Cincinnati Financial Affirmed

A.M. Best Co. affirmed the financial strength ratings of the subsidiaries of Cincinnati Financial Corporation. The affirmations include “A++” (superior) for the property/casualty group of The Cincinnati Insurance Companies and “A+” (superior) for The Cincinnati Life Insurance Co., all of Fairfield, Ohio. Concurrently, although the debt to capital ratio has improved from 2002 due to realized capital gains, Best downgraded the debt rating of Cincinnati Financial Corporation’s existing $420 million of 6.90 percent senior debentures to “aa-” from “aa” to bring it in line with Best’s notching guidelines. All rating outlooks are stable.

The affirmation of the financial strength rating of The Cincinnati Insurance Cos., the property/casualty group, reflects its superior risk-based capitalization, favorable operating results and long-standing independent agency distribution strategy. In addition, unlike the majority of the commercial lines sector, The Cincinnati Insurance Cos. have annually reported favorable loss reserve development and appear to be reserving current accident years more conservatively, which lends considerable stability to the organization.

Partially offsetting these factors are The Cincinnati Insurance Cos.’ high common stock leverage, elevated catastrophe leverage and payout of stockholder dividends, all of which have contributed to the decline in statutory surplus over the five year period. The largest factors for the five-year decline in statutory surplus are the adoption of NAIC Codification and the resulting deferred tax liabilities recorded for unrealized gains on equity investments.

The Cincinnati Insurance Cos.’ statutory surplus is highly susceptible to fluctuations in equity market values as common stocks represent more than 100 percent of statutory surplus and to severe catastrophe losses given its concentration of business in the Midwest and earthquake exposure related to the New Madrid fault. This risk is somewhat mitigated by The Cincinnati Insurance Cos.’ conservative underwriting leverage, solid liquidity and cash flows as well as the financial flexibility of its parent.

Going forward, Best expects the companies to maintain superior risk-adjusted capitalization as favorable operating margins generate growth in statutory surplus reducing both common stock and catastrophe leverage.

In view of the concentration of the holding company’s assets in common stock equities, combined with those of the subsidiaries and the exposure of the market value fluctuations of those assets to changes in the stock market, Best has reconsidered its atypical one notch differential between Cincinnati Financial Corporation’s senior debt and the insurance subsidiaries issuer credit rating. While the holding company maintains significant liquid assets that exceed its debt obligations, has demonstrated consistent earnings and good available cash flow coverage of fixed obligations, the debt rating downgrade reflects the concentration of assets and their correlation to the insurance subsidiaries exposure.