Fitch Affirms American Financial Group’s Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of American Financial Group, Inc.'s (NYSE:AFG) 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 is provided at the end of this release.

The affirmation reflects AFG's historical strong operating profitability relative to industry peers, adequate statutory capital levels, reasonable financial leverage and strong liquidity. Through statutory earnings, both property/casualty (P/C) and annuity and supplemental insurance (A&SI) 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, continued low interest rate environment and AFG's rapid growth, or plans for growth, in its businesses. Fitch is paying close attention to these growth trends and the impact on expected earnings and the risk profile of the company.

The compound annual growth rate (CAGR) of GAAP net written premium from 2006-2011 was 0.8%, but management recently raised its outlook for growth in 2012 to between 12% and 16%. In its P/C segment AFG reported a combined ratio of 93.5% in 2011, which while consistently better than the industry, has deteriorated over the past several years. In addition, investment income has been challenged by the low interest rate environment. Overall, AFG's return on equity declined to 7.6% in 2011, from and average of 12% from 2006-2010.

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 2.5 points in 2011, 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, continue to develop adversely.

In the A&SI segment, the CAGR of statutory premiums was 15.2% from 2006-2011. 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. Operating leverage for the A&SI segment increased to 13.0 times (x) in 2011, the top of management's range for the business, and NAIC RBC declined to 378% from 414% the prior year.

AFG's financial leverage ratio (FLR) of 17.8% (excluding FAS 115) at Dec. 31, 2011 was down from significantly higher levels historically. Debt-servicing capabilities remain ample due to solid operating company maximum dividend capacity and holding company cash and investments. While GAAP EBIT-to-fixed charge coverage declined to 6.7x for 2011, Fitch believes it was higher than industry average, and it remained within ratings expectations.

The strategic category for AFG's A&SI 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 A&SI, 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 A&SI operating companies could be moved toward 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 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+'.

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 ratings above were unsolicited and have been provided by Fitch as a service to investors.

The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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Fitch Ratings
Primary AnalystMartha M. Butler, CFA, +1-312-368-3191
Senior Director
Fitch, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary AnalystDouglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Committee ChairpersonMark E. Rouck, CFA, +1-312-368-2085
Senior Director
or
Media Relations:Brian Bertsch, +1-212-908-0549
Email: [email protected]

Source: Fitch Ratings