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Ratings agency, A.M. Best, reiterated its credit and insurance strength ratings on Aflac Inc. (AFL - Analyst Report) and its operating divisions, maintaining a stable outlook. Accordingly, the rating agency affirmed an issuer credit rating (ICR) of “a-” on Aflac’s senior unsecured debt and “bbb+” rating on subordinated debt and senior debentures.

Simultaneously, A.M. Best also asserted its financial strength rating (FSR) of “A+” (Superior) and ICR of “aa-” on all the subsidiaries of Aflac. The subsidiaries include American Family Life Assurance Co. of Columbus (Omaha), American Family Life Assurance Co. of Columbus (Japan Branch), its wholly owned subsidiary, American Family Life Assurance Co. of New York (New York) and Continental American Insurance Co.

Rationale for Ratings

A.M. Best remains confident about Aflac’s core operating strength. The company’s dominant position in Japan also supports a consistent growth outlook, according to the firm. Its bank channel sales, covering more than 90% of the banks in Japan, and WAYS policies have been steady revenue drivers so far, and exceeded the annualized premium sales target for the past couple of years.

Although Aflac's key mortality-based products and cancer-related products in Japan are areas of concern, these products are expected to gain traction in the near future. Moreover, the ratings are based on Aflac’s significant improvement in the U.S. operations owing to increase in agent production and improved distribution channels amid the weak sales environment.

Along with a strong brand name, Aflac enjoys a solid business model and healthy risk-based capitalization with reduced asset impairments. Healthy financial leverage and interest-coverage ratios also reflect a minimal risk exposure and strong solvency ratio. At the end of Mar 2013, Aflac projected its risk-based capital ratio to be higher than 630% at 2012-end, whereas its solvency ratio in Japan is expected to exceed 669% at 2012-end.

However, A.M. Best believes that Aflac’s earnings will be hampered by consistent realized investment losses at least until the de-risking activities are completed. Although the company’s exposure in the European sovereign debt and hybrid securities has narrowed from the past years, it continues to pose risk from impairments on investment portfolio in the future.

Overall, we believe that Aflac has the potential to maintain its dominant position in Japan and expand its reach in the U.S. markets, once the dollar/yen exchange rates improve and interest-rate fluctuations subside. This will pave the way for extended investment and growth opportunities, thereby generating higher earnings for the company.

While Aflac carries a Zacks Rank #4 (Sell), other outperformers in the insurance sector such as Amerisafe Inc. (AMSF - Analyst Report), Hilltop Holdings Inc. (HTH - Analyst Report) and Employers Holdings Inc. (EIG - Snapshot Report) are worth a look. All these stocks carry a Zacks Rank #1 (Strong Buy).

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