A.M. Best Affirms Ratings of Cincinnati Financial Corp. and Its Subsidiaries
OLDWICK, N.J. -- December 19, 2012
A.M. Best Co. has affirmed the financial strength rating (FSR) of A+
(Superior) and issuer credit ratings (ICR) of “aa-“ for The Cincinnati
Insurance Company, The Cincinnati Indemnity Company and The Cincinnati
Casualty Company, collectively referred to as The Cincinnati Insurance
Companies (CIC) standard market property/casualty group. Concurrently, A.M.
Best has affirmed the FSR of A (Excellent) and ICR of "a+" of The Cincinnati
Life Insurance Company (Cincinnati Life). Additionally, A.M. Best has affirmed
the ICR of "a-" and debt ratings of CIC and Cincinnati Life's publicly traded
parent, Cincinnati Financial Corporation (CINF) [NASDAQ: CINF]. All companies
are domiciled in Fairfield, OH, except where specified. The outlook for all
ratings is stable.
A.M. Best also has affirmed the FSR of A (Excellent) and ICR of "a" of The
Cincinnati Specialty Underwriters Insurance Company (CSU) (Wilmington, DE), a
wholly owned, separately rated excess and surplus lines subsidiary of The
Cincinnati Insurance Company, the lead property/casualty company. The outlook
for CSU remains stable.
The affirmation of the ratings reflects CIC's superior risk-adjusted
capitalization and conservative loss reserving standards that have resulted in
substantial favorable loss-reserve development for prior accident years. The
ratings also consider the group's generally conservative operating
fundamentals, favorable balance sheet liquidity, growing use of predictive
analytic modeling tools and historically strong operating performance. The
ratings also acknowledge the strong franchise value of CIC, which ranks among
the top 30 property/casualty organizations in the United States, based on net
premiums written. Lastly, CIC benefits from the financial flexibility afforded
by its publicly traded parent, which maintains modest financial leverage and
additional liquidity through its access to capital markets and lines of
Somewhat offsetting these positive factors are CIC's weakened underwriting
performance in recent years relative to its similarly rated peers,
historically elevated common stock leverage and geographic concentration of
risk. Although CIC's underwriting performance improved in 2012, it has
deteriorated in recent years from its historically strong levels, particularly
impacted by results in its homeowners and workers' compensation lines of
business, which pressured the group's overall underwriting results. Management
has implemented a number of strategic initiatives that have improved the
performance of these lines, including enhanced pricing techniques, improved
risk selection, increased use of technology, greater geographic
diversification and the establishment of direct workers' compensation claims
reporting. In addition, the group's market profile is somewhat geographically
concentrated, as nearly 50% of its writings are derived from six states in the
Midwest and Southeast. As a result, the group remains more exposed to
economic, legislative and judicial changes than more geographically
diversified peers. Further, this geographic concentration drove significant
increases in weather-related losses in recent accident years. Despite these
concerns, the outlook reflects CIC's superior level of risk-adjusted
capitalization, which supports the ongoing variability in the group's
underwriting and operating performance.
While A.M. Best believes positive rating actions are unlikely in the near
term, key factors that could trigger negative rating actions on CIC's ratings
include further deterioration in underwriting and operating results,
particularly if the resulting performance is materially below similarly rated
peers or causes substantial declines in risk-adjusted capitalization.
The ratings of CSU reflect its excellent level of risk-adjusted capital, the
profitable operating results reported in recent years driven primarily by
favorable loss-reserve development in prior accident years, as well as the
explicit and implicit support afforded it by its position within the
Cincinnati Financial enterprise.
The positive rating factors are partially offset by the execution risks
associated with this relatively new initiative as CSU did not offer excess and
surplus coverage prior to 2008, the poor operating performance and the
elevated expense ratio relative to the peer composite during the initial years
of operation. This concern is somewhat mitigated by the decline in the expense
ratio as the company achieves operating scale through increased premium
volume. Despite these concerns, the outlook reflects the company's excellent
level of risk-adjusted capitalization, the infrastructure support provided by
being part of CINF and expectations for improved performance based on
management's profitability improvement plan.
Key factors that could trigger negative rating actions on CSU's ratings
include any material deviation from the company's submitted financial
projections or lack of operational or financial support from its parent
company. Positive rating actions could be taken on CSU's ratings if
underwriting and operating results improve and are sustained over time while
maintaining a strong level of risk-adjusted capitalization.
The ratings of Cincinnati Life acknowledge its strong risk-adjusted
capitalization, positive trends in first year and renewal ordinary life
premiums, overall good credit quality of its investment portfolio and its role
in CINF as a provider for life, disability income and fixed annuity products.
Even with a $25 million dividend paid in 2011 to its parent, Cincinnati Life's
risk-adjusted capitalization is more than sufficient to support its ratings.
The company continues to focus on its core ordinary life line of business as
it has de-emphasized annuity sales in the current year.
Offsetting factors include the challenge of managing a growing percentage of
interest sensitive reserves in the current low interest environment,
relatively small contribution of net income to the enterprise and incurring
costs related to new business strain and XXX reserving, which are partially
offset by funding through capital and surplus.
The FSR of A+ (Superior) and ICRs of "aa-" have been affirmed with a stable
outlook for the following property/casualty members of The Cincinnati
*The Cincinnati Insurance Company
*The Cincinnati Indemnity Company
*The Cincinnati Casualty Company
The FSR of A (Excellent) and ICR of "a+" have been affirmed with a stable
outlook for The Cincinnati Life Insurance Company.
The FSR of A (Excellent) and ICR of "a" have been affirmed with a stable
outlook for The Cincinnati Specialty Underwriters Insurance Company.
The following debt ratings have been affirmed at "a-":
Cincinnati Financial Corporation
-- $28.0 million 6.90% senior unsecured debentures, due 2028
-- $371 million 6.125% senior unsecured notes, due 2034
-- $391 million 6.92% senior unsecured debentures, due 2028
The methodology used in determining these ratings is Best’s Credit Rating
Methodology, which provides a comprehensive explanation of A.M. Best’s rating
process and contains the different rating criteria employed in the rating
process. Key criteria utilized include: “Understanding BCAR for
Property/Casualty Insurers”; “Risk Management and the Rating Process for
Insurance Companies”; “Catastrophe Analysis in A.M. Best Ratings”; “Insurance
Holding Company and Debt Ratings”; “Rating Members of Insurance Groups”; and
“The Treatment of Terrorism Risk in the Rating Evaluation.” Best’s Credit
Rating Methodology can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world’s oldest and most
authoritative insurance rating and information source. For more information,
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
A.M. Best Company
Gordon McLean, 908-439-2200, ext. 5304
Senior Financial Analyst
Jennifer Marshall, 908-439-2200, ext. 5327
Managing Senior Financial Analyst
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
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