Propery and casulaty insurer, Cincinnati Financial Corp. (CINF)reported fourth quarter 2011 operating earnings of 86 cents per share, substantially ahead of the Zacks Consensus Estimate of 58 cents per share and up 23% year over year. The earnings outperformance came on the back of higher premiums in the commercial, personal and excess and surplus lines, and a lower share count.
Full year 2011 earnings per share came in at 74 cents, significantly higher than the Zacks Consensus Estimated of 47 cents.
Revenue for the quarter stood at $955 million, up 2% year over year. After-tax investment income increased a modest 2.0% year over year to $100 million. This growth was driven largely by dividend-paying stocks in the investment portfolio, partly mitigated by the current low-interest rate environment.
Full year 2011 total revenue increased slightly, 0.8% year over year, to $3.8 billion.
Total benefits and expenses increased 0.9% year over year to $769 million led by higher underwriting expense, acquisition expense partly offset by lower insurance losses.
Segment Results
The Commercial Lines Insurance segment recorded written premium of $546 million, up 4% from the prior-year quarter, reflecting growth in renewal business written premiums and partially offset by lower new business. Lower loss and loss expenses led to an increase in underwriting profit to $92 million from $52 million in the prior-year quarter. Combined ratio improved 670 basis points year over year to 83.9% owing to lower catastrophe losses.
Premium written in the Personal Lines Insurance segment increased 7.0% year over year to $196 million, aided by higher renewals and partly offset by reduced new business. The segment registered an underwriting profit of $1 million versus a loss of $3 million in the year-ago quarter.
The Excess and Surplus Lines Insurance segment recorded written premium of $18 million, up 20% year over year, largely driven by the opportunity to renew many accounts for the first time and average renewal price increases in a low- to mid-single-digit range.
Earned premiums in the Life Insurance segment increased 11.0% year over year to $42 million, on the back of an increase in Term life insurance premium as well as Universal life insurance.
Book value per share, a measure of net worth, inched up 0.8% year over year to $31.16.
Out Take
Cincinnati has had an average performance during the year. We believe its Commercial Lines segment will remain under pressure due to stiff competition and weak pricing environment, although there is a moderate decline in business.
The company is likely to witness limited investment growth owing to regular low yields for investment options. However, management is appointing agencies and expanding product offerings to offset the business decline. Its Personal line is witnessing gradually improving business conditions.
The Life segment is also performing favorably. Moreover, low leverage, solid capital, consistent cash flow generation, share repurchases and dividend increase are among the other positives. However, we expect pressure on the top line until the soft insurance market cycle is complete.
Cincinnati Financial closely competes with The Chubb Corp. (CB), The Travelers Companies Inc. (TRV) and Selective Insurance Group Inc. (SIGI). The company currently retains a Zacks # 5 Rank, which translates into a short-term ‘Strong Sell’ rating. Considering the slowly improving insurance market, we are maintaining our long-term “Neutral” recommendation on the shares.
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