A.M. Best has upgraded the issuer credit ratings (ICR) to "a+"
from "a" and affirmed the financial strength rating (FSR) of A
(Excellent) of Great American Life Insurance Company (GALIC) and
its wholly owned subsidiary, Annuity Investors Life Insurance Company
(AILIC), the key annuity subsidiaries of American Financial Group,
Inc. (AFG) (NYSE:AFG). The outlook for the ICRs has been revised to
stable from positive, while the outlook for the FSR is stable. The above
companies are headquartered in Cincinnati, OH.
The upgrading of GALIC and AILIC's ICRs reflects their status as market
leaders of fixed-indexed annuity products in the banking market, as well
as their consistent net operating earnings and improved risk-adjusted
capitalization. Additionally, the strong growth in the annuity business
over the past several years has helped GALIC and AILIC become a more
material contributor 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 partial
rating enhancement currently afforded by AFG.
Together, GALIC and AILIC have generated a significant amount of single
premium fixed and fixed indexed annuity premium for four consecutive
years. Both companies have been able to remain price competitive through
actively managing crediting rates, modifying commission schedules and
investing opportunistically. Additionally, several new bank channel
distributors have been added in recent years, including Wells Fargo in
2013, which also has contributed to premium growth. As a result, GALIC
and AILIC reported over $3 billion of annuity deposits in recent years,
driven by indexed annuities and sales through their bank and independent
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
sizeable capital contribution to GALIC during the fourth quarter of
2012, has enabled GALIC's risk-adjusted capitalization to increase
considerably as measured by Bet's Capital Adequacy Ratio (BCAR).
Although sales of fixed and indexed annuities have remained strong, A.M.
Best remains concerned with the prolonged premium challenges within the
403(b) market. The uncertainty of the 403(b) public education
marketplace, specifically the ongoing high unemployment rate and ongoing
budgetary constraints, has resulted in a reduction in premiums
throughout the 403(b) segment. As a result, AFG's first-year premiums
within the 403(b) marketplace continue to decline, although this is
partially mitigated by favorable persistency, driven in part by strong
surrender charge protection. Additionally, A.M. Best notes that the
annuity companies continue to maintain sizeable 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
and AILIC's improved capitalization, favorable net unrealized gain
positions within their investment portfolios and their long-standing
expertise in real estate related investments.
Factors that could result in favorable rating actions for GALIC and
AILIC over the near to medium term include positive rating actions taken
by A.M. Best on the core property/casualty operations of AFG or changes
in the group's business profile toward products that are viewed as being
more creditworthy (e.g., life insurance). Factors that could lead to
negative rating actions 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
Concurrently, A.M. Best has downgraded the FSR to B++ (Good) from A-
(Excellent) and the ICR to "bbb+" from "a-" 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 rating actions primarily reflect Manhattan National's diminished
strategic value within the organization, and the ratings are now
reflective of its stand-alone credit profile. A.M. Best believes 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 ICRs of "bbb" of Continental
General Insurance Company and United Teacher Associates Insurance
Company (both headquartered in Austin, TX), both 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.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
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