A.M. Best Co. has assigned a “bbb” debt rating to the $100 million 30-year senior unsecured notes to be issued by AAG Holding Co., Inc., a wholly owned subsidiary of Cincinnati-based insurer Great American Financial Resources Inc. (GAFRI).
The notes are a drawdown of the $250 million shelf registration previously filed by GAFRI. The financial strength rating of “A” (excellent) of the GAFRI group’s core life insurance subsidiaries remains unaffected. Additionally, Best has affirmed the ratings on existing debt guaranteed by GAFRI and indicative ratings on the aforementioned shelf. All the ratings have a stable outlook.
The vast majority of the proceeds will be used to repay outstanding bank debt, and the remainder will be used for general corporate purposes. For the current rating level, Best notes that overall financial leverage (including trust preferreds as debt) remains high for GAFRI, while interest coverage is adequate. However, the elimination of the short-term debt from GAFRI’s capital structure is viewed favorably by A.M. Best as it somewhat improves financial flexibility. GAFRI has committed to maintain financial leverage at or below its current level and to decrease its exposure to below investment grade and mortgage backed securities.
The ratings reflect the group’s solid operating performance, favorable liquidity position, adequate risk-adjusted capitalization and multiple distribution sources. Its established presence in the individual tax-deferred annuity market, particularly teachers in the primary and secondary grade levels in the public education market, has resulted in a stable liability structure evidenced by strong surrender charge protection.
Offsetting factors include the group’s concentration in individual fixed annuities — a highly competitive line vulnerable to changes in interest rates. While GAFRI has attempted to expand its operations beyond the annuity market, it has had limited success in growing its life insurance line, which continues to produce operating losses. In addition, its supplemental health business is subject to regulatory and market related concerns, which impact retention and profitability.
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