A.M. Best Affirms Ratings of Aflac Incorporated and Its Subsidiaries

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best has affirmed the financial strength rating of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of American Family Life Assurance Company of Columbus (Omaha, NE), American Family Life Assurance Company of Columbus (Japan Branch), American Family Life Assurance Company of New York (New York, NY) and Continental American Insurance Company (Continental American) (Columbia, SC). These companies represent the life/health insurance subsidiaries of Aflac Incorporated (Aflac) (Columbus, GA) [NYSE: AFL]. Concurrently, A.M. Best has affirmed the ICR of “a-” and all existing debt ratings of Aflac. The outlook for all ratings is stable. (See below for a detailed listing of debt ratings.)

The ratings recognize Aflac’s strong risk-adjusted capitalization, diverse sources of earnings and cash flows and its recognized position as a leading provider of individual guaranteed-renewable health and accident insurance both in Japan and the United States. In addition, the ratings reflect A.M. Best’s favorable view of the company’s execution of its long-term investment allocation strategy. Partially offsetting these strengths are the challenges Aflac has experienced more recently in growing sales in its Japan and U.S. markets and the impact of currency volatility on consolidated results.

Aflac continues to maintain strong risk-adjusted capital at its operating subsidiaries supported by consistent earnings and good liquidity throughout the organization. Additionally, the company is fairly active in the capital markets, with its most recent note issuance ($1 billion in March 2015) used to refinance high-coupon debt. Aflac’s debt-to-capital ratio is in line with peers at approximately 25% and interest coverage is strong at over 15 times.

Aflac possesses a strong global franchise and is focused on development of innovative, value-added products utilizing advanced technology to serve its large customer base. The company holds a market leading position in Japan as an insurer of third sector (i.e. cancer and medical insurance) risks. In the United States, Aflac’s individual operations are further enhanced by its Aflac Group operations, marketed out of the Continental American entity. Aflac’s overall profitability has been supported by good premium persistency across its core products, at around 76% through first quarter 2015. However, the company has recently been challenged to report material sales growth in the United States and Japan. The pronounced low interest rate environment has hindered sales of first sector (life insurance) products in Japan, and domestic sales have been relatively flat due to increased competition in the worksite/voluntary market.

Despite top-line challenges, Aflac has reported favorable operating results over the past several years. A.M. Best notes that recent operating profitability has been hampered by the significant weakening of the Japanese yen relative to the U.S. dollar. Results also reflect additional expenses related to modifications in the commission structure for Aflac’s domestic distribution system to enhance profitability going forward. Aflac’s operating results have consistently been supported by a steady stream of net investment income derived from its long-term investment strategy, which encompassed de-risking the portfolio and implementing interest rate and foreign currency hedges. The company holds a high proportion of Japanese government bonds and, going forward, will look to enhance yield through select allocations to high-yield bonds and bank loans. A.M. Best anticipates that cash flows for investment will be somewhat lower in the near to medium term due to materially lower sales of higher-premium, first sector products in Japan.

Factors that could lead to a positive rating action include material, sustained growth in both sales and statutory operating results from Aflac’s domestic and Japanese operations. Factors that could lead to a negative rating action include a significant decline in net premiums in Aflac’s core lines of business, sizable investment impairments/losses or a material deterioration in risk-adjusted capitalization.

The following debt ratings have been affirmed:

Aflac Incorporated—

-- “a-” on $300 million 3.45% senior unsecured notes, due 2015

-- “a-” on $650 million 2.65% senior unsecured notes, due 2017

-- “a-” on $550 million 2.40% senior unsecured notes, due 2020

-- “a-” on $350 million 4.00% senior unsecured notes, due 2022

-- “a-” on $700 million 3.625% senior unsecured notes, due 2023

-- “a-” on $750 million 3.625% senior unsecured notes, due 2024

-- “a-” on $450 million 3.25% senior unsecured notes, due 2025

-- “a-” on $400 million 6.90% senior unsecured notes, due 2039

-- “a-” on $450 million 6.45% senior unsecured notes, due 2040

-- “bbb+” on $450 million 5.50% subordinated debentures, due 2052

Yen-denominated Samurai notes:

-- “a-” on JPY 15.8 billion 1.84% senior unsecured notes, due 2016

Yen-denominated Uridashi notes:

-- “a-” on JPY 8 billion 2.26% senior unsecured notes, due 2016

The following indicative ratings have been assigned to securities available under the recently renewed shelf registration:

Aflac Incorporated—

-- “a-” on senior unsecured debt

-- “bbb+” on subordinated debt

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

• Analyzing Insurance Holding Company Liquidity
• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for U.S. and Canadian Life/Health Insurers
• A.M. Best's Liquidity Model for U.S. Life Insurers
• A.M. Best's Perspective on Operating Leverage
• Equity Credit for Hybrid Securities
• Evaluating Country Risk
• Insurance Holding Company and Debt Ratings

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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A.M. Best Company
Kate Steffanelli
Senior Financial Analyst
(908) 439-2200, ext. 5063
[email protected]
or
Andrew Edelsberg
Vice President
(908) 439-2200, ext. 5182
[email protected]
or
Christopher Sharkey
Manager, Public Relations
(908) 439-2200, ext. 5159
[email protected]
or
Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
[email protected]

Source: A.M. Best Company

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