Page Page Forward-Looking Statements 29 Uncertainties 37 Overview 30 Results of Operations 37 Critical Accounting Policies 30 General 37 Liquidity and Capital Resources 31 Income Items 38 Sources of Funds 31 Expense Items 43 Investments 32 Recent Accounting Standards 44

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 second quarter and first six months of 2009 were $127 million ($1.09 per share, diluted) and $231 million ($1.98 per share, diluted), respectively compared to $60 million ($.52 per share, diluted) and $136 million ($1.16 per share, diluted) reported in the same periods of 2008. The improved results reflect lower realized losses on investments (including other than temporary impairments), higher investment income and improved underwriting results 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).

                                       June 30,   December 31,
                                          2009     2008   2007
Long-term debt                           $ 915   $1,030  $ 937
Total capital (*)                        4,529    4,351  4,108
Ratio of debt to total capital:
 Including debt secured by real estate    20.2%    23.7%  22.8%
 Excluding debt secured by real estate    19.0%    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 2.51 for the six months ended June 30, 2009 and 1.63 for the entire year of 2008. Excluding annuity benefits, this ratio was 11.25 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.

In June 2009, AFG issued $350 million of 9-7/8% Senior Notes due 2019. As a result of this issuance, AFG terminated its 364 day credit facility under which it could borrow up to $120 million and voided its intercompany credit facility with a subsidiary under which it could borrow up to $50 million.

AFG can borrow up to $500 million under its revolving credit facility, which expires in 2011. AFG had $100 million in borrowings outstanding under this agreement at June 30, 2009, bearing interest at a rate of 1.1%.

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.

In July 2009, Great American Life Insurance Company ("GALIC"), a wholly-owned annuity and supplemental insurance subsidiary, was approved for membership in the Federal Home Loan Bank of Cincinnati ("FHLB"). The FHLB makes loans and provides other banking services to member institutions. Members are required to purchase stock in the FHLB in addition to maintaining collateral deposits that back any funds borrowed. Upon purchase, GALIC's $14.5 million of FHLB capital stock will be included in investment in equity securities. Membership in the FHLB will provide the annuity and supplemental insurance operations with a substantial additional source of liquidity.

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, changes in statutory accounting rules, 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 June 30, 2009, contained $14.9 billion in "Fixed maturities" classified as available for sale and $354 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 95% 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). To validate the appropriateness of the prices obtained, these investment managers consider 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 $2.0 billion at March 31, 2009. The impact of improving market conditions on the fair value of AFG's portfolio subsequent to March 31, 2009, reduced the pretax net unrealized loss to $1.1 billion at June 30, 2009, and approximately $650 million at July 31, 2009.

In general, the fair value of AFG's fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG's fixed maturity portfolio that an immediate increase of 100 basis points in the interest rate yield curve would have at June 30, 2009 (dollars in millions). Increases or decreases from the 100 basis points illustrated would be approximately proportional.

          Fair value of fixed maturity portfolio               $15,218
          Pretax impact on fair value of 100 bps
           increase in interest rates                           $  720
          Pretax impact as % of total fixed maturity portfolio    4.7%

Approximately 92% of the fixed maturities held by AFG at June 30, 2009, were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies. 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 $4.9 billion investment in MBS represented approximately one-third of its fixed maturities at June 30, 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 June 30, 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        $ 737      $ 757          103%        $ 20        100%
 Non-agency prime     2,349      2,006           85         (343)        94
 Alt-A                1,033        802           78         (231)        77
 Subprime               426        300           70         (126)        72
 Other                   32         28           88           (4)        81
Commercial            1,145      1,011           88         (134)       100
                     $5,722     $4,904           86%      ($ 818)        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 June 30, 2009, AFG owned approximately $926 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 $195 million of the securities insured. FSA International provided 79% of the $195 million in credit enhancement, and MBIA Inc. provided 17%. AFG's direct investment in monoline credit insurers was less than $12 million at June 30, 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.

The table below summarizes (in millions) AFG's investments where credit was enhanced by monoline insurers at June 30, 2009.

                                    Weighted Average Rating
                                        With                        Fair     Unrealized
                                   Insurance     Underlying        Value    Gain/(Loss)
Insured Securities
 With underlying ratings                 AA              A+         $174            $ 1
 Without underlying ratings              AA-      Not Rated           21             (9)
   Total                                 AA                         $195           ($ 8)

The weighted average credit rating was calculated by assigning numerical values to the ratings categories and weighting the result by securities' fair value.

Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet at June 30, 2009, is shown in the following table (dollars in millions). Approximately $500 million of available for sale "Fixed maturities" and $60 million of "Equity securities" had no unrealized gains or losses at June 30, 2009.

                                                    Securities  Securities
                                                         With        With
                                                    Unrealized  Unrealized
                                                        Gains      Losses
       Available for Sale Fixed Maturities
        Fair value of securities                        $6,007      $8,386
        Amortized cost of securities                    $5,724      $9,786
        Gross unrealized gain (loss)                     $ 283     ($1,400)
        Fair value as % of amortized cost                  105%         86%
        Number of security positions                     1,559       1,770
        Number individually exceeding
         $2 million gain or loss                             8         189
        Concentration of gains (losses) by type or
         industry (exceeding 5% of unrealized):
          Mortgage-backed securities                      $ 58       ($876)
          Banks, savings and credit institutions            15        (197)
          Insurance companies                                6         (95)
          States and municipalities                         26         (15)
          Gas and electric services                         46         (26)
          Direct obligations of the U.S. Government         12          (1)
        Percentage rated investment grade                   98%         89%

       Equity Securities
        Fair value of securities                         $ 233       $  61
        Cost of securities                               $  92       $  82
        Gross unrealized gain (loss)                     $ 141      ($  21)
        Fair value as % of cost                            255%         74%
        Number of security positions                        40          39
        Number of individually exceeding
         $2 million gain or loss                             3           3

The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities at June 30, 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                           6%          2%
            After one year through five years         45          21
            After five years through ten years        30          28
            After ten years                            5           4
                                                      86          55
            Mortgage-backed securities (average
             life of approximately five years)        14          45
                                                     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 June 30, 2009

Securities with unrealized gains:
 Exceeding $500,000 (137 issues)      $1,513        $ 130        109%
 $500,000 or less (1,422 issues)       4,494          153        104
                                      $6,007        $ 283        105%

Securities with unrealized losses:
 Exceeding $500,000 (729 issues)      $5,372      ($1,249)        81%
 $500,000 or less (1,041 issues)       3,014         (151)        95
                                      $8,386      ($1,400)        86%

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 June 30, 2009

Investment grade fixed maturities with
losses for:
 Less than one year (545 issues)                $2,522        ($ 241)         91%
 One year or longer (788 issues)                 4,923          (820)         86
                                                $7,445       ($1,061)         88%

Non-investment grade fixed maturities with
losses for:
 Less than one year (170 issues)                 $ 269        ($  80)         77%
 One year or longer (267 issues)                   672          (259)         72
                                                 $ 941        ($ 339)         74%

Common equity securities with losses for:
 Less than one year (16 issues)                   $  7         ($  1)         86%
 One year or longer ( - issues)                      -             -           -
                                                  $  7         ($  1)         86%

Perpetual preferred equity securities with
losses for:
 Less than one year (4 issues)                   $  15         ($  2)         85%
 One year or longer (19 issues)                     39           (18)         69
                                                 $  54        ($  20)         73%

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 . . .