S&P Affirms AFG Ratings; Raises Outlook

May 19, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on American Financial Group Inc. and the members of the Great American Insurance Co. pool, the Republic Indemnity Co. pool, the American Empire Pool, the Great American Holdings Pool, and the MidContinent Pool, which primarily consist of AFG’s specialty property/casualty lines, to stable from negative.

S&P also announced that it has affirmed its ‘A’ counterparty credit and financial strength ratings on the operating companies, and its ‘BBB’ counterparty credit rating on AFG.

“The revised outlook reflects the group’s strong business position in its specialty property/casualty markets, continued strengthening of operating results, improved financial flexibility, and strong capital adequacy,” said S&P. “Partially offsetting these factors are AFG’s marginal historical operating performance, exacerbated by a multitude of material charges and reserve development in recent years. In addition, AFG’s earnings diversification decreased following the IPO of its personal lines business in February 2003.”

S&P said it “expects that the group’s operating results–unblemished by material charges and reserve deficiencies–will be strong, with a combined ratio of 95 percent in the specialty line. The group’s consolidated capital adequacy, supported by organic earnings, is expected to remain at least at 145 percent. Debt plus preferred financial leverage (excluding unrealized fixed maturity gains) is expected to remain at or less than 35 percent, with fixed-charge coverage exceeding 5x.”

The bulletin also noted the following as “Major Rating Factors:(Comments are abridged)
— Strong competitive position – “Although AFG is not a market leader in any sub-segment, it does have a sufficient premium base ($3.2 billion in gross written specialty premium in 2003) to support a competitive infrastructure.”
— Improving operating results. “Consolidated GAAP pretax operating earnings improved to $301 million in 2003 from $176 million in 2002 and $86 million in 2001”
— Improved financial flexibility. S&P said it “expects that GAAP fixed-charge coverage, bolstered by the continued improvement in earnings, will improve to 5x, an appropriate level for the rating category, with 2004 financial leverage remaining at no more than 35 percent”.
— Strong capital adequacy. Estimated to exceed 145 percent as of year-end 2003, which is considered strong.
— Marginal historical operating results. “Historical operating results, adversely affected by a multitude of special charges and reserve additions, has been marginal, with underwriting losses of $202 million (108 percent combined ratio) in 2000 and $225 million (108 percent combined ratio) in 2001. “Although underwriting results improved to a $24 million loss in 2002 and a $22 million gain in 2003, results in 2003 were affected by several material charges and adverse reserve development.”
— Decreased earnings diversification.” With the disposal of the personal auto business in 2003, prospective earnings performance depends on the specialty lines business. Standard & Poor’s believes management will be pressured to demonstrate that the strength and diversification of its specialty segments will fuel a consistently strong earnings stream over the long term.”

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