Fitch Affirms Cincinnati Financial Corporation Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Cincinnati Financial Corporation (CFC) at 'A-' and its senior debt ratings at 'BBB+'. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of CFC's three standard market property and casualty insurance subsidiaries led by The Cincinnati Insurance Company (CIC) and its life insurance subsidiary, The Cincinnati Life Insurance Company, at 'A+'. A list of all ratings is detailed below. The Rating Outlook is Stable.

CFC's ratings strengths include its conservative operating subsidiary capitalization supported by a strong holding company cash position, moderate holding company leverage, a high-quality liquid bond portfolio with ample liquidity to meet its policyholder obligations, and competitive advantages from its successful single-channel distribution system. The ratings also recognize the steps CFC has taken to rebalance its common stock portfolio to reduce capital and earnings volatility going forward.

Ratings concerns are principally related to the challenges posed by competitive market conditions and the company's exposure to regional natural catastrophes and other weather-related losses. Fitch believes CFC's property/casualty underwriting performance has deteriorated relative to the industry and regional peers, as well as to historical levels. While the average calendar year GAAP underwriting combined ratio was 95.6% for the five years ending 2009, it was 103.1% for the 10 quarters, and 105.2% for the six months, ending June 30, 2010. CFC has implemented a number of technology initiatives including the use of predictive modeling tools, initially for workers' compensation and homeowners' insurance that are anticipated to improve underwriting expertise and loss ratios over time.

Consolidated operating leverage in property/casualty operations, as measured by net premiums written to policyholders' surplus (PHS), remains conservative and has not varied significantly from the five-year average of 0.76 times (x), despite considerable surplus volatility over the period. In addition, holding company cash and investments of $1 billion at year-end 2009 were significantly higher than peers of CFC's size.

Favorable loss and loss expense reserve development in each of the last 22 years serves as an indication of CFC's conservative reserving practices. In 2009, favorable reserve development was principally attributable to the commercial casualty line for accident years 2005-2008, partially offset by adverse development in workers' compensation.

Over the near term Fitch expects continued unfavorable underwriting performance as the property/casualty industry is solidly entrenched in the soft phase of the market cycle. The Stable Rating Outlook reflects CFC's mitigating balance sheet strengths.

Items that could cause Fitch to downgrade CFC's ratings include ongoing underwriting weakness, demonstrated by a calendar year combined ratio averaging over 105% for 2010 and 2011, and a deterioration in current balance sheet strengths. Fitch's rating rationale anticipates property casualty net earned premiums to policyholder surplus to remain below 1.0x, equity-credit-adjusted financial leverage to remain below 20%, total financing and commitments (TFC) ratio to remain below 0.25x, the lead property/casualty subsidiary's NAIC RBC ratio to remain greater than 375% and the life company's RBC ratio to remain greater than 350%. Fitch also assumes that CFC will continue to maintain cash and marketable securities at the holding company -- at least while underwriting performance is weak -- to exceed annual shareholder dividends and interest expense, which in recent years is approximately $300 million.

Fitch considers a rating upgrade to be unlikely in the near term due to CFC's regional footprint and regulatory, economic, and concentrated Midwest catastrophe exposures. Key rating drivers that could lead to an upgrade over the long term include a material and sustained improvement on recent underwriting performance that causes Fitch to view CFC as meaningfully better than peers and the industry, and improved catastrophe and overall risk management through difficult underwriting and economic conditions.

Fitch affirms the following ratings with a Stable Outlook:

Cincinnati Financial Corporation

--IDR at 'A-';

--$392 million 6.92% fixed-coupon senior debentures due May 15, 2028 at 'BBB+';

--$28 million 6.90% fixed-coupon senior debentures due May 15, 2028 at 'BBB+';

--$375 million 6.125% fixed-coupon senior notes due Nov. 1, 2034 at 'BBB+'.

The Cincinnati Insurance Company

The Cincinnati Casualty Company

The Cincinnati Indemnity Company

The Cincinnati Life Insurance Company

--IFS at 'A+'.

Additional information is available at 'www.fitchratings.com'.

Related Research:

--'Insurance Rating Methodology' (Aug. 16, 2010);

--'Non-Life Insurance Rating Methodology' (March 24, 2010);

--'Life Insurance Rating Methodology' (March 24, 2010).

Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

Non-Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285

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