A.M. Best Affirms Ratings of American Financial Group, Inc.’s Key Annuity Subsidiaries
March 20 2015 - 1:53PM
Business Wire
A.M. Best has affirmed the financial strength rating
(FSR) of A (Excellent) and the issuer credit ratings (ICR) of “a+”
of Great American Life Insurance Company (GALIC) and its
wholly owned subsidiary, Annuity Investors Life Insurance
Company (AILIC), the key life/health annuity subsidiaries of
American Financial Group, Inc. (AFG) [NYSE:AFG]. The outlook
for all ratings is stable. The above companies are headquartered in
Cincinnati, OH.
The ratings of GALIC and AILIC reflect their leading market
position in the sale of fixed-indexed annuity products through the
bank channel, as well as their consistent net operating earnings
and solid risk-adjusted capitalization. Additionally, strong growth
in the annuity business over the past several years has helped
GALIC and AILIC become material contributors to AFG’s consolidated
revenue and earnings. As a result, A.M. Best believes that the
strategic importance of these companies to the overall organization
continues to support the rating enhancement currently afforded by
AFG.
Together, GALIC and AILIC have generated significant amounts of
single premium fixed and fixed- indexed annuity premium for five
consecutive years. Both companies have been able to remain price
competitive through modifying commission schedules, actively
managing crediting rates and opportunistic investing. Additionally,
several new bank channel distributors have been added in recent
years, including Key Bank, Citizens Bank (Boston) and Wells Fargo,
which also has contributed to premium growth. As a result, GALIC
and AILIC reported over $3 billion of annuity deposits annually in
recent years driven by fixed-indexed annuity sales through their
bank and independent agent channels. The sharp increase in annuity
sales since 2009 has enabled GALIC to report continued improvement
in its core statutory operating earnings. Moreover, the growth in
operating earnings, in addition to a sizable capital contribution
to GALIC during the fourth quarter of 2012, has enabled GALIC to
maintain a solid level of risk-adjusted capitalization, despite the
significant increase in annuity premiums and reserves, as measured
by Best’s Capital Adequacy Ratio (BCAR).
Although sales of fixed and fixed-indexed annuities have
remained strong, the growth in the most recent period has been
attributable to its bank distribution channel. A.M. Best remains
concerned with the prolonged premium challenges within the
education channel, also referred to as the 403(b) public education
marketplace, and the retail channel. While sales in retail are down
this year due to aggressive pricing by some new entrants into the
fixed traditional and indexed annuity marketplace, the impact of
low interest rates, ongoing budgetary constraints and volatility of
the labor market continue to have a direct impact on the level of
new premiums flowing into the company’s 403(b) plans. As a result,
AFG’s first-year 403(b) premiums continue to decline, although this
is partially mitigated by favorable persistency, driven in part by
strong surrender charge protection. A.M. Best also notes that bank
channel sales in GALIC have been able to mostly offset the decline
in premiums in its retail and education marketplaces. Additionally,
A.M. Best notes that the annuity companies continue to maintain
sizable investments in financial sector corporate bonds and real
estate-related securities (in particular, non-agency residential
mortgage-backed securities and commercial mortgage-backed
securities), which have enhanced investment returns. However, A.M.
Best’s concerns are somewhat mitigated by GALIC’s and AILIC’s solid
risk-adjusted capitalization, favorable net unrealized gain
positions within their investment portfolios and their
long-standing expertise in real estate-related investments.
A.M. Best believes the potential for positive rating actions for
the members of Great American Group in the near to medium term
would be limited to positive rating actions taken by A.M. Best on
the core property/casualty operations of AFG. Factors that could
lead to negative rating movement include negative rating actions
taken by A.M. Best on the core property/casualty operations of AFG,
significant and sustained spread compression as a result of the
ongoing low interest rate environment, an increased concentration
of non-agency residential mortgage-backed securities and commercial
mortgage-backed securities within the group's investment portfolio,
or a material deterioration in risk-adjusted capitalization.
Concurrently, A.M. Best has affirmed the FSR of B++ (Good) and
the ICR of “bbb+” of Manhattan National Life Insurance
Company (Manhattan National) (headquartered in Cincinnati, OH),
a life/health subsidiary of AFG. The outlook for both ratings is
stable.
The ratings reflect Manhattan National’s diminished premium and
statutory earnings. A.M. Best continues to believe that the run-off
block of ordinary life business remaining at the company is no
longer central to the organization’s long-term strategy. Although
the life insurance line should continue to provide some revenue and
earnings diversification for AFG’s life and annuity operations, the
percentage has been steadily decreasing.
A.M. Best also has affirmed the FSR of B++ (Good) and the ICRs
of “bbb” of Continental General Insurance Company and
United Teacher Associates Insurance Company (both
headquartered in Austin, TX), life/health subsidiaries of AFG. The
outlook for these ratings is stable.
The methodology used in determining these ratings is Best’s
Credit Rating Methodology, which provides a comprehensive
explanation of A.M. Best’s rating process and contains the
different rating criteria employed in the rating process. Best’s
Credit Rating Methodology can be found at
www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- A.M. Best’s Liquidity Model for U.S.
Life Insurers
- A.M. Best’s Perspective on Operating
Leverage
- Rating Members of Insurance Groups
- Risk Management and the Rating Process
for Insurance Companies
- Understanding BCAR for U.S. and
Canadian Life/Health Insurers
This press release relates to rating(s) that have been
published on A.M. Best's website. For all rating information
relating to the release and pertinent disclosures, including
details of the office responsible for issuing each of the
individual ratings referenced in this release, please visit A.M.
Best’s Ratings & Criteria Center.
A.M. Best Company is the world's oldest and most
authoritative insurance rating and information source. For more
information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company,
Inc. ALL RIGHTS RESERVED.
A.M. Best Co.Tom ZitelliSenior Financial Analyst(908)
439-2200, ext. 5412tom.zitelli@ambest.comorTom
RosendaleAssistant Vice President(908) 439-2200, ext.
5201thomas.rosendale@ambest.comorChristopher SharkeyManager,
Public Relations(908) 439-2200, ext.
5159christopher.sharkey@ambest.comorJim PeavyAssistant Vice
President, Public Relations(908) 439-2200, ext.
5644james.peavy@ambest.com
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