A.M. Best Affirms Ratings of American Financial Group, Inc. and Its Property/Casualty Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a+” of Great American Insurance Companies (Great American) and Mid-Continent Group (Mid-Continent) (headquartered in Tulsa, OK) and their property/casualty members.

Concurrently, A.M. Best has affirmed the FSR of A+ (Superior) and ICRs of “aa-” of American Empire Surplus Lines Pool (American Empire) (Wilmington, DE) and its property/casualty members as well as the FSR of A (Excellent) and ICRs of “a” of Republic Indemnity Insurance Pool (Republic Indemnity) (Encino, CA) and its property/casualty members. In addition, A.M. Best has affirmed the ICRs of “bbb+” and senior debt ratings of American Financial Group, Inc. (AFG) [NYSE/NASDAQ: AFG] and AAG Holding Company, Inc. The outlook for all ratings is stable. All companies are domiciled in Cincinnati, OH, except where specified and are subsidiaries of AFG. (See link below for a detailed list of the companies and ratings.)

The ratings of Great American reflect its solid risk-adjusted capitalization, strong operating profitability in its core business lines and diversified business profile. These positive factors are driven by Great American’s strong business position, experienced management team and the balanced portfolio of specialty risks that are enhanced by geographic diversification.

Somewhat offsetting these favorable rating factors are the payment of significant stockholder dividends in recent years, pockets of modest adverse loss development in prior calendar years, elevated common equity leverage and the sizeable holdings of structured securities relative to surplus. In addition, Great American remains exposed to uncertainties associated with run-off books of business, asbestos and environmental and other mass tort liabilities.

The ratings of Mid-Continent recognize its solid risk-adjusted capitalization, strong operating results and successful business position within its targeted markets. These positive factors are driven by Mid-Continent’s expertise in providing primarily general liability coverage to the construction and oil and gas industries with a geographic concentration in Texas, Oklahoma and Florida.

Partially offsetting these positive rating factors are Mid-Continent’s concentration of structured securities in its investment portfolio relative to surplus and limited geographic spread of risk. Mid-Continent’s concentration in the construction industry, in conjunction with increased competitive pressures and weak economic conditions, has resulted in a significant decline in premium volume.

The ratings of American Empire acknowledge its strong risk-adjusted capitalization, successful strategy as a provider of excess and surplus lines products and management’s cycle management behavior, as evidenced by superior operating results and changes in premium volume over an extended period of time. These positive rating factors are partially offset by American Empire’s demonstrated sensitivity of the group’s premium volume to the property/casualty market cycle, the impact of reduced premiums on operating results and the concentration of structured securities in its investment portfolio relative to surplus.

The ratings of Republic Indemnity reflect its historically strong operating performance, driven by its product and geographic expertise and the support provided by AFG. Although Republic Indemnity’s underwriting performance was negatively impacted in recent years by an increase in loss cost trends, competitive pressures and unemployment levels in California, the pool continued to generate operating earnings and increase rates beginning in late 2009. Nevertheless, Republic Indemnity’s geographic and product line concentration exposes the pool to changes in regulatory, legislative and competitive forces. In addition, the pool also maintains a concentration of structured securities in its investment portfolio relative to surplus, and A.M. Best remains concerned with Republic Indemnity’s excess workers’ compensation program (which will run-off in 2011) that has resulted in Republic Indemnity being at risk for a large number of locations whose net losses (net of Terrorism Risk Insurance Program Reauthorization Act of 2007 and third-party reinsurance) would significantly impact surplus should a terrorist attack occur. Consequently, Republic Indemnity’s terrorism charge increased significantly (and exceeds that from a natural peril). Nonetheless, the ratings reflect the termination of the program in 2010 and the financial strength of AFG, which provides added financial flexibility.

AFG’s total debt-to-total capital (including accumulated other comprehensive income) and interest coverage ratios remain in line with its current ratings. Also, AFG maintains sound liquidity with approximately $1.14 billion in cash and cash equivalents at September 30, 2010, access to a $500 million revolving credit facility and has no material debt maturing until 2019. AFG continues to rely on stockholder dividends from its subsidiaries to fund interest expenses, repurchase company stock, redeem debt, reallocate capital to support its operating entities and for other corporate purposes. Nonetheless, management remains committed to maintaining capital at the rated entities at levels commensurate with their ratings.

For a complete listing of American Financial Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/021401americanfinancial.pdf.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Rating Members of Insurance Groups”; “Natural Catastrophe Stress Test Methodology”; “The Treatment of Terrorism Risk in the Rating Evaluation”; and “A.M. Best’s Ratings & the Treatment of Debt.” Methodologies can be found at www.ambest.com/ratings/methodology.

Founded in 1899, 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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