AM Best

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


Gregory Dickerson
Senior Financial Analyst—P/C
+1 908 439 2200, ext. 5161

Igor Bass
Financial Analyst—L/H
+1 908 439 2200, ext. 5109

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

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644


OLDWICK - AUGUST 11, 2017 04:00 PM (EDT)
A.M. Best has affirmed the Financial Strength Rating (FSR) of A+ (Superior) and the Long-Term Issuer Credit Rating (Long-Term ICR) 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 Long-Term ICR of “a-” and the Long-Term Issue Credit Ratings (Long-Term IR) of American Financial Group, Inc. (AFG) (Cincinnati, OH) [NYSE/NASDAQ: AFG]. The outlook of these Credit Ratings (ratings) is stable.

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

Concurrently, A.M. Best has revised the outlook of the Long-Term ICR to positive from stable and affirmed FSR of A (Excellent) and the Long-Term ICR of “a” of the property/casualty members of the Republic and Summit Insurance Pool. The outlook for the FSR remains stable. Two pool members – Republic Indemnity Company of America and Republic Indemnity Company of California – are headquartered in Encino, CA. The remaining members – Bridgefield Employers Insurance Company and Bridgefield Casualty Insurance Company (collectively, the Summit companies) – are headquartered in Lakeland, FL.

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

A.M. Best also has affirmed the FSR of A (Excellent) and the Long-Term ICR of “a+” of National Interstate Insurance Company (headquartered in Richfield, OH) and its affiliates (collectively referred to as National Interstate). The outlook of these ratings is stable.

At the same time, A.M. Best has affirmed the FSR of A (Excellent) and the Long-Term 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 of these ratings is stable.

Furthermore, A.M. Best has affirmed the FSR of B++ (Good) and the Long-Term ICR of “bbb+” of Manhattan National Life Insurance Company (Manhattan National) (Cincinnati, OH), a life subsidiary of AFG. The outlook of these ratings 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 and life and annuity companies and ratings.)

The ratings of Great American reflect the group’s solid risk-adjusted capitalization, consistently 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, adverse reserve development in certain areas persists, particularly relating to the run-off of its asbestos and environmental claims.

The downgrade of the Long-Term ICR of American Empire reflects A.M. Best’s view that although the group historically reported very favorable underwriting and operating results, recent results have sharply deteriorated and no longer support a Long-Term ICR of “aa”. The decline in performance has been driven by adverse development of prior years’ loss reserves reported in recent years that have caused underwriting results to deteriorate from their highly profitable historical level. In 2016, adverse prior-year loss reserve development caused the calendar year combined ratio to deteriorate by approximately 41 points. The unfavorable 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.

Management has taken a number of steps to restore the group’s profitability to historically strong levels. These steps include but are not limited to rate increases, more restrictive underwriting guidelines and a refined approach to claims mediation. While results in the first half of 2017 appear to be stabilizing, it is too early to gauge the ultimate effectiveness of these initiatives.

American Empire’s ratings reflect the group’s supportive risk-adjusted capitalization, very strong operating performance over the long term within the excess and surplus lines market (despite the more recent deterioration in performance) and the executive team’s longer term successful track record in managing operations through all phases of the market cycle. 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.

The positive Long-Term ICR outlook for the members of the Republic and Summit Insurance Pool reflects the pool’s continued strong operating performance on an absolute basis and relative to the results of similarly rated peers within the workers’ compensation composite, while maintaining solid-risk adjusted capitalization through profitable operations. The ratings also reflect management’s successful cycle navigation and the expanded geographic diversification of business following the addition of the Summit companies to the pool in 2014. The positive Long-Term ICR outlook further recognizes the pool’s smooth integration of the Summit companies, as evidenced by the group’s steadily improved combined ratios and overall profitability since the Summit companies were acquired. If the pool continues to generate overall operating performance comparable to recent results while maintaining excellent risk-adjusted capitalization over the next 24-36 months, positive rating action is possible.

The ratings of the Republic and Summit Pool 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 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 66% of 2016 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 pressured underwriting results for the past several years. 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.

National Interstate’s ratings reflect the group’s strong long-term operating performance; solid risk-adjusted capitalization achieved through generally profitable underwriting results; and demonstrated expertise within its niche transportation market. In addition, the ratings acknowledge the group’s experienced management team and conservative operating philosophy. The positive rating attributes are derived from management’s focus on maintaining rate integrity, controlled claims handling and detailed segmentation of risks that are supported by effective technology resources. Additionally, National Interstate’s focus on providing alternative risk transfer programs for the specialty transportation segment provides the group with a sustainable competitive advantage, particularly in terms of pricing, claims adjusting and loss control.

Partially offsetting these positive rating factors are adverse development of some recent calendar year loss reserves (although the 2014 and 2015 accident years have both developed favorably) and the associated deterioration in underwriting results in recent calendar years; as well as the concentration of business within the passenger and truck transportation industries.

The ratings of GALIC and AILIC reflect their leading market position in the sale of fixed-indexed annuity products through the bank distribution 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 continued 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 mortgage-backed securities, relative to its peers, and additional high exposure to collateralized loan obligations as a percentage of total capital.

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 debt-to-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 subsidiaries’ FSRs, Long-Term ICRs and Long-Term IRs, please visit American Financial Group, Inc.

This press release relates to Credit Ratings 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. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.

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