Best Upgrades American Financial Group and Affiliates Ratings

February 26, 2014

A.M. Best has upgraded the issuer credit rating (ICR) to “a-” from “bbb+” and the debt ratings of American Financial Group, Inc. (AFG). Best has also upgraded the financial strength rating (FSR) to ‘A+’ (Superior) from A (Excellent) and the ICRs to “aa-” from “a+” of Great American Insurance Company and its pooling affiliates (collectively referred to as Great American Insurance Companies or Great American). The outlook for the above ratings has been revised to stable from positive.

In addition Best has affirmed the FSR of ‘A+’ (Superior) and ICRs of “aa” of the property/casualty members of American Empire Surplus Lines Pool (American Empire), as well as the FSR of ‘A’ (Excellent) and ICRs of “a” of the members of the Republic Indemnity Insurance Pool (Republic Indemnity), headquartered in Encino, Calif.  The outlook for the ratings of American Empire and Republic Indemnity is stable.

Best concurrently affirmed the FSR of ‘A+’ (Superior) and the ICRs of “aa-” of the property/casualty members of the Mid-Continent Group, headquartered in Tulsa, Okla. The outlook for these ratings is stable. All companies are subsidiaries of AFG and are headquartered in Cincinnati, Ohio, unless otherwise specified.

The ratings of Great American reflect its “excellent risk-adjusted capitalization, strong operating profitability sustained over the long term and diversified business profile, which serves to protect its earnings stream,” Best explained.

“Great American’s strong operating performance reflects the profitable underwriting results derived through management’s disciplined operating strategy and specialty market knowledge, as well as the group’s multiple distribution channels, diversified product offerings, excellent geographic spread of risk, as well as access to data through its sophisticated technology platform.

“Great American’s strong underwriting performance also reflects the diversification of its premium writings and its modest exposure to natural catastrophes. The group also benefits from the financial flexibility provided by AFG, which maintains financial leverage that is in line with its current ratings, as well as additional liquidity sources given its access to capital markets and lines of credit.” Best said it “expects that earnings and cash flows from AFG’s operating subsidiaries will allow it to support Great American’s risk-adjusted capitalization, should the need arise.”

As partial offsetting factors Best noted the “significant stockholder dividends paid to AFG over the recent five-year period, which has constrained organic surplus growth, as well as elevated common stock leverage and adverse loss development in certain lines of business.”

Best explained that “while Great American has reported favorable loss reserve development in recent calendar years, areas of adverse reserve development persist, particularly relating to the run-off of its asbestos and environmental (A&E) claims. Despite these offsetting factors, the outlook for the ratings acknowledges the group’s excellent risk-adjusted capitalization, solid underwriting performance throughout the underwriting cycle, experienced management team and balanced portfolio of specialty risks that are enhanced by its geographic diversification.”

Best said “Mid-Continent’s ratings reflect its solid risk-adjusted capitalization, very strong operating performance sustained over the long term and successful position within its targeted markets. The group’s favorable underwriting and operating results reflect management’s proven product knowledge, accurate pricing and commitment to maintaining conservative reserving standards. The group also benefits from the financial flexibility provided by AFG.”

As partial offsetting factors, Best cited “the significant stockholder dividends paid to AFG, which has reduced policyholder surplus during the recent five-year period, and the group’s relatively limited geographic spread of business as the majority of business is derived from Oklahoma, Texas and Florida.

“American Empire’s ratings acknowledge its superior risk-adjusted capitalization, very strong operating performance over the long term (within the excess and surplus lines marketplace) and the successful track record of the executive team in managing operations through all phases of the market cycle. American Empire’s strong operating performance reflects its highly profitable underwriting results, low-cost operating structure and solid investment yield despite a reduction in the invested asset base, which has reduced investment income. The group’s underwriting results are reflective of management’s disciplined underwriting approach, accurate pricing, market expertise and strong product knowledge. The ratings also recognize the benefits of the financial flexibility provided by AFG.”

Partial offsetting factors, cited by Best include “the sensitivity of the group’s premium volume to the property/casualty market cycle, the impact of reduced premium on operating results and the significant level of stockholder dividends paid during the recent five-year period.

“The ratings of Republic Indemnity are based on its historically strong operating performance, solid capitalization achieved through profitable operations and the executive management team’s successful track record in managing operations through all phases of the market cycle, primarily within California, Best’s report continued. “The ratings also recognize the implicit and explicit support afforded by AFG, which has infused capital as needed to maintain Republic Indemnity’s risk-adjusted capitalization.”

As partial offsetting factors Best cited “the downturn in underwriting performance beginning in 2009 through 2012, relative to the group’s historical profitability levels given the impact of the macroeconomic environment, the cumulative impact of stockholder dividends paid to AFG and the group’s concentrated business risk, operating as a monoline workers’ compensation insurer with a high concentration of premium volume in California.”

Best noted that “AFG’s total debt-to-total capital (excluding accumulated other comprehensive income) and interest coverage ratios,” remain within its guidelines for its current ratings. “AFG maintains sound liquidity with parent company cash of approximately $525 million at December 31, 2013, as well as access to a $500 million revolving credit facility. AFG has no material debt maturing until 2019, further benefitting its liquidity position. AFG relies on stockholder dividends from its subsidiaries to fund interest expenses, repurchase company stock, redeem debt, re-allocate capital to support its operating entities and for other corporate purposes. Nonetheless, management remains committed to maintaining capital at the rated entities at levels commensurate with their ratings.”

In conclusion Best explained that due to recent rating actions it has taken on the organization in recent years, “additional positive rating actions are unlikely in the near term.

“Key factors that could trigger negative rating actions include a material deterioration of underwriting and operating results, particularly if the resulting performance is materially below similarly rated peers, a significant weakening in risk-adjusted capitalization, or an increase in the financial leverage or reduction in the interest coverage at AFG to a level that is out of line with its current ratings.”

A complete listing of American Financial Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings is available from A.M. Best.

Source: A.M. Best

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