News Column

Fitch Affirms American Family's Ratings; Outlook Revised to Positive

July 2, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) rating of American Family Mutual Insurance Company and its subsidiaries (American Family). The Rating Outlook is revised to Positive from Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The Positive Rating Outlook reflects American Family's very strong capitalization and improved underwriting performance. The ratings continue to reflect the company's strong market position in the Midwest. The above positive factors are partially offset by recent acquisition activity and the associated execution and growth risk, particularly given increased homeowners' insurance exposure.

Fitch's Prism capital model score for American Family in 2012 was 'extremely strong', the highest category. Fitch expects a similar high score for 2013. As of March 31, 2014, policyholders' surplus increased by over $755 million, or 15%, from year-end 2012 to $5.9 billion primarily due to investment gains and improved earnings 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.

American Family has low financial leverage of roughly 8%, all acquisition related. Operating leverage (net premium written to surplus) was moderate at 0.97 times (x) in 2013, and 1.1x in 2012 and 2011, down from historically higher levels due to reduced premium written and increased surplus.

American Family reported a 2013 statutory combined ratio of 101.9%, improved from 102.6% in 2012 and 106.7 in 2011 due partly to better homeowners' insurance results and a return to lower catastrophe-storm loss levels. The company's reinsurance program and a heightened focus on surplus protection is anticipated to reduce future earnings volatility. Fitch notes that the recent results compare favorably to the company's five and 10 year average combined ratio .

American Family has concentration risk related to the company's more limited geographic diversification versus peers. The company's top five states (Wisconsin, Missouri, Minnesota, Illinois, and Colorado) account for a majority of premiums written. Recent acquisitions have expanded the company's geographic, product, and distribution footprint nationally.

American Family acquired direct homeowners' insurance writer, Homesite Group Inc., in 2013 and direct nonstandard auto insurance writer, The Permanent General Companies (The General), in 2012. The Homesite acquisition in particular adds risk and uncertainty to the overall company profile given the homeowners insurance exposure and the associated earnings volatility and a five-year average combined ratio over 100%.

American Family Life Insurance Co.'s (AFLIC) rating reflects its status as a 'core' insurer within the American Family group of companies based on Fitch's Group Rating Methodology, 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. 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, including some seasoning of recent acquisitions. Fitch expects a certain amount of earnings volatility given American Family's natural catastrophe exposure.

The key rating triggers that could result in a return to a Stable Outlook include a sharp reduction in surplus or a material deterioration in operating performance due to recent acquisitions.

Fitch has affirmed the following ratings with a Positive Outlook:

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.

Midvale Indemnity Company

--IFS at 'A'.

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

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=837659

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Gretchen Roetzer

Director

+1-312-606-2327

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Douglas Pawlowski, CFA

Senior Director

+1-312-368-2054

or

Committee Chairperson

R. Andrew Davidson, CFA

Senior Director

+1-312-368-3144

or

Media Relations

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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