Best Affirms American Financial, Most Subs Ratings; Upgrades Mid-Continent

February 25, 2013

A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb+” and all debt ratings of American Financial Group, Inc. (AFG), as well as the financial strength rating (FSR) of ‘A’ (Excellent) and ICRs of “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 ratings of AFG and Great American is positive. Best has also affirmed the FSR of ‘A+’ (Superior) and ICRs of “aa” of the property/casualty members of American Empire Surplus Lines Pool, as well as the FSR of ‘A’ (Excellent) and ICRs of “a” of the members of the Republic Indemnity Insurance Pool, headquartered in Encino, Calif.

The outlook for the ratings of American Empire and Republic Indemnity is stable. All companies are headquartered in Cincinnati, OH, unless otherwise specified.

In addition, Best has upgraded the FSR to ‘A+’ (Superior) from ‘A’ (Excellent) and the ICRs to “aa-” from “a+” of the property/casualty members of the Mid-Continent Group, headquartered in Tulsa, Oklahoma, and has revised its outlook on the ratings to stable from positive.

The ratings of Great American reflect its “excellent risk-adjusted capitalization, strong operating profitability sustained over the long term and diversified business profile,” said Best. “Great American’s strong operating performance reflects the profitable underwriting results derived through management’s disciplined operating strategy and product knowledge, as well as the group’s multiple distribution channels, diversified product offerings, excellent geographic spread of risk and access to data through its sophisticated technology platform.”

Best also noted that Great American’s “strong underwriting performance” reflects its “modest exposure to natural catastrophes, as demonstrated in recent years with the group reporting relatively low catastrophe-related losses.

“Lastly, the group also benefits from the financial flexibility provided by its parent, AFG, which maintains financial leverage that is in line with its current ratings, as well as additional liquidity through 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 the company to support Great American’s capitalization, if needed.”

As somewhat negative factors, Best cited “the payment of significant stockholder dividends to AFG over the recent five-year period, 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, “there have been areas of adverse reserve development over the recent five-year period, particularly relating to the run-off of its environmental and asbestos (A&E) claims.”

However, Best also indicated that despite these offsetting factors, “the outlook for the ratings reflects the group’s excellent risk-adjusted capitalization, solid underwriting performance through all phases of the market 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 achieved 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, focus on accurate pricing, and commitment to conservative reserving standards. The group also benefits from the financial flexibility provided by its ultimate parent, 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.

“American Empire’s ratings acknowledge its superior risk-adjusted capitalization, 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 the highly profitable underwriting results, a low-cost operating structure and solid investment income despite a reduction in the invested asset base. The group’s underwriting results are reflective of management’s disciplined underwriting approach, pricing integrity and strong product and market knowledge. The ratings also reflect the benefits of the financial flexibility provided by its ultimate parent, AFG.

“These positive rating factors are partially offset by the demonstrated 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.”

Best said 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. The ratings also recognize the implicit and explicit support provided by its ultimate parent, AFG, which has infused capital as needed to maintain Republic Indemnity’s risk-adjusted capitalization.

“These positive rating factors are somewhat offset by the downturn in underwriting performance in recent years relative to the group’s historical profitability levels, an elevated underwriting expense measure that has increased as premium volume declined, 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.”

In its debt analysis of AFG Best said the company’s “total debt to total capital (excluding accumulated other comprehensive income) and interest coverage ratios remain within Best’s guidelines for its current ratings. Also, AFG maintains sound liquidity with approximately $1.7 billion in cash and cash equivalents at December 31, 2012, with access to a $500 million revolving credit facility.”

Best also noted that “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.”

For the future, Best said “positive rating actions could be taken on the ratings of AFG’s property/casualty subsidiaries if operating results remain in line with higher rated peers in the commercial casualty composite while maintaining a strong level of risk-adjusted capitalization. Positive actions on the ratings of AFG could result from favorable actions on the ratings of its key subsidiaries.

“Key factors that could trigger negative rating actions on the group’s ratings include a material deterioration of underwriting and operating results, particularly if the resulting performance is materially below similarly rated peers, which results in weakening in risk-adjusted capitalization below A.M. Best’s expectations, and 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.

Source: A.M. Best

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