Page Page Forward-Looking Statements 25 Uncertainties 33 Overview 26 Results of Operations 33 Critical Accounting Policies 26 General 33 Liquidity and Capital Resources 27 Income Items 33 Sources of Funds 27 Expense Items 37 Investments 28 Recent Accounting Standards 38

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as "anticipates", "believes", "expects", "estimates", "intends", "plans", "seeks", "could", "may", "should", "will" or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings and investment activities; recoverability of asset values; expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims; rate changes; and improved loss experience.

Actual results or financial condition could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including:

º changes in financial, political and economic conditions, including changes in interest rates and extended economic recessions or expansions;
º performance of securities markets;
º our ability to estimate accurately the likelihood, magnitude and timing of any losses in connection with investments in the non-agency residential mortgage market, especially in the subprime and Alt-A sectors;
º new legislation or declines in credit quality or credit ratings that could have a material impact on the valuation of securities in our investment portfolio, including mortgage-backed seurities;
º the availability of capital;
º regulatory actions;
º changes in legal environment affecting AFG or its customers;
º tax law and accounting changes;
º levels of natural catastrophes, terrorist activities (including any nuclear, biological, chemical or radiological events), incidents of war and other major losses;
º development of insurance loss reserves and establishment of other reserves, particularly with respect to amounts associated with asbestos and environmental claims;
º availability of reinsurance and ability of reinsurers to pay their obligations;
º the unpredictability of possible future litigation if certain settlements of current litigation do not become effective;
º trends in persistency, mortality and morbidity;
º competitive pressures, including the ability to obtain adequate rates; and
º changes in AFG's credit ratings or the financial strength ratings assigned by major ratings agencies to our operating subsidiaries.

The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements.

AFG is organized as a holding company with almost all of its operations being conducted by subsidiaries. AFG, however, has continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends, and taxes. Therefore, certain analyses are best done on a parent only basis while others are best done on a total enterprise basis. In addition, because most of its businesses are financial in nature, AFG does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.

Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses and in the sale of traditional fixed, indexed and variable annuities and a variety of supplemental insurance products.

Net earnings attributable to AFG's shareholders for the first three months of 2009 were $103.8 million ($.88 per share, diluted) compared to $76.0 million ($.64 per share, diluted) reported in the same period of 2008. The improved results reflect lower realized losses on investments (including other than temporary impairments) and higher investment income partially offset by lower underwriting profit in the property and casualty insurance operations.

Significant accounting policies are summarized in Note A to the financial statements. The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and thus impact amounts reported in the future. The areas where management believes the degree of judgment required to determine amounts recorded in the financial statements make accounting policies critical are as follows:

º the establishment of insurance reserves, especially asbestos and environmental-related reserves,
º the recoverability of reinsurance,
º the recoverability of deferred acquisition costs,
º the establishment of asbestos and environmental reserves of former railroad and manufacturing operations, and
º the valuation of investments, including the determination of "other-than-temporary" impairments.

For a discussion of these policies, see Management's Discussion and Analysis - "Critical Accounting Policies" in AFG's 2008 Form 10-K.

     LIQUIDITY AND CAPITAL RESOURCES

     Ratios AFG's debt to total capital ratio on a consolidated basis is shown
     below (dollars in millions).

                                       March 31,   December 31,
                                           2009     2008   2007
Long-term debt                           $1,058   $1,030  $ 937
Total capital (*)                         4,480    4,351  4,108
Ratio of debt to total capital:
 Including debt secured by real estate     23.6%    23.7%  22.8%
 Excluding debt secured by real estate     22.5%    22.5%  21.5%

(*) Includes long-term debt, noncontrolling interests and shareholders' equity (excluding unrealized gains (losses) related to fixed maturity investments).

AFG's ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 2.32 for the three months ended March 31, 2009 and 1.63 for the entire year of 2008. Excluding annuity benefits, this ratio was 9.58 and 4.75, respectively. Although the ratio excluding interest on annuities is not required or encouraged to be disclosed under Securities and Exchange Commission rules, it is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.

Parent Holding Company Liquidity Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and marketable securities or to generate cash through borrowings, sales of other assets, or similar transactions.

AFG retired the $136 million of 7-1/8% Senior Debentures at maturity in April 2009, using cash on hand.

AFG can borrow up to $500 million under its revolving credit facility, which expires in 2011. AFG had $465 million in borrowings outstanding under this agreement at March 31, 2009, bearing interest at a rate of 2.6%.

In July 2008, AFG entered into a 364 day credit facility under which it can borrow up to $120 million at an interest rate of 2.25% over LIBOR. No amounts have been borrowed under this credit facility. AFG expects to renew this facility in the second quarter of 2009.

Under tax allocation agreements with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary's contribution to amounts due under AFG's consolidated tax return.

Subsidiary Liquidity In December 2007, National Interstate, a 53%-owned property and casualty insurance subsidiary, entered into a five-year unsecured credit agreement under which it can borrow up to $75 million, subject to certain conditions. Amounts borrowed bear interest at rates ranging from .45% to .9% (currently .65%) over LIBOR based on National Interstate's credit rating.

The liquidity requirements of AFG's insurance subsidiaries relate primarily to the liabilities associated with their products as well as operating costs and

expenses, payments of dividends and taxes to AFG and contributions of capital to their subsidiaries. Historically, cash flows from premiums and investment income have provided more than sufficient funds to meet these requirements without requiring a sale of investments or contributions from AFG. Funds received in excess of cash requirements are generally invested in additional marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, short-term investments.

The excess cash flow of AFG's property and casualty group allows it to extend the duration of its investment portfolio somewhat beyond that of its claim reserves.

In the annuity business, where profitability is largely dependent on earning a "spread" between invested assets and annuity liabilities, the duration of investments is generally maintained close to that of liabilities. With declining rates, AFG receives some protection (from spread compression) due to the ability to lower crediting rates, subject to guaranteed minimums. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on AFG's annuity products.

AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Nonetheless, significant declines in the fair value of the insurance subsidiaries' investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.

Investments AFG's investment portfolio at March 31, 2009, contained $14.3 billion in "Fixed maturities" classified as available for sale and $298 million in "Equity securities," all carried at fair value with unrealized gains and losses included in a separate component of shareholders' equity on an after-tax basis.

Fair values for AFG's portfolio are determined by AFG's internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on closing prices obtained from the pricing services. For mortgage-backed securities ("MBS"), which comprise approximately one-third of AFG's fixed maturities, prices for each security are generally obtained from both pricing services and broker quotes. For the other two-thirds, approximately 94% are priced using a pricing service and the balance is priced internally or by using non-binding broker quotes. When prices obtained for the same security vary, AFG's investment professionals select the price they believe is most indicative of an exit price.

The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of MBS are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers' prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs.

Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG's internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price (consistent with SFAS No. 157). These investment managers validate the appropriateness of the prices obtained considering widely published indices as benchmarks, changes in interest rates, general economic conditions and the credit quality of the specific issuers. Prices obtained from a broker or pricing service are adjusted only in cases where they are deemed not to be representative of an appropriate exit price (fewer than 1% of the securities).

Increasing turmoil in the global financial markets caused credit spreads (the difference in rates between U.S. government bonds and other fixed maturities) to widen significantly during 2008. These wider spreads, as well as a lack of liquidity and the collapse of several financial institutions, were the primary cause of AFG's pretax net unrealized loss on fixed maturities rising from $47 million at December 31, 2007, to $1.9 billion at December 31, 2008 and $2.0 billion at March 31, 2009. An improvement in the fair value of AFG's portfolio in April 2009 reduced the pretax net unrealized loss on fixed maturities to approximately $1.7 billion as of April 30, 2009.

The following table summarizes the estimated effect on AFG's fixed maturity portfolio that a hypothetical immediate increase of 100 basis points in the interest rate yield curve would have at March 31, 2009 (dollars in millions).

          Fair value of fixed maturity portfolio               $14,619
          Pretax impact on fair value of 100 bps
           increase in interest rates                          ($  799)
          Pretax impact as % of total fixed maturity portfolio   (5.5%)

Approximately 93% of the fixed maturities held by AFG at March 31, 2009, were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies. Note that all references to ratings of investment securities held at March 31, 2009, incorporate ratings changes through April 30, 2009. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and noninvestment grade. Management believes that the high quality investment portfolio should generate a stable and predictable investment return.

AFG's $4.8 billion investment in MBS represented approximately one-third of its fixed maturities at March 31, 2009. MBS are subject to significant prepayment risk due to the fact that, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates.

Summarized information for AFG's MBS (including those classified as trading) at March 31, 2009, is shown (in millions) in the table below. Agency-backed securities are those issued by a U.S. government-backed agency; Alt-A mortgages are those with risk profiles between prime and subprime. The Alt-A securities, the majority of which are backed by fixed-rate mortgages, have an average life of approximately five years. The subprime securities have an average life of approximately four years; substantially all are collateralized by fixed-rate mortgages.

                                                                    % Rated
                  Amortized            Fair Value as  Unrealized Investment
Collateral type        Cost Fair Value     % of Cost Gain (Loss)      Grade
Residential:
 Agency-backed        $ 791      $ 810          102%      $  19        100%
 Non-agency prime     2,460      1,981           81        (479)        95
 Alt-A                1,062        772           73        (290)        77
 Subprime               449        323           72        (126)        74
 Other                   32         27           81          (5)        82
Commercial            1,146        914           80        (232)       100
                     $5,940     $4,827           81%    ($1,113)        92%

Issuers will sometimes purchase monoline insurance to "wrap" or enhance the credit of a security issuance in order to benefit from better market execution. At March 31, 2009, AFG owned approximately $894 million of fixed maturity securities wrapped by monoline insurers. Since many of these issuers have ratings equal or superior to the insurer, credit was enhanced in only $194 million of the securities insured. Ambac Financial provided 42% of the $194 million in credit enhancement, FSA International provided 34% and MBIA Inc. provided 17%. AFG's direct investment in monoline credit insurers was less than $12 million at March 31, 2009. None of the insured subprime securities carry an explicit underlying rating. Management does not believe the risk of loss on the securities without underlying credit ratings is material to AFG's financial condition.

Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet at March 31, 2009, is shown in the following table (dollars in millions). Approximately $229 million of available for sale "Fixed maturities" and $51 million of "Equity securities" had no unrealized gains or losses at March 31, 2009.

                                                    Securities  Securities
                                                         With        With
                                                    Unrealized  Unrealized
                                                        Gains      Losses
       Available for Sale Fixed Maturities
        Fair value of securities                        $4,656     $ 9,424
        Amortized cost of securities                    $4,478     $11,557
        Gross unrealized gain (loss)                     $ 178    ($ 2,133)
        Fair value as % of amortized cost                  104%         82%
        Number of security positions                     1,333       1,942
        Number individually exceeding
         $2 million gain or loss                             3         328
        Concentration of gains (losses) by type or
         industry (exceeding 5% of unrealized):
          Mortgage-backed securities                      $ 45    ($ 1,156)
          Banks, savings and credit institutions             4        (333)
          Insurance companies                                2        (180)
          States and municipalities                         27         (16)
          Gas and electric services                         23         (44)
          Direct obligations of the U.S. Government         18           -
        Percentage rated investment grade                   99%         90%

       Equity Securities
        Fair value of securities                         $ 152       $  95
        Cost of securities                               $  33      $  175
        Gross unrealized gain (loss)                     $ 119      ($  80)
        Fair value as % of cost                            457%         54%
        Number of security positions                        13          70
        Number of individually exceeding
         $2 million gain or loss                             1          17

The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities at March 31, 2009, based on their fair values. Asset-backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.

                                                Securities  Securities
                                                     With        With
                                                Unrealized  Unrealized
                                                    Gains      Losses
           Maturity
            One year or less                           7%          2%
            After one year through five years         50          29
            After five years through ten years        23          23
            After ten years                            3           5
                                                      83          59
            Mortgage-backed securities (average
             life of five years)                      17          41
                                                     100%        100%

                      AMERICAN FINANCIAL GROUP, INC. 10-Q

                      Management's Discussion and Analysis

          of Financial Condition and Results of Operations - Continued



     The table below (dollars in millions) summarizes the unrealized gains and
     losses on fixed maturity securities by dollar amount.


                                                                Fair
                                   Aggregate    Aggregate   Value as
                                        Fair   Unrealized  % of Cost
                                       Value  Gain (Loss)      Basis
Fixed Maturities at March 31, 2009

Securities with unrealized gains:
 Exceeding $500,000 (72 issues)        $ 793        $  66        109%
 Less than $500,000 (1,261 issues)     3,863          112        103
                                      $4,656        $ 178        104%

Securities with unrealized losses:
 Exceeding $500,000 (902 issues)      $6,639      ($1,981)        77%
 Less than $500,000 (1,040 issues)     2,785         (152)        95
                                      $9,424      ($2,133)        82%

The following table summarizes (dollars in millions) the unrealized loss for all securities with unrealized losses by issuer quality and length of time those securities have been in an unrealized loss position.

                                                                            Fair
                                             Aggregate     Aggregate    Value as
                                                  Fair    Unrealized   % of Cost
                                                 Value          Loss       Basis
Securities with Unrealized
 Losses at March 31, 2009

Investment grade fixed maturities with
losses for:
 Less than one year (937 issues)                $4,898        ($ 722)         87%
 One year or longer (556 issues)                 3,549        (  967)         79
                                                $8,447       ($1,689)         83%

Non-investment grade fixed maturities with
losses for:
 Less than one year (265 issues)                 $ 469        ($ 163)         74%
 One year or longer (184 issues)                   508        (  281)         64
                                                 $ 977        ($ 444)         69%

Common equity securities with losses for:
 Less than one year (29 issues)                  $  28        ($  16)         63%
 One year or longer ( - issues)                      -             -           -
                                                 $  28        ($  16)         63%

Perpetual preferred equity securities with
losses for:
 Less than one year (18 issues)                  $  23        ($  19)         55%
 One year or longer (23 issues)                     44         (  45)         50
                                                 $  67        ($  64)         51%

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 (accounted for as a realized loss) and the cost basis of that investment is reduced. The determination of whether unrealized losses are "other than temporary" requires judgment based on subjective as well as objective factors. See Note D to the financial statements.

Based on its analysis, management believes (i) AFG will recover its cost basis in the securities with unrealized losses and (ii) that AFG has the ability and intent to hold the securities until they recover in value. Although AFG has the ability to continue holding its investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers' creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG's ability or intent change with regard to a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other than temporary impairment could be material to results of operations in future periods. Further significant declines in the fair value of AFG's investment portfolio could have a significant adverse effect on AFG's liquidity.

Uncertainties Management believes that the areas posing the greatest risk of material loss are the adequacy of its insurance reserves and contingencies arising out of its former railroad and manufacturing operations. See Management's Discussion and Analysis - "Uncertainties" in AFG's 2008 Form 10-K.

. . .