Moody’s Investors Service has confirmed the A3 insurance financial strength ratings of the property and casualty insurance subsidiaries of American Financial Group as well as its debt ratings (senior unsecured at Baa3) and changed its ratings outlook on all of the company’s ratings to negative from stable.
AFG’s leverage profile, the reduction in proceeds from the spin-off of its personal auto operations and its constrained financial flexibility accounted for the ratings agency’s change of heart.
AFG’s core commercial insurance operations will continue to report improved earnings, Moody’s predicts, and that trend needs to persist without disruption over the medium-term to reduce financial leverage and improve financial flexibility. Moody’s noted AFG’s modest coverage of its fixed charges and the fact that the holding company’s need for subsidiary dividends could constrain statutory capital generation were key factors contributing to the outlook change.
Furthermore, Moody’s sees as a risk AFG’s dependence on its bank credit facility to meet ongoing working capital needs, which may inhibit the company’s ongoing efforts to further moderate financial leverage. Moody’s also believes that pricing and reserving risks continue as the company grows its specialty commercial segments and transitions its operations to focus entirely on commercial risks.
Moody’s noted that proceeds from the company’s initial public offering of its personal automobile insurer, Infinity Property and Casualty Corporation, fell significantly below expectations and are expected to include a $30 million net charge in the first quarter of 2003. Although the spin-off allowed AFG to somewhat lower its financial leverage profile by reducing bank borrowings, Moody’s notes that the decrease in proceeds modestly lowers expected coverage levels of the holding company’s near-term obligations. Moody’s added that the ratings confirmation reflects AFG’s specialty commercial underwriting expertise and its focus on underwriting profit.
Moody’s noted that the company’s business segments continue to benefit from the improved rate and underwriting environment in commercial lines, which is expected to benefit earnings and capital generation.