September 16, 2008 / 7:34 PM / 10 years ago

UPDATE 2-Cincinnati Financial to take hit from Lehman, GSEs

(Adds analysts’ comments, background, updates share movement)

By Anurag Kotoky

BANGALORE, Sept 16 (Reuters) - Cincinnati Financial Corp (CINF.O), a U.S. Midwestern property and casualty insurer, said its exposure to troubled institutions like Lehman Brothers Holdings Inc and government-sponsored enterprises will hurt its 2008 results.

However, analysts do not expect the charges related to the exposure to hurt the company significantly in the coming quarters.

Cincinnati said it had sold most of the $24 million of Lehman preferred stock and debt securities held at June 30, and expects to take a related charge of $9 million in third quarter.

Lehman Brothers, once an investment banking giant, filed for bankruptcy protection on Monday after trying to finance too many risky assets with too little capital.

Cincinnati, which still holds securities of American International Group Inc (AIG.N) worth about $81 million as of Sept. 15, sees an impairment charge of about $50 million from securities related to the mortgage giants Fannie Mae FNM.N and Freddie Mac FRE.N.

“It’s a small amount relative to its investment portfolio. We are talking about just 3 percent of the portfolio. It’s very much manageable,” Elizabeth Malone, an analyst with Keybanc Capital Markets, told Reuters.

Fox-Pitt analyst Dan Schlemmer expects the company to take substantial impact from the charges in the third-quarter itself.

Both the analysts expect a number of small insurance companies to report third-quarter charges related to their exposure to Lehman Brothers and AIG.

However, Schlemmer said a possible failure of AIG could benefit smaller insurers like Cincinnati Financial as it could mean more business available to them, but at the same time, they can also be impacted by credit-quality risks.

Cincinnati Financial expects net investment income to decline more than 10 percent in 2008, and said it will also record about $20 million of policy-holder losses in the third quarter as catastrophe losses for July and August.

Apart from the charges, third-quarter results will also include a gain of $225 million from the sale of half of its stake in Fifth Third Bancorp (FITB.O).

Shares of the Fairfield, Ohio-based company fell more than 5 percent to $26.99, before recovering to trade up 55 cents at $29.06 Tuesday afternoon on Nasdaq. (Editing by Amitha Rajan, Deepak Kannan)

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