S&P: Aflac Life Insurance Japan Ltd. Rated 'A+'; Outlook Stable

S&P Global Ratings said today it assigned its 'A+' long-term issuer credit and financial strength ratings to Aflac Life Insurance Japan Ltd. At the same time, we withdrew our 'A+' long-term issuer credit and financial strength ratings on American Family Life Assurance Co. - Japan Branch at the company's request. The outlook is stable.

The rating reflects our view that Aflac Life Insurance Japan Ltd. is core to the group under our group methodology criteria. In late 2016, Aflac announced its intent to convert its branch in Japan to a subsidiary, and this completes the transition. This conversion, in our opinion, represents more of a change in the geography of financial reporting than an actual change in management strategy. Effectively, this new company assumes the business of the former entity. Previously, the Japan branch was owned by and reported through the primary U. S. legal operating entity (Aflac of Columbus), and dividends from Japan were subject to regulatory scrutiny in Japan and the U. S. via the Nebraska Insurance Department (domicile of Aflac Columbus) before they reached the holding company. As part of this change, Aflac also formed a wholly owned U. S. subsidiary (Aflac Holdings LLC), which is a parent to Aflac Life Insurance Japan Ltd. This conversion alleviates some of the bottleneck in dividends, and therefore we expect a more-diversified dividend flow to the parent.

The outlook on Aflac is stable based on its stand-alone credit profile and our stable outlook on Japan. On a stand-alone basis, we expect Aflac to continue generating above-industry-average operating earnings (EBIT return on revenue of 17%-19%), maintain its leading market position, and retain capitalization at least at the 'AA' level per our capital model.

We could lower the ratings on Aflac if we were to lower the rating on Japan. Also, although unlikely, we might consider lowering the rating if, contrary to our expectations, capital adequacy declined substantially below levels we consider strong, and if Aflac group's differentiating business strengths diminished versus peers'.

Specific to the holding-company rating that is currently two notches lower than those on the core operating companies, a negative rating action would be driven by a decline in fixed-charge coverage below 12x on a consistent basis or if financial leverage stays higher than the 25%-30% range. If shareholder dividends or share buy-backs are greater than expected, resulting in reduced holding-company liquidity, we may also lower our ratings.

We view a positive rating action over the next 24 months as unlikely because our ratings on companies are typically no higher than our ratings on the sovereign where these firms have a majority of operations or a significant amount of invested assets. Because Aflac is currently rated at the same level as our rating on the Japanese sovereign, there is limited likelihood of us upgrading Aflac unless we upgrade the Japanese sovereign first.

The only potential rating upside could be based on either Aflac's ability to diversify its assets and operations significantly outside of Japan, or Aflac's board of directors approving a risk-mitigation plan that we find to be adequate to alleviate the impact of a sovereign default on Aflac's Japanese operations.
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