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Fitch Affirms American Financial Group's Ratings; Outlook Stable

^{Published on 2011-04-15 11:30:23 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of American Financial Group, Inc. (NYSE:AFG)'s principal operating subsidiaries. Fitch has also affirmed the following ratings for AFG:

--Issuer Default Rating (IDR) at 'A-';

--Senior unsecured notes at 'BBB+'.

The Rating Outlook is Stable. A full list of rating actions appears at the end of this release.

AFG ratings strengths include consistently solid underwriting performance in its specialty property/casualty (P/C) operations with a five-year average combined ratio of 85.9%, and adequate statutory capital levels and a strong liquidity at both the holding company and operating subsidiary levels. The company's use of financial leverage with debt-to-capital of 17.2% (excluding FAS 115) at year-end 2010 was down from significantly higher levels historically.

Debt-servicing capabilities remain ample due to solid operating company maximum dividend capacity and holding company cash position. While GAAP EBIT to fixed charges declined to 9.0 times (x) in 2010, it remained higher than industry average and is considered solid for the rating level.

Ratings concerns are primarily related to the challenges posed by competitive market conditions affecting AFG's core P/C specialty businesses. While the company has traditionally posted better-than-industry average operating results, underwriting margins have declined somewhat due to soft insurance rates in several key business lines. In addition, investment income has been challenged by the low interest rate environment and Fitch believes uncertainty regarding loss reserve development in the company's longer tail liabilities is likely to increase.

The stand-alone insurer financial strength (IFS) ratings of AFG's annuity and supplemental insurance operating companies are currently two notches lower than the published rating of 'A+'. The ratings receive uplift to the group rating reflecting the larger AFG organization's support and financial flexibility. Fitch believes that AFG effectively manages the asset/liability risk of its annuity operations, but believes these operations could be subject to greater than average disintermediation risk in a rapidly rising interest rate environment.

Fitch views AFG's P/C and life statutory capitalization as adequate for the rating category. Through statutory earnings, both P/C and life operations have been good self-generators of capital, though P/C operations remain the primary source of dividends to the holding company.

Fitch considers a rating downgrade to be unlikely in the near term due to AFG's continued outperformance of the industry. Key ratings drivers that could lead to a downgrade over the longer term include: material deterioration in P/C reserve adequacy or prolonged deterioration in P/C underwriting performance;

financial leverage in excess of 30%; material and sustained deterioration in the competitive positioning of the annuity and supplemental insurance segment or a material increase in surrenders either or which required resources from the holding company or P/C operations to support.

Separately, the ratings of AFG's annuity and supplemental insurance operating companies could be moved toward their stand-alone ratings if Fitch changed its view on the segment's strategic importance to AFG, or if the segment's financial performance diverged significantly from AFG's.

Fitch considers a rating upgrade to be unlikely in the near term due to the fact that the P/C industry is solidly entrenched in the soft phase of the market cycle. Key ratings drivers that could lead to an upgrade over the longer term include:

underwriting and investment performance that causes Fitch to view AFG as comparable from a ratings perspective with higher rated companies; decrease in the target maximum for long-term financial leverage below 20%.

Fitch has affirmed the following ratings for AFG with a Stable Outlook:

American Financial Group, Inc.

--IDR at 'A-';

--9.875% senior notes due 2019 at 'BBB+';

--7.125% senior debentures due 2034 at 'BBB+';

--7% senior debentures due 2050 at 'BBB+'.

American Premier Underwriters, Inc.

--IDR at 'A-';

--10.875% subordinate notes due 2011 at 'BBB-'.

Great American Insurance Company Intercompany Pool*

--IFS at 'A+'.

*Members of the Pool include: Great American Insurance Company, Great American Insurance Company of New York, Great American Fidelity Insurance Company, Great American Spirit Insurance Company, Great American Security Insurance Company, Great American Protection Insurance Company, Great American Alliance Insurance Company, Great American Assurance Company, Great American E&S Insurance Company, and Great American Contemporary Insurance Company.

Republic Indemnity Company of America

Republic Indemnity Company of California

Mid-Continent Casualty Company

Mid-Continent Assurance Co.

Oklahoma Surety Co.

American Empire Insurance Co.

American Empire Surplus Lines Insurance Company

--IFS at 'A+'.

Great American Financial Resources, Inc.

--IDR at 'A-';

--7.5% senior notes due 2033 at 'BBB+';

--7.25% senior notes due 2034 at 'BBB+'.

American Annuity Group Capital Trust IV

--7.35% preferred securities at 'BBB-'.

Central Reserve Life Insurance Company

Continental General Insurance Company

Great American Life Insurance Company

Loyal American Life Insurance Company

Annuity Investors Life Insurance Company

United Teacher Associates Insurance Company

--IFS at 'A+'.

Additional information is available at '[ www.fitchratings.com ]'. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (March 31, 2011);

--'Non-Life Insurance Rating Methodology' (March 31, 2011);

--'Life Insurance Rating Methodology' (March 31, 2011);

--'Fitch's Approach to Rating Insurance Groups' (March 24, 2010).

Applicable Criteria and Related Research:

Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266 ]

Non-Life Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366 ]

Life Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612905 ]

Fitch's Approach to Rating Insurance Groups

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765 ]

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