We are maintaining our Neutral recommendation on the shares of Cincinnati Financial Corp. (CINF) prior to the release of its third quarter earnings, due late October.
Our recommendation is based on the gradually improving Commercial Lines, Personal Lines and Excess and Surplus Lines business. However, the continued low interest rate environment and the lack of a complete reversal in the insurance pricing cycle keeps us on the sidelines.
Cincinnati Financial’s Commercial Lines business is steadily witnessing improving market conditions after several years of significant competitive pressure. The improvement comes on the back of company’s initiatives as well as a gradual increase in insurance rates. We expect moderate top-line growth, as competitive pressure will somewhat offset moderate price increases.
Cincinnati Financial’s Personal Line segment has been underperforming over the past few years. However, with new business gains, strong retention levels and rate increases, the segment is back on track witnessing premium growth. Going forward, with an improvement in the personal business market, the company will see increased premium growth.
The company’s Excess and Surplus line is also performing well. Despite a soft market environment, the segment has been able to achieve rate increases in the last 22 months. We expect this trend to continue, given the improving excess and surplus lines market.
A strong relationship with its agencies also bodes well for Cincinnati Financial. The company made 133 new agency appointments during fiscal 2011 and expects to add 130 agencies in 2012. We believe that the increasing number of agencies will drive premium growth in the future.
However, Cincinnati Financial faces some headwinds in the form of a low interest rate environment and exposure to catastrophes. While the low interest rates have curbed investment income, these have also adversely affected the company’s Life Insurance business, which sells interest sensitive products.
Moreover, Cincinnati Financial’s geographic concentration ties its performance in the Midwest region, which is prone to catastrophes. Due to this, the company’s operations are prone to catastrophe losses, imparting volatility to the earnings.
Nevertheless, Cincinnati Financial’s solid capital position with low reliance on debt gives it an inherent strength. It also remains a favorite with value investors with its track record of increasing dividend for the past 51 years.
Based in Fairfield, Ohio, Cincinnati Financial closely competes with Harleysville Group Inc. and Selective Insurance Group Inc. (SIGI). The company currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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