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Rating Action:

Moody's affirms AFG's ratings (Baa1 senior), changes outlook to stable

15 Jun 2015

Approximately $990 million of debt securities affected.

New York, June 15, 2015 -- Moody's Investors Service has affirmed the Baa1 senior debt rating for American Financial Group, Inc. (NYSE: AFG), the A1 insurance financial strength (IFS) ratings of AFG's property and casualty (P&C) operations led by Great American Insurance Company (GAIC), and the A2 IFS rating of AFG's life insurance subsidiary Great American Life Insurance Company (GALIC). The outlook for these ratings was changed to stable from negative reflecting good underwriting profitability and capital levels. In the same action, Moody's affirmed the A3 IFS rating of AFG's workers' compensation subsidiary, Republic Indemnity Insurance Company (Republic) with a stable outlook.

RATINGS RATIONALE

Property and Casualty (P&C) Operations

According to Pano Karambelas, Moody's lead analyst for AFG, "The change to a stable outlook reflects good underwriting profit margins across the P&C group's many specialty business segments including Republic's workers' compensation business concentrated in California and the southeastern US. The company has made significant progress in managing the southeastern US business, acquired from Liberty Mutual in 2014, in terms of retaining key executives and agents as well as completing the integration of its finance, HR, and legal operations." Moody's expects the P&C group will continue to successfully manage the profitability of its commercial specialty businesses, particularly the use of an opportunistic strategy in workers' compensation, which represents about 24% of premiums.

Moody's said the affirmation of A1 IFS ratings of the P&C operations reflects the group's long-standing track record and underwriting expertise as a lead specialty-market underwriter across a diverse array of niche commercial lines segments, consistently strong profitability, low exposure to catastrophe volatility, good financial leverage metrics, and a performance driven compensation structure. These strengths are tempered by GAIC's high underwriting leverage, moderate exposure to adverse reserve development in its commercial casualty portfolio, and elevated reinsurance recoverables compared to peers reflecting high reinsurance utilization.

The rating agency stated that the A3 IFS rating of AFG's Republic Indemnity is based on Republic's position and focus as a leading workers' compensation carrier with business in California and the southeastern US, with a track record of pursuing profitability over revenue growth in the highly cyclical workers' compensation market. These strengths are offset by the inherent volatility associated with the company's monoline focus in workers' compensation including the attendant sensitivity of reserves to claims inflation. Moody's views Republic as less integrated within the P&C group based on its monoline workers' compensation business which operates as a separate pool within the P&C group. Hence, Republic's A3 IFS rating is consistent with its standalone credit profile.

Moody's said factors that could lead to an upgrade of the P&C ratings include: 1) improved risk-adjusted capitalization (gross underwriting leverage consistently below 5.0x); 2) combined ratios consistently in the mid 90% range; and 3) strong and consistent earnings with returns on capital above 10%. The following factors could lead to a downgrade of the P&C ratings: 1) adverse development in excess of 2% of reserves; 2) material reductions in earnings capacity (returns on capital sustained below 10%); and/or 3) a decline (e.g., due to catastrophes and/or investment losses) in P&C group surplus by more than 10% over a rolling twelve month period.

Life Operations

Moody's said the affirmation of GALIC's A2 IFS rating and change to a stable outlook reflects the one notch of uplift it receives due to the financial support from the rest of AFG's operations, and the alignment of its outlook with the outlook of AFG and its P&C affiliates. In addition, GALIC's rating also reflects its strong profitability and position in the fixed annuity markets, including its niche position in tax-deferred annuities for public and private education employees with significant barriers to entry in the 403(b) market. Other strengths include the company's stable earnings base, improving expense structure and expanding distribution. Credit weaknesses include the potential for adverse regulation in the company's core 403(b) market, exposure to both spread compression in the continued low interest rate environment and increased surrenders in an environment with rapidly rising interest rates, managing growth in the bank fixed annuity market, and holdings of non-agency residential mortgage-backed securities (RMBS), although these investments have been performing well.

The rating agency commented that an upgrade of AFG and/or its P&C affiliates could place upward pressure on GALIC's rating. Additionally, the following factors could place upward pressure on GALIC's standalone credit profile: 1) improved market position in the 403(b) market and better diversification away from fixed index annuities (FIAs); and 2) consistent profitability as measured by ROC of at least 7%. Conversely, a downgrade of AFG and/or its P&C affiliates could place downward pressure on GALIC's ratings. In addition, the following factors could lead to downward pressure on the standalone credit profile of GALIC: 1) company action level NAIC risk-based capital (RBC) ratio of less than 325%; and 2) consistent profitability as measured by ROC below 4%.

Holding Company

Moody's said the affirmation of AFG's debt ratings reflects the diversified earnings and cash flows of its P&C and life operations, moderate use of financial leverage, and very good earnings coverage metrics. The holding company's senior debt rating is positioned three notches below the A1 IFS rating of the P&C operations and one notch lower than the stand-alone credit profile of GALIC. The group has maintained moderate adjusted financial leverage in the low 20% range, with good cash flow and earnings coverage of interest. Moody's expects that AFG will continue to maintain a strong liquidity profile, including about $200 million of cash and short-term securities at the holding company.

The following factors could lead to an upgrade of the holding company ratings include: 1) upgrade of the IFS ratings of the P&C and life subsidiaries; 2) earnings coverage consistently at or above 8x; and 3) financial leverage in the low 20% range. Factors that could lead to a downgrade of the holding company ratings include: 1) a downgrade of the IFS ratings of the P&C and/or life subsidiaries; 2) earnings coverage consistently at or below 6x; and 3) financial leverage consistently in the mid-to-high 20% range.

The following ratings have been affirmed and the outlook changed to stable from negative:

American Financial Group, Inc. -- senior debt at Baa1; subordinated debt at Baa2;

Great American Insurance Company -- insurance financial strength at A1;

Great American Alliance Insurance Company -- insurance financial strength at A1;

Great American Assurance Company -- insurance financial strength at A1;

Great American Contemporary Insurance Company -- insurance financial strength at A1;

Great American E&S Insurance Company -- insurance financial strength at A1;

Great American Fidelity Insurance Company -- insurance financial strength at A1;

Great American Insurance Company of New York -- insurance financial strength at A1;

Great American Protection Insurance Company -- insurance financial strength at A1;

Great American Security Insurance Company -- insurance financial strength at A1;

Great American Spirit Insurance Company -- insurance financial strength at A1;

Great American Casualty Insurance Company -- insurance financial strength at A1;

Great American Life Insurance Company -- insurance financial strength at A2.

The following rating has been affirmed with a stable outlook:

Republic Indemnity Company of America -- insurance financial strength at A3.

The principal methodologies used in these ratings were Global Property and Casualty Insurers published in August 2014, and Global Life Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

AFG is an Ohio-based holding company that, through its operating subsidiaries, provides specialty commercial property and casualty insurance as well as the sale of fixed and fixed-indexed annuities in the retail, financial institution and educational markets." In 2014, AFG reported revenues of $5.7 billion and net income of $452 million. In the first quarter of 2015, AFG had $1.3 billion in revenues and $19 million in net income. Shareholders' equity was approximately $5.1 billion as of March 31, 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Pano Karambelas
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms AFG's ratings (Baa1 senior), changes outlook to stable
No Related Data.
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