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Rating Action:

Moody's affirms AFG's ratings (Baa1 senior); outlook stable

03 Aug 2018

Affirms AFG's P&C intercompany pool members and GALIC ratings

NOTE: On August 28, 2018, the press release was corrected as follows: The following was added as the fourth and fifth paragraphs of the Regulatory Disclosures section: “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 rating analyst and the Moody’s legal entity that has issued the ratings. The person who approved American Financial Group, Inc., Great American Alliance Insurance Company, Great American Assurance Company, Great American Casualty Insurance Company, Great American Contemporary Insurance Company, Great American E & S Insurance Company, Great American Fidelity Insurance Company, Great American Insurance Company, Great American Insurance Company of New York, Great American Protection Insurance Company, Great American Security Insurance Company, Great American Spirit Insurance Company, and Republic Indemnity Company of America credit ratings is Sarah Hibler, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653. The person who approved Great American Life Insurance Company credit ratings is Scott Robinson, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653.” Revised release follows.

NOTE: On August 08, 2018, the press release was corrected as follows: The methodology paragraph at the end of the Ratings Rationale section was changed to the following: “The principal methodologies used in rating American Financial Group, Inc. were Property and Casualty Insurers published in May 2018 and Life Insurers published in May 2018. The principal methodology used in rating Great American Insurance Company, Great American Alliance Insurance Company, Great American Assurance Company, Great American Contemporary Insurance Company, Great American E & S Insurance Company, Great American Fidelity Insurance Company, Great American Insurance Company of New York, Great American Protection Insurance Company, Great American Security Insurance Company, Great American Spirit Insurance Company, Great American Casualty Insurance Company and Republic Indemnity Company of America was Property and Casualty Insurers published in May 2018. The principal methodology used in rating Great American Life Insurance Company was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.” Revised release follows.

New York, August 03, 2018 -- Moody's Investors Service ("Moody's") has affirmed the Baa1 senior debt rating of 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). In the same action, Moody's also affirmed the A3 IFS rating of Republic Indemnity Company of America. See complete ratings list below. The outlook for the ratings is stable reflecting the company's underwriting strength and track record of strong, stable profitability.

RATINGS RATIONALE

Property and Casualty (P&C) Operations

Moody's said the affirmation of the 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, and a performance driven compensation structure. These strengths are tempered by high gross 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 added that the A3 IFS rating of Republic Indemnity is based on the company's position as a leading workers' compensation carrier with business in California and the southeastern US and 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 5x); 2) combined ratios consistently in the mid 90% range; 3) strong and consistent earnings with returns on capital above 10%; and 4) financial leverage in the low 20% range. 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 (returns on capital sustained below 10%); 3) a decline in surplus by more than 10% over a rolling twelve month period; and 4) financial leverage consistently in the mid-to-high 20% range.

Life Operations

According to Moody's, GALIC's rating affirmation was based on the company's leading position in the market for fixed indexed and fixed annuities (FIAs), its expanding distribution and efficient expense structure, and good profitability and capital adequacy. The rating is also based on the benefits of GALIC's ownership by the AFG group, and expected financial support if needed.

These strengths are mitigated by the firm's limited product diversity, and an in-force annuity business that is subject to spread compression consistent with peer annuity companies. However, regulatory capital is relatively resilient in a stress scenario because of product features, especially on its GALIC's newer business, which can mitigate the effects of interest rate risks (i.e., prolonged low interest rates or a spike in rates) and rising option costs on its profitability.

The following factors could lead to an upgrade of the company's ratings: better diversification away from fixed and indexed annuities (FIAs); consistent profitability as measured by return on capital (ROC) of at least 7%; an upgrade of the property-casualty operations and/or AFG; NAIC risk-based capital (RBC) ratio of 375% or greater. Conversely, the following factors could result in a downgrade of GALIC's ratings: significant deterioration of niche annuity market positions; NAIC risk-based capital (RBC) ratio (company action level) of less than 325%; consistent profitability, as measured by ROC, below 4%. A downgrade of AFG and/or its P&C affiliates could also put pressure on GALIC.

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 strong earnings coverage metrics. The holding company's senior debt rating is positioned three notches below the A1 IFS rating of its flagship GAIC property-casualty operations, and is two notches below the A2 IFS rating of GALIC.

As of June 30, 2018, AFG's financial leverage was 22.1% with earnings coverage of 8.6x. Moody's expects that AFG will continue to maintain a strong liquidity profile. For the first half of 2018, AFG continued to generate strong income with net earnings attributable to shareholders of $355 million compared to $298 million in the prior year period. The P&C operations generated a healthy underwriting profit with a combined ratio of 92.8% which included favorable reserve development and benign catastrophe losses. GALIC's first half earnings were also strong with pretax annuity earnings of $224 million, including an unlocking charge primarily attributable to higher fixed-indexed annuity option costs.

The following factors could lead to an upgrade of the holding company ratings: 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:

American Financial Group, Inc. -- senior unsecured debt at Baa1; subordinated debt at Baa2 (hyb), Outlook remains Stable;

Great American Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Alliance Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Assurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Contemporary Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American E & S Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Fidelity Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Insurance Company of New York -- insurance financial strength at A1, Outlook remains Stable;

Great American Protection Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Security Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Spirit Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Casualty Insurance Company -- insurance financial strength at A1, Outlook remains Stable;

Great American Life Insurance Company -- insurance financial strength at A2, Outlook remains Stable;

Republic Indemnity Company of America -- insurance financial strength at A3, Outlook remains Stable.

The principal methodologies used in rating American Financial Group, Inc. were Property and Casualty Insurers published in May 2018 and Life Insurers published in May 2018. The principal methodology used in rating Great American Insurance Company, Great American Alliance Insurance Company, Great American Assurance Company, Great American Contemporary Insurance Company, Great American E & S Insurance Company, Great American Fidelity Insurance Company, Great American Insurance Company of New York, Great American Protection Insurance Company, Great American Security Insurance Company, Great American Spirit Insurance Company, Great American Casualty Insurance Company and Republic Indemnity Company of America was Property and Casualty Insurers published in May 2018. The principal methodology used in rating Great American Life Insurance Company was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

American Financial Group, Inc., based in Cincinnati, Ohio, is a holding company that, through its operating subsidiaries, provides specialty commercial property and casualty insurance as well as fixed, fixed-indexed and variable-indexed annuities in the retail, financial institution, registered investment advisor and educational markets. In 2017, AFG reported revenues of $6.9 billion and net income of $475 million. Shareholders' equity was approximately $5.1 billion as of June 30, 2018.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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 rating analyst and the Moody’s legal entity that has issued the ratings.

The person who approved American Financial Group, Inc., Great American Alliance Insurance Company, Great American Assurance Company, Great American Casualty Insurance Company, Great American Contemporary Insurance Company, Great American E & S Insurance Company, Great American Fidelity Insurance Company, Great American Insurance Company, Great American Insurance Company of New York, Great American Protection Insurance Company, Great American Security Insurance Company, Great American Spirit Insurance Company, and Republic Indemnity Company of America credit ratings is Sarah Hibler, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653. The person who approved Great American Life Insurance Company credit ratings is Scott Robinson, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653.” 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.

Michael Dion, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Sarah Hibler
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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