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

OLDWICK, N.J.--()--A.M. Best 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 standard market property/casualty group (CIC). Concurrently, A.M. Best has affirmed the FSR of A (Excellent) and the ICR of "a+" of The Cincinnati Life Insurance Company (Cincinnati Life). A.M. Best also has affirmed the FSR of A (Excellent) and the ICR of "a" of The Cincinnati Specialty Underwriters Insurance Company (CSU) (Wilmington, DE), a wholly owned, separately rated excess and surplus (E&S) lines subsidiary of The Cincinnati Insurance Company, the lead property/casualty company. Additionally, A.M. Best has affirmed the ICR of "a-" and debt ratings of CIC’s publicly traded parent, Cincinnati Financial Corporation (CINF) [NASDAQ: CINF]. The outlook for all ratings is stable, with the exception of the outlook for the ICR of CSU which was revised to positive from stable. All companies are domiciled in Fairfield, OH, except where specified.

The affirmation of CIC’s ratings reflect the group’s superior risk-adjusted capitalization and historically conservative loss reserving standards that have resulted in the recognition of substantial favorable development of prior accident-year loss reserves. The ratings also reflect the group's historically strong operating earnings, which have improved in recent years. In addition, the ratings recognize the strong distribution network within its targeted regional markets that is centered on cultivating strong, long-term relationships with local independent insurance agencies. 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.

These positive rating factors are partially offset by the variability in CIC's earnings in earlier years of the most recent five-year period, relative to its similarly rated peers, primarily due to the impact of significant natural catastrophe losses on underwriting results and historically elevated common stock leverage. The group's market profile remains somewhat geographically concentrated relative to its rating level, as nearly 50% of its writings are derived from six states, primarily in the Midwest, as well as the Northeast and Southeast. As a result, the group remains more exposed to potential economic, legislative and judicial changes than its more geographically diversified peers. This geographic concentration leaves the group susceptible to weather-related losses, as evidenced in recent accident years.

The 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 A.M. Best's expectation that management's initiatives will result in sustained improvement in underwriting and operating results.

A.M. Best anticipates that sustained improvement in operating earnings, driven by profitable underwriting results at a level which outperforms similarly rated peers, could result in positive rating action over the near term. Key factors that could trigger negative rating actions on CIC's ratings include deterioration in underwriting and operating results, particularly if the resulting performance is materially below similarly rated peers.

The ratings of CSU reflect its excellent level of risk-adjusted capital, reflective of capital contributions and retained earnings, significantly improved operating results in recent years driven by underwriting profitability, and conservative initial reserve estimates as evidenced by the favorable loss-reserve development in prior accident years. In addition, the company also benefits from the explicit and implicit support afforded from being part of CINF. The company serves the needs of existing independent agencies of its immediate parent, The Cincinnati Insurance Company.

These positive rating factors are partially offset by weak earnings in earlier years when CSU was in the start-up phase, the lack of scale as a carrier within the E&S marketplace and the slightly elevated expense ratio relative to the peer composite over the five-year period. These concerns are somewhat mitigated by the improving expense ratio as the company achieves operating scale through increased premium volume.

Despite these concerns, the revised outlook to positive reflects the company's excellent level of risk-adjusted capitalization, improving operating performance in recent years, the ongoing infrastructure support provided by being part of CINF and expectations for strong operating performance, based on management initiatives to enhance profitability over the near term.

Further positive rating action could be taken on CSU's ratings if the recent improvement in underwriting and operating results is sustained over time, while a strong level of risk-adjusted capitalization is maintained.

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.

The ratings of Cincinnati Life reflect its adequate but declining risk-adjusted capitalization, good quality 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 due primarily to recent operating losses tied to retaining Regulation XXX reserves and a relatively small contribution to the revenue and earnings of the enterprise.

A.M. Best believes that a positive rating action on Cincinnati Life is unlikely in the near to medium term. 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 Best’s Capital Adequacy Ratio, increased losses in the ordinary life line, continued spread compression on interest sensitive reserves that could adversely impact operating earnings and a change in business mix with greater focus on less creditworthy products.

The following debt ratings have been affirmed with a stable outlook:

Cincinnati Financial Corporation—
-- “a-” on $28.0 million 6.90% senior unsecured debentures, due 2028
-- “a-” on $371 million 6.125% senior unsecured notes, due 2034
-- “a-” on $391 million 6.92% senior unsecured debentures, due 2028

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

  • A.M. Best’s Liquidity Model for U.S. Life Insurers
  • Catastrophe Analysis in A.M. Best Ratings
  • Equity Credit for Hybrid Securities
  • Insurance Holding Company and Debt Ratings
  • Rating Members of Insurance Groups
  • Risk Management and the Rating Process for Insurance Companies
  • The Treatment of Terrorism Risk in the Rating Evaluation
  • Understanding BCAR for U.S. and Canadian Life/Health Insurers
  • Understanding BCAR for Property/Casualty Insurers
  • Understanding Universal BCAR

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Gordon McLean, 908-439-2200, ext. 5304
Senior Financial Analyst–P/C
gordon.mclean@ambest.com
or
Jennifer Marshall, 908-439-2200, ext. 5327
Assistant Vice President–P/C
jennifer.marshall@ambest.com
or
Richard McMillan, 908-439-2200, ext. 5615
Managing Senior Financial Analyst–L/H
richard.mcmillan@ambest.com
or
Raj Shah, 908-439-2200, ext. 5409
Assistant Vice President–L/H
raj.shah@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Gordon McLean, 908-439-2200, ext. 5304
Senior Financial Analyst–P/C
gordon.mclean@ambest.com
or
Jennifer Marshall, 908-439-2200, ext. 5327
Assistant Vice President–P/C
jennifer.marshall@ambest.com
or
Richard McMillan, 908-439-2200, ext. 5615
Managing Senior Financial Analyst–L/H
richard.mcmillan@ambest.com
or
Raj Shah, 908-439-2200, ext. 5409
Assistant Vice President–L/H
raj.shah@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com