A.M Best Revises CINF Ratings - Analyst Blog
December 28 2011 - 11:26AM
Zacks
As a part of its annual rating review, rating agency A.M. Best
declared its rating action on Cincinnati Financial
Corp. (CINF) and its operating subsidiaries. The agency
has downgraded the issuer credit rating (“ICR”) as well as the debt
rating of Cincinnati Financial by one notch to “a-“ from “a”. It
also downgraded the issuer credit rating of the Cincinnati
Insurance Companies (“CIC”) to “aa-“ from “aa” while
affirming the financial strength rating (“FSR”) of “A+”.
A.M.Best made a downward revision of the ICR of CIC on account
of the weak operating results posted by the company over the recent
years. CIC’s geographic concentration ties its performance to
business, economic, environmental and regulatory conditions in
certain states. Though the company markets its property casualty
insurance products in 39 states, its business is significantly
concentrated in the Midwest and Southeast regions, which are prone
to catastrophes.
Moreover, CIC’s another line of business, worker’s compensation,
is witnessing deteriorating volumes. In the last three years,
workers’ compensation has lost share due to the deteriorating labor
market. As employment growth stalls, workers’ compensation risk
exposure reduces. Consequently, the need for higher coverage
decreases.
Nevertheless, A.M. Best has taken into consideration CIC’s
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.
A.M.,Best also acknowledged the significant strides made by CIC
in implementing technology-based projects to improve critical
efficiencies and streamline processes for the agencies, allowing it
to increase market share. Another positive factor is management’s
reserving philosophy that has benefited earnings for the past
several years from the favorable development of loss reserves on
prior accident years.
Alongside, A.M.Best also affirmed the (FSR) of A and the (ICR)
of “a+” on The Cincinnati Life Insurance Company with a stable
outlook. The rating affirmations of Cincinnati Life comes following
its favorable risk-adjusted capitalization, improved operating
performance and a strong investment portfolio. The rating agency
also has a favorable view of the company’s emphasis on its core
line of business while doing away with the higher risk annuities
business.
Cincinnati Life faces its share of challenges in the form of a
low interest rate environment which translates in low investment
yields, continued reserving requirements which put pressure on the
capital and the unit’s limited contribution to the consolidated
income.
The FSR of “A” and ICR of “a” for The Cincinnati Specialty
Underwriters Insurance Company (CSU), another subsidiary of CIC,
was also affirmed. This rating action on CSU reflects its solid
capitalization and financial support from Cincinnati
Financial. However, the current soft market and its foray
into providing excess and surplus coverage pose risks to the
business.
All the ratings carry a stable outlook. This indicates that the
company has been experiencing stable financial and market trends as
well as there is a low likelihood of the company's rating change
over an intermediate period. However, we believe that macroeconomic
concerns relating to the euro zone contagion, sustained low
interest rate environment, a continued high level of unemployment
and a weak U.S. economy will influence the company’s ratings over
the near term.
Cincinnati Financial closely competes with Harleysville
Group Inc. (HGIC) and Selective Insurance Group
Inc. (SIGI). The company currently retains a Zacks # 3
Rank, which translates into a short-term Hold rating. However,
considering weak macroeconomic conditions, we are maintaining our
long-term Underperform recommendation on the shares.
CINCINNATI FINL (CINF): Free Stock Analysis Report
HARLEYSVILLE GP (HGIC): Free Stock Analysis Report
SELECT INS GRP (SIGI): Free Stock Analysis Report
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