CINF Stays Neutral - Analyst Blog
March 28 2012 - 9:45AM
Zacks
We are maintaining our Neutral
recommendation on the shares of Cincinnati Financial
Corp. (CINF), to reflect the gradually improving
Commercial Lines, Personal Lines and Excess and Surplus Lines
market. However, the continued low interest rate environment and
the lack of a complete reversal in the insurance pricing cycle
keeps us on the sidelines.
The Commercial Lines business is
gradually witnessing improving market conditions after several
years of significant competitive pressure. The segment has
witnessed top-line growth in fiscal year 2011 with a 3% rise in net
premium, which declined 1% and 26% in 2010 and 2009 respectively.
This improvement came on the back of company initiatives as well as
a gradual increase in insurance rates. The company has implemented
predictive analytics to improve its pricing precision, while
leveraging local relationships with its agents at the same
time. We expect moderate top-line growth, as competitive
pressure will somewhat offset moderate price increases.
Cincinnati’s Personal Line segment
has been underperforming over the past few years. However, with new
business gains, strong retention levels and rate increases that
affected the homeowner line of business in 2009, the segment is
back on track witnessing premium growth. The company’s investments
in pricing precision and technology and new agency appointments are
positively impacting the Personal Lines segment, thus helping it to
produce a narrower loss ratio in that area. Going forward, with an
improvement in the personal business market, the company will see
increased premium growth.
Cincinnati’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 16
months. We expect the trend to continue, given the improving excess
and surplus lines market.
A strong relationship with its
agencies also bodes well for Cincinnati. The company made 133 new
agency appointments during fiscal year 2011 and expects to add 130
agencies during the next fiscal. We believe that the
increasing number of agencies will drive premium growth in the
future.
However, Cincinnati 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, they have also adversely affected the company’s
Life Insurance business, which sells interest sensitive products.
While the U.S. economy is gradually recovering, there is still a
lot of uncertainty surrounding a sustained recovery due to high
unemployment, low GDP, declining home values and the Eurozone
crisis.
Moreover, Cincinnati’s geographic
concentration ties its performance in the Midwest region, which is
prone to catastrophes. As such, the company’s operations are prone
to catastrophe losses, imparting volatility to the earnings.
Nevertheless Cincinnati’s solid
capital position with low reliance on debt gives it an inherent
strength. It also remains a favorite with value investors, given
its track record of increasing dividend for the past 51 years.
Based in Fairfield, Ohio,
Cincinnati Financial closely competes with Harleysville
Group Inc.(HGIC) and Selective
Insurance Group Inc. (SIGI). The company
currently retains a Zacks # 3 Rank, which translates into a
short-term ‘Hold’ rating.
CINCINNATI FINL (CINF): Free Stock Analysis Report
HARLEYSVILLE GP (HGIC): Free Stock Analysis Report
SELECT INS GRP (SIGI): Free Stock Analysis Report
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