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A.	Accounting Policies	H.	Minority Interest
B.	Acquisitions and Sales of Subsidiaries	I.	Shareholders' Equity
C.	Segments of Operations	J.	Discontinued Operation
D.	Deferred Acquisition Costs	K.	Equity in Net Earnings (Losses)
E.	Managed Investment Entity		of Investees
F.	Long-Term Debt	L.	Commitments and Contingencies
G.	Payable to Subsidiary Trusts
	(Issuers of Preferred Securities)

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.

Subsidiary Realignment  In the fourth quarter of 2003, AFG merged with two of its subsidiaries, American Financial Corporation ("AFC") and AFC Holding Company, with AFC's Series J Preferred stock exchanged for approximately 3.3 million shares of AFG Common Stock (aggregate value of $75 million). In addition, approximately $170 million in deferred tax liabilities associated with AFC's holding of AFG stock were eliminated. As of January 31, 2004, American Premier Underwriters, Inc. ("APU", a wholly-owned subsidiary) paid an extraordinary dividend consisting of approximately two-thirds of its assets, including insurance subsidiaries, to its immediate parent, APU Holding Company, and retained sufficient assets to enable it to meet its estimated liabilities.

Investments  Fixed maturity securities classified as "available for sale" are reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity. Fixed maturities classified as "trading" are reported at fair value with changes in unrealized holding gains or losses during the period included in investment income. 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,

6

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

the geographic location of the mortgaged properties and the creditworthiness 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.

Derivatives  Derivatives included in AFG's Balance Sheet consist primarily of (i) the interest component of certain life reinsurance contracts (included in other liabilities), (ii) an interest rate swap (included in debt), and (iii) 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.

The terms of the interest rate swap match those of the hedged debt; therefore, the swap is considered to be (and is accounted for as) a 100% effective fair value hedge. Both the swap and the hedged debt are adjusted for changes in fair value by offsetting amounts. Accordingly, since the swap is included with long-term debt in the Balance Sheet, the only effect on AFG's financial statements is that the interest expense on the hedged debt is recorded based on the variable rate.

Managed Investment Entity  The Financial Accounting Standards Board ("FASB") issued revised Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities" ("VIEs") in December 2003. FIN 46 sets forth the requirements for consolidating entities that do not share economic risk and reward through typical equity ownership, but rather through contractual relationships that distribute economic risks and rewards among various parties. Once an entity is determined to be a VIE, it is generally required to be consolidated by the primary beneficiary (the party with a majority of either the expected losses or residual rewards or both). Under FIN 46, AFG is considered to be the primary beneficiary of a collateralized debt obligation ("CDO") in which it owns subordinated notes (considered equity) representing approximately two-thirds of the CDO's equity (but less than 50% of the voting power) and 5 % of the total notes issued by the CDO. Accordingly, AFG implemented FIN 46 effective December 31, 2003. Since AFG has no right to use the CDO assets and the CDO liabilities can be extinguished only by using CDO assets, the assets and liabilities of the CDO are shown separate from AFG's other assets and liabilities in the Balance Sheet. Income and expenses of the CDO are shown separately in the Statement of Earnings; related minority interest is shown in Note H under "Minority Interest Expense."

Goodwill  Goodwill represents the excess of cost of subsidiaries over AFG's equity in their underlying net assets. Goodwill is not amortized but is subject to an impairment test at least annually.

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

7

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

       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 property and casualty 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.

Subsidiaries of Great American Financial Resources, Inc. ("GAFRI"), an 82%-owned subsidiary, cede life insurance policies to a third party on a funds withheld basis whereby GAFRI retains the assets (securities) associated with the reinsurance contracts. Interest is credited to the reinsurer based on the actual investment performance (including realized gains and losses) of the retained assets. Effective October 1, 2003, GAFRI implemented SFAS No. 133 Implementation Issue B36 ("B36"). Under B36, these reinsurance contracts are considered to contain embedded derivatives (that must be marked to market) because the yield on the payables is based on specific blocks of the ceding companies' assets, rather than the overall creditworthiness of the ceding company. GAFRI determined that changes in the fair value of the underlying portfolios of fixed maturity securities is an appropriate measure of the value of the embedded derivative. As permitted under B36, GAFRI reclassified the securities related to these transactions from "available for sale" to "trading". The mark to market on the embedded derivatives offsets the investment income recorded on the mark to market of the related trading portfolios.

       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.

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.

DPAC includes the present value of future profits on business in force of insurance companies acquired by GAFRI, which represents the portion of the costs to acquire companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. The present value of future profits is amortized with interest in relation to expected gross profits of the acquired policies for annuities and universal life products and in relation to the premium paying period for traditional life and health insurance products.

8

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

       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 the market value of deposits invested in underlying investment funds on which GAFRI 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 generally 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 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.

9

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

       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.

Payable to Subsidiary Trusts (Issuers of Preferred Securities)  Under FIN 46, AFG deconsolidated wholly-owned subsidiary trusts because they are "variable interest entities" 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 to the trusts is shown as a liability in AFG's Balance Sheet, and beginning in 2004, the related interest expense is shown in AFG's Statement of Earnings as "interest on subsidiary trust obligations." Prior to 2004, this interest was included in the Statement of Earnings as minority interest expense, net of tax. Implementation of FIN 46 with respect to the preferred securities had no effect on net earni ngs.

Minority Interest  For balance sheet purposes, minority interest represents the interests of noncontrolling shareholders in AFG subsidiaries. For income statement purposes, minority interest expense represents those shareholders' interest in the earnings of AFG subsidiaries. See "Payable to Subsidiary Trusts" above.

Income Taxes  Prior to the AFG/AFC merger in November 2003, AFC filed consolidated federal income tax returns which included all 80%-owned U.S. subsidiaries, except for certain life insurance subsidiaries and their subsidiaries. Because holders of AFC Preferred Stock held in excess of 20% of AFC's voting rights, AFG (parent) and AFC Holding were not eligible to file consolidated returns with AFC, and therefore, filed separately. Following the AFG/AFC merger, AFG will file consolidated federal income tax returns which will include the companies previously included in the AFC consolidated return.

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 shares at the dates of grant. No compensation expense is recognized for stock option grants. On March 31, 2004, the FASB issued a proposal that would require AFG to recognize the fair value of employee stock options as compensation expense beginning in 2005.

10

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

The following table illustrates the effect on net earnings (in thousands) and earnings per share had compensation cost been recognized and determined based on the "fair values" at grant dates consistent with the method prescribed by SFAS No. 123. For SFAS No. 123 purposes, the "fair value" of $8.92 per option granted in the first quarter of 2004 and $5.60 in the first quarter of 2003 was calculated using the Black-Scholes option pricing model and the following assumptions: dividend yield of 2%; expected volatility of 29% in 2004 and 30% in 2003; risk-free interest rate of 3.7% for 2004 and 3.6% for 2003; and expected option life of 7.5 years in 2004 and 7.4 years in 2003. 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
	March 31,
	2004	2003
Net earnings, as reported	$73,200	$25,120
Pro forma stock option expense, net of tax	(1,217)	(1,521)
Adjusted net earnings	$71,983	$23,599
Earnings per share (as reported):
Basic	$1.00	$0.36
Diluted	$0.98	$0.36
Earnings per share (adjusted):
Basic	$0.98	$0.34
Diluted	$0.97	$0.34

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 their vested retirement fund account balances from securities of AFG and its affiliates to independently managed investment funds. As of March 31, 2004, the Plan held 11% of AFG's outstanding Common Stock. Company contributions are expensed in the year for which they are declared.

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.

Discontinued Operations  SFAS No. 144, "Accounting For the Impairment or Disposal of Long-Lived Assets," broadens the definition of what constitutes a discontinued operation to include a component of an entity (rather than a segment of a business). A component of an entity may be a reportable segment, a subsidiary or an asset group. Under SFAS No. 144, future operating losses of discontinued entities are no longer recognized before they occur.

11

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

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 1,172,000 shares in 2004 and 114,000 shares in 2003 representing the dilutive effect of common stock options.

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

3. Segments of Operations  AFG manages its business as three segments: (i) property and casualty insurance, (ii) annuity, supplemental insurance and life, and (iii) other, which includes holding company costs, and beginning in 2004, the operations of a CDO that AFG manages.

	Three months ended
	March 31,
	2004	2003
Revenues (a)
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$124,916	$132,194
Specialty casualty	174,494	155,600
Specialty financial	84,362	59,234
California workers' compensation	77,429	58,786
Other	20,617	22,034
Personal	4,981	114,938
Other lines	2	(1)
	486,801	542,785
Investment income	63,725	70,199
Realized gains (losses)	25,995	15,236
Other income	42,605	32,948
	619,126	661,168
Annuities, life and health (b)	247,012	220,946
Other (c)	8,155	(42,192)
	$874,293	$839,922
Operating Profit (Loss)
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$ 20,659	$  5,242
Specialty casualty	10,793	(1,228)
Specialty financial	(754)	(5,699)
California workers' compensation	3,739	4,717
Other	(1,816)	6,489
Personal	(44)	5,212
Other lines (d)	(2,403)	749
	30,174	15,482
Investment and other income	80,948	69,728
	111,122	85,210
Annuities, life and health	29,087	15,563
Other (c)	(21,941)	(63,293)
	$118,268	$ 37,480
(a)  Revenues include sales of products and services as well as other
income earned by the respective segments.
(b)  Investment income comprises the majority of these revenues. Includes
impairment charges of $1.2 million and $21.7 million for the three
months ended March 31, 2004 and 2003, respectively.
(c)  Other revenues and operating profit (loss) for 2003 include the loss on
the public offering of Infinity. Operating profit (loss) includes
holding company expenses.
(d)  Represents development of lines in "run-off"; AFG has ceased underwriting
new business in these operations.

4. Deferred Acquisition Costs  Included in deferred acquisition costs in AFG's Balance Sheet are $56.3 million and $57.9 million at March 31, 2004, and December 31, 2003, 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 $67.4 million and $65.8 million of accumulated amortization. Amortization of the PVFP was $1.6 million and $2.2 million during the first three months of 2004 and 2003. During each of the next five years, the PVFP is expected to decrease at a rate of approximately 14% of the balance at the beginning of each respective year.
5. Managed Investment Entity  AFG has an investment in, and acts as investment manager for, a CDO of which AFG has been determined to be the "primary beneficiary". Under FIN 46, AFG began consolidating the CDO on December 31, 2003.

Upon formation in 1999, the CDO issued securities in various senior and subordinate classes and the proceeds were invested in primarily floating rate, secured bank loans, and to a lesser extent, high yield bonds, all of which serve as collateral for the securities issued by the CDO. None of the collateral was purchased from AFG. Income from the CDO's investments is used to service its debt and pay other operating expenses, including management fees to AFG. AFG's investment in this CDO is subordinate to the senior classes (approximately 92% of the total securities) issued by the CDO. To the extent there are defaults and unrecoverable losses on the underlying collateral resulting in reduced cash flows, AFG's class would bear losses first.

The assets (substantially all cash and investments carried at market as "trading securities") of this managed investment entity are separately disclosed in the Balance Sheet because they are not available for use to satisfy AFG obligations. Likewise, the CDO liabilities (substantially all debt) are separately disclosed because they represent claims against only the CDO's assets and not against AFG's other assets. Accordingly, AFG's exposure to loss on this investment is limited to its investment (approximately $11.5 million at March 31, 2004).

Beginning in 2004, the operating results of the CDO are included in AFG's Statement of Earnings. However, due to the non-recourse nature of the instruments issued by the CDO, any excess losses included in AFG's results that are not absorbed by AFG's investment over the life of the CDO will ultimately reverse when the CDO is liquidated. Accordingly, while implementation of FIN 46 impacts the timing of income recognition, it does not impact the overall amount of income recognized over the life of this investment.

AFG is the investment manager and has an investment of $6.3 million in another CDO (included in fixed maturities) at March 31, 2004, which is not required to be consolidated. This CDO was formed in 2000 and had approximately $475 million in investments at March 31, 2004.

14

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):

	March 31,	December 31,
	2004	2003
Holding Company:
AFG 7-1/8% Senior Debentures due April 2009	$296,682	$301,501
AFG Senior Convertible Notes due June 2033	189,857	189,857
AFG 7-1/8% Senior Debentures due February 2034	115,000	-
AFG 7-1/8% Senior Debentures due December 2007	75,100	75,100
Other	8,064	8,160
	$684,703	$574,618
Subsidiaries:
GAFRI 7-1/2% Senior Debentures due November 2033	$112,500	$112,500
GAFRI 6-7/8% Senior Notes due June 2008	100,000	100,000
GAFRI 7-1/4% Senior Debentures due January 2034	86,250	-
Notes payable secured by real estate	26,919	27,063
APU 10-7/8% Subordinated Notes due May 2011	11,415	11,433
Other	10,799	11,248
	$347,883	$262,244

7. Payable to Subsidiary Trusts (Issuers of Preferred Securities)  Wholly-owned subsidiary trusts of AFG and GAFRI have issued preferred securities and, in turn, purchased from their parent company a like amount of subordinated debt which provides interest and principal payments to fund the respective trusts' obligations. The preferred securities must be redeemed upon maturity or redemption of the subordinated debt. AFG and GAFRI effectively provide unconditional guarantees of their respective trusts' obligations.

Date of		Amount Outstanding		Optional
Issuance	Issue (Maturity Date)	3/31/04	12/31/03	Redemption Dates
October 1996	AFG 9-1/8% TOPrS   (2026)	$  -	$95,459	Redeemed March 2004
November 1996	GAFRI 9-1/4% TOPrS (2026)	-	65,013	Redeemed March 2004
March 1997	GAFRI  8-7/8% Pfd  (2027)	42,800	70,000	On or after 3/1/2007
May 2003	GAFRI   7.35% Pfd  (2033)	20,000	20,000	On or after 5/15/2008
May 2003	Variable Rate Pfd  (2033)	15,000	15,000	On or after 5/23/2008

8. Minority Interest  Minority interest in AFG's Balance Sheet represents the interest of noncontrolling investors in the following (in thousands):

9. Shareholders' Equity  At March 31, 2004, 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 Transportation Company. 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.

10. Discontinued Operation  In the fourth quarter of 2003, AFG pursued a sale of Transport Insurance Company, an inactive property and casualty subsidiary with only run-off liabilities, including old asbestos and environmental claims. Transport's asbestos and environmental ("A&E") reserves represent approximately one-eighth of AFG's total A&E reserves. Although an agreement has not been finalized, management expects to complete a sale in 2004. In December 2003, AFG recorded a $55 million impairment charge to reduce its investment in Transport to estimated fair value, which was determined based on negotiations with potential buyers. Transport's results are reflected as discontinued for all periods presented in the statement of earnings; balance sheet amounts have not been reclassified.
11. Equity in Net Earnings (Losses) of Investees  Equity in net earnings (losses) of investees in 2004 represents AFG's share of the losses from a start-up manufacturing business that was formerly a subsidiary. Equity in net losses from this business for the first quarter of 2004 and 2003 were $918,000 and $865,000, respectively.

12. Commitments and Contingencies  There have been no significant changes to the matters discussed and referred to in Note N - "Commitments and Contingencies" of AFG's Annual Report on Form 10-K for 2003.

	Page		Page
Forward-Looking Statements	18	Results of Operations	25
Overview	18	General	25
Critical Accounting Policies	19	Income Items	25
Liquidity and Capital Resources	19	Expense Items	28
Ratios	19	Other Items	29
Sources of Funds	20	Proposed Accounting Standard	30
Investments	20
Uncertainties	23

• 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
Available-for-sale Fixed Maturities
Market value of securities	$11,311	$1,234
Amortized cost of securities	$10,714	$1,260
Gross unrealized gain (loss)	$   597	($   26)
Market value as % of amortized cost	106%	98%
Number of security positions	1,738	144
Number individually exceeding
$2 million gain or loss	24	-
Concentration of gains (losses) by
type or industry (exceeding 5% of
unrealized):
Banks, savings and credit institutions	$  80.8	($  0.4)
Gas and electric services	73.5	(3.7)
Mortgage-backed securities	72.5	(6.7)
U.S. government and government agencies	38.5	(1.5)
State and municipal	35.4	(1.9)
Asset-backed securities	19.3	(2.9)
Air transportation (generally collateralized)	8.2	(3.4)
Percentage rated investment grade	94%	91%
Other Stocks
Market value of securities	$   475	$   53
Cost of securities	$   216	$   55
Gross unrealized gain (loss)	$   259	($    2)
Market value as % of cost	220%	97%
Number individually exceeding
$2 million gain or loss	4	-

			Market
	Aggregate	Aggregate	Value as
	Market	Unrealized	% of Cost
	Value	Gain (Loss)	Basis
Fixed Maturities at March 31, 2004
Securities with unrealized gains:
Exceeding $500,000 (407 issues)	$ 5,101	$409	108.7%
Less than $500,000 (1,331 issues)	6,210	188	103.1
	$11,311	$597	105.6%
Securities with unrealized losses:
Exceeding $500,000 (16 issues)	$   184	($ 14)	92.9%
Less than $500,000 (128 issues)	1,050	(12)	98.9
	$ 1,234	($ 26)	97.9%

			Market
	Aggregate	Aggregate	Value as
	Market	Unrealized	% of Cost
	Value	Gain (Loss)	Basis
Fixed Maturities with Unrealized
Losses at March 31, 2004
Investment grade with losses for:
One year or less (92 issues)	$1,043	($11)	99.0%
Greater than one year (15 issues)	77	(4)	95.1%
	$1,120	($15)	98.7%
Non-investment grade with losses for:
One year or less (15 issues)	$   44	($ 3)	93.6%
Greater than one year (22 issues)	70	(8)	89.7%
	$  114	($11)	91.2%

	Three months ended
	March 31,
	2004	2003
Gross Written Premiums (GAAP)
Specialty:
Property and transportation	$239.9	$191.6
Specialty casualty	363.3	339.9
Specialty financial	106.6	74.2
California workers' compensation	96.2	69.6
Other	.7	1.5
Total Specialty	806.7	676.8
Personal (a)	2.0	181.1
	$808.7	$857.9
Net Written Premiums (GAAP)
Specialty:
Property and transportation	$146.9	$124.9
Specialty casualty	198.3	165.7
Specialty financial	90.6	57.5
California workers' compensation	84.0	66.0
Other	17.3	24.7
Total Specialty	537.1	438.8
Personal (a)	2.0	117.9
	$539.1	$556.7
Combined Ratios (GAAP)
Specialty:
Property and transportation	83.5%	96.0%
Specialty casualty	93.8	100.8
Specialty financial	100.9	109.6
California workers' compensation	95.2	92.0
Other	108.8	70.6
Total Specialty	93.3	97.9
Personal (a)	100.9	95.5
Aggregate (including discontinued lines)	93.8%	97.1%
(a)  Includes the operations of Infinity through the sale date in      mid-February 2003.

	Three months ended
	March 31,
	2004	2003
Other income	$17.0	$16.0
Other operating and general expenses	16.1	16.1
Interest charges on borrowed money	.5	.6