The outlook is stable.
The rating action reflects Standard & Poor's view that American Family's operating
performance, although improved due to its independent contractor exclusive
agent distribution network and overall rate increases, will continue to lag
some of its large national competitors due to the economic drag of its current
diversification efforts.
Although American Family has continued to reduce its exposure to storms in
the Midwest by pursing a program to expand into the western states, short-term
implementation issues are likely to result in both higher expenses and increased
losses due to adverse selection in the new states and the group's lack of economies
of scale in its expansion states.
Personal lines insurance carriers, including American Family, have witnessed
significantly improved underwriting margins in the past couple of years. Standard
& Poor's expects that American Family's overall performance will continue to
be comparable to its personal lines peers.
The group consists of the parent, AFMIC, a personal lines insurer, three other
operating personal lines carriers ceding all risk to AFMIC, and American Family
Life Insurance Co., a writer of individual life and annuity products primarily
for individuals who are insured by the group's property/casualty carriers.
Outlook
Although Standard & Poor's believes that American Family should continue to
perform well in its core states, benefited from rate increases and its competitive
expense structure, its performance will continue to lag because of the group's
lack of economies of scale in its expansions states.
The combined ratio is expected to be 96%-98% (assuming normal catastrophe losses),
due to rate increases and other underwriting actions to improve profitability;
however, Standard & Poor's believes that the group's results will continue
to be exposed to operating volatility due to its concentration of risk in the
Midwest, the costs associated with geographic expansion, and somewhat aggressive
composition of its investment portfolio.
In addition, the comparative increase in underwriting gains generated in 2003
and as of August 2004 is not expected to materially decline in 2005, because
the company is committed to maintaining prices to meet the target profit levels.
Capitalization will remain strong at about 160%, though diminished compared
with historical levels.
Major Rating Factors
-- Capitalization. Although capital adequacy improved to 163% at year-end 2003
from 143% at year-end 2002, and has continued to improve in 2004, it is still
considerably below historical levels due to geographic expansions, underwriting
losses in 2000 and 2001, and losses on the equity portfolio in 2002. In addition
the catastrophe exposure might constitute a quality-of-capital issue for the
group, but the group has catastrophe reinsurance protection equal to 28% of
surplus. Reserves are adequate.
-- Operating performance. Management has implemented various corrective actions
to bolster the group's operating results, which included rate increases and
other underwriting initiative, which improved results in the homeowners' book
of business in 2003 verses 2002 (combined ratio 94% verses 104%). This resulted
from overall price increases, more stringent unde