We are maintaining our Neutral recommendation on the shares of
Cincinnati Financial Corp.
) following second quarter earnings release. The company is set to
benefit from the gradually improving Commercial Lines, Personal
Lines and, Excess and Surplus Lines insurance rates. However, the
continued low interest rate environment as well as the lack of a
complete reversal in the insurance pricing cycle keeps us on the
The Commercial Lines business is gradually witnessing improving
market conditions after several years of significant competitive
pressure. The segment has observed top-line growth in 2011 with a
3% rise in net premium, compared with a decline of 1% and 26% in
2010 and 2009, respectively.
This improvement came on the back of the company's 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. We expect
considerate top-line growth in the long run, 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
witnessing premium growth at the current level.
The company's investments in pricing precision and technology,
along with new agency appointments, are positively impacting the
segment, thus helping it to produce a narrower loss ratio. Going
forward, with an improvement in the personal business market, the
company will see increased premium growth.
Cincinnati Financial'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 the trend to continue, since the excess and surplus lines
market is improving.
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 the next
fiscal year. We believe that the increasing number of
agencies will drive premium growth in the future.
However, the company 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.
Moreover, Cincinnati Financial's business is highly concentrated
in the Midwest region, which is prone to catastrophes. Due to this,
the company's operations are heavily exposed 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
Harleysville Group Inc.
Selective Insurance Group Inc.
). The company currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating.
CINCINNATI FINL (CINF): Free Stock Analysis
SELECT INS GRP (SIGI): Free Stock Analysis
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