A.M. Best Co. has assigned a debt rating of “bbb” to the $100 million 30-year senior unsecured notes to be issued by Cincinnati-based American Financial Group Inc. (AFG), the corporate parent of the Great American Insurance Group. The notes are a drawdown of the $600 million shelf registration previously filed by AFG. At the same time, A.M. Best has affirmed the ratings on the existing debt and indicative ratings on the aforementioned shelf. All debt ratings have stable outlooks. The financial strength ratings of the AFG companies are unaffected.
The net proceeds from this offering will be used to redeem the 9.125 percent preferred securities issued by American Financial Capital Trust I, a wholly owned subsidiary trust of AFG, in October 1996. For the current rating level, A.M. Best notes that AFG maintains a high overall financial leverage (including trust preferreds as debt) and low fixed coverage ratios. Although some improvement has been noted in recent years, A.M. Best does not anticipate a significant reduction in financial leverage. Therefore, AFG’s need to generate sustainable earnings and cash flows is placed on the subsidiaries for adequate debt service. The replacement of the higher rate preferred securities will improve AFG’s interest expense and coverage.
The rating reflects AFG’s insurance subsidiaries’ excellent capitalization and historically favorable operating earnings. Capitalization is driven by reasonable net underwriting leverage and a quality investment portfolio, which is partially offset by high affiliate equity allocations that are typically viewed as less liquid assets. Core operating earnings have generally been favorable reflective of management’s disciplined underwriting, product knowledge, access to data through its sophisticated technology platform and firm market conditions. The rating also reflects the effective multiple distribution channel network, diversified product offerings within its segment and excellent geographic spread of risk.
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