S&P Affirms American Family ‘AA-‘ Ratings

August 7, 2003

Standard & Poor’s has affirmed its ‘AA-‘ long-term counterparty credit and financial strength ratings on all units of American Family Insurance Group (American Family) based on the companies’ diminishing – though still very strong – level of capitalization, limited financial flexibility, somewhat aggressive investment philosophy, and increased volatility because of geographic concentration, which exposed the company to weather-related and catastrophe losses.

Partially offsetting these weaknesses are the company’s well-established regional market presence as one of the leading personal lines organizations in the Midwest, which is derived from its effective independent contractor exclusive agent distribution network and significantly improved operating results.

Standard & Poor’s also said that it affirmed its ‘A-1+’ short-term counterparty credit rating on American Family Mutual Insurance Co. (AFMIC).

The outlook on these companies is negative.

The group consists of the parent, AFMIC, a personal lines insurer; three other operating personal lines carriers ceding all risk to AFMIC (American Family Insurance Co., American Standard Insurance Co. of Ohio, and American Standard Insurance Co. of Wisconsin); and American Family Life Insurance Co. (AFLIC), a writer of individual life and annuity products primarily for individuals who are insured by the group’s property/casualty carriers.

“American Family’s pretax operating income is expected to be $130 million-$175 million in 2003,” noted Standard & Poor’s credit analyst Polina Chernyak. Although underwriting actions are expected to improve profitability, Standard & Poor’s believes that the group’s results will continue to be exposed to operating volatility in the near term because of the group’s concentration of risk in the Midwest, the costs associated with geographic expansion, and the somewhat aggressive composition of its investment portfolio.

American Family is a major writer of personal lines insurance in the U.S. In 2002, it wrote the 10th-largest volume of automobile insurance and eighth-largest volume of homeowners insurance. Automobile insurance had been a historical strength, but homeowners’ multi-peril insurance had suffered because of weak industry pricing and weather-related events that have caused heavy losses in recent years.

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