OLDWICK, N.J., FEBRUARY 22, 2013 A.M. Best Co. has revised the issuer credit rating (ICR) outlook to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and ICRs 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 Great American Financial Resources, Inc. (GAFRI). The outlook for the FSR remains stable. GAFRI is a wholly owned subsidiary of American Financial Group, Inc. (AFG) [NYSE: AFG]. Both companies are headquartered in Cincinnati, OH.
The revised outlook for the ICRs reflects the fact that GAFRI’s recent disposition of much of its supplemental health insurance business is indicative of a more focused commitment to its core annuity lines. Additionally, the strong growth in its annuity business over the past several years has helped GAFRI become a more material contributor to AFG’s consolidated revenue and earnings. As a result, A.M. Best believes that the strategic importance of GAFRI to AFG has increased to a level that now warrants partial rating enhancement.
The rating affirmations of GAFRI’s principal annuity subsidiaries reflect the companies’ market leading positions in the sale of fixed indexed annuity products in the 403(b) and banking market, consistent net operating earnings and improved risk-adjusted capitalization. GALIC and AILIC have reported a significant amount of single premium fixed and fixed indexed annuity statutory premium for three consecutive years. Both companies have been able to remain price competitive through actively managing crediting rates, modifying commission schedules and opportunistic investing. As a result, GALIC and AILIC reported over $2 billion of fixed 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 GAFRI to report continued improvement of its 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 GAFRI’s risk-adjusted capitalization to increase considerably as measured by A.M. Best’s capital model.
While 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 budgetary constraints and volatility of the labor market since the economic crisis, has resulted in a reduction in premiums throughout the 403(b) segment. As a result, GAFRI’s first-year premiums within the 403(b) marketplace continue to decline. A.M. Best notes that the persistency of the group’s annuity products has been relatively strong due to its surrender charge protection, helping to preserve overall revenue growth. However, A.M. Best remains cautious that a prolonged low interest rate environment will adversely impact not only annuity sales within the 403(b) market but also those within GAFRI’s bank and independent distributors. Additionally, the annuity companies maintain a sizeable investment in financial sector corporate bonds and real estate-related investments (in particular, non-agency residential mortgage-backed securities and commercial mortgage-backed securities – areas in which the company has expertise), which has enhanced investment returns. However, A.M. Best’s concerns are somewhat mitigated by the companies’ improved capitalization and increasing net unrealized gain positions within their investment portfolios.
Concurrent with the rating actions outlined above, A.M. Best has downgraded the ICR to “bbb” from “bbb+” and affirmed the FSR of B++ (Good) for United Teacher Associates Insurance Company (UTA) (headquartered in Austin, TX), a life/health subsidiary of GAFRI. The outlook for the ratings is stable.
The rating action primarily reflects UTA’s diminished strategic value within the organization, and its rating is now reflective of its stand-alone credit profile. A.M. Best believes that the supplemental health business remaining at UTA, primarily a run-off block of long-term care, is no longer central to the organization’s long-term strategy. Although the supplemental benefits line should continue to provide some revenue and earnings diversification for GAFRI, the percentage is expected to decrease considerably in the near term.
Factors that could result in a favorable rating action for the key annuity companies within GAFRI over the near to medium term include a positive rating action taken by A.M. Best on the core property/casualty operations of AFG or changes in the group’s business profile towards products that are viewed as being more creditworthy (i.e., life insurance). Factors that could lead to a negative rating action include a negative rating action 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.
The FSR of A- (Excellent) and ICR of “a-” have been affirmed for Manhattan National Life Insurance Company (headquartered in Cincinnati, OH), a life/health subsidiary of GAFRI. The outlook for both ratings is stable.
The FSR of B++ (Good) and ICR of “bbb” have been affirmed for Continental General Insurance Company (headquartered in Austin, TX), a life/health subsidiary of GAFRI. 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.
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