S&P Raises L-T Counterparty Rating on Aflac (AFL) to 'A'

Standard & Poor's Rating Service said that it has raised its long-term counterparty credit rating on Aflac Inc. (NYSE: AFL) to 'A' from 'A-'. We also raised our ratings on the company's senior debt to 'A' from 'A-' and junior subordinated debt to 'BBB+' from 'BBB'. At the same time, we are affirming our 'AA-' financial strength and counterparty credit ratings on the company's core insurance entities: American Family Life Assurance Co. of Columbus, American Family Life Assurance Co. Japan Branch, and American Family Life Assurance Co. of NY (collectively, Aflac). The outlook is negative.

"We are raising our rating on the nonoperating holding company, Aflac Inc., making it two notches, instead of the standard three, lower than the financial strength rating of the operating companies," said Standard & Poor's credit analyst Deep Banerjee. "We based the upgrade on very strong fixed-charge coverage ratio, 15x as of year-end 2013, moderate financial leverage--including debt, hybrids, unfunded pension obligations, and net present value of operating leverage--for the current rating level, strong operating company dividend capacity, and liquidity at the holding company relative to its ongoing obligations, such as interest and principal payments on debt."

Somewhat constraining our view of the holding company strengths is the lack of diversity among regulated subsidiaries in terms of domiciles. Aflac Japan, which is a branch in Japan, resides under the group's lead operating company, American Family Life Assurance Co. of Columbus which is domiciled in Nebraska. The Aflac Japan branch repatriates profits to the lead operating company in Nebraska, which up-streams dividends to the holding company, Aflac Inc. So, profits originating in Japan are subject to the regulatory scrutiny of both the Japanese regulator (FSA) and the Nebraska Insurance Dept. before they reach Aflac Inc. Aflac Japan has not faced any significant regulatory restrictions so far in terms of repatriating profits, and we do not expect it to so long as it maintains an adequate regulatory solvency margin ratio or capitalization in Japan. We feel the company's strengths outweigh this potential bottleneck, as well as the fact that the holding company receives some additional payments in the form of management fees and expenses from its operating entities that are outside the ordinary dividend capacity.

We base our financial strength ratings of the group's operating companies on Aflac's, in our view, very strong business and financial risk profiles. Our view on Aflac's business risk profile stems from the intermediate industry and country risk and very strong competitive position with a well-recognized brand, strong operating performance, and leading market share in its core products. We regard Aflac's financial risk profile as very strong, reflecting very strong risk based capitalization as measured by our insurance capital model, intermediate risk position constrained by single-issuer concentration, albeit declining, in Japanese government bonds, and strong financial flexibility stemming from wide access to capital markets and strong consolidated fixed-charge coverage.

The negative outlook on Aflac parallels our negative outlook on Japan. Any downward movement in our sovereign rating on Japan will lead to a commensurate downward movement in our ratings on Aflac. On a stand-alone basis, we expect Aflac to continue generating above-industry average operating earnings and retain capitalization at least at the 'AA' level per our capital model. We expect the company to continue to diversify its investment portfolio and have a much lower than historic levels of investment-related losses in 2014 and 2015.

"We could revise the outlook to stable from negative at the current rating level if we revise our outlook on the Japan sovereign to stable at the current rating, or Aflac passes both the capital and liquidity stress test as per our methodology related to rating above the sovereign, or if the company has a well-documented risk- mitigation plan that would alleviate the risk associated with a sovereign default stress scenario," Mr. Banerjee continued. "We could take a negative rating action on Aflac if we lower our sovereign rating on Japan, or if Aflac's capitalization deteriorates so that it is no longer redundant at the 'AA' as per our insurance capital model or if there is a significant decline in earnings over the next 12-24 months."

We could apply the standard three-notch differential between our ratings on the operating company and those on the holding company if fixed-charge coverage falls below 12x on a consistent basis, financial leverage stays higher than 25%-30%, or if the company's shareholder dividends or share buybacks are greater than we expect, resulting in reduced holding company liquidity.

Our ratings on companies are usually no higher than our ratings on the sovereign where these firms have a majority of their operations or significant amount of invested assets. Since Aflac is currently rated at the same level as our rating on the Japanese sovereign, there is limited likelihood of Aflac's rating being upgraded.

You May Also Be Interested In

• Growth isn't weak enough to truly undercut inflation pressures - BMO
• Safe & Green (SGBX) Provides Update on Audit and Planned 10-K Filing
• Comerica (CMA) PT Raised to $54 at Piper Sandler