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A.M. Best Upgrades Issuer Credit Ratings of American Financial Group's Key Annuity Subsidiaries
[February 21, 2014]

A.M. Best Upgrades Issuer Credit Ratings of American Financial Group's Key Annuity Subsidiaries

OLDWICK, N.J. --(Business Wire)--

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 (News - Alert) 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 risk-adjusted capitalization.

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

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit

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