Fitch Affirms American Family's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) rating of American Family Mutual Insurance Company and subsidiaries (American Family). Fitch has also assigned its 'A' IFS rating to Midvale Indemnity Company (Midvale), a wholly owned insurance subsidiary of American Family, based on Fitch's Group Rating Methodology. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The rating affirmation 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 is improved but still pressured operating performance with year-to-date storm losses of roughly $700 million. The company reported improved results in 2012 following a year of record high storm losses in 2011, reaching nearly $1.2 billion of gross losses.

As of Sept. 30, 2013, policyholders' surplus increased by over $200 million, or 4%, from year-end 2012 to $5.4 billion primarily due to investment gains and reduced storm losses. In 2012, surplus increased by over $500 million, or 11%, from year-end 2011 primarily due to the reasons mentioned above. Fitch's Prism capital model score for American Family in 2012 was 'extremely strong'.

American Family has virtually no debt and operating leverage (net premium written to surplus) was a moderate 1.0 times (x, annualized) through the first nine months of 2013, and 1.1x in 2012 and 2011, down from historically higher levels due to reduced premium written and increased surplus. Fitch expects operating leverage to increase modestly as a result of recent acquisitions, this following a period of slow to negative growth.

Through the first nine months of 2013, American Family posted a statutory combined ratio of 104.9%, improved from 107.4% posted for the same period last year partly as a result of better homeowners' insurance results. For the year-ending 2012, American Family posted a 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 is not expected to be used in 2013, and was only minimally used in 2012, American Family's aggregate catastrophe reinsurance was used for the first time during 2010-2011, favorably 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 a majority of premiums written. This concentration results in a heightened sensitivity to competitive conditions and large catastrophe exposure to Midwest storms. Fitch expects less Midwest concentration due to recent acquisitions that have expanded American Family's geographic, product, and distribution footprint nationally. While Fitch views a reduction in the company's exposure to Midwest storms favorably, Fitch notes that it will monitor American Family's increased hurricane exposure going forward.

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.

Midvale Indemnity Company's (Midvale) rating reflects its status as an 'important' insurer within the American Family group of companies based on Fitch's Group Rating Methodology. Midvale's inclusion within the American Family group IFS rating is based on its position within American Family's organizational structure and overall business strategy. This includes Midvale's 100% intercompany quota share reinsurance agreement with American Family. As a result, Midvale's rating receives upward lift to the American Family group rating level.

RATING SENSITIVITIES

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 assigned the following rating with a Stable Outlook:

Midvale Indemnity Company

--IFS 'A'.

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'

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811839

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gretchen Roetzer, +1-312-606-2327
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Committee Chairperson
R. Andrew Davidson, CFA, +1-312-368-3144
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gretchen Roetzer, +1-312-606-2327
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Committee Chairperson
R. Andrew Davidson, CFA, +1-312-368-3144
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com