Fitch Affirms AFG and Subs

Fitch Ratings has affirmed the ‘BBB+’ long-term issuer ratings of American Financial Group Inc. (AFG) and its subsidiaries American Premier Underwriters Inc. (APU) and Great American Financial Resources Inc. (GAFR).

The affirmation affects $815 million worth of specific debt issuance by the companies (see bottom for a complete listing of ratings). Additionally, Fitch Ratings affirms the insurer financial strength ratings of AFG’s property/casualty subsidiaries and life insurance subsidiaries at “A+.” Fitch also affirmed GAFR’s trust originated preferred securities (TOPrS) at “BBB.” The rating outlook for all ratings is stable.

AFG is a public holding company with subsidiaries engaged primarily in the sale of property/casualty insurance, life insurance and annuities. The company had total assets of $19.9 billion and total shareholders equity of $1.8 billion, as of Sept. 30, 2003.

During 2003, AFG successfully sold its personal lines property/casualty business in two separate public offerings to focus on its specialty commercial lines business. The life operations occupy a good niche in the qualified annuity market, which is typified by profitable and persistent business. The organization remains challenged to reduce financial leverage and improve expense efficiency. Profitability remains a concern for the life operation, and fixed annuity writers in general, as the low interest rate environment squeezes interest margins.

AFG’s specialty lines operations have historically generated favorable underwriting results. The specialty business lines are diverse and consist of better than 20 different independently managed business units that can be grouped into the following nine categories: California workers compensation, inland & ocean marine, agricultural, surety and credit, collateral protection, umbrella and excess liability, commercial automobile, excess and surplus, and executive and professional liability.

Overall, operating performance at AFG continues to show improvement, returning to bottom line profitability in 2002 and 2003. However, AFG’s results in 2003 include only a portion of the property/casualty personal lines operations, now a part of Infinity Property Casualty Corp., through the equity accounting method. AFG’s incurred loss and loss adjustment expense ratio has improved significantly due to recent sharp pricing increases in nearly all segments.

Specifically, during the first nine months of 2003, the loss ratio fell to 70.8 percent compared to 76.4 percent for the full year 2002. Fitch anticipates further improvement in underwriting performance going forward. AFG management has focused on improving the expense ratio of the property/casualty operations. However, the sale of the personal lines operations has led to a decrease in overall expense efficiency. Fitch anticipates that AFG will continue its expense control initiatives in 2004, but recognizes that further progress is still required in this area.

AFG’s life insurance and annuity operations are conducted through GAFR, a publicly traded holding company, which is 83 percent owned by AFG. GAFR’s insurance subsidiaries have a niche selling primarily fixed annuities to the K-12 education market. Beginning in the 4th quarter of 2003, GAFR was selling fixed annuities that have a newly approved 1.5 percent minimum crediting rate guarantee that should relieve some pressure on spreads. GAFR’s annualized pretax operating return on assets was 0.85 percent, which remains considerably below its historic average. Fitch expects GAFR’s ROA to progress toward historic levels within the next one or two rating cycles.

AFG’s consolidated debt-to-total capital ratio, adjusting for partial equity credit of trust preferred securities and the impact of FAS 115, was 32.5 percent at September 30, 2003. This level of financial leverage is considered somewhat high for the rating category. However, the financial leverage trend has been favorable and the sale of Infinity brought leverage closer to the 30 percent target at year-end 2003. AFG’s interest coverage during the first nine months of 2003 was sound at 6.4 times.