We are maintaining our Neutral recommendation on the shares of
Cincinnati Financial Corp.
) prior to the release of its third quarter earnings, due late
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
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.
). 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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