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Fitch Avows Aflac's Credibility

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Fitch Ratings affirmed its credit and insurance strength ratings on Aflac Inc. (AFL - Free Report) and its subsidiaries, reflecting its confidence in the fundamental growth of the company.

Accordingly, Aflac and its subsidiaries continue to enjoy an insurance financial strength (IFS) rating of “AA-” and long-term issuer default rating (IDR) of “A.” The outlook was also affirmed at stable, which was upgraded from negative in Apr 2011.

Despite the challenging economic conditions that have recently marred the insurance industry in Japan, Aflac continues to enjoy a modest liquid position.The company’s investments and cash position is experiencing steady growth. At 2012-end, total investment and cash stood at $118.2 billion compared with $103.46 billion at 2011-end, while shareholders' equity totaled $16.0 billion against $13.50 billion during the comparable period.

Furthermore, Aflac’s National Association of Insurance Commissioners (NAIC) risk-based capital ratio strongly increased 137 basis points to 630% at the end of 2012. Moreover, gross unrealized investment losses narrowed to $0.9 billion at 2012-end from $2.2 billion at 2011-end. Going ahead, this strong capital, statutory surplus position and earnings-generation capacity is expected to mitigate balance sheet risk and provide liquidity cushion to its long-term growth.

Based on these factors, Fitch has affirmed the ratings of Aflac although it maintains “A+” sovereign rating on Japan with a negative outlook. The ratings agency further expects to continue to affirm the company’s ratings as long as Japan carries a rating of “A” or above. This also validates Fitch’s confidence in Aflac that has the potential to deliver strong earnings despite vast exposure to the Japanese market.

Although the company’s investment portfolio comprises about 43% in Japanese government bonds amid low interest-rate environment, Fitch believes that this market feature induces Aflac to retain such long-term securities until maturity. Overall, Aflac has been achieving its earnings target for the last 20 years, which is reflected in its consistent dividend increment. Once the economy treads on a more stable path, we believe that the company will be able to gain traction from the increased client activity and product profile.

While Aflac carries a Zacks Rank #4 (Sell), other insurers that are outperforming include Amerisafe Inc. (AMSF - Free Report) , CNO Financial Group Inc. (CNO - Free Report) and Progressive Corp. (PGR - Free Report) . All of these carry a Zacks Rank #1 (Strong Buy).

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