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Cincinnati Financial Exceeds

Zacks Equity Research

Cincinnati Financial Corp. (CINF) reported first quarter 2012 operating earnings of 48 cents per share, ahead of the Zacks Consensus Estimate of 42 cents per share. Earnings were 45% higher year over year. The earnings outperformance came on the back of higher premiums in the Commercial, Personal and Excess and Surplus lines.

Revenue for the quarter stood at $986 million, up 6% year over year, primarily led by higher earned premiums. After-tax investment income remained flat at $99 million.

Total benefits and expenses increased 2.3% year over year to $874 million due to higher, insurance loss and benefits, underwriting expense and acquisition expense.

Segment Results

The Commercial Lines Insurance segment recorded written premium of $626 million, up 6% from the prior-year quarter, reflecting growth in renewal business as well as new businesses. Lower loss and loss expenses led to an increase in underwriting profit to $34 million, in contrast to an underwriting loss of $22 million in the prior-year quarter. Combined ratio, a measure of insurer’s profitability, improved 1010 basis points year over year to 94.2% owing to lower catastrophe losses.

Premiums written in the Personal Lines Insurance segment increased 12.0% year over year to $193 million, aided by an increase in insurance pricing for both new businesses and renewals.  Despite a higher top line, the segment posted underwriting loss of $22 million, far wider than the loss of $3 million suffered in the year-ago quarter.

Premiums written in the Excess and Surplus Lines Insurance segment amounted to $24 million, up 33% year over year. The growth was largely driven by first-time renewal of many accounts and average renewal price increases in high single-digit range.

Earned premiums in the Life Insurance segment increased 11.0% year over year to $41 million, on the back of an increase in Term life insurance premium as well as Universal life insurance.

Annuity premium declined 72% year over year to $16 million.

Book value per share, a measure of net worth, was up 3% sequentially to $32.07 as of March 31, 2012.

Our Take

Cincinnati Financial recorded an average performance during the first quarter of 2012. We believe its Commercial Lines segment will remain under pressure due to stiff competition and a weak pricing environment, although there is a moderate improvement in business.

The company is likely to witness limited investment growth owing to regular low yields for investment options. However, management is appointing agencies and expanding the product line to offset the decline in business. Its Personal Line is witnessing a gradual improvement in business conditions.

The Life segment is also performing favorably. Moreover, low leverage, solid capital, consistent cash flow generation, share repurchases and consistent dividend increases continue to act as positives for the company. However, we expect pressure on the top line until the soft insurance market cycle reverses fully.

Cincinnati Financial closely competes with The Chubb Corp. (CB), The Travelers Companies Inc. (TRV) and Selective Insurance Group Inc. (SIGI). The company currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. Considering the slowly improving insurance market, we are maintaining our long-term Neutral recommendation on the shares.

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