A.M. Best Rates Aflac Notes - Analyst Blog

Basking after a good quarter, Aflac Inc. (AFL) announced on Friday that rating agency A.M. Best Co. assigned debt ratings to its newly issued senior debt securities. The existing financial strength, issuer credit and debt ratings for Aflac remain unaltered.

Accordingly, A.M. Best has provided an “a-” rating to Aflac’s newly issued $300 million senior unsecured notes due 2015, and to $450 million senior unsecured notes due 2040. While the $300 million notes carry an interest rate of 3.45%, the $450 million notes have an interest yield of 6.45%.

A.M. Best’s debt rating of “a-” reflects a stable outlook for Aflac’s debt securities. This is based on the opinion that the newly issued unsecured notes will help increase Aflac’s financial leverage without posing much risk to the capital, which now enjoys a healthy risk-adjusted capital position.

Consistent with the current ratings and outlook, Aflac’s financial leverage is estimated to be around 25%, which is considered appropriate for the rating category. Further, the rating agency believes that Aflac has the potential to withstand any write-offs in its bond portfolio.

Moreover, the strong performance in Aflac’s operations in Japan and the steady improvement in the company’s U.S. wing provide ample confidence for long-term growth. In addition, the improving macro factors along with a stronger yen are also helping in reducing realized investment losses. Going forward, these factors showcase a positive operating climate for Aflac, both in Japan and the U.S.

Given these healthy growth prospects for Aflac, Fitch Ratings also assigned an “A-” rating to the above mentioned senior unsecured notes on Aug 6, with 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, this is a “could-be-risk” scenario as Fitch stresses 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 recently.

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. In addition, Aflac's management also expects to fund its stock repurchase program, the recommencement of which was announced last week, along with its general corporate expenses. Aflac had shelved its share repurchase program in 2008.

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 favorably 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 steady growth. The cash position increased to $73.2 billion in 2009 from $68.6 billion in 2008, thereby providing ample operating leverage to the balance sheet.

Based on this sturdy liquidity position, Aflac recently raised its fourth quarter dividend by 7.1% to 30 cents from 28 cents per share. Going ahead, Aflac’s strong capital and surplus position is expected to mitigate balance sheet risk and provide a liquidity cushion to its long-term growth, as well as provide value to shareholders.
 
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