On Aug 30, we downgraded our recommendation on the shares of Cincinnati Financial Corp. ( CINF) to Neutral from Outperform. Though the company posted better than expected second quarter earnings, its greater than average exposure to catastrophes, weak personal lines business and a low interest rate environment keeps us on the sidelines.
Cincinnati Financial’s Personal Lines business has been underperforming over the past few years. The personal lines unit continues to report soft margins. Despite the company’s efforts to apply predictive modeling for pricing and raise rates in some lines, in order to save margins, the segment will not see underwriting profitability in the near term, given the stiff competitive market conditions in this line of business.
Cincinnati Financial also faces some headwinds due to a low interest rate environment.
Moreover, the company’s operations are prone to catastrophe losses, imparting volatility to the earnings.
Counting on the positives, Cincinnati Financial is continuously witnessing improving business conditions in Commercial and Excess and Surplus lines insurance business.
A strong relationship with its agencies also bodes well for Cincinnati Financial.
With respect to earnings results, second quarter 2013 operating earnings of 61 cents per share were significantly exceeding the Zacks Consensus Estimate of 32 cents per share and 3.6 times higher than 17 cents reported in the year ago quarter.
The earnings beat came on the back of increased underwriting profits from each of the three property casualty segments.
Other Stocks to Consider
Besides Cincinnati Financial which is carrying a Zacks Rank #3 (Hold), HCI Group Inc. ( HCI), Everest Re Group Ltd. ( RE) and State Auto Financial Corp. ( STFC) all carrying favorable Zacks Rank #1 (Strong Buy) and look impressive.
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