OREANDA-NEWS. April 14, 2016. Fitch Ratings has affirmed Aflac Inc.'s (Aflac) 'A-' senior notes and the 'A+' Insurance Financial Strength (IFS) ratings of Aflac's insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings appears at the end of this release.

KEY RATING DRIVERS

The affirmation of Aflac's ratings reflect the company's extremely strong competitive position in the supplemental accident and health insurance markets in Japan and the U.S., its extremely strong earnings profile and very strong capitalization. The ratings also incorporate the impact of slow economic growth in Aflac's key Japanese market and its sizeable exposure to Japanese sovereign risk including significant concentration in Japanese government bonds (JGB).

Aflac's IFS rating is capped at one notch above Japan's sovereign rating of 'A', due to Aflac Japan's exposure to Japan's economy. Aflac Japan comprises more than two-thirds of Aflac's assets, capital and profitability, making Japan's economy a significant business and ratings factor. Factors contributing to the notch between Aflac's ratings and Japan's sovereign rating include Aflac's sizeable global diversification and its ability to generate strong financial results from its U.S. operations.

Aflac maintains a dominant market position in both Japan and the U.S. selling cancer and other supplemental accident and health insurance products. The company's key competitive advantages include its low-cost operations, continued product innovation and brand name recognition. However, Aflac faces growing competition in both Japan and the U.S.

Fitch views Aflac's capitalization as very strong with an estimated NAIC risk-based capital (RBC) ratio of 933% and operating leverage of 7.6x as of Dec. 31, 2015. Similarly, Aflac's Japanese Solvency Margin Ratio (SMR) remains strong at 828% as of Dec. 31, 2015. Aflac's financial leverage ratio remains within rating expectations at 25.3% as of Dec. 31, 2015.

Aflac has significant investment concentration in JGBs and related agencies, which represent approximately 35% of total investments as of Dec. 31, 2015. During 2015, Aflac utilized alternative investment strategies to enhance yields, such as increasing its allocation to senior secured bank loans, most of which have below-investment-grade ratings, and to high yield corporate bonds. While Aflac has taken additional asset risk, the agency views its credit quality as acceptable, evidenced by its risky asset ratio of 31% compared with 80% for the industry at year-end 2015.

Aflac's extremely strong and stable earnings profile reflects the company's very strong underwriting performance over an extended period of time and limited exposure to market-sensitive products.

The company reported a 14% decline in net income to \\$2.5 billion in 2015, partially due to lower realized investment gains, foreign currency hedging losses and the make-whole premium paid to investors for the early redemption of its 8.5% senior notes. Excluding these items, net operating earnings declined 5% to \\$2.7 billion, largely due to the weakening yen. When the impact of foreign currency translation is excluded, operating earnings declined by a modest 2%.

Pretax operating margins remained extremely strong at 21.9% for Aflac Japan and 18.3% for Aflac U.S. in 2015 compared with 20.9% and 18.3%, respectively, in 2014. Fitch expects the company's profitability metrics to continue to exceed rating expectations over the intermediate term, despite ongoing headwinds associated with a continued weakening yen and low reinvestment rates.

Fitch views Aflac's asset/liability management as adequate, as investments and liabilities are reasonably well matched. Aflac is exposed to material reinvestment risk due to its long duration liabilities in Japan, but has taken various steps to reduce volatility associated with interest rates. Aflac manages its currency risk by matching yen-denominated assets with yen-denominated liabilities and hedging the yen exposure to its net investment in its Japanese branch operations.

RATING SENSITIVITIES

A one notch upgrade of Aflac's IFS rating could result from an upgrade in Fitch's sovereign rating (local currency) of Japan to 'A+', or higher (currently 'A'/Outlook Stable).

The key rating triggers that could result in a downgrade include:

--A downgrade in Fitch's sovereign rating (local currency) of Japan to 'A-', or lower (currently 'A'/Outlook Stable);
--Significant investment impairments or losses in Aflac's capital position;
--A decline in Aflac's run-rate pre-tax operating margin below 17% in Japan or 15% in U.S.;
--A significant increase in either operating (greater than 16x) or financial leverage (greater than 30%);
--NAIC RBC less than 400%.

Fitch has affirmed the following ratings, with a Stable Outlook:

Aflac Inc.
--Long-term Issuer Default Rating (IDR) at 'A';
--1.84% Samurai notes due July 2016 at 'A-';
--2.26% Uridashi notes due September 2016 at 'A-';
--2.65% USD650 million senior notes due Feb. 15, 2017 at 'A-';
--2.4% USD 550 million senior notes due March 16, 2020 at 'A-'
--4.0% USD350 million senior notes due Feb. 15, 2022 at 'A-';
--3.625% USD700 million senior notes due June 2023 at 'A-';
--3.625% USD750 million senior notes due Nov. 15, 2024 at 'A-';
--3.25% USD 450 million senior notes due March 17, 2025 at 'A-'.
--6.9% USD400 million senior notes due Dec. 17, 2039 at 'A-'.
--6.45% USD450 million senior notes due Aug. 15, 2040 at 'A-'
--5.5% USD500 million junior subordinated debentures due Sept. 15, 2052 at 'BBB'.

American Family Life Assurance Co. of Columbus
American Family Life Assurance Co. of New York
Aflac Japan
--IFS at 'A+'.