Leverage strategy prompts downgrades of Franklin Life. (American General Corp. finances Franklin Life Insurance Co. purchase by releasing capital)

National Underwriter Life & Health-Financial Services Edition, February, 1995 by Connolly, Jim

Franklin Life Insurance Co. was downgraded after American General Corp. purchased the insurer through financing that included releasing $250 million of Franklin's assets. Franklin had its financial strength, claims-paying, and claims ratings reduced after the $1.17 cash purchase on Jan 31, 1995. American General hopes to regain the ratings losses in 1996. The capital also will help reduce American General's debt-to-total capital ratio to 25%.

In theory, using a company's surplus capital to finance a purchase may be completely acceptable, analysts said, but as Franklin Life found out recently, the practice can be a different matter.

The insurer, based in Springfield, Ill., was downgraded by Moody's Investors Service, which lowered its financial strength rating to "A...

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