Fitch Downgrades Cincinnati Financial Corporation; Outlook Stable

The rating action is primarily driven by CFC's unfavorable underwriting performance within its property/casualty operations in 2008 and thus far in 2009, on an absolute basis and relative to comparably rated peers. Through the first six months of 2009, CFC posted a GAAP combined ratio of 112.1% which includes 11.6 points, or $171 million of catastrophe losses, partially offset by 1.2 points, or $18 million of favorable reserve development on prior accident years.

CFC's recent underwriting results highlight the company's limited amount of geographic diversification relative to peers in the prior rating category. The company's top five states (Ohio, Illinois, Indiana, Pennsylvania, and Georgia) accounted for almost 48% of earned premiums in 2008. This concentration results in a heightened sensitivity to competitive conditions and high catastrophe exposure to Midwest storm activity. The action reflects a somewhat more conservative perspective taken by Fitch than in the past with respect to concentration risk and the higher potential level of earnings volatility than its peers in the prior rating category.

Positively, Fitch believes CFC's capitalization remains strong. At June 30, 2009 policyholders' surplus (PHS) at the property/casualty operating subsidiaries declined 4% to $3.2 billion. Operating leverage, as measured by net written premium to PHS remains low at 0.93 times (x). Fitch notes that CFC holds over $1.0 billion in cash and investments at the holding company which could be downstreamed to the insurance subsidiaries should capitalization deteriorate in 2009.

Fitch views favorably the number of steps CFC has taken to rebalance its investment portfolio and reduce earnings volatility going forward. The company's exposure to financial sector common stocks now represents approximately 1% of the entire equity portfolio down from 12% at year-end 2008 and 56% at year-end 2007. Common stock to PHS was down to 53% at year-end 2008 from 86% at year-end 2007.

Fitch believes CFC's high-quality bond portfolio provides ample liquidity to meet its policyholder and debt servicing obligations. At June 30, 2009 the company had approximately $254 million of cash and cash equivalents. Additionally, the company has access to $225 million in bank lines of credit, with $49 million outstanding. The company's financial leverage, as measured by debt to total capitalization, remains low at 16.8%.

Ohio-based CFC is a publicly traded financial services company with a sizable property and casualty insurance operation, as well as a smaller life insurance operation and lease/finance company. At June 30, 2009, CFC reported consolidated assets of $13.5 billion and shareholders' equity of $4.1 billion.

Fitch has downgraded the following ratings with a Stable Rating Outlook:

Cincinnati Financial Corporation

--IDR to 'A-' from 'A';

--$392.249 million 6.92% fixed-coupon senior debentures due May 15, 2028 to 'BBB+' from 'A-';

--$27.683 million 6.90% fixed-coupon senior debentures due May 15, 2028 to 'BBB+' from 'A-';

--$375 million 6.125% fixed-coupon senior notes due Nov. 1, 2034 to 'BBB+' from 'A-'.

The Cincinnati Insurance Company

The Cincinnati Casualty Company

The Cincinnati Indemnity Company

--IFS to 'A+' from 'AA-'.

The Cincinnati Life Insurance Company

--IFS to 'A+' from 'AA-'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings, New York 
Tana M. Higman, +1-312-368-3122 (Chicago) 
James B. Auden, +1-312-368-3146 (Chicago) 
Cynthia J. Crosson, +1-212-908-0863 
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