S&P Raises AFG’s Subsidiaries Ratings to ‘A+’; Outlook Stable

Standard & Poor’s Ratings Services has raised its counterparty credit and financial strength ratings on American Financial Group’s (AFG) core insurance subsidiaries to ‘A+’ from ‘A’.

S&P also raised its counterparty credit rating on American Financial Group to ‘BBB+’ from ‘BBB’. The outlook on all these companies is stable.

“The upgrade recognizes the group’s very strong operating performance, led by the property/casualty segment’s underwriting performance, which compares favorably with that of many industry-leading peers” explained credit analyst Steven Ader.

S&P said the P/C specialty group’s “performance relative to its risk profile–with minimal hurricane and earthquake exposures and relatively low net policy limits–further supports our positive view of earnings. This performance stems from more than 20 sub-segment property/casualty businesses, with further diversification from a strongly performing Annuity and Supplemental life business, which contributed 18 percent of pretax operating income in 2009.”

The analysis added that, although continued soft market conditions “will pressure future performance, we believe the group will continue to outperform the property/casualty industry. The group ties underwriter bonuses directly to underwriting profitability and does not fully pay them until the accident year matures.

“This compensation structure reinforces AFG’s strong underwriting culture that–combined with solid diversification–enables each of the segments to fluctuate volume rather than unduly sacrificing pricing, thereby reinforcing profitability. Consistent and appropriate reserving practices, verified through our reserve review, further support the continuation of industry-leading performance.”

In addition S&P pointed out that its ratings on AFG and its operating insurance subsidiaries “reflect the group’s very strong operating results produced by its strongly positioned portfolio of specialty property/casualty commercial lines, annuity, and supplemental life businesses. Very strong capital adequacy that is redundant for the rating and appropriate financial leverage and coverage metrics further support the rating.”

As offsetting factors, S&P cited “the investment portfolio’s exposure to adverse economic conditions. Reinsurance recoverable and asbestos and environmental exposures, though well managed, are modestly above some similarly rated peers’. In addition, the group’s competitive advantage in many segments is a function of underwriting expertise and focus rather than brand or scale, exposing the segments to heightened competition.”

S&P also indicated that it expects that AFG will “continue to generate very strong operating results that are superior to the industry’s. Although difficult market conditions will pressure property/casualty operating results, underwriting profitability will remain strong. Similarly, the Annuity and Supplemental life segment will likely continue to generate strong results. We expect that the group’s capital adequacy will remain well redundant for the rating level.”

Ader added: “For us to consider another upgrade, the group would need to achieve a broader competitive position while sustaining its operating performance. As such, further upward rating movement is unlikely over the next 24 months. Downward rating pressure could result if the group’s performance were to fall short of our expectations.”

Source: Standard & Poor’s