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Rating Action:

MOODY'S CONFIRMS AMERICAN FINANCIAL GROUP'S AND GREAT AMERICAN FINANCIAL RESOURCES'S RATINGS, OUTLOOKS REMAIN NEGATIVE

02 Jul 2003
MOODY'S CONFIRMS AMERICAN FINANCIAL GROUP'S AND GREAT AMERICAN FINANCIAL RESOURCES'S RATINGS, OUTLOOKS REMAIN NEGATIVE Moody's Investors Service has confirmed the Baa3 senior debt ratings of American Financial Group (NYSE: AFG), which were placed on review for possible downgrade on May 27, 2003. Moody's also confirmed the A3 insurance financial strength ratings of the property and casualty members of the Great American Insurance Group as well as the A3 insurance financial strength of the group's affiliated life and annuity insurer - Great American Life Insurance Company. In the same action, Moody's confirmed the Baa3 senior debt ratings of the affiliated life insurance holding company, Great American Financial Resources, Inc. (NYSE: GFR). The outlook for all of the ratings remains negative.



Moody's noted that review for possible downgrade was initiated due to continued concerns about AFG's holding company liquidity profile. Specifically, the rating agency was concerned about cash coverage of holding company requirements considering the restricted unencumbered statutory dividend capacity from its main operating subsidiary, Great American Insurance Company, due to a depleted unassigned surplus account.



Moody’s confirmed the ratings following the company’s successful restoration of unassigned funds at Great American primarily due to regulatory approval of an extraordinary dividend of a subsidiary which holds AFG common stock. Moody’s noted that this action essentially restores unencumbered dividend capacity to the holding company, and reduces our concerns regarding AFG’s financial flexibility. While Moody’s believes the company’s unencumbered dividend capacity coverage of fixed charges remains lower than peers, expectations for improved underwriting profitability will contribute to building the company's statutory surplus and unrestricted dividend capacity coverage of fixed charges. In addition, Moody’s notes that the holding company’s cash position has improved following the company’s recent convertible note offering, which primarily paid down bank borrowings.



Moody's expects that AFG's specialty commercial lines will continue to report underwriting profits as higher rates and underwriting improvements favorably impact earned premium results and capital levels. The rating agency also expects that AFG will continue to focus on building retained earnings and growing its equity base to further reduce its relatively high financial leverage profile. Moody’s noted that AFG’s financial leverage is also expected to be reduced further as a result of AFG’s previously announced merger with a wholly owned subsidiary, which will convert publicly traded preferred stock into AFG common equity. Moody's noted that as Great American grows, consistent internal capital growth continues to be essential for the company to improve its financial position, reduce financial leverage, moderate operational leverage and comfortably service parent company cash requirements.



Moody’s noted that the negative outlook on GFR and AFG continue to reflect concerns regarding the modest cash on cash coverage at both companies, the impact of the low interest rate environment on the life company’s block of fixed annuities, and most significantly, GFR’s exposure to bank borrowings maturing in 2004. The rating agency believes that reliance on short term financing increases the risk profile of the organization. Moody’s expects that GFR will materially reduce its exposure to short term bank borrowings over the near-term and the negative ratings outlook recognizes that the ratings could drop if plans to address the 2004 maturity are delayed.



Offsetting the aforementioned risks are the Great American Life Insurance Company’s (A3 IFSR) niche in the 403(b) market, cost cutting initiatives and an increased focus on core products.



The following debt ratings associated with AFG and its P&C subsidiaries were confirmed, the outlook is negative:



American Financial Group, Inc. -- Baa3 senior unsecured debt Baa3, (P)Baa3 prospective senior unsecured debt and (P)Ba1 prospective subordinated debt;



American Financial Capital Trust I -- Ba1 capital securities;



American Financial Capital Trust II -- (P)Ba1 prospective capital securities;



American Financial Corporation -- Ba2 preferred stock;



Great American Insurance Company -- A3 insurance financial strength;



Great American Fidelity Insurance Company -- A3 insurance financial strength;



Great American Spirit Insurance Company -- A3 insurance financial strength;



Great American Contemporary Insurance Company -- A3 insurance financial strength;



Great American Security Insurance Company -- A3 insurance financial strength;



Great American Protection Insurance Company -- A3 insurance financial strength;



Great American Alliance Insurance Company -- A3 insurance financial strength;



Great American Assurance Company -- A3 insurance financial strength;



Great American E & S Insurance Company -- A3 insurance financial strength;



Great American Insurance Company of New York -- A3 insurance financial strength;



Republic Indemnity Company of America -- A3 insurance financial strength;



Worldwide Casualty Insurance Company -- A3 insurance financial strength;



The following ratings associated with Great American Financial Resources, Inc. and its life insurance subsidiaries were confirmed, the outlook is negative:



AAG Holding Company, Inc. -- Baa3 senior debt, (P)Baa3 prospective senior unsecured debt, (P)Ba1 prospective subordinated debt;



Great American Financial Resources Inc. -- (P)Ba2 prospective preferred stock;



American Annuity Group Capital Trust I & II -- Ba1 capital securities;



Great American Life Insurance Company -- A3 insurance financial strength.



Moody’s also assigned prospective ratings to AFG’s recently filed $600 million multiple use shelf. The ratings are as follows and the outlook is negative:



American Financial Group, Inc. -- (P)Baa3 prospective senior unsecured debt and (P)Ba1 prospective subordinated debt; (P) Ba2 prospective preferred stock;



American Financial Capital Trusts II, III, IV – (P)Ba1 prospective capital securities.



AFG is an Ohio-based holding company that, through its operating subsidiaries, provides specialty commercial property and casualty insurance, as well as tax-deferred annuities and life insurance products. At March 31, 2003, AFG reported net income of $25 million for the first quarter and shareholders’ equity of $1.7 billion. GFR, the holding company for the group’s life insurance operations, is a subsidiary of Great American Insurance Company and is partially owned by public shareholders. At March 31, 2003, GFR reported net income of $8.3 million for the first quarter and shareholders’ equity of $866 million.



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