AM Best

A.M. Best Affirms Ratings of American Financial Group, Inc. and Most of Its Insurance Subsidiaries


Michael Russo
Senior Financial Analyst—P/C
+1 908 439 2200, ext. 5372

Thomas Rosendale
Assistant Vice President—L/H
+1 908 439 2200, ext. 5201

Christopher Sharkey
Manager, Public Relations
+1 908 439-2200, ext. 5159

Jim Peavy
Assistant Vice President, Public Relations
+1 908 439-2200, ext. 5644


OLDWICK - MAY 12, 2016 01:13 PM (EDT)
A.M. Best has affirmed the financial strength rating of A+ (Superior) and the issuer credit rating of “aa-” of Great American Insurance Company and its pooling affiliates, collectively referred to as Great American Insurance Companies (Great American). Concurrently, A.M. Best has affirmed the ICR of “a-” and the issue ratings of American Financial Group, Inc. (AFG) (Cincinnati, OH) [NYSE/NASDAQ: AFG]. The outlook for each of these ratings is stable.

Additionally, A.M. Best has revised the ICR outlook to negative from stable and affirmed the FSR of A+ (Superior) and the ICR of “aa” of the property/casualty members of American Empire Surplus Lines Pool (American Empire). The outlook for the FSR remains stable.

Concurrently, A.M. Best has affirmed the FSR of A (Excellent) and the ICR of “a” of the property/casualty members of the Republic and Summit Insurance Pool. The outlook for each of these ratings is stable. Two of the group’s members – Republic Indemnity Company of America and Republic Indemnity Company of California – are headquartered in Encino, CA. The group’s other members – Bridgefield Employers Insurance Company and Bridgefield Casualty Insurance Company – are headquartered in Lakeland, FL.

In addition, A.M. Best has affirmed the FSR of A+ (Superior) and the ICRs of “aa-” of the property/casualty members of the Mid-Continent Group (Mid-Continent) (headquartered in Tulsa, OK). The outlook for each of these ratings is stable.

A.M. Best also has affirmed the FSR of A (Excellent) and the ICRs of “a+” of Great American Life Insurance Company (GALIC) and its wholly owned subsidiary, Annuity Investors Life Insurance Company (AILIC), the key annuity subsidiaries of AFG. The outlook for each of these ratings is stable.

Further, A.M. Best has affirmed the FSR of B++ (Good) and the ICR of “bbb+” of Manhattan National Life Insurance Company (Manhattan National), a life subsidiary of AFG. The outlook for each rating is stable.

All companies are subsidiaries of AFG and are headquartered in Cincinnati, OH unless otherwise specified. (Please see link below for a detailed listing of the property/casualty companies and ratings.)

The ratings of Great American reflect the group’s excellent risk-adjusted capitalization, strong operating profitability, which has been sustained over the long term, and diversified business profile, which serves to protect its earnings stream. 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 and access to data through its sophisticated technology platform.

These positive ratings factors are somewhat offset by elevated common stock leverage and adverse prior- year loss reserve development occurring in certain lines of business. While Great American has reported overall 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 claims.

The revised ICR outlook for American Empire reflects adverse development of prior years’ loss reserves reported in recent years that have caused underwriting results to deteriorate from their highly profitable historical level, which significantly outperformed the average results of the group’s composite. The adverse development has been driven by the other liability line of business specifically relating to the New York contractors business for accident years 2009 through 2014. In 2015, adverse prior-year loss reserve development increased the calendar year combined ratio by approximately 12 points. The ratings affirmation reflects American Empire’s excellent risk-adjusted capitalization, very strong operating performance over the long term within the excess and surplus lines market and the executive team’s successful track record in managing operations through all phases of the market cycle. American Empire’s historically strong operating performance reflects its profitable underwriting results due in part to its low cost operating structure, augmented by solid investment income.

The ratings assigned to the members of the Republic and Summit Insurance Pool reflect the group’s historically strong operating performance, solid risk-adjusted capitalization achieved through profitable operations and management’s successful market cycle navigation, as well as the expanded geographical diversification of business following the addition of the Summit companies to the pool in 2014. The ratings also recognize the implicit and explicit support afforded by AFG, which has infused capital as needed to maintain risk-adjusted capitalization at a level in line with the ratings.

These positive rating factors are somewhat offset by the weakened underwriting performance earlier in the latest five-year period, relative to its historical results. Other offsetting factors include the concentrated nature of the group’s business in a single line of insurance and geographic concentration in two states, Florida and California, which accounted for approximately 65% of 2015 direct premiums written. This concentration creates an elevated exposure to legislative, judicial and regulatory changes.

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 and commitment to maintaining accurate pricing.

These positive rating factors are partially offset by adverse prior-year loss reserve development in recent years arising from the product liability line of business, which has caused underwriting results to deteriorate. Additional offsetting factors include the group’s relatively limited geographic spread of business as the majority of business is derived from Texas, Oklahoma and Florida, which exposes the operations to an elevated degree of regulatory, legislative and competitive risks.

The ratings of GALIC and AILIC reflect their leading market position in the sale of fixed-indexed annuity products through the bank channel, and their consistent net operating earnings and strong risk-adjusted capitalization. Additionally, strong growth in the annuity business over the past several years has helped GALIC and AILIC become material contributors to AFG’s consolidated revenue and earnings. As a result, A.M. Best believes that the strategic importance of these companies to the overall organization continues to support the rating enhancement currently afforded by AFG.

Offsetting rating factors include the group’s concentrated business profile within the individual annuity market, premium declines within the retail and educational channels, and the group’s exposure to real estate-related investments, in particular, residential and commercial mortgage-backed securities, relative to its peers.

Manhattan National’s ratings reflect its strong risk-adjusted capitalization offset by its declining premium and statutory earnings trends. A.M. Best believes that the run-off block of ordinary life business remaining at the company is no longer central to the organization’s long-term strategy. Although the life insurance line should continue to provide some revenue and earnings diversification for AFG’s annuity operations, the contribution has been steadily decreasing.

Each of the groups also benefit 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 line of credit. A.M. Best expects that earnings and cash flows from AFG’s operating subsidiaries will allow it to support risk-adjusted capitalization, should the need arise. At the same time, surplus growth at each group has been limited over the past five years by the payment of significant stockholder dividends to AFG. These dividends vary based on capital needs at the various subsidiaries.

AFG’s total debt-to-total capital (excluding accumulated other comprehensive income) and interest coverage ratios remain within A.M. Best’s guidelines for its current ratings. AFG maintains sound liquidity and access to a revolving credit facility. AFG has no material debt maturing until 2019, further benefiting its liquidity position. AFG relies on stockholder dividends from its subsidiaries to fund interest expenses, repurchase company stock, redeem debt, reallocate 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.

While A.M. Best does not anticipate positive rating actions in the near term, positive rating actions could be taken in the future if underwriting and operating results materially outperform other similarly rated carriers, while maintaining an appropriate level of risk-adjusted capitalization. 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, or – in the case of American Empire and Mid Continent, a failure of underwriting performance to return to its outperformance of similarly-rated peers; a significant deterioration 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.

For a complete list of American Financial Group, Inc.’s property/casualty subsidiaries’ FSRs, ICRs and issue ratings, please visit American Financial Group, Inc.

This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page.

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