A.M. Best Avows Aflac's Strength - Analyst Blog
May 31 2011 - 12:33PM
Zacks
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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