U.S. property and casualty insurer
Cincinnati Financial Corp.
) expects its bottom line result to suffer on account of cat losses
incurred during the quarter, though the top line is expected to
perform comparatively well.
The company said that it expects second quarter 2012 combined
ratio to be in the range of 108% - 112%. Combined ratio, which
represents an insurer's underwriting profitability, calculates the
money spent on claims and expenses as a percentage of premium. A
ratio above 100% signifies underwriting loss. Thus, the lower the
ratio, the better.
The insurer expects to incur pretax catastrophe losses of
approximately $140 million - $160 million, primarily as a result of
two storms in the Midwest and Mid-Atlantic states. These losses are
expected to add approximately 17% -19% to the quarter's combined
ratio, which are above the historical range. On a five-year average
basis, the company has witnessed a weightage of approximately 16.9%
on account of cat losses in second quarter.
Despite a tepid bottom-line performance expectation for second
quarter 2012, Cincinnati disclosed that it expects the top line to
record growth on account of an 18% increase in net premiums
written. This growth comes primarily on the back of several
growth initiatives undertaken by the company in the recent past,
which includes expansion of its marketing capabilities, appointment
of new agents, pricing precision using predictive analytics along
with improvements in internal processes.
Cincinnati also made a disclosure about its investment
portfolio. Investment income is an important component of
Cincinnati Financial's revenues and net income. Cincinnati's
investment portfolio contains a significant concentration of
equities forming approximately 23% of the total investment
portfolio, compared to its peers
Travelers Companies Inc.
Hanover Insurance Group, Inc.
), which hold 10% or lesser equity investments. Its largest equity
shareholder continues to be
) constituting approximately 1.1% of the investment portfolio.
Cincinnati's high equity concentrated investment portfolio is
like a double-edged sword. While its high quality dividend paying
stocks help to boost investment income, the inherent volatility
associated with the stock markets may cause the company's book
value to decline.
Cincinnati is scheduled to release its second quarter 2012
earnings on July 26, 2012, after markets close. The Zacks Consensus
Estimate of earnings is $1.25 per share, indicating a
year-over-year decline of 7.2%.
Cincinnati currently retains a Zacks # 3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we are
also maintaining our long-term Neutral recommendation on the
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