AFG Outlook Revised to Stable

Standard & Poor’s Ratings Services revised its outlook on American Financial Group Inc. (AFG) 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 consists of AFG’s specialty property/casualty lines, to stable from negative.

S&P also announced it 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, according to 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. Major rating factors include: strong competitive position; improving operating results; improved financial flexibility; strong capital adequacy; and 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.