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A.	Accounting Policies	F.	Long-Term Debt
B.	Acquisitions and Sales of Subsidiaries	G.	Minority Interest
C.	Segments of Operations	H.	Shareholders' Equity
D.	Investment in Investees	I.	Commitments and Contingencies
E.	Goodwill	J.	Subsequent Events

1. Accounting Policies

Basis of Presentation  The accompanying consolidated financial statements for American Financial Group, Inc. ("AFG") and subsidiaries are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary to be in conformity with generally accepted accounting principles.

Certain reclassifications have been made to prior years to conform to the current year's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.

Proposed Merger with AFC  On November 20, 2003, American Financial Corporation ("AFC") Series J preferred shareholders are scheduled to vote on a proposed merger agreement under which AFC and its parent, AFC Holding Company ("AFC Holding" or "AFCH", a direct 100%-owned subsidiary of AFG), would each merge into AFG. If approved, AFC Series J preferred shareholders will receive $26.00 in AFG Common Stock (aggregate value $75 million) in exchange for each share of Series J preferred stock. In addition, approximately $170 million in deferred tax liabilities associated with AFC's holding of AFG stock would be eliminated.

Investments  All fixed maturity securities are considered "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity. Short-term investments are carried at cost; loans receivable are carried primarily at the aggregate unpaid balance. Premiums and discounts on mortgage-backed securities are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations. The most significant determinants of prepayments are the difference between interest rates on the underlying mortgages and current mortgage loan rates and the structure of the security. Other factors affecting prepayments include the size, type and age of underlying mortgages, the geographic location of the mortgaged properties and the cr edit worthiness of the borrowers. Variations from anticipated prepayments will affect the life and yield of these securities.

Gains or losses on securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other than temporary, a provision for impairment is charged to earnings (included in realized gains) and the cost basis of that investment is reduced.

6

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

Derivatives  Derivatives included in AFG's Balance Sheet consist primarily of investments in common stock warrants (valued at $5.9 million at September 30, 2003; included in other stocks), the equity-based component of certain annuity products (included in annuity benefits accumulated) and related call options (included in other investments) designed to be consistent with the characteristics of the liabilities and used to mitigate the risk embedded in those annuity products. Changes in the fair value of derivatives are included in current earnings.

Investment in Investee Corporations  Investments in securities of 20%-to 50%-owned companies are generally carried at cost, adjusted for AFG's proportionate share of their undistributed earnings or losses.

Goodwill  Goodwill represents the excess of cost of subsidiaries over AFG's equity in their underlying net assets. Effective January 1, 2002, AFG implemented Statement of Financial Accounting Standards ("SFAS") No. 142, under which goodwill is no longer amortized but is subject to an impairment test at least annually. As required under SFAS No. 142, AFG completed the transitional test for goodwill impairment (as of January 1, 2002) in the fourth quarter of 2002. The resulting write-down was reported by restating first quarter 2002 results for the cumulative effect of a change in accounting principle.

Insurance  As discussed under "Reinsurance" below, unpaid losses and loss adjustment expenses and unearned premiums have not been reduced for reinsurance recoverable.

       Reinsurance  Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG's insurance subsidiaries report as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums retained by AFG's insurance subsidiaries under contracts to fund ceded losses as they become due. AFG's insurance subsidiaries also assume reinsurance from other companies. Income on reinsurance assumed is recognized based on reports received from ceding companies.

       Deferred Policy Acquisition Costs ("DPAC")  Policy acquisition costs (principally commissions, premium taxes and other marketing and underwriting expenses) related to the production of new business are deferred. For the property and casualty companies, DPAC is limited based upon recoverability without any consideration for anticipated investment income and is charged against income ratably over the terms of the related policies.

DPAC related to annuities and universal life insurance products is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of expected gross profits on the policies. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains. DPAC related to annuities is also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in "Unrealized gain on marketable securities, net" in the shareholders' equity section of the Balance Sheet.

7

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues.

       Annuity and Life Acquisition Expenses  Annuity and life acquisition expenses on the Statement of Earnings consists primarily of amortization of DPAC related to the annuity and life, accident and health businesses. This line item also includes certain marketing and commission costs that are expensed as paid.

       Unpaid Losses and Loss Adjustment Expenses  The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon (a) the accumulation of case estimates for losses reported prior to the close of the accounting period on direct business written; (b) estimates received from ceding reinsurers and insurance pools and associations; (c) estimates of unreported losses based on past experience; (d) estimates based on experience of expenses for investigating and adjusting claims; and (e) the current state of the law and coverage litigation. Establishing reserves for asbestos and environmental claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage.

Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the Statement of Earnings in the period in which determined. In spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.

       Annuity Benefits Accumulated  Annuity receipts and benefit payments are recorded as increases or decreases in "annuity benefits accumulated" rather than as revenue and expense. Increases in this liability for interest credited are charged to expense and decreases for surrender charges are credited to other income.

       Life, Accident and Health Reserves  Liabilities for future policy benefits under traditional life, accident and health policies are computed using the net level premium method. Computations are based on the original projections of investment yields, mortality, morbidity and surrenders and include provisions for unfavorable deviations. Reserves established for accident and health claims are modified as necessary to reflect actual experience and developing trends.

       Variable Annuity Assets and Liabilities  Separate accounts related to variable annuities represent deposits invested in underlying investment funds on which Great American Financial Resources, Inc. ("GAFRI"), an 82%-owned subsidiary, earns a fee. Investment funds are selected and may be changed only by the policyholder, who retains all investment risk.

       Premium Recognition  Property and casualty premiums are earned over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on reports received from such companies and organizations. For traditional life, accident and health products, premiums are recognized as revenue when legally collectible

8

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.

       Policyholder Dividends  Dividends payable to policyholders are included in "Accounts payable, accrued expenses and other liabilities" and represent estimates of amounts payable on participating policies which share in favorable underwriting results. Estimates are accrued during the period in which premiums are earned. Changes in estimates are included in income in the period determined. Policyholder dividends do not become legal liabilities unless and until declared by the boards of directors of the insurance companies.

Minority Interest  For balance sheet purposes, minority interest represents the interests of noncontrolling shareholders in consolidated AFG subsidiaries, including AFC preferred stock and preferred securities issued by consolidated trust subsidiaries of AFG. For income statement purposes, minority interest expense represents those shareholders' interest in the earnings of consolidated AFG subsidiaries as well as AFC preferred dividends and accrued distributions on the preferred securities of consolidated trusts.

Under current guidance provided by Financial Accounting Standards Board Interpretation No. 46 ("FIN 46"), AFG believes it will be required to deconsolidate three wholly-owned subsidiary trusts because they are "variable interest entities" ("VIEs") in which AFG is not considered to be the primary beneficiary. These subsidiary trusts were formed to issue preferred securities and, in turn, purchase a like amount of subordinated debt from their parent company which provides interest and principal payments to fund the respective trust obligations. Accordingly, the subordinated debt due the trusts would be shown as a liability in the Balance Sheet and the related interest expense would be shown in the Statement of Earnings as interest on subsidiary trust obligations. The FASB has deferred implementation of FIN 46 for VIEs created before February 1, 2003, until periods ending after December 15, 2003. See Note G - "Minority Interest."

Income Taxes  AFC files consolidated federal income tax returns which include all 80%-owned U.S. subsidiaries, except for certain life insurance subsidiaries and their subsidiaries. Because holders of AFC Preferred Stock hold in excess of 20% of AFC's voting rights, AFG (parent) and AFC Holding are not eligible to file consolidated returns with AFC, and therefore, file separately. If the proposed merger of AFG, AFC and AFC Holding is approved, AFG would file a single consolidated return and the separate filings of AFC and AFC Holding would be eliminated.

Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a benefit will be realized.

Stock-Based Compensation  As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," AFG accounts for stock options and other stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under AFG's stock option plan, options are granted to officers, directors and key employees at exercise prices equal to the fair value of the

9

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

shares at the dates of grant. No compensation expense is recognized for stock option grants.

The following table illustrates the effect on net earnings (in thousands) and earnings per share had compensation cost been recognized and determined based on "fair values" at grant dates consistent with the method prescribed by SFAS No. 123. For SFAS No. 123 purposes, the "fair value" of $5.62 per option granted in 2003 and $8.52 in 2002 was calculated using the Black-Scholes option pricing model and the following assumptions: dividend yield of 2%; expected volatility of 30%; risk-free interest rate of 3.6% for 2003 and 4.9% for 2002; and expected option life of 7.4 years. There is no single reliable method to determine the actual value of options at grant date. Accordingly, actual value of the option grants may be higher or lower than the SFAS No. 123 "fair value".

	Three months ended		Nine months ended
	September 30,		September 30,
	2003	2002	2003	2002
Net earnings, as reported	$41,600	$26,880	$97,230	$40,420
Pro forma stock option expense,
net of tax	(1,619)	(1,868)	(4,744)	(4,114)
Adjusted net earnings	$39,981	$25,012	$92,486	$36,306
Earnings per share (as reported):
Basic	$0.60	$0.39	$1.40	$0.59
Diluted	$0.59	$0.39	$1.39	$0.58
Earnings per share (adjusted):
Basic	$0.57	$0.36	$1.33	$0.53
Diluted	$0.57	$0.36	$1.33	$0.53

Benefit Plans  AFG provides retirement benefits to qualified employees of participating companies through the AFG Retirement and Savings Plan, a defined contribution plan. AFG makes all contributions to the retirement fund portion of the plan and matches a percentage of employee contributions to the savings fund. Employees have been permitted to direct the investment of their contributions to independently managed investment funds, while Company contributions have been invested primarily in securities of AFG and affiliates. Employees may direct the investment of a portion of their vested retirement fund account balances (increasing from 75% in September 2003 to 100% in April 2004) from securities of AFG and its affiliates to independently managed investment funds. As of September 30, 2003, the Plan owned 11% of AFG's outstanding Common Stock. Company contributions are expensed in the year for which they are decla red.

AFG and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. AFG also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period employees earn such benefits.

Earnings Per Share  Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted earnings per share includes the following dilutive effect of common stock options: third quarter of 2003 and 2002 - 368,000 shares and 282,000 shares; nine months of 2003 and 2002 - 278,000 shares and 460,000 shares, respectively.

10

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

Statement of Cash Flows  For cash flow purposes, "investing activities" are defined as making and collecting loans and acquiring and disposing of debt or equity instruments and property and equipment. "Financing activities" include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, benefits and withdrawals are also reflected as financing activities. All other activities are considered "operating". Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.

2. Acquisitions and Sales of Subsidiaries

Fidelity Excess and Surplus Insurance Company  In June 2003, AFG sold Fidelity Excess and Surplus Insurance Company, an inactive subsidiary, for $28.9 million, realizing a pretax gain of $4.3 million. AFG retained all liability for Fidelity's business related to the period AFG owned the company.

Direct automobile insurance business  In April 2003, AFG sold two of its subsidiaries that market automobile insurance directly to customers for $32.2 million, realizing a pretax gain of $3.4 million on the sale. The transaction included the transfer of the right of Great American Insurance Company, an AFG subsidiary, to renew certain of its personal automobile insurance business written on a direct basis in selected markets. Premiums generated by the businesses sold were approximately $79 million in 2002.

Infinity Property and Casualty Corporation  On December 31, 2002, AFG transferred to Infinity Property and Casualty Corporation ("Infinity", a newly formed subsidiary) the following subsidiaries involved primarily in the issuance of nonstandard auto policies: Atlanta Casualty Company, Infinity Insurance Company, Leader Insurance Company and Windsor Insurance Company. Effective January 1, 2003, Great American Insurance Company transferred to Infinity its personal insurance business written through independent agents. In February 2003, AFG sold 61% of Infinity in a public offering for net proceeds of $186.3 million, realizing a pretax loss of $39.4 million on the sale. In addition, AFG realized a $5.5 million tax benefit related to its basis in Infinity stock. The businesses transferred generated aggregate net written premiums of approximately $690 million in 2002. See Note J - "Subsequent Events - Planned Sale of Remaining Infin ity Shares."

New Jersey private passenger automobile insurance business  In September 2002, an AFG subsidiary entered into an agreement under which two unrelated entities assumed the subsidiary's obligations to renew its private passenger automobile insurance business written in New Jersey. AFG recognized a $10.8 million pretax loss on the transaction. As of September 9, 2002, AFG no longer accepts any new private passenger automobile insurance in that state.

Manhattan National Life Insurance  In June 2002, GAFRI paid $48.5 million for Manhattan National Life Insurance Company ("MNL"), which no longer was writing new business, but had approximately 90,000 policies-in-force (primarily term life). GAFRI has reinsured 90% of this in-force business.

11

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

3. Segments of Operations   AFG's property and casualty group writes primarily specialized commercial products for businesses through a highly diversified group of specialty business units. Some of the more significant areas are inland and ocean marine, California workers' compensation, agricultural-related coverages, executive and professional liability, fidelity and surety bonds, collateral protection, and umbrella and excess coverages. In February 2003, AFG sold a substantial portion of its Personal segment; see Note B - "Acquisitions and Sales of Subsidiaries". The Personal group wrote nonstandard and preferred/standard private passenger auto and other personal insurance coverage. AFG's annuity, life and health business markets primarily retirement products as well as life and supplemental health insurance.

	Three months ended		Nine months ended
	September 30,		September 30,
	2003	2002	2003	2002
Revenues (a)
Property and casualty insurance:
Premiums earned:
Specialty	$462,798	$403,738	$1,282,104	$1,130,439
Personal	15,201	201,290	151,182	697,110
Other lines	10	(16)	8	306
	478,009	605,012	1,433,294	1,827,855
Investment income	59,619	82,380	189,055	249,139
Realized gains (losses)	19,995	(15,785)	63,868	(55,565)
Other income	45,291	32,601	123,929	81,559
	602,914	704,208	1,810,146	2,102,988
Annuities, life and health (b)	241,400	225,787	690,949	650,829
Other (c)	5,105	13,434	(32,030)	33,418
	$849,419	$943,429	$2,469,065	$2,787,235
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Specialty	$ 23,963	$  4,706	$   50,657	$   17,377
Personal	(2,697)	(2,223)	1,083	(10,116)
Other lines (d)	(1,121)	56	(46,427)	(20,784)
	20,145	2,539	5,313	(13,523)
Investment and other income (e)	35,354	45,259	190,040	141,433
	55,499	47,798	195,353	127,910
Annuities, life and health	34,047	7,387	62,851	40,476
Other (c)	(17,215)	(3,782)	(97,352)	(42,208)
	$ 72,331	$ 51,403	$  160,852	$  126,178
(a)  Revenues include sales of products and services as well as other
income earned by the respective segments.
(b)  Investment income comprises approximately three-fifths of these revenues. Includes
impairment charges of $27.7 million and $68.7 million for the quarter and nine months
ended September 30, 2002.
(c)  Other revenues and operating profit (loss) for the nine months ended September 30,
2003, include a loss of $45.9 million on the public offering of Infinity.
Operating profit (loss) includes holding company expenses.
(d)  Represents development of lines in "run-off" and includes a pretax charge
of $43.8 million in the first nine months of 2003 for an arbitration
decision relating to a 1995 property claim from a discontinued business;
AFG has ceased underwriting new business in these operations.
(e)  Includes a third quarter 2003 pretax charge of $35.5 million related to
the settlement of litigation. See Legal Proceedings in Item 1 of Part II.

4. Investment in Investees Investment in investee corporations reflects AFG's ownership of 7.9 million shares (38%) of Infinity common stock. The market value of the investment in Infinity stock was $221 million at September 30, 2003, and $260 million at November 10, 2003. Prior to AFG's sale of 12.5 million shares of Infinity in February 2003, AFG beneficially owned 100% of Infinity (see Note B). Infinity is a national provider of personal automobile insurance with an emphasis on the nonstandard market. See Note J - "Subsequent Events - Planned Sale of Remaining Infinity Shares".

Equity in Infinity's net earnings was $3.8 million for the third quarter and $8.3 million for the first nine months of 2003. Summarized financial information for Infinity is shown below for the nine months ended September 30, 2003 (in millions).

Earned premiums	$504.2
Total revenues	551.3
Net earnings	38.8

Equity in net earnings (losses) of investees for the first nine months of 2002 represents AFG's share of the losses from two start-up manufacturing businesses that were formerly subsidiaries. One of these businesses was sold in the fourth quarter of 2002; equity in the net loss of the remaining business was $855,000 for the third quarter and $2.4 million for the first nine months of 2003.

5. Goodwill  Effective January 1, 2002, goodwill is no longer amortized but is subject to annual impairment testing. AFG completed its initial test in the fourth quarter of 2002 which resulted in a $40.4 million ($.59 per share, basic and diluted) impairment charge, net of tax, reported by restating first quarter 2002 results for the cumulative effect of a change in accounting principle. The impairment charge included $21.2 million (pretax) for the annuities and life insurance segment related to a decrease in estimated future earnings based upon lower forecasted new business sales over the next few years and $39.6 million (pretax) for the personal lines segment related primarily to planned future reductions in new business volume written through the direct channel.

Substantially all of the $79.4 million decrease in goodwill during the first nine months of 2003 related to the sale of subsidiaries in AFG's Personal segment.

Included in deferred acquisition costs in AFG's Balance Sheet are $64.4 million and $66.8 million at September 30, 2003, and December 31, 2002, respectively, representing the present value of future profits ("PVFP") related to acquisitions by AFG's annuity and life business. The PVFP amounts are net of $63.5 million and $57.3 million of accumulated amortization. Amortization of the PVFP was $1.9 million in the third quarter and $6.2 million in the first nine months of 2003 and $4.9 million in the third quarter and $8.5 million in the first nine months of 2002. During each of the next five years, the PVFP is expected to decrease at a rate of approximately 13% of the balance at the beginning of each respective year.

 

 

13

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

6. Long-Term Debt  The carrying value of long-term debt consisted of the following (in thousands):

	September 30,	December 31,
	2003	2002
Holding Companies:
AFG 7-1/8% Senior Debentures due April 2009	$301,451	$301,298
AFG 7-1/8% Senior Debentures due December 2007	75,100	79,600
AFG Senior Convertible Notes due June 2033	189,857	-
AFC notes payable under bank line	-	248,000
APU 10-7/8% Subordinated Notes due May 2011	11,449	11,498
Other	8,314	8,014
	$586,171	$648,410
Subsidiaries:
GAFRI 6-7/8% Senior Notes due June 2008	$100,000	$100,000
GAFRI notes payable under bank line	90,600	148,600
Notes payable secured by real estate	27,205	35,610
Other	11,472	12,561
	$229,277	$296,771

7. Minority Interest  Minority interest in AFG's balance sheet is comprised of the following (in thousands):

	September 30,	December 31,
	2003	2002
Interest of noncontrolling shareholders
in subsidiaries' common stock	$184,961	$157,207
Preferred securities issued by consolidated
subsidiary trusts	241,663	241,663
AFC preferred stock	72,154	72,154
	$498,778	$471,024

Date of		Amount	Optional
Issuance	Issue (Maturity Date)	Outstanding	Redemption Dates
October 1996	AFCH   9-1/8% TOPrS (2026)	$98,750	Currently redeemable
November 1996	GAFRI  9-1/4% TOPrS (2026)	72,913	Currently redeemable
March 1997	GAFRI  8-7/8% Pfd   (2027)	70,000	On or after 3/1/2007

8. Shareholders' Equity  At September 30, 2003, the shares of AFG Common Stock outstanding included 1,361,711 shares held by American Premier, its subsidiary, for possible distribution to certain creditors and other claimants upon proper claim presentation and settlement pursuant to the 1978 plan of reorganization of its predecessor, The Penn Central Corporation. Shares being held for distribution are not eligible to vote, but otherwise are accounted for as issued and outstanding. AFG is authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5 million shares of Nonvoting Preferred Stock, each without par value. See Note A - "Accounting Policies - Proposed Merger with AFC."

The Senior Convertible Notes issued in June 2003 could be converted under certain conditions into 5.9 million shares of AFG Common Stock. See Note F - "Long-Term Debt."

Stock Options  At September 30, 2003, there were 9.7 million shares of AFG Common Stock reserved for issuance upon exercise of stock options. As of that date, options for 7.8 million shares were outstanding. Options generally become exercisable at the rate of 20% per year commencing one year after grant; those granted to non-employee directors of AFG are fully exercisable upon grant. Options generally expire ten years after the date of grant.

9. Commitments and Contingencies  There have been no significant changes to the matters discussed and referred to in Note K - "Commitments and Contingencies" of AFG's Annual Report on Form 10-K for 2002.

10. Subsequent Events

	Page		Page
General	17	Results of Operations	23
Forward-Looking Statements	17	General	23
Critical Accounting Policies	18	Income Items	23
Liquidity and Capital Resources	18	Expense Items	26
Ratios	18	Other Items	27
Sources of Funds	18	Recent Accounting Standards	28
Investments	18
Uncertainties	21

• changes in economic conditions, including interest rates, performance of securities markets, and the availability of capital;
• regulatory actions;
• changes in legal environment;
• tax law changes;
• levels of natural catastrophes, terrorist events, incidents of war and other major losses;
• the ultimate amount of liabilities associated with certain asbestos and environmental-related claims;
• the unpredictability of possible future litigation if certain settlements do not become effective;
• adequacy of insurance reserves;
• trends in mortality and morbidity;
• availability of reinsurance and ability of reinsurers to pay their obligations;
• competitive pressures, including the ability to obtain rate increases; and
• changes in debt and claims paying ratings.

	Securities	Securities
	With	With
	Unrealized	Unrealized
	Gains	Losses
Fixed Maturities
Market value of securities	$9,494	$2,577
Amortized cost of securities	$8,934	$2,645
Gross unrealized gain (loss)	$  560	($   68)
Market value as % of amortized cost	106%	97%
Number of security positions	1,801	286
Number individually exceeding
$2 million gain or loss	19	4
Concentration of gains (losses) by
type or industry (exceeding 5% of
unrealized):
Mortgage-backed securities	$ 69.3	($ 22.3)
Electric services	53.9	(1.6)
Banks and savings institutions	48.8	(.4)
U.S. government and government agencies	35.8	(2.5)
State and municipal	34.7	(5.0)
Telephone communications	28.4	-
Asset-backed securities	15.7	(7.3)
Air transportation (generally collateralized)	5.5	(13.2)
Percentage rated investment grade	94%	91%
Other Stocks
Market value of securities	$  324	$   45
Cost of securities	$  163	$   48
Gross unrealized gain (loss)	$  161	($    3)
Market value as % of cost	199%	94%
Number individually exceeding
$2 million gain or loss	5	-

			Market
	Aggregate	Aggregate	Value as
	Market	Unrealized	% of Cost
	Value	Gain (Loss)	Basis
Fixed Maturities at September 30, 2003
Securities with unrealized gains:
Exceeding $500,000 (372 issues)	$4,490	$378	109.2%
Less than $500,000 (1,429 issues)	5,004	182	103.8
	$9,494	$560	106.3%
Securities with unrealized losses:
Exceeding $500,000 (40 issues)	$  772	($ 45)	94.5%
Less than $500,000 (246 issues)	1,805	(23)	98.7
	$2,577	($ 68)	97.4%

			Market
	Aggregate	Aggregate	Value as
	Market	Unrealized	% of Cost
	Value	Gain (Loss)	Basis
Fixed Maturities with Unrealized
Losses at September 30, 2003
Investment grade with losses for:
Less than 6 months (169 issues)	$2,156	($27)	98.8%
7 to 12 months (25 issues)	130	(7)	94.9
Greater than 12 months (20 issues)	66	(7)	90.4
	$2,352	($41)	98.3%
Non-investment grade with losses for:
Less than 6 months (20 issues)	$   55	($ 1)	98.2%
7 to 12 months (9 issues)	24	(  1)	96.0
Greater than 12 months (43 issues)	146	( 25)	85.4
	$  225	($27)	89.3%