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Fitch Affirms CINF, Holds It Stable

CINF TRV CB

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Earlier this week, leading rating agency Fitch ratings, took a rating action on the U.S. property and casualty insurer Cincinnati Financial Corporation (CINF - Analyst Report). The rating agency confirmed the issuer default rating (IDR) as well as senior debt rating of Cincinnati at ‘A-‘ and ‘BBB+’ respectively.

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.  

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 rating action.

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.

Cincinnati’s peer, The Chubb Corp. (CB - Analyst Report) also carries a IDR of ‘AA-‘ and IFS of ‘AA’. Another peer, The Travelers Companies Inc. (TRV - Analyst Report) 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.

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