Rating Action on CINF – Analyst Blog

Yesterday, the rating agency Fitch Ratings affirmed the issuer default rating (IDR) as well as senior debt rating of “A-” and “BBB+” on Cincinnati Financial Corporation (CINF). Along with this, the rating agency also affirmed the issuer financial strength (IFS) rating of A+ on three of its subsidiaries –– the Cincinnati Insurance Co., the Cincinnati Casualty Co., the Cincinnati Indemnity Co., and the Cincinnati Life Insurance Co. All the ratings carry a stable outlook.

 

The rating affirmation on Cincinnati comes on the back of its adequate risk adjusted capitalization, favorable operating performance, and significant market diversification.   Given Cincinnati’s agents centered business model, its relationship with local insurance agencies is a primary strategic advantage.

 

Cincinnati is also taking significant strides by implementing technology projects to improve critical efficiencies and streamline processes for the agencies, allowing it to win an increasing market share. Management’s reserving philosophies that have also benefited earnings for the past 22 years from the favorable development of loss reserves on prior accident years. Cincinnati’s investment portfolio restructuring, aimed at reducing equity market exposure is also viewed positively. 

 

However, owing to Cincinnati’s geographic concentration, its performance is contingent on business, economic, environmental and regulatory conditions in certain states. Though the company markets its property casualty insurance products in 35 states, its business is significantly concentrated in the Midwest region which is vulnerable to catastrophes, thus leading to earnings volatility

 

Cincinnati’s property and casualty business, which accounts for approximately 65% of its total revenue, is suffering from soft market conditions. The combined ratio has averaged 102.5% (a greater than 100%, implying underwriting loss) over the 2008–2009 period, which was 2.5% higher than the average for the 10-year period prior to 2008. Fitch believes that the property and casualty business of the company will continue to suffer over the near term with the market cycle showing no signs of turning.

 

Fitch said that it might downgrade Cincinnati’s rating in future, if combined ratio averages 105% for the years 2010 and 2011 and balance sheet weakens. Also, it will watch the impact that catastrophes might have on Cincinnati’s earnings.