Aflac Inc.'s credit ratings affirmed at S&P due to robust capital buffers

Published 05-02-2025, 03:34 am
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Investing.com -- Aflac Inc (NYSE:AFL).'s issuer credit ratings have been confirmed by S&P Global (NYSE:SPGI) Ratings due to the company's robust capital and earnings profile. The ratings agency has upgraded its financial risk profile assessment for Aflac from strong to very strong and affirmed the 'A-' issuer credit ratings for Aflac Inc. and 'A+' issuer credit and financial strength ratings for Aflac's core operating companies. The outlook remains stable, reflecting the expectation that Aflac will continue to maintain its strong position in its core market while preserving capital strength in line with its financial risk.

S&P Global Ratings affirmed the 'A+' long-term financial strength and issuer credit ratings for Aflac's core operating companies, namely American Family Life Assurance Co. of Columbus (WA:CLC), American Family Life Assurance Co. - Japan Branch, and American Family Life Assurance Co. of New York, collectively known as Aflac. The 'A-' long-term issuer credit ratings for the holding company, Aflac Inc., were also confirmed.

The revised financial risk profile assessment from strong to very strong is a result of Aflac's consistent maintenance of capital redundancy above the 99.95% confidence level. Despite some expected interim capital volatility following Aflac Japan's conversion from a branch to a subsidiary and the implementation of U.S. generally accepted accounting principles (GAAP) Long-Duration Targeted Improvement (LDTI), Aflac has managed to maintain its capital strength.

Aflac's competitive position is seen as very strong due to its geographically diverse business model, strong foothold in core markets, robust operating performance, well-recognized brand, and solid distribution network. Aflac is the largest insurer of cancer insurance and supplemental medical insurance products in Japan, holding about 60.7% of Japan's in force cancer insurance market and 12.8% of the stand-alone medical insurance market as of December 2023. In the U.S., Aflac maintains a strong position in voluntary supplemental insurance, such as income and asset protection products, through employers.

Despite the company's strong position, its high exposure to Japan's life market poses some risk due to the country's prolonged low interest rate environment and an aging and declining population. Aflac has been investing in adding new products for the younger and middle-age population, supported by its lower benefit ratio and expense ratio. The company's operating performance is expected to remain strong, with a five-year average (2019-2023) GAAP return on revenue of 24%, and GAAP return on assets of 3.3%. As of the third quarter of 2024, Aflac reported a robust 31.6% return on revenue.

Aflac's investment portfolio, primarily composed of fixed-income investments and cash with an average credit quality of 'A', is managed prudently. Riskier investments including equities, hedge funds, middle-market loans, and private equity represent less than 10% of total assets. However, the company's significant concentration in Japanese national government bonds is a key risk. The company has $57 billion of yen denominated assets backing its yen denominated liabilities. Aflac does not hedge its earnings for foreign exchange risk, but hedges any currency risk associated with capital and surplus that is held at Aflac Inc. in U.S. dollars.

Aflac's funding structure is seen as neutral to the rating. The company has accessed capital markets in both Japan and the U.S., even in challenging macroeconomic conditions. Aflac's financial leverage on a reported equity basis decreased to 24.6% as of Sept. 30, 2024. Excluding accumulated other comprehensive income, adjusted financial leverage was 22.1%. Aflac's EBITDA fixed-charge coverage ratio remained strong at 27.7x, as of Sep. 30, 2024.

The ratings on Aflac are constrained by the sovereign credit rating on Japan (A+/Stable/A-1) since most of Aflac's assets and earnings are from its Japanese operations. Aflac Inc. benefits from a two notch difference between the holding company and operating companies, given that Aflac Japan is the holding company's largest contributor of earnings and dividends. The company's liquidity is regarded as exceptional, consistent with its liability profile.

The stable outlook is based on Aflac's stand-alone credit profile and the stable rating outlook on Japan. On a stand-alone basis, Aflac is expected to continue generating operating earnings that are above the industry average, maintain its leading market position, and retain at least a very strong capital and earnings profile.

The ratings on Aflac could be lowered in the next 24 months if the rating on Japan is lowered or if capital adequacy falls substantially and the group's differentiating business strengths diminish. The ratings could be raised if the rating on Japan is raised, Aflac diversifies its assets and operations significantly outside of Japan, Aflac's board of directors approves an adequate risk mitigation plan for alleviating the effect of a sovereign default on Aflac's Japanese operations, or if Aflac's credit fundamentals are viewed as consistent with those of higher-rated peers.

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