S&P Affirms Cincinnati Insurance and Subsidiaries, But Retains Negative Outlook

September 16, 2004

Standard & Poor’s Ratings Services affirmed its “AA-” counterparty credit and financial strength ratings on Cincinnati Insurance Co., Cincinnati Casualty Co. and Cincinnati Indemnity Co. (CIC).

At the same time, Standard & Poor’s affirmed its “A” counterparty credit and senior unsecured debt ratings on Cincinnati Financial Corp. The outlook remains negative.

S&P said the ratings are based on the group’s strong, competitive business position, which is afforded by its extremely loyal and productive agency force, high business persistency, extremely strong capitalization, and high degree of financial flexibility.

S&P said the negative outlook reflects the group’s underperformance in its homeowners’ business, which hampered results in recent years, aggressive investment strategy, relatively slow, deliberate 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, because management’s steady approach to the marketplace, aggressive position in stocks and its catastrophe exposure could affect the quality of its strong capital.

On Aug. 26, 2004, Cincinnati Financial Corp. announced that the Ohio Department of Insurance approved the transfer of $1.6 billion in investment securities to its lead property/casualty unit, the Cincinnati Insurance Co., a move related to its previously disclosed application for relief under the Investment Company Act of 1940. This transfer results in a 36.4-percent pro forma ratio of investment securities held at the holding company to total holding-company-only assets as of June 30. However, total assets are unchanged because of the correlating increase in net assets of subsidiaries.

Although S&P said it expects that CIC should continue to perform well in its largest business segment, commercial lines, but will lag its peers in personal lines profitability over the near term. This is partially a result of slower than expected conversion from multi-year homeowner policies and lack of scale in the company’s personal lines business, the ratings firm said.

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