Aflac Inc.’s AFL life/health insurance subsidiaries – American Family Life Assurance Company of Columbus, American Family Life Assurance Company of Columbus (Japan), American Family Life Assurance Company of New York and Continental American Insurance Company – were affirmed financial strength rating of A+ (Superior) and issuer credit rating (ICR) of “aa-” by A. M. Best.
Additionally, A.M. Best affirmed the ICR of “a-” and all existing debt ratings of Aflac. The outlook for all ratings is stable.
The ratings reflect the company’s consistent level of risk-adjusted capitalization, diverse sources of earnings and cash flows. The rating affirmations also suggest the company’s recognized position as a leading provider of individual guaranteed-renewable health and accident insurance both in Japan and the U.S. Furthermore, the ratings indicate A.M. Best’s favorable opinion about Aflac’s execution of its long-term investment allocation strategy.
The company is visibly active in the capital markets as is evident from its most recent note issuance ($1 billion in March 2015). Aflac is expected to prudently use the amount to refinance its high-coupon debt, thereby capitalizing on lower interest rates. Aflac’s debt-to-capital ratio is also in line with peers at 25% and its interest coverage is more than 15 times stronger.
Aflac remains focused on consistently serving and improving its customer base with innovative and value-added products that utilize the latest technology. As an insurer of third-sector risks, the company is a market leader in Japan. Aflac’s individual operations in the U.S. are boosted by its Aflac Group operations, which are marketed out of the entity – Continental American. Good premium persistency across the company’s core products contributed to the overall 76% profitability in the first quarter of 2015.
However, all these positives remain challenged by the low interest rate environment that continues to hinder sales growth in the Japan and U.S. markets. Also, the impact of currency volatility on consolidated results has been affecting the company adversely.
Aflac has reported favorable operating results over the past several years despite top-line challenges. The weakening of the Japanese yen against the U.S. dollar has hampered the operating profitability of the company. Hence, in order to improve the profitability the company bore extra expenses for the modifications in the commission structure of its domestic distribution system, which were reflected in the results.
Aflac’s operating results have consistently been supported by a steady stream of net investment income from its long-term investment strategy. A.M. Best, however, anticipates that cash flows for investment will be lower in the near to medium term. This is mainly due to lower sales of higher premium first-sector products in Japan.
The Zacks Rank #3 (Hold) stock is likely to witness an upgrade in the ratings if it manages to sustain growth in both sales and statutory operating results from its domestic and Japanese operations. Nevertheless, a decline in net premiums in Aflac’s core lines of business, sizable investment impairments/losses or a material deterioration in risk-adjusted capitalization can result in a negative rating action for the company.
Better-ranked stocks from the insurance sector include Endurance Specialty Holdings Ltd. ENH, Markel Corp. MKL and State Auto Financial Corp. STFC. All these stocks sport a Zacks Rank #1 (Strong Buy).
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