Cincinnati Financial (CINF) Rides on Premiums Amid Cat Loss

Cincinnati Financial Corporation’s CINF agent-centered business model, improving premium, industry-leading margins, solid capital position and effective capital deployment poise it well for growth.

The company has a decent surprise history. It surpassed estimates in three of the last four quarters and missed in one, with the average surprise being 2.82%.

Sustained solid operational performance at Commercial Lines and Personal Lines segments poise CINF for long-term growth.

Premium growth at Cincinnati Financial, one of the top 25 U.S. P&C insurers, outperforms the industry average. Premium growth initiatives, price increases and a higher level of insured exposure should help it retain the momentum. Cincinnati Financial expects property-casualty premium to grow 8% in 2022.

Its agent-centric business model, expansion of marketing and service capabilities with a focus on high-net-worth clients and reinsurance assumed through Cincinnati Re to diversify risk should continue to drive premium improvement.

Predictive analytics to improve pricing precision while leveraging local relationships with its agents bodes well for growth.

However, CINF is exposed to catastrophe losses that induce underwriting volatility. Cincinnati Financial expects to maintain a GAAP combined ratio in the low to mid-90% range in 2022.

The company has been witnessing an increase in expenses over the past many years due to a rise in insurance loss and policyholder benefits as well as underwriting, acquisition and insurance expenses, resulting in margin contraction.

Nonetheless, Cincinnati Financial has a solid balance sheet with high liquidity and low leverage. The insurer boasts 33 years of favorable reserve development.

Banking on operational excellence, the insurer has a stellar track record of hiking dividends for 62 straight years as well as paying special dividends. The company increased dividends at an eight-year CAGR (2015-2022) of 5.2%.

The insurer targets a value creation ratio of 10% to 13% over the next five years. Sustained solid operational performance should help it achieve the target.

Some Key Industry Players

Some key stocks from the insurance industry include Berkshire Hathaway (BRK.B), American Financial Group AFG and Arch Capital Group ACGL.

Berkshire Hathaway delivered a four-quarter average earnings surprise of 17.55%. It is one of the largest property and casualty insurance companies measured by premium volume. The company should continue to benefit from its growing Insurance business as well as its Manufacturing, Service and Retailing, and Finance and Financial Products segments. Continued insurance business growth fuels an increase in float, drives earnings and generates maximum return on equity. With Warren Buffett at its helm, Berkshire continues to create tremendous value for shareholders.

American Financial delivered a four-quarter average earnings surprise of 37.09%. American Financial, a niche player in the P&C markets, will benefit from the strategic acquisitions, improved pricing, higher renewal ratio, solid capital position and effective capital deployment. AFG estimates earnings of $10.75 to $11.75 per share in 2022.

Arch Capital delivered a four-quarter average earnings surprise of 33.64%. New business opportunities, rate increases, growth in existing accounts and solid capital position poise it well for growth.

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