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Rating Action:

Moody's upgrades American Financial Group; outlook stable

23 Apr 2013

New York, April 23, 2013 -- Moody's Investors Service has upgraded the senior debt ratings of American Financial Group, Inc. (NYSE: AFG) to Baa1 from Baa2, the insurance financial strength (IFS) ratings of AFG's property and casualty (P&C) operations led by Great American Insurance Company (GAIC) to A1 from A2, and the IFS rating of Great American Life Insurance Company (GALIC), to A2 from A3. Moody's also affirmed the A3 IFS rating of AFG's Republic Indemnity Insurance Company. The outlook on all of the ratings was changed to stable from positive.

RATINGS RATIONALE

P&C Operations

According to Pano Karambelas, Moody's lead analyst for AFG, "The upgrades reflect the company's sustained solid financial fundamentals, including consistently strong profitability, good market position in a diverse group of specialty niche businesses, limited catastrophe exposure, and moderate adjusted financial leverage (24% at year-end 2012) with good cash flow and earnings coverage of interest (12.4x and 7.4x on a five-year average basis, respectively)." The upgrade considers the company's long-standing track record and underwriting expertise as a lead specialty-market underwriter across a wide range of low-to-moderate hazard commercial property and casualty business classes. The rating agency expects the company will continue to average returns on capital in excess of 10% and combined ratios in the low 90% range. These strengths are tempered by AFG's high operating leverage and elevated reinsurance recoverables compared to peers reflecting high reinsurance utilization, including significant cessions to the Federal Crop Insurance Corporation (a division of the US Dept. of Agriculture); exposure to execution risk in its gradually expanding international operations; and pressure on operating earnings as a result of low investment yields given the low interest rate environment.

The A3 IFS rating of AFG's Republic Indemnity is based on Republic's position and focus as a leading writer of California workers' compensation, and its concentration in this historically volatile, limited geographic business line. Moody's expects that Republic will continue to employ an opportunistic strategy, pursuing profitability over revenue growth in step with conditions in the CA workers' compensation sector. That said, the rating agency views the intrinsic credit profile of Republic's underlying operations as constrained due to the historic volatility of its monoline business focus and regulatory/geographic concentration. In addition, given Republic's business profile and the relatively limited interaction between the company and other AFG affiliates, Republic's rating is consistent with its intrinsic credit profile and is not accorded ratings uplift from AFG.

Factors that could lead to an upgrade of the P&C ratings include: 1) improved risk-adjusted capitalization (gross underwriting leverage consistently below 4.0x); and 2) continued development of the core franchise while maintaining historical profitability. The following factors could lead to a downgrade of the P&C ratings: 1) adverse development in excess of 3% of reserves; 2) material reductions in earnings capacity (returns on capital sustained below 10% in multiple years); or 3) 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

The upgrade of GALIC's rating to A2 from A3 is based on the implicit support of the P&C operations and their upgrade. The A2 IFS rating on GALIC, an indirect subsidiary of Great American Financial Resources (GAFRI), reflects its niche position in the tax-deferred annuity business for public and private education employees with significant barriers to entry (403(b) market). Other strengths include the company's stable earnings base, improving expense structure, expanding distribution, and implicit support from AFG (reflecting 1-notch of uplift for parental support). Credit weaknesses include the potential for adverse regulation in the company's core 403(b) market, managing growth in the bank fixed annuity market, and significant holdings of non-agency residential mortgage-backed securities (RMBS), although these have been performing well.

The following could lead to an upgrade of GALIC's rating: 1) improved market position in the 403(b) market and better diversification away from fixed indexed annuities; and 2) consistent profitability as measured by returns on capital of at least 7%. The following could lead to a downgrade of GALIC's rating: 1) downgrade of AFG and its P&C affiliates or reduction in implicit support; 2) pre-tax investment losses of greater than $75 over the next 12 months; or 3) NAIC risk-based capital (RBC) ratio below 300% (on Company Action Level basis).

Holding Company

The upgrade to AFG's holding company ratings is based on the upgrade of GAIC and its P&C affiliates. AFG's Baa1 senior debt rating is 3 notches lower than the A1 IFS rating of GAIC and its P&C affiliates and is 1 notch lower than the stand-alone credit profile of GALIC. The holding company's debt obligations benefit from the diversified earnings and cash flows of AFG's P&C and life operations.

The following could lead to an upgrade of the holding company ratings: 1) an upgrade of the IFS ratings of the P&C and/or life subsidiaries; 2) pretax interest coverage levels consistently above 8x; and 3) adjusted financial leverage consistently below 20%. 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) pretax interest coverage consistently at or below 6x; and 3) financial leverage consistently in the mid-to-high 20% range.

The following ratings have been upgraded and the outlook changed to stable from positive:

American Financial Group, Inc. -- senior debt to Baa1 from Baa2; senior unsecured shelf to (P)Baa1 from (P)Baa2; subordinated unsecured shelf to (P)Baa2 from (P)Baa3; junior subordinated unsecured shelf to (P)Baa2 from (P)Baa3; preferred stock to (P)Baa3 from (P)Ba1;

American Financial Capital Trust II, III, IV -- preferred securities to (P)Baa2 from (P)Baa3;

American Annuity Capital Trust II -- preferred securities to Baa2(hyb) from Baa3(hyb);

Great American Insurance Company -- insurance financial strength to A1 from A2;

Great American Alliance Insurance Company -- insurance financial strength to A1 from A2;

Great American Assurance Company -- insurance financial strength to A1 from A2;

Great American Contemporary Insurance Company -- insurance financial strength to A1 from A2;

Great American E&S Insurance Company -- insurance financial strength to A1 from A2;

Great American Fidelity Insurance Company -- insurance financial strength to A1 from A2;

Great American Insurance Company of New York -- insurance financial strength to A1 from A2;

Great American Protection Insurance Company -- insurance financial strength to A1 from A2;

Great American Security Insurance Company -- insurance financial strength to A1 from A2;

Great American Spirit Insurance Company -- insurance financial strength to A1 from A2;

Great American Casualty Insurance Company -- insurance financial strength to A1 from A2;

Great American Life Insurance Company -- insurance financial strength to A2 from A3.

The following rating has been affirmed and the outlook changed to stable from positive:

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

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, supplemental and life insurance products through Great American Financial Resources, Inc. (unrated), the indirect holding company of GALIC. In 2012, AFG reported revenues of $5.1 billion and net income of $488 million. Shareholders' equity was approximately $4.7 billion at year-end 2012.

The principal methodologies used in these ratings were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010 and Moody's Global Rating Methodology for Life Insurers published in May 2010.

Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

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.

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 upgrades American Financial Group; outlook stable
No Related Data.
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