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A.M. Best Affirms Ratings of Cincinnati Financial Corporation and Its Subsidiaries

^{Published on 2010-12-13 11:40:18 - Market Wire}
 

OLDWICK, N.J.--([ BUSINESS WIRE ])--A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of aaaa of the standard market property/casualtygroup, The Cincinnati Insurance Companies (CIC) and its members. A.M. Best also has affirmed the FSR of A (Excellent) and ICR of aaa of The Cincinnati Specialty Underwriters Insurance Company (CSU) (Wilmington, DE) and the ICR and debt ratings of aaa of Cincinnati Financial Corporation (CINF) (NASDAQ: CINF). CSU is the excess and surplus lines property/casualty subsidiary of CIC. Concurrently, A.M. Best has affirmed the FSR of A (Excellent) and ICR of aa+a of The Cincinnati Life Insurance Company (Cincinnati Life). The outlook for all ratings is stable. All companies are domiciled in Fairfield, OH, except where specified. (See below for a detailed listing of the companies and ratings.)

"A.M. Besta™s Ratings & the Treatment of Debt."

CICa™s ratings reflect its superior risk-adjusted capitalization, conservative reserving philosophy that has historically produced redundant reserves, historical operating performance and successful distribution within its targeted regional markets. A key element of CICa™s business strategy is the groupa™s focus on marketing and servicing clients through a network of independent agents fostered through strong, long-term relationships. Successful agency relations are demonstrated when measuring the production of CICa™s agencies, as the group is either the number one or number two carrier in more than 75% of reporting agency locations appointed for more than five years. CICa™s relationship with its agent base is strengthened by the local presence of field support associates, a competitive commission structure and comprehensive portfolio of insurance products.

The ratings also reflect the financial flexibility provided by CINF, which maintains modest financial leverage and considerable liquid assets totaling nearly $1.1 billion (sum of stocks, bonds and cash on balance sheets) at September 30, 2010.

Partially offsetting these positive rating factors are CICa™s elevated common stock leverage, geographic concentration and underwriting losses that began in 2008 and were driven by soft market conditions on its core commercial lines book of business, as well as its underperforming homeownersa™ and workersa™ compensation books of business. Although management undertook an aggressive restructuring of its investment portfolio in 2008 and 2009, which led to a more diversified and better balanced investment portfolio, CIC maintains high common stock leverage, which is approximately 50% of statutory policyholder surplus. This concern is offset by CICa™s conservative underwriting and reserving philosophies, with loss reserves more than fully covered by a highly rated, diversified bond portfolio. CICa™s geographic concentration in the Midwest and Southeast, despite recent expansion initiatives, exposes it to economic, legislative and judicial changes, as well as weather and catastrophe-related losses (as evidenced by significant weather-related losses, which led to underwriting losses in 2008, 2009 and 2010). In addition, a poor homeownersa™ underwriting performance coupled with poor workersa™ compensation results continue to place a drag on overall underwriting profitability. However, management has implemented strategic initiatives to improve the performance of these segments through enhanced pricing techniques, improved risk selection and technology, greater geographic diversification, and specific to workersa™ compensation, the establishment of a workersa™ compensation claims reporting center.

The ratings of Cincinnati Life acknowledge its improved statutory and GAAP net income, strong risk-adjusted capitalization, increasing first year and renewal ordinary life premiums in recent years and its role in CINF as a provider for life, disability income and annuity products. Cincinnati Lifea™s recent operating performance has been stronger, mainly due to favorable interest rate spreads, improved investment income and favorable premium results. Premium growth in the most recent period has been driven primarily by the sale of fixed annuities, although ordinary life remains the core product line. A.M. Best notes that while Cincinnati Lifea™s statutory capital remains well below levels prior to the 2007 U.S. financial crisis, its risk-adjusted capitalization is sufficient to support its insurance and investment risks.

Offsetting rating factors include the challenges Cincinnati Life faces in managing its growing fixed annuity business in the current low interest rate environment, costs related to new business strain and XXX reserving and the relatively small contribution of net income to the enterprise.

The ratings of CSU reflect its excellent level of risk-adjusted capital and the explicit and implicit support garnered from being part of CINF. Somewhat offsetting these positive rating factors are the execution risks associated with this new excess and surplus (E&S) initiative, as management has not offered E&S coverages in the past, coupled with current soft market conditions.

The FSR of A+ (Superior) and ICRs of aaaa have been affirmed for The Cincinnati Insurance Companies and its following property/casualty members:

• The Cincinnati Insurance Company
• The Cincinnati Indemnity Company
• The Cincinnati Casualty Company

The following debt ratings have been affirmed:

Cincinnati Financial Corporationa"

-- aaa $28 million 6.90% senior unsecured debentures, due 2028
-- aaa $375 million 6.125% senior unsecured notes, due 2034 (of which $374 million is outstanding)
-- aaa $392 million 6.92% senior unsecured debentures, due 2028 (of which $391 million is outstanding)

The principal methodology used in determining these ratings is [ Besta™s Credit Rating Methodology - Global Life and Non-Life Insurance Edition ], which provides a comprehensive explanation of A.M. Besta™s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: aRisk Management and the Rating Process for Insurance Companiesa; aUnderstanding BCAR for Property/Casualty Insurersa; aNatural Catastrophe Stress Test Methodologya; aThe Treatment of Terrorism Risk in the Rating Evaluationa; a[ Rating Members of Insurance Groups ]a; aUnderstanding BCAR for Life and Health Insurersa; and a[ A.M. Besta™s Ratings & the Treatment of Debt ].a Methodologies can be found at [ www.ambest.com/ratings/methodology ].

Founded in 1899, A.M. Best Company is the worlda™s oldest and most authoritative insurance rating and information source. For more information, visit [ www.ambest.com ].

Copyright © 2010 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.