-rate earnings or profitability 
(ROA less than 3.5%) over the next several years; 

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

--Prolonged RBC less than 400%.

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

Aflac Inc.
--Issuer Default Rating (IDR) at 'A'.

American Family Life Assurance Co. of Columbus
American Family Life Assurance Co. of New York
Aflac Japan
--IFS at 'AA-'.

Fitch has affirmed the following ratings: 

Aflac Inc.
--2.26% Uridashi notes due September 2016 at 'A-';
--1.47% Samurai notes due July 2014 at 'A-';
--1.84% Samurai notes due July 2016 at 'A-';
--Variable Samurai notes due July 2014 at 'A-';
--8.5% senior notes due May 15, 2019 at 'A-';
--6.9% senior notes due Dec. 17, 2039 at 'A-'. 
--3.45% USD 300 million senior notes due Aug. 15, 2015 at 'A-';
--6.45% USD 450 million senior notes due Aug. 15, 2040 at 'A-'
--2.65% USD 650 million senior notes due Feb. 15, 2017 at 'A-';
--4.0% USD 350 million senior notes due Feb. 15, 2022 at 'A-'.

Fitch has assigned the following new rating:

Aflac Inc.
--5.5% USD 450 million junior subordinated debentures due 2052 at 'BBB'.
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