MOODY'S ASSIGNS Baa3 RATING TO AAG HOLDING COMPANY'S $86 MILLION NOTES; AFFIRMS RATINGS ON AMERICAN FINANCIAL GROUP AND AFFILIATES
Moody's Investors Service assigned a Baa3 senior debt rating to the $86 million, 30-year 7.25% senior debentures issued by AAG Holding Company Inc. (AAG), an intermediate holding company of Great American Financial Resources, Inc. (GAFRI). Proceeds from the issuance of the 30-year notes, which are fully and unconditionally guaranteed by GAFRI, will be used to redeem the company’s 9.25% trust preferred securities.
The rating agency also affirmed the existing debt ratings of GAFRI (Baa3 senior debt) and the A3 insurance financial strength rating of Great American Life Insurance Company (GALIC) with a stable outlook. On November 13, 2003, following the announcement that the company had successfully refinanced its short term bank borrowings, Moody’s changed the company’s rating outlook to stable from negative. The company’s negative outlook was primarily related to concerns about GAFRI's liquidity profile; specifically, the company had been relying on short-term bank facility financing to fund long term capital needs. These rating agency concerns have now been eliminated as the company recently issued approximately $113 million retail debt offering and used the proceeds to pay down its bank facility that was contractually expiring at year-end 2004.
The new debt issuance represents an opportunity for the company to refinance relatively high interest trust preferred securities with lower interest, long term debentures. After the new debt issuance and subsequent redemption of the trust preferred securities, Moody's expects the company's financial leverage (including trust preferred securities) to be in the low 30% range. Longer term, Moody's expects that the company will reduce leverage to under 30%.
Moody’s also affirmed the Baa3 senior debt ratings of American Financial Group (AFG) and the A3 insurance financial strength ratings for members of the Great American Insurance Group, its property and casualty (P&C) subsidiaries. The ratings carry a stable outlook. Moody’s noted that expectations for improved P&C operating earnings, lower financial and operational leverage as well as higher fixed coverage levels support AFG’s current ratings and stable outlook.
Moody's ratings of GAFRI are based primarily on the company's niche position in the tax-deferred annuity market for public education employees (403(b) market). The rating also takes into account the company's renewed focus on its core operations, as well as GAFRI's relationship with its parent, AFG, which owns 82% of the company. These strengths are tempered somewhat by GAFRI's moderately high financial leverage and modest cash on cash coverage of its holding company debt. Moody's noted that any future upward rating movement would be largely dependent upon a continued improvement and diversification of GALIC's statutory earnings, leading to an increase in capitalization and free cash flow. A change in the credit profile of AFG would also have a material impact on the ratings at GAFRI.
The following ratings associated with Great American Financial Resources, Inc. and its life insurance subsidiaries were affirmed with a stable outlook:
AAG Holding Company, Inc. -- Baa3 senior debt, (P)Baa3 prospective senior unsecured debt, (P)Ba1 prospective subordinated debt;
Great American Financial Resources Inc. -- (P)Ba2 prospective preferred stock;
American Annuity Group Capital Trust I & II -- Ba1 capital securities;
Great American Life Insurance Company -- A3 insurance financial strength.
The following debt ratings associated with AFG and its P&C subsidiaries were affirmed with a stable outlook:
American Financial Group, Inc. -- Baa3 senior unsecured debt Baa3, (P)Baa3 prospective senior unsecured debt and (P)Ba1 prospective subordinated debt;
American Financial Capital Trust I -- Ba1 capital securities;
American Financial Capital Trust II -- (P)Ba1 prospective capital securities;
American Financial Corporation -- Ba2 preferred stock;
Great American Insurance Company -- A3 insurance financial strength;
Great American Fidelity Insurance Company -- A3 insurance financial strength;
Great American Spirit Insurance Company -- A3 insurance financial strength;
Great American Contemporary Insurance Company -- A3 insurance financial strength;
Great American Security Insurance Company -- A3 insurance financial strength;
Great American Protection Insurance Company -- A3 insurance financial strength;
Great American Alliance Insurance Company -- A3 insurance financial strength;
Great American Assurance Company -- A3 insurance financial strength;
Great American E & S Insurance Company -- A3 insurance financial strength;
Great American Insurance Company of New York -- A3 insurance financial strength;
Republic Indemnity Company of America -- A3 insurance financial strength;
Worldwide Casualty Insurance Company -- A3 insurance financial strength.
AFG is an Ohio-based holding company that, through its operating subsidiaries, provides specialty commercial property and casualty insurance, as well as tax-deferred annuities and life insurance products. At September 30, 2003, AFG reported net income of $97.2 million for the first nine months of 2003 and shareholders' equity of $1.8 billion. During the same reporting period, GAFRI reported net income of $35.2 million and shareholders' equity of $769 million (net of capital gains of $211 million).
Moody’s Insurance Financial Strength Ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. Visit our website at www.moodys.com/insurance.
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