AFL AFLAC Inc

Fitch Ratings affirmed its credit and insurance strength ratings on Aflac Inc. (AFL) and its subsidiaries, on Friday, despite the fact that almost 77% of the company’s operations are based in Japan, which was struck by devastating tsunami, earthquake and nuclear reactor disasters last month.

The rating agency has upgraded its outlook to ‘stable’ from ‘negative,’ based on Aflac’s strong credit quality and reduced exposure to perpetual preferred securities, when compared to its peer group. Accordingly, the company’s subsidiaries continue to enjoy 'AA-' insurance financial strength (IFS) rating.

Fitch also maintained its 'A-' rating on Aflac’s long-term senior unsecured notes that were issued in 2010 -- $300 million senior unsecured notes due 2015 carrying an interest rate of 3.45%, and to $450 million senior unsecured notes due 2040 carrying an interest yield of 6.45%.

In August last year, Fitch assigned an “A-” rating to the above-mentioned senior unsecured notes, though it tagged a negative outlook. This was based on the probability of future impairments in Aflac’s investment portfolio, which can adversely impact its earnings and capital strength.

Nevertheless, as expected, this was a “could-be-risk” scenario as Fitch stressed on Aflac’s strong earnings potential in 2010 and forward, which will help in mitigating risks related to the constitutional capital and also enhance the company’s statutory earnings that have already exceeded $1 billion in 2010.

The net proceeds from Aflac’s senior unsecured notes are projected to be utilized for the full repayment of fixed rate 1.52% Uridashi notes and variable interest rate Uridashi notes, both due in September 2011.

Despite challenging economic conditions that have recently marred the insurance industry in Japan, 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.

Furthermore, Aflac’s National Association of Insurance Commissioners (NAIC) risk-based capital ratio increased about 76 basis points to 555% at the end of 2010. Going ahead, this strong capital and surplus position is expected to mitigate balance sheet risk and provide liquidity cushion to its long-term growth.

With reduced asset impairments that also helped shrink Aflac’s debt-to-capital ratio to about 23%, Fitch believes that Aflac is modestly leveraged to absorb its insurance losses in Japan better than its peers, since the company has minimal operations in the hardest-hit areas.

While Aflac’s key mortality-based products and cancer-related products are supposed to be the areas of concern, Fitch remains confident of the company’s credit quality, which improved modestly over the last few quarters.

Overall, Aflac has been achieving its earnings target for the last 20 years, which is reflected in its consistent dividend increment. Amid nominal economic recovery, Aflac has been able to improve its expense ratio that resulted in consistent profit margin expansion.

Once the economy treads on a more stable path, we believe that the company will be able to gain from the increased client activity and enhancement of its group product platform, which will be eventually reflected in the top- and bottom-line growth in 2011 and beyond.

Aflac primarily competes with Unum Group (UNM) and Catalyst Health Solutions Inc. (CHSI).

 
AFLAC INC (AFL): Free Stock Analysis Report
 
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