Best Affirms AFG’s Financial Strength, Debt Ratings

June 21, 2004

Insurance ratings standard-bearer A.M. Best Co. has affirmed the debt ratings of “bbb” and “bbb-” of Cincinnati-based American Financial Group Inc.’s (AFG) various debt securities. Best has also affirmed the debt ratings of “bbb” and “bb+” of AAG Holding Co. Inc.’s various senior debentures. AAG is a wholly owned subsidiary of Great American Financial Resources Inc. (GAFRI). Additionally, Best has affirmed the various indicative debt ratings of AFG and GAFRI.

Best has also affirmed the financial strength ratings of “A” (excellent) and “A-” (excellent) for the property/casualty and life/health subsidiaries of AFG and GAFRI and upgraded the financial strength ratings to “A” (excellent) from “A-” (excellent) for National Interstate Insurance Co. (Ohio) and National Interstate Insurance Company of Hawaii (Hawaii). The outlook for all the ratings is stable.

These rating actions reflect AFG’s strong capitalization and favorable operating results. Capitalization is driven by AFG’s reasonable net underwriting leverage and quality investment portfolio, which is partially offset by affiliate equity allocations, that are typically viewed as less liquid assets. Core operating earnings have generally been favorable, reflective of management’s disciplined underwriting, product knowledge, access to data through its sophisticated technology platform and firm market conditions.

The ratings recognize AFG’s effective multiple distribution channel network, diversified product offerings within its segment and its excellent geographic spread of risk. Moreover, AFG benefits from a consistent and stable management team with extensive insurance experience and resources. Also, AFG maintains a strong liquidity position given its cash holdings, unused line of credit and shelf registration.

The ratings also consider AFG’s adverse loss reserve development, historically high financial leverage and low fixed-coverage ratios. Although improvement in financial leverage has been noted in the last year, A.M. Best anticipates continued reduction in financial leverage; as such, AFG’s need to generate sustainable operating profitability and positive cash flows is placed on the subsidiaries in order to meet ongoing debt servicing requirements.

The rating outlook for the subsidiaries is stable due to AFG’s continued strong capital position, favorable operating profitability and improved specialty lines market conditions.

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