Rating Action on Aflac - Analyst Blog

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A.M. Best Co. reiterated issuer credit rating ("ICR") of "a-" of Aflac Inc. ( AFL ). The rating agency also affirmed the present debt ratings of the company.

Concurrently, A.M. Best reiterated the financial strength rating ("FSR") of A+ (Superior) and ICR of "aa-" of American Family Life Assurance Company of Columbus (Omaha, NE), American Family Life Assurance Company of Columbus(Japan Branch), American Family Life Assurance Company of New York (New York, New York) and Continental American Insurance Company (Continental American) (Columbia, SC), the company's subsidiaries.

The outlook of all rating remains stable.

The ratings further reiterate Aflac's dominant position as life insurance and individual guaranteed-renewable health and accident insurance provider in Japan and the United States. The ratings also reflect Aflac's solid top-line growth and enhanced operating earnings coupled with its ability to maintain adequate risk-adjusted capital ratios over the past few quarters.

Aflac delivered strong operating results over the preceding quarters on the heels of better performances by its subsidiaries. The improved performances were driven by prudent restraint over expenses control and controlled distribution strategy.

Almost 75% of the company's sales and premiums come from Japan. Aflac has grown primarily on the heels of its insurance operations in Japan. Alongside, substantial improvement in group sales from Continental American's worksite distribution drove sales growth in the United States.

The rating agency noted that Aflac's endeavor to diversify its product offering has helped it to deliver comparatively stable operating results.

However, Aflac recorded huge impairments in its investment portfolio in 2011, largely due to investment de-risking activities, which is a part of its new investment strategy.  The company continues to have European exposure, more specifically to European perpetual preferred investments. The rating agency remains concerned regarding the adverse impact on earnings and capital, stemming from repositioning investment portfolio and expected losses.

Nevertheless A.M. Best believes Aflac can weather losses within its investment portfolio on the back of solid earnings stream, healthy cash flows and favorable risk-adjusted capitalization.

A.M. Best stated that the ratings could be subject to downgrade if Aflac incurs huge losses owing to the execution of a new investment strategy, decline in premiums in its core business lines or capital erosion in its subsidiaries.

We believe, the company's strong ratings scores from eminent credit rating agencies will help retain investor confidence and augment its business going forward.

We retain our long term Neutral recommendation on Aflac Inc. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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