Best Affirms Cincinnati Financial and Subs Ratings; Outlook Stable

December 24, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of The Cincinnati Insurance Company, The Cincinnati Indemnity Company and The Cincinnati Casualty Company, collectively referred to as The Cincinnati Insurance Companies (CIC), a standard market property/casualty group.

Best also affirmed the FSR of ‘A’ (Excellent) and ICR of “a+” of The Cincinnati Life Insurance Company, as well as the FSR of ‘A’ (Excellent) and ICR of “a” of The Cincinnati Specialty Underwriters Insurance Company (CSU), based in Wilmington, Delaware, a wholly owned, separately rated, excess and surplus lines subsidiary of The Cincinnati Insurance Company.

In addition Best has affirmed the ICR of “a-” and debt ratings of CIC’s publicly traded parent, Cincinnati Financial Corporation (CINF). The outlook for all ratings is stable. All of the companies are domiciled in Fairfield, Ohio, except where specified.

The affirmation of the ratings reflects CIC’s “superior risk-adjusted capitalization and historically conservative loss reserving standards that have resulted in substantial favorable development of prior accident year loss reserves,” Best explained. “The ratings also reflect the group’s enhanced operating earnings in 2012 and 2013, which are reflective of improving underwriting performance, favorable balance sheet liquidity, increasing application 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 25 property/casualty organizations in the United States, based on net premiums written.

“Lastly, CIC benefits from the financial flexibility afforded by CINF, which maintains modest financial leverage and is a source of additional liquidity through its access to capital markets and lines of credit.”

As a partial offsetting factor Best noted “CIC’s weakened earnings during the 2008-2012 period relative to its similarly rated peers, primarily due to significant natural catastrophe losses on underwriting results and historically elevated common stock leverage.”

Best also indicated that the group’s market profile “is somewhat geographically concentrated relative to its rating level, as nearly 50 percent 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 its more geographically diversified peers.

“Further, this geographic concentration drove significant increases in weather-related losses in recent years. In addition, greater geographic diversification is one of several strategic initiatives that have led to improved underwriting performance in 2012 and 2013. Other initiatives include improved pricing techniques, better risk selection, increased use of technology and the establishment of direct workers’ compensation claims reporting.”

Best said the stable Outlook “reflects CIC’s ability to withstand variability in the group’s underwriting and operating performance due to its superior level of risk-adjusted capitalization, as well as Best’s expectation that management’s initiatives will result in sustained improvement in underwriting and operating results.”

Best indicated that while it “believes positive rating actions for CIC are unlikely in the near term, key factors that could trigger negative rating actions include a deterioration in underwriting and operating results, or an increase in catastrophe loss beyond expectations that weakens operating performance and risk-adjusted capitalization.”

Best said 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 as part of CINF.”

As partial offsetting factors Best cited the “execution risks associated with this relatively new initiative as CSU did not offer excess and surplus coverage prior to 2008, variable operating performance, and the elevated expense ratio relative to the peer composite during the initial years of operation.”

Best added, however, that “these concerns are 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 initiatives to improve profitability over the near term.

“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.”

Best said the ratings of Cincinnati Life “reflect its adequate but declining risk-adjusted capitalization, overall good credit quality in its investment portfolio, positive premium growth trends in its core ordinary life line of business and strategic role within CINF.

“Partially offsetting these factors are challenges in managing the new business strain related to ordinary life sales and interest-sensitive reserves in the low interest rate environment, declines in statutory surplus, and a relatively small contribution to the net income of the enterprise.

“Cincinnati Life is currently well positioned at its rating level. Factors that could lead to a negative rating action are a reduced commitment from its parent, material decline in risk adjusted capital as measured by the BCAR, continued spread compression on interest sensitive reserves leading to further weakening in operating earnings, or a change in business mix with greater focus on less credit worthy products.”

The following debt ratings have been affirmed with a stable outlook:
Cincinnati Financial Corporation–
— “a-” on $28.0 million 6.90 percent senior unsecured debentures, due 2028
— “a-” on $371 million 6.125 percent senior unsecured notes, due 2034
— “a-” on $391 million 6.92 percent senior unsecured debentures, due 2028

Source: A.M. Best

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