Fitch Affirms Aflac Inc. Ratings; Outlook Stable

Wed Apr 10, 2013 2:40pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 10 (Fitch) Fitch Ratings has affirmed the 'A' long-term default (IDR) rating 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. Key Ratings Drivers 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. Fitch's Sovereign rating on Japan is 'A+', with a Negative Outlook. The agency believes that Aflac's ratings can be retained at their current levels provided Japan's Sovereign rating remains 'A' or higher. Fitch views Aflac's ability to generate comparably strong financial results during periods of weak economic conditions in Japan, as well as the capital flexibility bought by the company's branch operation structure, as contributing factors to the notch between Aflac's ratings and Japan's Sovereign rating. Currently, the Japanese market represents over two-thirds of Aflac's profitability. Further, Japanese government bonds (JGB) and agencies represent approximately 43% of total investments. Fitch believes that Aflac has the ability to absorb reasonably foreseeable 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 risk and diversify its portfolio. Gross unrealized investment losses on Aflac's perpetual preferred and financial sector investments were $0.9 billion at Dec. 31, 2012 compared to $2.2 billion at Dec. 31, 2011. Fitch's expectation is that Aflac will continue to generate strong operating earnings in the near term sufficient to offset potential investment-related losses. Recent earnings have been solid; the company generated $4.7 billion of GAAP business segment pre-tax income (before net realized losses) in 2012, which was a 2.4% improvement over 2011. On a statutory basis 2012 operating earnings were $2.2 billion, a 25% improvement over 2011. GAAP interest coverage is consistent with Fitch's median guidelines for an 'AAA' level rating, although coverage has fallen in 2011 and 2012 due to higher interest expenses from increased debt. Statutory basis total adjusted capital (TAC) totaled $8.9 billion at Dec. 31, 2012, a 40% increase compared to year-end 2011. Aflac's consolidated NAIC RBC ratio increased 137 basis points (bps) to a very strong 630%. 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. Ratings Sensitivities The key rating triggers that could result in an upgrade include: --Continued effective management of investment risks; --A decrease in operating leverage below the 10x-11x range; --RBC of 500% or more over several periods, recognizing exchange rates can cause volatility; --Financial leverage in the 20% range or below; --Statutory interest coverage above 6x; 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+'; Negative Outlook), as Fitch would not expect to rate Aflac's IFS rating more than two notches higher than the Japan Sovereign; --Negative developments related to the investment climate in Europe or Japan which cause significant investment impairments or losses in Aflac's capital position; --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 (greater than 16x) 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'; --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-'. --5.5% USD 500 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 'AA-'. Contact: Primary Analyst Bruce E. Cox Director +1-312-606-2316 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Mark Rouck Senior Director +1-312-368-2085 Committee Chairperson Martha Butler Senior Director +1-312-368-3191 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --Insurance Rating Methodology (Jan., 2013). Applicable Criteria and Related Research Insurance Rating Methodology — Amended here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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