Yesterday, Aflac Inc. (AFL - Analyst Report) had its junior subordinated debt rated by Standard & Poor's Ratings Services (S&P) at “BBB”, while the counterparty credit rating was denoted at “A-”. However, the outlook remains negative based on the negative sovereign rating in Japan.
Primarily, the rating agency assigned the “BBB” rating to Aflac’s recently issued long-term junior subordinated debentures worth $500 million. The debentures are slated to expire in 2052.The amount of the proceeds is expected to inject ample liquidity by utilizing funds for general corporate and capital purposes.
Following this debt issue, Aflac’s financial leverage is estimated to be about 25%, while fixed-charge coverage is projected to be within 20x, which aligns well with the company’s ratings, according to S&P. Meanwhile, in July 2012, ratings agency – A.M. Best Co. disclosed its rating of “a-” to the senior unsecured notes issued by Aflac, with a stable outlook. At that time, this rating agency had expected the company’s interest coverage to remain over 10x and financial leverage to stay below 25%.
Nevertheless, both the rating agencies have been backed by Aflac’s consistent growth of 3% in the U.S. in the first half of 2012, coupled with solid 51% growth in Japan, driven by vigorous bank channel and cancer product sales. Consequently, operating earnings climbed 3.4% for Aflac in the first half of 2012.
Further, the company’s National Association of Insurance Commissioners (NAIC) estimated risk-based capital ratio of 560 600% in the first half of 2012, improving from 493% in 2011, reflects its stable returns and appears impressive amid the ongoing de-risking program. Going ahead, the strong capital and surplus cash position is expected to mitigate this balance sheet risk and provide liquidity cushion to its long-term growth.
Overall, Aflac’s strong brand name and solid business model enabled it to improve earnings considerably faster than other life and health insurers such as Unum Group (UNM - Analyst Report) and Employer Holdings Inc. (EIG - Snapshot Report).
Moreover, the company’s strong capital and surplus cash position is expected to mitigate balance-sheet risks and provide liquidity cushion in the long run, as well as return value to shareholders consistently. Hence, we continue to retain our long-term Neutral stance on the stock, with a Zacks Rank #3, implying a short-term Hold rating.