Cincinnati Ins. Co. Affirmed, Outlook Neg.
Standard & Poor's (S&P) Ratings Services revised its outlook on Cincinnati Insurance Co., Cincinnati Casualty Co., and Cincinnati Indemnity Co., which are Cincinnati Financial Corp.'s (CFC) P/C operating companies, to negative from stable because of the group's poor experience in its homeowners business, which adversely affected results in recent years. In addition, the group has an aggressive investment strategy, is relatively slow to respond to changing markets, and has volatility related to some geographic concentration, which exposes it to weather-related and catastrophe losses.
At the same time, S&P affirmed its "A+" counterparty credit rating on CFC and its "AA-" counterparty credit and financial strength ratings on all of CFC's operating companies. The ratings on CFC's P/C companies (collectively referred to as CIC) are based on CIC's strong, competitive business position, which is afforded by its extremely loyal and productive agency force, high business persistency, strong level of capitalization, and extremely strong financial flexibility. The continued long-term success of CIC's business model partially depends on market conditions remaining relatively stable, since management's steady approach to the marketplace and aggressive position in stocks and catastrophe exposure could affect the quality of its strong capital. S&P believes CIC's operating performance will improve somewhat, as CIC should continue to perform well in its largest business segment, commercial lines. The group has taken rate increases and is implementing Web-based systems for agents and claims representatives. In addition, CIC is taking other underwriting actions to improve personal lines profitability, including limiting the offering of multi-year policies, but it still will lag its peers in personal lines.
Great American Debt Gets 'bbb'
A.M. Best Co. has assigned a "bbb" debt rating to the $100 million, 30-year senior unsecured notes to be issued by AAG Holding Co. Inc., a wholly-owned subsidiary of Cincinnati-based insurer Great American Financial Resources Inc. (GAFRI). The notes are a draw down of the $250 million shelf registration previously filed by GAFRI. The financial strength rating of "A" (excellent) of the GAFRI group's core life insurance subsidiaries remains unaffected. Additionally, Best has affirmed the ratings on existing debt guaranteed by GAFRI and indicative ratings on the aforementioned shelf. All the ratings have a stable outlook.
The vast majority of the proceeds will be used to repay outstanding bank debt, and the remainder will be used for general corporate purposes. For the current rating level, Best notes that overall financial leverage (including trust preferred as debt) remains high for GAFRI, while interest coverage is adequate. However, the elimination of the short-term debt from GAFRI's capital structure is viewed favorably by Best as it somewhat improves financial flexibility. GAFRI has committed to maintain financial leverage at or below its current level and to decrease its exposure to below investment grade and mortgage backed securities.
Best said the ratings reflect the group's solid operating performance, favorable liquidity position, adequate risk-adjusted capitalization and multiple distribution sources. Its established presence in the individual tax-deferred annuity market, particularly teachers in the primary and secondary grade levels in the public education market, has resulted in a stable liability structure evidenced by strong surrender charge protection. Offsetting factors include the group's concentration in individual fixed annuities—a highly competitive line vulnerable to changes in interest rates. While GAFRI has attempted to expand its operations beyond the annuity market, it has had limited success in growing its life insurance line, which continues to produce operating losses.
Markel North America Affirmed
Fitch Ratings has affirmed the "A" insurer financial strength ratings of the members of the Markel North America insurance group. It also affirmed the group's "BBB-" long-term issuer rating and existing senior debt ratings and the "BB+" trust preferred stock rating of Markel Capital Trust. All the outlooks are stable.
Fitch notes Markel's overall continuing insurance operations have benefited from the current hard market conditions and have reported strong underwriting results in 2003. However, the current year's strong operating results were partially offset in the third quarter of 2003 by charges for legacy issues, specifically $55 million of additional asbestos and environmental (A&E) reserves and $50 million in increases to other prior accident years' reserves. Approximately half of the A&E charge and all of the prior accident years charge relates to Markel's North American insurance subsidiaries. The rating agency indicated that, despite the charges, it believes Markel generally employs conservative accounting and reserving practices, which improve the quality of its earnings and capital. It added that following the asbestos charge, Markel's North American insurance subsidiaries' asbestos reserves are adequate relative to Fitch's 16 times survival ratio benchmark though generally not at the same level of conservatism as Markel's non A&E reserves. The ratings also consider Markel's moderately high financial leverage, which is above 30 percent.
