Cincinnati Financial Corp.’s (CINF) second-quarter net income of 26 cents per share came ahead of the Zacks Consensus Estimate of 22 cents. Results were significantly better than the prior-year loss of 3 cents per share. Earnings were aided by an increase in investment income, coupled with a decline in property and casualty underwriting loss.
Total revenue for the quarter remained almost unchanged at $878 million from $874 million in the prior year quarter, but lower than the Zacks Consensus Estimate of $898 million.
After-tax investment income increased 8% year over year to $98 million. Book value declined 2.4% from the prior-year quarter to $29.13 per share as of June 30, 2010. The value creation ratio, which factors in growth in book value as well as dividend contribution, deteriorated to -1.1% from 8.4% in the prior-year quarter. For the five-year period from 2010 through 2014, management continues to target an average value creation ratio of 12% to 15%.
Segment Results
Strong retention ratio coupled with modest pricing declines (1% during the first half of 2010) led to a 2% year-over-year increase in net premiums written to $532 million in the Commercial Insurance segment. There was a marked improvement in underwriting loss to $9 million from $61 million in the prior-year quarter. Combined ratio improved 920 basis points year over year to 101.7%, due to favorable prior-year reserve release and fairly stable current accident year results.
Strong new business and pricing increases led to a 7% year-over-year increase in net written premiums to $204 million in the Personal Lines segment. Combined ratio improved 980 basis points to 123.4% from 133.2% in the prior-year quarter, due to low catastrophe losses.
Earned premiums in the Life Insurance segment increased 8.0% from the prior-year quarter to $40 million. The growth was mainly derived from higher premiums from Universal Life Insurance products.
Cincinnati Financial remains well capitalized at the insurance company level with reference to the minimum risk-based capital requirement. Its reliance on debt as a source of capital has been low. It targets a debt-to-total-capital ratio of less than 20%. During the quarter, debt-to-capital ratio stood at 15.0%, unchanged from the 2009 year-end levels.
Cincinnati Financial’s Commercial Lines’ prime premium contributor has been suffering from soft market conditions. Not much improvement is expected here in 2010. However, its Personal Lines segment is expected to clock a modest positive growth with strong business retention and rate increases evidenced.
We remain cautious on the investment portfolio with an above-average equity concentration. However, new agency appointments and increased footprint will win new business. Low leverage, solid capital and consistent cash flow generation are other positives. Although value creation through business growth will remain subdued, shareholders will benefit by dividend increases and share repurchases over the near term.
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