Standard & Poor's has assigned its 'BBB' senior unsecured debt rating to American Financial Group Inc's planned issue of $100m, 30-year senior debentures, which will be drawn down from the company's existing shelf registration statement.
AFG is to use the proceeds from the offering to redeem the outstanding 9.125% TOPrS, scheduled to mature in October 2026. While this will moderately increase debt leverage once the TOPrS are redeemed, Standard & Poor's views this tradeoff favorably given the company's reduced cost of funds and modest net reduction in fixed charges.
Steven Ader, a credit analyst at Standard and Poor's, said: "The rating on AFG is based on its good business position in its specialty property/casualty and life/annuity niche markets, continued strengthening of operating results, and strong capital adequacy. Partially offsetting these factors is AFG's poor historical operating performance, exacerbated by a multitude of material charges and reserve development in recent years. In addition, AFG's earnings diversification decreased following the IPO of its personal lines business in February 2003."
AFG's net earnings were $97.2m as of 30 September 2003, up on the same period in 2002. However, they were below Standard & Poor's expectations because of special pretax charges, including a $35.1m litigation settlement and $43.8m of adverse development in discontinued operations. Operating earnings are supported by the strong performance of the specialty property/casualty lines of business.
The negative outlook reflects AFG's historical difficulty in achieving consistently strong operating results, exacerbated by a continued series of material charges and Standard & Poor's concern about the potential for adverse reserve development. The ratings are based on the expectation that prospective operating results will be strong. Debt plus preferred financial leverage (excluding unrealized fixed maturity gains) is expected to approach 33% by year-end 2004, with fixed-charge coverage exceeding 5x.
