CHICAGO--()--Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) rating of American Family Mutual Insurance Company (American Family). The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating action reflects American Family's strong market position in the Midwest and very strong capitalization with negligible financial leverage and moderate operating leverage. The company has demonstrated its ability to replenish capital following multiple years of large losses. Balanced against these strengths was improved but still pressured 2012 operating performance with storm losses of roughly $840 million. The company reported poor results in 2011 as a result of record high storm losses, reaching nearly $1.2 billion of gross losses.
As of Dec. 31, 2012, policyholders' surplus increased by over $500 million, or 11%, from year-end 2011 to $5.2 billion primarily due to realized investment gains and reduced catastrophe losses. Despite record high losses in 2011, Fitch notes that the company's surplus increased 2% in 2011 to $4.7 billion primarily from realized investment gains.
American Family has virtually no debt and operating leverage (net premium written to surplus) was a moderate 1.1 times (x) in 2012 and 2011, down from historically higher levels due to reduced premium written and increased surplus.
For the year-ending 2012, American Family posted a statutory combined ratio of 102.5%, improved from 106.7% in 2011 with a return to lower catastrophe levels. Changes in the company's reinsurance program and a heightened focus by the company on surplus protection have the potential to reduce earnings volatility. Fitch notes that the three-year average combined ratio, and its standard deviation, compare favorably to the company's five and 10 year results. While it was only minimally used in 2012, American Family's aggregate catastrophe reinsurance was used for the first time during 2010-2011, lowering the combined ratio by roughly seven points, net of expenses. Fitch expects the program to remain in place going forward.
American Family has concentration risk related to the company's limited amount of geographic diversification versus peers. The company's top five states (Wisconsin, Missouri, Minnesota, Illinois, and Colorado) account for over 60% of premiums written. This concentration results in a heightened sensitivity to competitive conditions and large catastrophe exposure to Midwest storms.
American Family Life Insurance Co.'s (AFLIC) rating reflects its status as a core insurer within the American Family group of companies, as Fitch believes AFLIC's traditional life insurance products are complementary to American Family's exclusive agent distribution system. As a result, AFLIC's rating receives upward lift to the American Family group rating level.
The key rating triggers that could result in an upgrade include maintaining a 'very strong' prism score, low financial leverage and moderate operating leverage, and show continued improvement in underwriting profitability with an average combined ratio and operating ratio approaching 100% and 95%, respectively. Fitch expects a certain amount of earnings volatility given American Family's catastrophe exposure.
The key rating triggers that could result in a downgrade include a material reduction in surplus, an inability to renew its catastrophe reinsurance programs and a significantly weakened competitive position.
Fitch has affirmed the following ratings:
American Family Mutual Insurance Co.
American Family Insurance Company
American Standard Insurance Co. of Ohio
American Standard Insurance Co. of Wisconsin
American Family Life Insurance Co.
--IFS at 'A'.
The Rating Outlook is Stable.
Additional information is available on Fitch's web site at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology - Amended