Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Cincinnati Financial Corp.'s (CINF) three standard market property and casualty insurance subsidiaries and its life insurance subsidiary.
Fitch has also affirmed the following ratings for CINF:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable for all ratings. A full rating list follows at the end of this press release.
The affirmation reflects CINF's ratings strengths including its conservative operating subsidiary capitalization supported by a strong holding company cash and marketable securities position and moderate holding company financial leverage. At year-end 2011, statutory operating leverage for property/casualty (P/C) operations was 0.83 times (x) and the NAIC RBC at 396 percent was materially higher than industry averages.
Rating concerns are principally related to the challenges posed by competitive market conditions and CINF's exposure to regional natural catastrophes and other weather-related losses. CINF reported a small underwriting gain in the fourth quarter of 2011, the first quarter of 2012, following four full years of underwriting losses. Catastrophe losses continue to exceed the company's 10-year average of 5.4 points and have been tied to an inordinate number of inland storms and tornadoes, many of which produced losses below CINF's reinsurance retention.
After adjusting for catastrophe losses however, Fitch believes CINF's underwriting performance has deteriorated relative to the industry and regional peers. On an accident year basis, excluding catastrophes, the company's GAAP combined ratio was 104.5 percent in 2008, 105.0 percent in 2009, 106.5 percent in 2010, 105.2 percent in 2011 and 99.7 percent through three months of 2012.
CINF 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. Still Fitch expects CINF to report breakeven or unfavorable underwriting performance over the near term as the industry remains in the soft phase of the market cycle.
Fitch believes CINF's P/C reserves are adequate and well managed. The company has reported favorable prior-year reserve development in each of the last 23 years. Adverse development in the workers' compensation segment was reported in three of the last seven years and remains more exposed to potential future adverse development, in Fitch's view. Notably, commercial casualty reserves have been a source of material favorable reserve development over the five years ending 2011.
Fitch's rating rationale anticipates P/C net earned premiums to policyholder surplus to remain below 1.0x, financial leverage ratio to remain below 20 percent, the lead P/C subsidiary's NAIC RBC ratio to remain greater than 375 percent and the life company's RBC ratio to remain greater than 350 percent. Fitch also assumes that CINF 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.
The key rating trigger that could lead to a downgrade is continuing poor underwriting performance. Deterioration in current balance sheet strengths as defined in the previous paragraph could also lead to a downgrade.
Fitch considers a rating upgrade to be unlikely in the near term due to CINF's regional footprint and regulatory, economic, and concentrated Midwest catastrophe exposures. Key rating triggers that could lead to an upgrade over the longer term include a material and sustained improvement on recent underwriting performance and improved catastrophe and overall risk management through difficult underwriting and economic conditions.
Fitch affirms the following ratings with a Stable Outlook:
Cincinnati Financial Corp.
--IDR at 'A-';
--6.92 percent senior debentures due May 15, 2028 at 'BBB+';
--6.90 percent senior debentures due May 15, 2028 at 'BBB+';
--6.125 percent 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 'fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Insurance Rating Methodology
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