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Cincinnati Beats Yet in Red

Zacks Equity Research

Cincinnati Financial Corp. (NasdaqGS:CINF - News) has reported second quarter 2011 operating loss of 57 cents per share, narrower than the Zacks Consensus Estimate of a loss of 64 cents. Earnings, however, contrasted with the year-ago quarter’s operating profit of 26 cents. Wider-than-expected losses were primarily attributable to high catastrophe incidence during the quarter.

Revenue for the quarter stood at $975, up 11% year over year. After-tax investment income at Cincinnati inched up 1% year over year to $99 million. This growth was driven by a large part of dividend-paying stocks in the investment portfolio, partly mitigated by the current low-interest rate environment.

Combined ratio shot up drastically by 2900 basis points year over year to 136.6%, led by higher-than-average catastrophe loss (cat loss) incidence during the quarter. Cincinnati’s business concentration in the Midwest U.S. makes it prone to high cat loss incidence. A combined ratio of more than 100% implies an underwriting loss.

Segment Results

The Commercial Lines Insurance segment recorded earned premium of $533 million, down 1% from the prior-year quarter. Higher loss and loss expenses led to an underwriting loss of $128 million, significantly wider than a loss of $10 million recorded in the year-ago quarter.

Combined ratio deteriorated 2250 basis points year over year to 124.2% owing to higher catastrophe losses.

Earned premium written in the Personal Lines Insurance segment inched up 1.0% year over year to $180 million, aided by strong new business, higher renewal and pricing hikes. The segment, however, incurred an underwriting loss of $142 million versus a loss of $40 million in the year-ago quarter. High loss and loss expenses, led by extreme cat losses, accounted for the underwriting disaster. Combined ratio deteriorated 5580 basis points to 179.2%.

Earned premiums in the Life Insurance segment increased 8.0% year over year to $43 million, on the back of an increase in Term life insurance premium and other life insurance annuity as well as disability income products, partly offset by a decline in Universal life insurance premium. Operating profit grew 20% year over year to $12 million.

After-tax investment income upped a modest 1.0% year over year to $99 million due to higher invested assets, partially offset by lower yields.

As of June 30, 2011, book value per share clocked a modest 6% hike year over year to $31.01. As of December 31, 2010, book value stood at $30.91 per share. The value creation ratio, which factors both book value growth and dividend contribution into it, improved to 0.1% from a negative 1.1% in the last year quarter.

During May, the rating agency Fitch Ratings affirmed an “A+” Insurer Financial Strength  (:IFS) ratings, and an “A-” Issuer Default Ratings (:IDR) for Cincinnati, with a stable outlook.

Cincinnati has renewed its reinsurance coverage for the rest of 2011, in order to manage its catastrophe risk, reduce its cat loss claims and keep its investment portfolio intact.

We maintain a Neutral recommendation on the shares of Cincinnati Financial. Cincinnati competes with Harleysville Group Inc. (NasdaqGS:HGIC - News), and Selective Insurance Group Inc. (NasdaqGS:SIGI - News), both of which have significant market presence in Midwestern United States.

CINCINNATI FINANCIAL (CINF): Read the Full Research Report

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