Fitch Affirms Ratings of Aflac Inc.; Outlook Stable

Wed Sep 25, 2013 1:24pm EDT

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(The following statement was released by the rating agency) CHICAGO, September 25 (Fitch) Fitch Ratings has affirmed Aflac Inc.'s (Aflac) 'A ' long-term Issuer Default Rating (IDR) and the 'AA-' Insurance Financial Strength (IFS) ratings of Aflac's insurance subsidiaries. The Rating Outlook is Stable. A complete list of rating actions appears at the end of this release. Key Ratings Drivers The affirmation of Aflac's ratings reflects the company's strong, 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. The Japanese market represents well over two-thirds of Aflac's profitability. Fitch's expectation is that Aflac will continue to generate strong operating earnings in the near term. This reflects Aflac's solid, GAAP business segment pre-tax income (before net realized losses) of $2.5 billion and $4.7 billion in first half 2013 and full year 2012, respectively. GAAP interest coverage and maximum statutory dividend interest coverage (annualized) were 16.9x and 8.4x, respectively for the first half of 2013. Aflac has taken steps over the last two years to reduce its investment risk and diversify its portfolio, resulting in general improvements in investment credit quality. Decreases in perpetual preferred, financial institution, and GIIPS exposure have occurred, while exposures to the broader United States and Canadian markets have increased. Investment impairments in the company's fixed maturities and perpetual preferred securities portfolio have dropped, and the investment situation in Europe has improved. Gross unrealized investment losses on Aflac's perpetual preferred and financial sector investments were $0.9 billion at both June 30, 2013 and year-end 2012 compared to $2.2 billion at Dec. 31, 2011. Total adjusted capital (TAC) was $9.5 billion at June 30, 2013, a 6% increase compared to year-end 2012 and Aflac estimates its consolidated NAIC RBC ratio increased 94 basis points (bps) to a very strong 724% at June 30, 2013. At June 30, 2013 the operating leverage ratio was a strong 10.1x versus 12x at year-end 2012. Aflac's Japanese Solvency Margin remains strong at a reported 585% but has dropped from 669% at year-end 2012 due to an increase in government bond yields. Aflac has announced an unspecified increase in the use of interest rate hedges to help protect its Solvency Margin. 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 Japanese Government Bonds (JGB). Aflac has taken steps to sell and repurchase a significant portion of its JGBs that were held as available for sale and reclassified them as policy reserve matching securities, which can be carried at amortized cost. JGBs and agencies represent approximately 35% of total investments at June 30, 2013. Fitch's concerns in this area are also tempered by Aflac's liability profile that 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. Aflac's leverage ratios remain within rating expectations. The financial leverage ratio increased to 26% at June 30, 2013 from 24% at March 31, 2013 and the total financing and commitments ratio (TFC) to 0.46x from 0.33x, due to a new $700 million debt issuance. GAAP interest coverage is expected to remain consistent with Fitch's median guidelines for an 'AAA' level rating, although coverage will fall due to higher interest expenses from the increased debt. 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); --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. --IDR at 'A'; --3.65% USD 700 million senior notes due June 2023 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% 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: Additional information is available at ''. Applicable Criteria and Related Research: --Insurance Rating Methodology (August 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status 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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