CHICAGO - (Business Wire) Fitch Ratings affirmed the 'AA' insurer financial strength rating (IFS) of Aflac Inc.'s insurance operating subsidiaries American Family Life Assurance Co. of Columbus (AFLAC), American Family Life Assurance Co. of New York (Aflac NY), and the Japan branch, Aflac Japan. Fitch has affirmed Aflac Inc.'s IDR at 'AA-' and senior debt rating at 'A+'. The Rating Outlook is Stable.
Aflac's ratings are supported by continued strong operating results, a conservative investment strategy that has succeeded in the difficult Japanese interest rate environment, strong absolute and risk-adjusted capital, and name-brand recognition in a well defined market niche.
Aflac's capital strength is very strong as measured by Prism, Fitch's economic capital model, and is 121% of the 'AAA' threshold for year-end 2006. This score is within Fitch's expectations and in line with 2005's 'AAA' score. Consolidated year-end 2007 risk-based capital of 574% is considered extremely strong.
Aflac's equity credit adjusted leverage was 15.6% at Dec 31, 2007, which is within Fitch's expectation of remaining below 25% and lower than recent years. Earnings coverage of interest expense remained extremely strong at nearly 95 times (x) in 2007, and statutory interest coverage was 59x, reflecting the low cost of yen-denominated debt, which has a weighted average interest rate of 1.4%.
GAAP operating results for 2008 were good, producing company earnings records. Operating earnings before yen appreciation topped $1.6 billion on 13.4% growth, and pretax operating profit margin was a strong 16.1%, a ten year high.
New 2007 annualized sales growth increased in Japan despite industry wide sales slowdowns in the company's key standalone medical product. A 2.4% reduction in sales was better than 2006 and sales grew in the last half of the year indicating improvement and should benefit further in 2008 by new distribution arrangements in the banking and Japanese postal channels. Aflac expects to continue to address its problems with improved distribution training programs and continued new product introductions. New annualized sales growth decreased to 9.5% in the United States as expected after very strong 13% growth in 2006. The company continues to benefit from strong advertising and brand recognition, along with increasing agent productivity and more extensive training programs.
Fitch remains concerned with the low interest rate environments in both Japan and the US, which provide a challenge to Aflac's investment results. Aflac's investment portfolio consists primarily of high quality fixed-income securities with a relatively small allocation of below investment-grade securities, real estate, and loans compared with peers. Approximately 82% of the company's total assets support its Japanese business. To overcome the difficult Japan investment environment, Aflac Japanese invests in private-issue fixed-income securities, which are attractive because they offer higher yields, are issued by a diverse group of non-Japanese corporations, and have longer maturities that better match product liabilities.
Aflac Japan accounts for approximately three-quarters of total operating income for Aflac despite the fact that sales have balanced between Japan and the US over the past several years. Name-brand recognition continues to be a competitive advantage for Aflac Japan. Aflac Japan is a leader in its industry with the largest number of individual insurance policies in-force.
Aflac NY's rating is based on an explicit capital support agreement from AFLAC, as well as its strategic importance within Aflac Inc. Aflac Inc. is a publicly traded holding company with GAAP assets of $66 billion and shareholders' equity of $8.8 billion as of Dec. 31, 2007.
Fitch has affirmed the following ratings with a Stable Rating Outlook:
Aflac Inc.
--Issuer Default Ratings at 'AA-';
--6.5% senior notes due April 2009 at 'A+';
--1.52% Uridashi notes due Sept. 2011 at 'A+';
--2.26% Uridashi notes due Sept. 2016 at 'A+';
--Variable Uridashi notes due Sept. 2011 at 'A+';
--1.87% Samurai notes due June 2012 at 'A+';
--0.71% Samurai notes due July 2010 at 'A+'.
American Family Life Assurance Co. of Columbus
American Family Life Assurance Co. of New York
Aflac Japan
--Insurer financial strength at 'AA'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings
Bruce E. Cox, +1-312-606-2316 (Chicago)
Peter F. Patrino, CFA, +1-312-368-3266 (Chicago)
Kenneth Reed, +1-212-908-0540 (Media Relations, New York)
