Fitch Affirms Cincinnati Financial Corporation's Ratings; Outlook Stable
CHICAGO -- November 20, 2012
Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings
of Cincinnati Financial Corporation's (CINF) three standard market property
and casualty insurance subsidiaries and its life insurance subsidiary. Fitch
has also affirmed the following ratings for CINF:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable. A full rating list follows at the end of this
The affirmation reflects CINF's balance sheet strengths, including:
conservative operating subsidiary capitalization, sizable holding company cash
and marketable securities position, moderate holding company financial
leverage ratio (FLR) and well managed property/casualty (P/C) loss reserves.
P/C operating leverage averaged 0.81x from 2007 to 2011, and the lead
subsidiary's NAIC RBC was 396% at year-end 2011. Holding company cash and the
FLR were $1.2 billion and 15.8%, respectively at Sept. 30, 2012. The company
has reported favorable prior-year reserve development in each of the last 23
Rating concerns are principally related to the challenges posed by competitive
market conditions and CINF's exposure to regional natural catastrophes and
other weather-related losses. The P/C segment reported a combined ratio of
101.1% through nine months of 2012, following underwriting losses annually
since 2007, with catastrophe losses continuing to exceed the company's 10-year
average of 5.4% of earned premiums.
Fitch believes CINF's losses related to Hurricane Sandy will be modest as the
company is not active in New Jersey and has less than 1% market share in the
states most impacted by the storm.
However, after adjusting for catastrophe losses, Fitch believes CINF's
underwriting performance has deteriorated relative to the industry and
regional peers. On an accident year basis, excluding catastrophes, the
company's GAAP combined ratio averaged 105.3% for 2008-2011, although it
improved to 98.8% through nine months of 2012.
CINF has implemented a number of technology initiatives including the use of
predictive modeling tools that are anticipated to improve underwriting
expertise and loss ratios over time.
Fitch's rating rationale anticipates P/C net earned premiums to policyholder
surplus to remain below 1.0x, financial leverage ratio to remain below 20%,
the lead P/C subsidiary's NAIC RBC ratio to remain greater than 375% and the
life company's RBC ratio to remain greater than 350%. Fitch also assumes that
CINF will continue to maintain cash and marketable securities at the holding
company -- at least while underwriting performance is weak -- to exceed annual
shareholder dividends and interest expense, which in recent years is
approximately $300 million.
The key rating trigger that could lead to a downgrade is a combined ratio
exceeding 105% on a sustained basis, which is worse than the median credit
sector factor for companies with an 'A' IFS rating. Deterioration in current
balance sheet strengths as defined in the previous paragraph could also lead
to a downgrade.
Fitch considers a rating upgrade to be unlikely in the near term due to CINF's
regional footprint and concentrated Midwest catastrophe exposures. Key rating
triggers that could lead to an upgrade over the longer term include a material
and sustained improvement on recent underwriting performance and improved
catastrophe and overall risk management through difficult underwriting and
Fitch affirms the following ratings with a Stable Outlook:
Cincinnati Financial Corporation
--IDR at 'A-';
--6.92% senior debentures due May 15, 2028 at 'BBB+';
--6.90% senior debentures due May 15, 2028 at 'BBB+';
--6.125% senior notes due Nov. 1, 2034 at 'BBB+'.
The Cincinnati Insurance Company
The Cincinnati Casualty Company
The Cincinnati Indemnity Company
The Cincinnati Life Insurance Company
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
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Martha M. Butler, CFA, +1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
James B. Auden, CFA, +1-312-368-3146
Mark E. Rouck, CFA, +1-312-368-2085
Brian Bertsch, New York, +1 212-908-0549
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