AM Best Information Services

MARCH 29, 2012 12:00 AM (EDT)

A.M. Best Revises Outlook to Positive for American Financial Group, Inc. and Most of Its Property/Casualty Subsidiaries

Jennifer Marshall, CPCU
Managing Senior Financial Analyst
(908) 439-2200, ext. 5327

Andrew Colannino
Vice President
(908) 439-2200, ext. 5706

Rachelle Morrow
Senior Manager, Public Relations
(908) 439-2200, ext. 5378

Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644


OLDWICK, N.J. - MARCH 29, 2012 12:00 AM (EDT)
A.M. Best Co. has revised the outlook to positive from stable and affirmed the issuer credit ratings (ICR) of “bbb+” and all debt ratings of American Financial Group, Inc. (AFG) [NYSE: AFG] and AAG Holding Company, Inc. (AAG). Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and ICRs of “a+” of Great American Insurance Companies (Great American) and Mid-Continent Group (Mid-Continent) and their property/casualty members (headquartered in Tulsa, OK).

In addition, A.M. Best has upgraded the ICRs to “aa” from “aa-” and affirmed the FSR of A+ (Superior) of the American Empire Surplus Lines Pool (American Empire) and its property/casualty members. A.M. Best also has affirmed the FSR of A (Excellent) and ICRs of “a” of the Republic Indemnity Pool (Republic Indemnity) and its property/casualty members headquartered in Encino, CA. The outlook for the ratings of American Empire and Republic Indemnity is stable.

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

The ratings of Great American reflect its solid risk-adjusted capitalization, strong operating profitability and diversified business profile. Great American’s operating performance has been driven by consistently favorable underwriting results, which are reflective of management’s disciplined operating strategy and product knowledge. The group also benefits from its multiple distribution channels, diversified product offerings, excellent geographic spread of risk, access to data through its sophisticated technology platform and a modest exposure to natural catastrophes, as demonstrated in recent years with the group reporting relatively low catastrophe-related losses. Moreover, Great American 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.

These positive rating factors are somewhat offset by the payment of significant stockholder dividends to AFG over the recent five-year period, elevated common stock leverage and pockets of adverse loss development, particularly related to the run-off of the group’s asbestos and environmental liabilities. While Great American’s capitalization was strained in 2008, following deteriorating underwriting results and significant realized and unrealized capital losses, its strong underwriting results combined with recovery of the financial markets in recent years have resulted in a supportive level of risk-adjusted capitalization.

Mid-Continent’s ratings recognize its solid risk-adjusted capitalization, strong operating performance and successful position within its targeted markets. The group’s favorable underwriting and operating results have been driven by management’s proven product knowledge, niche-focused marketing efforts and adherence to disciplined pricing standards. Mid-Continent also benefits from the financial flexibility afforded by AFG. These positive rating factors are partially offset by the significant stockholder dividends paid to AFG in recent years and Mid-Continent’s limited geographic spread of business.

American Empire’s ratings acknowledge its superior risk-adjusted capitalization, strong operating performance, experience as a provider of excess and surplus lines products 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 is reflective of excellent underwriting results, a low-cost operating structure and a solid stream of investment income. The group’s underwriting results are attributable to management’s disciplined underwriting approach, pricing integrity and strong product and market knowledge. American Empire benefits from the financial flexibility provided by AFG.

These positive rating factors are partially offset by the demonstrated sensitivity of the group’s premium volume to the property/casualty market cycle and the impact of reduced premiums on operating results and the significant amount of stockholder dividends paid in recent years.

The ratings of Republic Indemnity are based on its historically strong operating performance, adequate capitalization and management’s experience in providing workers’ compensation insurance coverage, primarily in California. The ratings also recognize the implicit and explicit support provided by AFG, which has historically demonstrated its commitment to maintaining Republic Indemnity’s capital adequacy by infusing capital when needed.

These positive rating factors are somewhat offset by challenging market conditions in the workers’ compensation line of business, the underwriting results in more recent years, which are not in line with the group’s historical performance levels, the relatively high underwriting expenses, the accumulation 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.

AFG’s total debt-to-total capital (including accumulated other comprehensive income) and interest coverage ratios remain in line with its current ratings. Also, AFG maintains sound liquidity with approximately $1.3 billion in cash and cash equivalents at December 31, 2011 and access to a $500 million revolving credit facility. AFG has no material debt maturing until 2019, further benefitting its liquidity position. AFG continues to rely 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.

Positive rating actions could be taken on the ratings of Great American and Mid-Continent if their underwriting and operating results continue to outperform other similarly-rated peers and are consistently in-line with higher rated peers in the commercial casualty composite while maintaining a strong level of risk-adjusted capitalization. Positive rating 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 AFG or any of its subsidiaries include the deterioration of risk-adjusted capitalization and/or operating results, particularly if the resulting performance is 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.

For a complete listing of American Financial Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit American Financial Group, Inc.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include:: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Rating Members of Insurance Groups”; “Catastrophe Analysis in A.M. Best Ratings”; “The Treatment of Terrorism Risk in the Rating Evaluation”; and “A.M. Best’s Ratings & the Treatment of Debt.” Best’s Credit Rating Methodology can be found at

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