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As a part of its annual rating review process, rating agency A.M. Best Co. took rating action on Cincinnati Financial Corp. (CINF - Analyst Report) and its operating subsidiaries. The rating agency has reiterated the issuer credit rating (ICR) of “a-“ on the company.

Along with this, the rating agency has affirmed ICR of “aa-“ as well as the financial strength rating (FSR) of “A+” to Cincinnati Insurance Companies (“CIC”).

A.M. Best considered CIC’s adequate risk adjusted capitalization, favorable operating performance and significant market diversification while taking the rating action. Given Cincinnati’s agent-centered business model, its relationship with local insurance agencies is its biggest strength.

A.M. Best also acknowledges significant efforts made by CIC in implementing technology projects to improve critical efficiencies and streamline processes for the agencies, allowing it to win an increasing market share. Another positive factor is management’s reserving philosophy that has benefited earnings for the past several years through favorable development of loss reserves on prior accident years.

However, A.M. Best is cautious over the company’s geographic concentration in the Midwest region and Southeast regions, which are prone to catastrophes. Due to this, the company’s operations are greatly exposed to catastrophe events, which will keep the earnings under pressure.

The rating agency is concerned over weak results from the company’s workers’ compensation and homeowner’s line of business. Its workers’ compensation is witnessing deteriorating volumes. In the last three years, this business has lost significant share due to the deteriorating labor market.

Alongside, A.M. Best affirmed the FSR of A and the ICR of “a+” to The Cincinnati Life Insurance Company with a stable outlook. The rating affirmations comes on the back of favorable risk adjusted capitalization, improved operating performance and a strong investment portfolio of this business line. The rating agency also views favorably the company’s emphasis on its core lines of business while doing away with higher risk annuities business.

However, headwinds being faced Cincinnati Life include a low interest rate environment resulting in low investment yields, continued reserving requirements causing strain on capital and the unit’s low earnings contribution to the consolidated income.

Another subsidiary, The Cincinnati Specialty Underwriters Insurance Company (CSU), also got an FSR of “A” and ICR of “a”. This rating action on CSU reflects the segment’s solid capitalization and financial support from Cincinnati Financial.  However, the current soft market and its foray into providing excess and surplus coverage pose business uncertainties.  However, a decline in the expense ratio – as the company achieved operating scale through increased premium volume – provides relief to an extent.

All the above stated ratings carry a stable outlook indicating that Cincinnati Financial is experiencing stable financial and market trends and that there is a low likelihood of change in rating over an intermediate period.

Peers Chubb Corp. (CB - Analyst Report) and The Travelers Companies, Inc. (TRV - Analyst Report), also carry an investment grade ratings from A.M. Best.

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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