Cincinnati Revises Cat Loss Est - Analyst Blog

Yesterday, property and casualty insurer Cincinnati Financial Corp. (CINF) made an upward revision to its preliminary estimate of catastrophe losses (cat losses) from property damages caused by adverse weather conditions that continued into May.

After the revision, the company expects pre-tax cat losses in the range of $240–$290 million. The revised range is $90 million north of the preliminary estimate announced during mid-May, which reflected only the April storms in the southern states of the U.S.

Cincinnati stated that catastrophes had affected its second quarter loss ratio by an average of 8.5% over the past decade. However, the impact of the recent catastrophes on the second quarter results will be approximately 33–40% (up from 21–28%), beating the historical average.

During the first quarter, Cincinnati’s loss ratio was adversely affected by 5.5%, including 1.1% from the Japan earthquake. However, in comparison, cat losses contributed only 2.1% to the first quarter 2010 loss ratio. The first quarter 2011 operating income was lowered by 10 cents per share year over year owing to substantial cat losses.

For the Commercial Lines, the largest contributor to Cincinnati’s business, the first quarter of 2011 was an unusual one, with 50% higher cat loss ratio compared with the annual average over the past decade. The ratio was even above the cat loss ratio recorded in each of the years over the decade.

However, Cincinnati’s use of reinsurance cover will limit its loss as the company will be reimbursed for losses exceeding $45 million. Its geographic concentration ties its performance to business, economic, environmental and regulatory conditions in certain states. Though the company markets its property casualty insurance products in 35 states, its business is significantly concentrated in the catastrophe-prone Midwest region, which keeps its earnings under pressure.

Cincinnati relies on more than one modeling firm to estimate its exposure to catastrophe losses. One such firm is RMS, which has made a public revision to its model. The new version has increased estimated losses from hurricanes for Cincinnati, as well as for much of the industry.

The top-line growth at Cincinnati Financial has been sluggish for the past five years, with an average revenue growth rate of mere 2% since 2004. The decline was completely due to weak markets and economic pressures. The lingering effects of a soft insurance market pricing are expected to influence growth rates and earned premium levels in 2011 or perhaps later, depending on when the insurance market conditions improve. These conditions continue to weaken loss ratios and hamper the near-term profitability. The Commercial Lines, which accounted for 73% of 2010 net written premiums, is still experiencing a strong competition in the market, along with pricing decline in low single digits and reduced insured exposure levels that include negative effects on audit premium. However, net written premiums were down $26 million or 1% in 2010, reflecting an improvement from the 6% decline in 2009. We expect the segment to remain somewhat weak until the economy strengthens significantly.

We maintain a Neutral recommendation on the shares of Cincinnati Financial. The stock carries a Zacks #3 Rank (near-term Hold recommendation), indicating no clear directional pressure on the shares. Cincinnati competes with Harleysville Group Inc. (HGIC), and Selective Insurance Group Inc. (SIGI), both of which have significant market presence in Midwestern United States.

CINCINNATI FINL (CINF): Free Stock Analysis Report

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