AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes inland and ocean marine, agricultural-related business and commercial automobile, (ii) Specialty casualty, which includes executive and professional liability, umbrella and excess liability and excess and surplus, (iii) Specialty financial, which includes fidelity and surety bonds and collateral protection, and (iv) California workers' compensation. AFG's annuity and supplemental insurance business markets primarily retirement annuities and various forms of supplemental insurance. AFG's reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

The following tables (in thousands) show AFG's revenues and operating earnings before income taxes by significant business segment and sub-segment.

At March 31, 2006, sinking fund and other scheduled principal payments on debt for the balance of 2006 and the subsequent five years were as follows: 2006 - $.9 million; 2007 - $60.8 million; 2008 - $45.6 million; 2009 - $204.4 million; 2010 - $2.2 million; and 2011 - $8.2 million.

During the first quarter of 2006, AFG repurchased $22.8 million of its 7-1/8% Debentures due 2009 for $24.2 million in cash and GAFRI repurchased $54.8 million of its 6-7/8% Notes for $56.8 million in cash.

In March 2006, AFG and GAFRI replaced their existing credit agreements with a new five-year revolving credit facility under which they can borrow a combined $500 million. AFG and GAFRI have agreed not to borrow more than $325 million and $200 million, respectively, under the credit facility and AFG has agreed to guarantee amounts borrowed by GAFRI. Amounts borrowed bear interest at rates ranging from 0.5% to 1.25% over LIBOR based on AFG's credit rating.

To achieve a desired balance between fixed and variable rate debt, GAFRI has entered into interest rate swaps that effectively convert its 6-7/8% fixed rate Senior Notes to a floating rate of 3-month LIBOR plus 2.9%. In connection with the 2006 debt repurchases discussed above, GAFRI paid an additional $1.6 million to effectively terminate the portion of the interest rate swaps that covered the repurchased debt.

AFG's Senior Convertible Notes were issued at a price of 37.153% of the principal amount due at maturity. Interest is payable semiannually at a rate of 4% of issue price per year through June 2008, after which interest at 4% annually will be accrued and added to the carrying value of the Notes. The Notes are redeemable at AFG's option at any time on or after June 2, 2008, at

accreted value ranging from $371.53 per Note to $1,000 per Note at maturity. Generally, holders may convert each Note into 11.5016 shares of AFG Common Stock (at $32.30 per share currently) (i) if the average market price of AFG Common Stock to be received upon conversion exceeds 120% of the accreted value ($38.76 per share currently) for a specified period, (ii) if the credit rating of the Notes is significantly lowered, or, (iii) if AFG calls the notes for redemption. Based on the market price of AFG's Common Stock during the quarter ended March 31, 2006, the Notes are currently convertible through June 30, 2006. AFG intends to deliver cash in lieu of Common Stock upon conversion of the Notes; accordingly, shares issuable upon conversion of the Notes are not treated as dilutive.

At March 31, 2006, there were 11.3 million shares of AFG Common Stock reserved for issuance under AFG's stock incentive plan. 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 expire ten years after the date of grant. Data for stock options issued under AFG's stock incentive plans is presented below:

Total compensation expense related to stock incentive plans for the three months ended March 31, 2006 was $2.2 million. Related tax benefits totaled $443,000. Included in these totals are $744,000 in compensation expense and $119,000 in tax benefits related to stock incentive plans of two AFG subsidiaries. As of March 31, 2006, there was a total of $22.7 million of total unrecognized compensation expense related to nonvested stock options granted under AFG's plan. That cost is expected to be recognized over a weighted average of 3.8 years.

The following table illustrates the effect on net earnings (in thousands) and earnings per share for the three months ended March 31, 2005, had compensation cost been recognized and determined based on the "fair values" at grant dates consistent with the method used beginning in 2006.

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 increases; and improved loss experience.

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

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.

At March 31, 2006, AFG (parent) had over $120 million in cash and securities and no amounts borrowed under its bank line of credit.

Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance and in the sale of retirement annuities and supplemental insurance products.

AFG's net earnings for the first three months of 2006 were $101.5 million or $1.27 per share (diluted), compared to $62.9 million or $.81 per share reported in the first quarter of 2005. The results reflect continued improvement in property and casualty underwriting results and net realized gains on investments in the 2006 quarter compared to net realized losses in the 2005 quarter.

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 could 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:

AFG's ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 2.61 for the quarter ended March 31, 2006 and 1.82 (2.25 excluding A&E and other mass tort charges) for the entire year of 2005. Excluding annuity benefits, this ratio was 8.88 and 4.81 (6.83 excluding the A&E and other mass tort charges), 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.

In March 2006, AFG and GAFRI replaced their existing credit agreements with a new five-year revolving credit facility under which they can borrow a combined $500 million. AFG and GAFRI have agreed not to borrow more than $325 million and $200 million, respectively, under the credit facility and AFG has agreed to guarantee amounts borrowed by GAFRI. Amounts borrowed bear interest at rates ranging from 0.5% to 1.25% over LIBOR based on AFG's credit rating.

Under a currently effective shelf registration statement, AFG can offer additional equity or debt securities, including 2.3 million shares of common stock under an equity distribution agreement with UBS Securities LLC. The shelf registration provides AFG with greater flexibility to access the capital markets from time to time as market and other conditions permit.

During the first quarter of 2006, AFG repurchased $22.8 million of its 7-1/8% Debentures due 2009 for $24.2 million in cash.

During the first quarter of 2006, GAFRI repurchased $54.8 million of its 6-7/8% Senior Notes due 2008 for $56.8 million in cash.

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 GAFRI's 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. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on GAFRI's annuity products. With declining rates, GAFRI receives some protection (from spread compression) due to the ability to lower crediting rates, subject to guaranteed minimums.

AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses, as well as meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies.

Approximately 94% of the fixed maturities held by AFG at March 31, 2006, 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 a high quality investment portfolio should generate a stable and predictable investment return.

Individual portfolio securities are sold creating gains or losses as market opportunities exist. Since all of these securities are carried at fair value in the balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.

Summarized information for the unrealized gains and losses recorded in AFG's Balance Sheet at March 31, 2006, is shown in the following table (dollars in millions). Approximately $159 million of available for sale "Fixed maturities" had no unrealized gains or losses at March 31, 2006.

AFG realized aggregate losses of $5.1 million during the first quarter of 2006 on $129.3 million in sales of fixed maturity securities (four issues/issuers) that had individual unrealized losses greater than $500,000 at December 31, 2005. These securities were "AAA" rated mortgage-backed securities that decreased in fair value by an aggregate of $2.2 million from year-end 2005 to the sale date due to an increase in the general level of interest rates.

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.

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

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

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. A listing of factors considered and resources used is contained in the discussion of "Investments" under Management's Discussion and Analysis in AFG's 2005 Form 10-K.

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 mature or recover in value. Should either of these beliefs 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 a future period. Management believes it is not likely that future impairment charges will have a significant effect on AFG's liquidity.

AFG reported operating earnings before income taxes of $169 million for the first quarter of 2006 compared to $104 million for the 2005 quarter. The increase reflects a $26.8 million improvement in property and casualty underwriting results and net realized gains of $29.8 million for the 2006 quarter compared to net realized losses of $5.5 million for the 2005 quarter. Realized gains for the 2006 quarter includes a pretax gain of $23.6 million on the sale of AFG's interest in The Cincinnati Reds.

Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company's performance. See Note C - "Segments of Operations" for the detail of AFG's operating profit by significant business segment.

Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of underwriting losses, loss adjustment expenses and underwriting expenses to premiums. A combined ratio under 100% is indicative of an underwriting profit. The combined ratio does not reflect investment income, other income or federal income taxes.

Premiums and combined ratios for AFG's Specialty property and casualty insurance operations were as follows (dollars in millions):

Net written premiums for the specialty insurance operations were 5% higher in the 2006 first quarter than the same period in 2005. Significant premium growth in the Property and Transportation group was partially offset by a decline in California workers' compensation premiums. The specialty operations generated an underwriting profit of $69.8 million in the first quarter of 2006, a $26.5 million (61%) increase over the 2005 first quarter. Favorable reserve development more than offset a $10.8 million (1.8 point) increase in catastrophe losses in 2006 compared to 2005, principally from severe storms in the Midwest.

Property and transportation net written premiums increased 14% over the 2005 quarter due primarily to new premium volume from the recently acquired Farmers Crop Insurance Alliance, higher commodity prices used to establish 2006 crop insurance coverages and growth in the inland marine businesses. Although the majority of the Midwest storm losses affected this group, those losses were offset by favorable prior year reserve development, particularly in the crop insurance operations. The combined ratio improvement of 3.8 points also reflects strong underwriting profits from the transportation, marine and equine operations.

Due to recent upward revisions in industry models of correlated catastrophe exposure associated with writing both workers' compensation and excess property

coverage in California, AFG has decided that it would stop writing most of its earthquake-exposed excess property coverage in California effective in April 2006. This excess property business had net written premiums of $17 million in 2005. AFG's excess property and California workers' compensation exposure to a catastrophic earthquake that models indicate could occur once in every 500 years was limited to less than 10% of equity. Excluding the excess property coverage to be non-renewed, AFG's exposure will be limited to less than 1% of equity for an earthquake that models indicate could occur once in 500 years.

Specialty casualty net written premiums were 9% higher than the 2005 quarter due primarily to volume growth as well as lower premiums ceded under reinsurance agreements, principally in the executive liability and excess and surplus lines. The 4.1 point improvement in the combined ratio compared to the 2005 quarter reflects a significant decrease in adverse reserve development in the executive liability operations. In addition, the excess and surplus lines and coverage for not-for-profit businesses continued to produce strong underwriting profits.

Specialty financial net written premiums were about 4% lower than the 2005 quarter as more premiums were ceded in the 2006 period under residual value reinsurance agreements. AFG is exiting the residual value business in 2006 as the remaining contracts expire. The 5.2 point improvement in the combined ratio compared to the 2005 quarter reflects a significant reduction in losses from the residual value business. In addition, the fidelity and crime, trade credit and financial institutions operations continued to generate strong profitability.

California workers' compensation net written premiums for the 2006 quarter were about 15% below the 2005 first quarter, reflecting the effect of lower rates, partly offset by good business retention and volume growth. Underwriting margins continue to benefit from an improved claims environment resulting from the workers' compensation reforms enacted in California.

Realized gains (losses) on securities include provisions for other than temporary impairment of securities still held of $3.0 million in the first quarter of 2006 and $1.9 million in the first quarter of 2005.

Sales of properties have reduced revenues and expenses from AFG's real estate operations. Other income includes net pretax gains on the sale of real estate assets of $7.0 million in the first quarter of 2006 and $2.6 million for the 2005 period.  See Note H - "Subsequent Events."

The increase in annuity benefits for the first quarter of 2006 compared to the 2005 period reflects higher reserves due primarily to new business.

The vast majority of GAFRI's DPAC asset relates to its fixed annuity, variable annuity and run-off life insurance lines of business. Continued spread compression, decreases in the stock market and adverse mortality could lead to write-offs of DPAC in the future.

The $1.1 million (6%) decrease in interest expense is due primarily to the retirement of debt during the first quarter of 2006 and late 2005, partially offset by a higher effective interest rate on GAFRI's floating rate debt.

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AFG's management, with participation of its Co-Chief Executive Officers and its principal financial officer, has evaluated AFG's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG's Co-CEOs and principal financial officer concluded that these disclosure controls and procedures were effective.

In the ordinary course of business, AFG and its subsidiaries routinely enhance their information systems by either upgrading current systems or implementing new systems. There has been no change in AFG's business processes and procedures during the first fiscal quarter of 2006 that has materially affected, or is reasonably likely to materially affect, AFG's internal controls over financial reporting.