Earlier this week, leading rating agency Fitch ratings, took a
rating action on the U.S. property and casualty insurer
Cincinnati Financial Corporation
). The rating agency confirmed the issuer default rating (IDR) as
well as senior debt rating of Cincinnati at 'A-' and 'BBB+'
Along with this, the rating agency affirmed the issuer financial
strength (IFS) rating at 'A+' on four 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 Financial comes on the back
of the parent company's balance sheet strength as of September
30, 2012. This is demonstrated by its strong risk based
capitalization (RBC) (396%), substantial cash and cash equivalent
($1.2 billion); a low level of leverage (15.8%). It also has a
disciplined reserve practice, witnessed by a favorable prior-year
reserve development every year, for the past 23 years in a row.
The rating agency is also positive about Cincinnati Financial's
efforts to improve critical efficiencies and streamline processes
for the agencies through implementation of technology projects,
in a bid to win an increasing market share.
On the flip side, the rating agency is concerned with the
competitive property and casualty market landscape. Also, owing
to Cincinnati Financial's geographic concentration, its
performance is highly dependent on business, economic,
environmental and regulatory conditions of certain states.
Though the company markets its property and 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. However, Superstorm Sandy will
give rise to limited losses for the company due to its low
exposure in the affected areas.
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Cincinnati's poor performance reflected on its combined ratio,
which averaged 101.1% (ratio greater than 100% implies
underwriting loss) through the first nine months of 2012. It has
also been generating annual underwriting losses since 2007.
Even after adjusting the catastrophe losses, Cincinnati Financial
has generated an underwriting loss, which again reflected on its
combined ratio that averaged 105.3% over the 2008 to 2011 period.
Fitch can continue with its current investment grade rating if
the company meets certain criteria, such as leverage ratio below
20%; leading property and casualty subsidiary's RBC ratio
remaining greater than 375% and life company's RBC ratio
remaining greater than 350%. Cincinnati Financial's dividend and
interest payment obligations are around $300 million at present.
The rating agency expects the company to at least keep this much
amount of cash equivalents in hand so that it can stay away from
any payment default.
Fitch is likely to take negative rating action if the Cincinnati
Financial continues to report combined ratio of more than 105%
and low balance sheet strength. Also, the company's high exposure
to cat losses may stop the rating agency from taking a positive
Notwithstanding the negatives, the company might see a positive
rating action if it is able to show a strong underwriting
performance amid the soft property and casualty market.
The Chubb Corp.
) also carries a IDR of 'AA-' and IFS of 'AA'. Another peer,
The Travelers Companies Inc.
) carries an IDR of 'A+' and IFS of 'AA.' Both of the companies
carry a stable outlook.
Cincinnati Financial currently retains a Zacks #2 Rank, which
translates into a short-term Buy rating. However, we maintain a
long-term Neutral recommendation on its shares.