A.M. Best Affirms Cincinnati Financial’s Subsidiaries

Oldwick, N.J.-based insurer ratings agency A.M. Best Co. has affirmed the financial strength ratings of the insurance subsidiaries of Cincinnati Financial Corp. The affirmations include “A++” (superior) for the property/casualty group of the Cincinnati Insurance Cos. 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 has downgraded the debt rating of Cincinnati Financial’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. 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 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 Companies’ 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 Companies’ conservative underwriting leverage, solid liquidity and cash flows as well as the financial flexibility of its parent. Best said it 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.

Meanwhile, the rating affirmation of the life/health operation reflects its strategic position within Cincinnati Financial, its expanding geographical presence, utilization of full-time life insurance specialists embedded within the P/C based independent agency network, independent life agencies, consistently positive statutory operating performance and its strong level of risk-adjusted capitalization.

The financial strength rating of “A++” (superior) has been affirmed for the Cincinnati Insurance Cos. and the following members: Cincinnati Insurance Co., Cincinnati Casualty Co., Cincinnati Indemnity Co.