AFG’s Q3 Earnings Down 14% From Year Earlier

November 3, 2003

Cincinnati-based insurer American Financial Group (AFG) reported net earnings for the 2003 third quarter of $41.6 million, or 59 cents per share. These results include an after-tax charge of $23.1 million, or 33 cents per share, related to the settlement of litigation and net realized gains of $13.9 million, or 20 cents per share. AFG’s net earnings for last year’s third quarter were $26.9 million, or 39 cents per share, which included net realized losses of $13.7 million, or 19 cents per share.

The third-quarter earnings missed analysts’ expectations by six cents a share, according to Thomson First Call. Shares closed down .03 percent.

The litigation was brought in late 1994 by several medical groups, alleging antitrust violations by California workers’ compensation insurers, including one of AFG’s subsidiaries. While the company believed it had significant defenses to these antitrust claims, in light of the risks resulting from certain recent adverse pretrial rulings, it was concluded that a settlement was in the company’s best interest.

Many investors and analysts focus on “core earnings” of companies, setting aside items which are not considered to be part of the ongoing earnings of the company. Core earnings from insurance operations were $51.2 million, or 73 cents per share, for the third quarter of 2003 and included a $6.5 million after-tax reserve reduction related to recently enacted California workers’ compensation legislation and $3.8 million of investee earnings from AFG’s 38 percent investment in Infinity Property and Casualty Corp. Reported core earnings from insurance operations (including those which now comprise Infinity) for the previous year’s third quarter were $43.3 million, or 62 cents per share.

The 2003 third-quarter earnings were above the 2002 period primarily due to improved underwriting margins in the specialty businesses within the property/casualty insurance operations, partially offset by lower investment income. Details of the financial results may be found in the accompanying schedules.

AFG CEO Carl H. Lindner said the company was still on target to achieve previously announced annual earnings of $2.10 to $2.30 per share, and announced that the company expected core earnings to range from $2.75 to $3 per share in 2004.

The P&C Group generated an underwriting profit of $20.1 million in the 2003 third quarter, an improvement of $17.5 million over the same period a year ago. The combined ratio of the P&C Group for the 2003 third quarter was 95.8 percent compared to 99.6 percent for the 2002 third quarter. The group’s underwriting results for the 2003 quarter were favorably impacted by approximately 2 points from the effect of the recently enacted workers’ compensation legislation. Third quarter 2003 results also included approximately $3.8 million, or 0.8 points, of losses from severe weather compared to about $0.5 million, or 0.1 point, in the 2002 period. The ongoing operations of the P&C Group consist primarily of the specialty commercial operations managed by the Specialty Group.

The Specialty Group reported an underwriting profit for the 2003 third quarter with a combined ratio of 94.8 percent, an improvement of 4 points from the 2002 third quarter. These results included the previously mentioned effect of the California workers’ compensation legislation and about $38 million, or 8 points, of prior years’ adverse development. The Group’s gross written premiums for the 2003 quarter grew approximately 20 percent compared with the 2002 period, reflecting rate increases in most of its businesses. The Group’s net written premiums grew at a lower rate of 10.4 percent over the 2002 period, primarily due to premiums ceded under reinsurance agreements put into place in the latter part of 2002.

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