TEXT-Fitch rates American Financial Group senior debt issue
Aug 31 - Fitch Ratings has assigned a 'BBB+' rating to American Financial Group, Inc.'s (NYSE: AFG) $125 million issuance of 5.75% senior unsecured debt maturing Aug. 25, 2042. Fitch has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of AFG's principal operating subsidiaries as well as 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 is provided at the end of this release. Proceeds from the issuance are expected to be used to redeem AFG's 7.125% senior notes which are callable on Sept. 28, 2012. AFG's pro forma financial leverage ratio (FLR) was 19.2% (excluding FAS 115 and secured subsidiary borrowings) at June 30, 2012 compared to 18.3% at Dec. 31, 2011. GAAP EBIT-to-fixed charge coverage was 6.3x for the first six months of 2012 and remained within ratings expectations. Debt-servicing capabilities remain ample due to solid operating company maximum dividend capacity and holding company cash and investments. The affirmation reflects AFG's historically strong operating profitability relative to industry peers, adequate statutory capital levels for the rating category, reasonable financial leverage and strong liquidity. Through statutory earnings, both property/casualty (P/C) and annuity operations have been positive self-generators of capital, though P/C operations remain the primary source of dividends to the holding company. Ratings concerns include weakening underwriting results in the core P/C operations, the continued low interest rate environment and AFG's rapidly growing annuity business. Statutory premiums in the annuity segment grew 7% in the first six months of 2012, and Fitch continues to observe the impact on expected earnings and the risk profile of the company. Earned premiums in P/C operations grew 3% in the first six months of 2012. AFG reported a combined ratio of 92.5% for the period, compared to 97.2% for the first six months of 2011, better in both periods than the industry. Investment income has been challenged by the low interest rate environment. While AFG's overall return on equity improved to 9.3% for the first six months of 2012, it declined from an average of 11.1% from 2007-2011. Fitch also believes favorable loss reserve development in the company's longer-tail liabilities is likely to continue to decrease. The impact of favorable prior year reserve development on the combined ratio declined to 3.7 points for the first six months of 2012, compared to an average of 5.8 points from 2007-2011. Reserves for asbestos and environmental (A&E) and for foreign operations (primarily non-U.S. medical malpractice) have continued to develop adversely in recent periods. The CAGR of annuity statutory premiums was 17.5% from 2007-2011. Fitch believes rapid growth during this period of low interest rates has increased the risk profile of this operation and could have an impact on future earnings. Estimated operating leverage for the annuity segment which is not being sold (see below) is estimated to be 12.6 times (x) at June 30, 2012, near the top of management's range for the business. Estimated NAIC RBC was 389% at June 30, 2012. Under Fitch's rating methodology, the strategic category for AFG's two annuity operating companies is 'Very Important'. The stand-alone IFS ratings of 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 these operations could be subject to greater than average disintermediation risk in a rapidly rising interest rate environment. Key ratings triggers 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%; and for annuity operations, a material and sustained deterioration in operating performance or a material increase in surrenders, either of which required resources from the holding company or P/C operations to support. Separately, the ratings of AFG's two annuity operating companies could be moved to their stand-alone ratings if Fitch changed its view on the segment's strategic importance to AFG. This could occur if the rapid growth in the segment continues and the segment's financial performance and risk profile further diverged from the P/C segment. Key ratings triggers that could lead to an upgrade over the longer term include: improvement in P/C reserve adequacy, underwriting and investment performance commensurate with higher rated companies, and/or a decrease in the target maximum for long-term financial leverage below 15%. Fitch has assigned the following rating: American Financial Group, Inc. --5.75% senior debentures due 2042 at 'BBB+'. 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+'; --6.375% senior debentures due 2042 at 'BBB+'; --7% senior debentures due 2050 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-'. American Annuity Group Capital Trust IV --7.35% preferred securities at 'BBB-'. Great American Life Insurance Company Annuity Investors Life Insurance Company --IFS at 'A+'. Additionally, Fitch has maintained the Rating Watch Negative on the following two companies which were downgraded and placed on Rating Watch Negative on May 16, 2012. The strategic category for these companies is 'Limited Importance' as they are in run-off. The ratings remain on Rating Watch Negative pending the results of an external actuarial study performed on long-term care reserves. --United Teacher Associates Insurance Company --Continental General Insurance Company --IFS at 'BBB'. The ratings could be downgraded further pending the results of the study, or deterioration in RBC to materially below 200%, without commensurate capital support from AFG.
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