As a part of its yearly review exercise, A.M. Best Co. has undertaken a rating action on U.S. property and casualty insurer American Financial Group Inc. AFG. The company’s issuer credit rating (ICR) of "a-" and all debt ratings were affirmed.
The rating agency also reiterated the financial strength ratings (FSR) of A+ (Excellent) and ICR of “aa-” of Great American Insurance Companies, the subsidiaries of American Financial Group. The outlook remains stable.
The rating affirmations of the units account for the company’s sturdy risk-adjusted capitalization and continued solid operational results reflecting strong underwriting performances at varied lines of business. The rating agency also acknowledges astute management in maintaining underwriting discipline, which has kept its operations profitable.
The company’s bouquet of insurance offerings also makes possible premium writings in different lines that provide a huge buffer for the business. The company’s manageable exposure to catastrophe losses also provides an extra edge to its underwriting margins.
The rating agency positively views the company’s leverage ratio which comfortably satisfies the rating agency benchmark. The company also carries sufficient liquidity given its reach in capital markets and line of credit and no material debt maturing until 2019.
However, these positives are dwarfed by considerable dividend payments made to the parent company, higher common stock leverage and loss development in certain lines of business.
Concurrently, A.M. Best reiterated the FSR of A+ (Superior) and ICRs of "aa" of the property/casualty members of American Empire Surplus Lines and FSR of A (Excellent) and ICRs of "a" of the units of the Republic and Summit Insurance Pool. The outlook remains stable.
The ratings reflect excellent risk-adjusted capitalization, sustained solid operating performance within the excess and surplus lines marketplace (owing to underwriting profitability, low-cost operating model and strong investment income) and management's successful efforts to sail through different phases of the market cycle. The ratings also account for financial support provided by American Financial Group. The rating agency specifically acknowledges the acquisition of Summit which has added revenue streams to the Republic and Summit Insurance Pool.
Nevertheless, the positive factors of these entities were overshadowed by some integration risks from the Summit acquisition and weakened profitability over the past five years as reflected by the combined ratio. Also, while the company has a diverse range of business it is particularly accumulated in a single line of insurance which increases the odds of business risk.
Additionally, the rating agency affirmed the FSR of A+ (Superior) from A (Excellent) along with the ICRs of "aa-" of the property/casualty members of the Mid-Continent Group, with a stable outlook.
The ratings upgrade came on the back of its dominant footprint, sustained solid operating results, sturdy risk-adjusted capitalization and financial support provided by American Financial Group. However, geographic limitations of the business and considerable dividend payment are drags on the positives.
A stable outlook negates any chance of a rating upgrade in the near term. But A.M. Best might consider rating upgrades if the company and its subsidiaries continue to perform better than their peers, and maintain a sturdy risk-adjusted capitalization.
On the flip side, a dip in underwriting and operating results subsequently affect risk-adjusted capitalization or lead to higher leverage or lower interest coverage. These might lead to a rating downgrade.
Rating affirmations or upgrades from credit rating agencies play important roles in building investor confidence in the stock as well as maintaining creditworthiness in the market.
American Financial Group carries a Zacks Rank #3 (Hold). Some better-ranked property & casualty insurers are Allied World Assurance Company Holdings, AG AWH, AmTrust Financial Services, Inc. AFSI and Arch Capital Group Ltd. ACGL with a Zacks Rank #1 (Strong Buy) each.
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