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Rating Action:

Moody's upgrades American Financial Group's senior debt to Baa2

11 Dec 2007
Moody's upgrades American Financial Group's senior debt to Baa2

Approximately $900 million of Securities Affected.

New York, December 11, 2007 -- Moody's Investors Service announced today that is has upgraded the senior debt ratings for American Financial Group, Inc. ("American Financial"; NYSE: AFG) and its wholly owned subsidiary, Great American Financial Resources, Inc ("GAFRI" which includes AAG Holding Company, Inc.) to Baa2 from Baa3 as well as the insurance financial strength (IFS) ratings of American Financial's leading property and casualty insurance subsidiaries to A2 from A3. This action concludes a review for possible upgrade that was initiated on October 5, 2007. The outlook for the ratings is stable.

According to Moody's, the upgrade for Great American Insurance Company ("GAIC"), and its affiliated P&C pool members reflects the group's improved capital adequacy, higher levels of profitability and fixed charge coverage as well as the parent company's intention to maintain financial leverage at current levels. AFG's property & casualty insurance subsidiaries maintain strong niche positions in many specialty commercial lines with a focus on underwriting profitability. Moody's believes that management has instituted a performance driven compensation structure, with a significant contingent, deferred component which works well within the often volatile property and casualty industry. While the company's financial profile has improved significantly, key challenges remain high operational leverage, exposure to natural and man-made catastrophe losses, particularly a California earthquake, and concerns surrounding the company's corporate governance structure.

Moody's also maintained the three notch spread between AFG's Baa2 senior debt rating and the A2 IFS ratings of its lead P&C operating subsidiaries, which is typical for U.S. based insurance holding company structures. While our review also considered the ongoing organization restructuring following the acquisition of the minority interest in GAFRI, Moody's believes that the diversification of revenues and earnings from the smaller life operations was not sufficient to narrow the notching.

According to Moody's, lower operating and financial leverage, stronger earnings that lead to continued improvements in risk adjusted capital, interest coverage levels consistently above 7x as well as significant improvement in the company's corporate governance structure could lead to a rating upgrade. Conversely, failure to sustain improved earnings and/or risk adjusted capitalization, adverse development in excess of 5% of reserves, increased operating or financial leverage or interest coverage levels below 6x could lead to a rating downgrade. Specifically as it relates to notching, a multinotch upgrade of the IFS ratings of the company's lead life companies as well as greater balance (e.g. moving towards 50/50) between P&C and life earnings and cashflow to service AFG debt could lead to a narrowing of the notching between the senior debt rating and the IFS ratings of AFG's lead P&C operating subsidiaries.

Moody's confirmed the A3 insurance financial strength rating for AFG's leading stand-alone workers' compensation insurance company, Republic Indemnity Company of America. Republic Indemnity's rating reflects the monoline nature and often volatile business profile and its significant exposure to gross catastrophe losses, particularly from a California earthquake.

Moody's also affirmed the A3 insurance financial strength rating and reiterated the positive outlook on American Financial's life insurance subsidiary, Great American Life Insurance Company.

The following ratings have been upgraded with a stable outlook:

American Financial Group, Inc. -- senior debt at Baa2; senior unsecured at (P)Baa2; subordinated unsecured at (P)Baa3; preferred stock at (P)Ba1;

AAG Holding Company, Inc. -- senior debt at Baa2; senior unsecured at (P)Baa2; subordinated unsecured at (P)Baa3;

American Financial Capital Trust II, III, IV -- preferred securities at (P)Baa3;

American Annuity Capital Trust II -- preferred securities at Baa3;

Great American Insurance Company -- insurance financial strength at A2;

Great American Alliance Insurance Company -- insurance financial strength at A2;

Great American Assurance Company -- insurance financial strength at A2;

Great American Contemporary Insurance Company -- insurance financial strength at A2;

Great American E&S Insurance Company -- insurance financial strength at A2;

Great American Fidelity Insurance Company -- insurance financial strength at A2;

Great American Insurance Company of New York -- insurance financial strength at A2;

Great American Protection Insurance Company -- insurance financial strength at A2;

Great American Security Insurance Company -- insurance financial strength at A2;

Great American Spirit Insurance Company -- insurance financial strength at A2;

Worldwide Casualty Insurance Company -- insurance financial strength at A2;

The following ratings have been confirmed with a stable outlook:

Republic Indemnity Company of America -- insurance financial strength at A3.

The following ratings have been affirmed with a positive outlook:

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

American Financial, located in Cincinnati, Ohio, is a diversified holding company that, through its operating subsidiaries, provides specialty commercial property and casualty insurance, as well as tax-deferred annuities and life insurance products. For the first nine months of 2007, American Financial reported $3.4 billion in total revenue and net income of $293 million. As of September 30, 2007, shareholders' equity was $3.0 billion.

Moody's Insurance Financial Strength Ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Jeffrey S. Berg
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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