A.M. Best Affirms Ratings of Great American Financial Resources, Inc.’s Primary Life/Health 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 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). Additionally, A.M. Best has affirmed the FSRs and ICRs of the other core supplemental health subsidiaries of GAFRI. GAFRI is a wholly owned subsidiary of American Financial Group, Inc. (AFG) (NYSE: AFG). All companies are headquartered in Cincinnati, OH, with the exception of the health subsidiaries, which are headquartered in Austin, TX. The outlook for all ratings is stable. (See below for a detailed list of the companies and ratings.).

The rating affirmations of GAFRI’s principal annuity subsidiaries reflect the companies’ strong positions in the individual tax-deferred and banking market, continuing top-line growth and improved statutory operating income. GALIC and AILIC have reported a significant increase in single premium fixed and fixed indexed annuity products for two consecutive years. Both companies have been able to remain price competitive due to opportunistic investment activities. As a result, GALIC and AILIC reported record fixed annuity deposits in recent years, driven by indexed annuities and sales through their bank channels. The sharp increase in annuity sales has enabled GAFRI to report continued improvement of its statutory operating earnings.

While sales of fixed and indexed annuities remain strong, A.M. Best remains concerned about the ongoing premium challenges within the 403(b) market. The uncertainty of the 403(b) public education marketplace, specifically recent layoffs and budget constraints within the public school systems, has resulted in a reduction of premiums throughout the 403(b) arena. As a result, GAFRI’s first-year premiums within the 403(b) marketplace decreased considerably in recent years. A.M. Best notes that the persistency of the group’s run-off two-tiered annuity products has been relatively strong, helping to preserve overall revenue growth. Additionally, the annuity companies continue to have a sizeable investment exposure to financial sector corporate bonds and real estate-related investments—in particular, non-agency residential mortgage-backed securities and commercial mortgage-backed securities—whose valuations continue to fluctuate. However, A.M. Best’s concerns are somewhat mitigated by the companies’ strong capitalization, strategic importance to AFG and sizeable unrealized gain position within their investment portfolios.

The ratings of GAFRI’s supplemental benefits companies recognize the continuing challenges the companies face in profitably growing their businesses. As such, A.M. Best believes the supplemental health business is not central to the organization’s long-term strategy. The supplemental benefits line continues to provide some revenue and earnings diversification for GAFRI; however, the percentage has decreased relative to the group’s tax-sheltered annuity focus. In 2011, roughly 11% of consolidated statutory net premiums and less than 15% of GAAP pre-tax operating earnings were generated by GAFRI’s supplemental health segment.

Historically, operating performance and capitalization levels of the supplemental health unit has fluctuated and trends have remained generally flat-to-declining. The individual health business, which is primarily comprised of Medicare supplement insurance, represents the majority of current premium income and exposes the companies to the considerable competitive and regulatory pressures associated within this product line. Moreover, GAFRI’s supplemental benefits companies are no longer actively marketing life insurance or long-term care policies. Furthermore, those GAFRI supplemental health companies that sell annuities as a complimentary product to their life and supplemental health products continue to de-emphasize that line of business.

A.M. Best believes the following factors could cause favorable rating results for the Great American group within the near to medium term: a diversification of business profile towards products that are highly creditworthy (i.e., life insurance), premium growth within the 403(b) marketplace and continued growth of operating earnings. Factors that could lead to negative future rating actions include a prolonged low interest rate environment, continuing decline of 403(b) markets premium or a material deterioration of capital.

The FSRs of A- (Excellent) and ICRs of “a-” have been affirmed for the following life/health subsidiaries of Great American Financial Resources, Inc.:

Loyal American Life Insurance Company
Manhattan National Life Insurance Company

The FSR of B++ (Good) and ICR of “bbb+” have been affirmed for United Teacher Associates Insurance Company, a life/health subsidiary of Great American Financial Resources, Inc.

The FSRs of B++ (Good) and ICRs of “bbb” have been affirmed for the following life/health subsidiaries of Great American Financial Resources, Inc.:

Central Reserve Life Insurance Company
Continental General Insurance Company
Provident American Life and Health Insurance Company

The ICRs have been downgraded to “bbb” from “bbb+” and the FSRs of B++ (Good) have been affirmed for the following life/health subsidiaries of Great American Financial Resources, Inc.:

American Retirement Life Insurance Company
Great American Life Assurance Company

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. Key criteria utilized include: “Understanding Universal BCAR”; “Understanding BCAR for Life/Health Insurers”; “Rating Health Insurance Companies”; “Rating Members of Insurance Groups”; “Assessing Country Risk”; “A.M. Best’s Liquidity Model for U.S. Life Insurers”; “A.M. Best’s Perspective on Operating Leverage”; and “Risk Management and the Rating Process for Insurance Companies.” Best’s Credit Rating Methodology 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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