HGIC Harleysville Grp. Inc. (MM)

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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