The ratings on CINF's property/casualty companies (collectively referred to as CIC) are based on CIC's strong, competitive business position, which is afforded by its extremely loyal and productive agency force; high business persistency; strong level of capitalization; and extremely strong financial flexibility.
Outlook
Standard & Poor's revised the outlook because of the group's poor experience in its homeowners business, which adversely affected results in recent years; aggressive investment strategy; relatively slow response to changing markets; and volatility related to some geographic concentration that exposes the company to weather-related and catastrophe losses. The continued long-term success of CIC's business model partially depends on market conditions remaining relatively stable, since management's steady approach to the marketplace and aggressive position in stocks and catastrophe exposure could affect the quality of its strong capital.
Standard & Poor's believes CIC's operating performance will improve somewhat, as CIC should continue to perform well in its largest business segment, commercial lines. The group has taken rate increases and is implementing Web-based systems for agents and claims representatives. In addition, CIC is taking other underwriting actions to improve personal lines profitability, including limiting the offering of multi-year policies, but it still will lag its peers in personal lines. Progress could be tempered by its sizable position in the equities markets, adverse regulatory and judicial decisions, and natural and man-made catastrophes.
Capitalization will remain strong at 140%-165%. Growth will continue to be strong at 11%-13%, reflecting a combination of rate increases and new business.
Major Rating Factors
-- Very strong distribution channel. CIC's strong, competitive position in the standard lines property/casualty market is largely a function of its well-established, long-term agency relationships. An understanding of the needs of independent agents, a very favorable contingent commission structure, and competitive products and services have resulted in an extremely loyal and productive distribution channel. This has allowed CIC to report strong premium growth and strong historical operating performance relative to peers.
-- Low-cost infrastructures. CIC has adopted a very successful operating strategy, with underwriting and claims representatives working from their homes and living in the local markets in which they serve, eliminating the need for branch offices. This strategy allows the company to enjoy extremely low operating expenses relative to competitors and use this advantage to pay its agents very good commissions.
-- Strong capitalization. CIC's capitalization (statutory surplus of $2.3 billion at year-end 2002 and $2.5 billon as of Sept. 30, 2003) is considered strong on a risk-adjusted basis. However, it is down from its extremely strong level in 2000 and prior years for several reasons, including statutory codification in 2001 that reduced capitalization by $400 million, lower operating earnings, and unrealized losses on the investment portfolio. CIC's capital adequacy ratio, based on Standard & Poor's capital adequacy model for pro