Approximately $420 million in debt securities affected.
NEW YORK, Nov 26 - Moody's Investors Service has affirmed Cincinnati Financial Corporation's (NasdaqNM: CINF NASDAQ: CINF) A2 senior debt rating and its Aa3 insurance financial strength rating of the company's property & casualty subsidiaries. The ratings carry a stable outlook. Moody's noted that the company's sound balance sheet, its sizable capital base and conservative leverage profile are primary rating strengths that led to the ratings affirmation. Moody's believes that CINF possesses a strong franchise with its independent agents who share the same underwriting and expense philosophy and expects the company's results will continue to benefit from the improved market pricing conditions. Offsetting these strengths, the rating agency continued, are the company's continued struggles with large loss severity trends, but pricing and underwriting initiatives should continue to offset these patterns, which are being closely monitored by the company. Other challenges include the risks inherent in the company's investment strategy, which is concentrated in a limited number of equities, and continued development for front and back-end technology systems that lag companies of comparable size. While this long-term investment strategy has generated significant book value growth, through the first nine months of 2002, the company's realized gains on equity investments decreased by $557 million, pushing shareholders' equity down to $5.5 billion from almost $6 billion as of December 31, 2001. Although the reduction in equity is significant, the company's financial leverage still remains under 10%. Moody's notes that the company's investment philosophy focuses on low portfolio turnover, dividend paying equities and a long-term approach that has allowed them to build unrealized gains over time. Moody's believes that CINF's capital base creates a cushion against volatile operating results, but, a material reduction in its capital base, from a prolonged downturn in the valuation of one or more of its major equity holdings that would reduce the company's excess capital, could result in negative ratings pressure. Moody's maintains a two-notch spread between the company's insurance financial strength ratings and CINF's senior debt rating, rather than a more typical three-notch spread. The basis for this notching is the additional financial flexibility afforded the holding company through its direct ownership of a substantial investment portfolio that is not subject to insurance regulatory purview. These investments include $4.4 billion in equities, $321 million in bonds and $14 million in cash at September 30, 2002, compared with $603 million of debt outstanding. The stable outlook reflects Moody's view that the quality of CINF's operating model will enable it to compete effectively in its core markets. CINF is an Ohio-based parent company for entities that sell insurance and, to a lesser extent, specialty financial services. CINF's property and casualty year-to-date operating results in 2002 have shown improvement over 2001; largely results of the company's efforts to increase prices and re-underwrite its insurance portfolio back to profitability. For the nine months ended September 30, 2002, the company reported a GAAP combined ratio of 101.4% versus 105.6% for the same period in 2001.