Moody’s Investors Service has affirmed Cincinnati Financial Corporation’s (CINF) A2 senior debt rating and its Aa3 insurance financial strength rating of the company’s property & casualty subsidiaries with a stable outlook. It cited the company’s sound balance sheet, its sizable capital base and conservative leverage profile as 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,” said the announcement.
It pointed out, however that offsetting these strengths are the company’s “continued struggles with large loss severity trends;” this in turn is countered by Cincinnati’s pricing and underwriting initiatives.
“Other challenges include the risks inherent in the company’s investment strategy, which is concentrated in a limited number of equities,” said Moody’s “and continued development for front and back-end technology systems that lag companies of comparable size.”
It indicated that although “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 it considered the reduction “significant,” the rating agency noted that the company’s financial leverage still remains under 10%.
Moody’s explained that it “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,” the announcement concluded.
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