Cincinnati Financial Corp.’s(CINF) third-quarter net income of 34 cents per share was three cents shy of the Zacks Consensus Estimate of 37 cents. Results were also lower than 59 cents per share earned in the prior-year quarter. Earnings suffered due to a decline in property-casualty insurance results.
Total revenues increased 6% year over year to $1.1 billion and also came in higher than the Zacks Consensus Estimate of $0.9 million.
After-tax investment income increased 1% year over year to $97 million due to a decline in bond yields, which slowed down the overall return.
Increased fair value of Cincinnati’s investment portfolio led to an increase in book value, which was up 8% from the prior-year quarter to $30.80 per share as of September 30, 2010. The value creation ratio, which factors in both growth in book value and dividend contribution, deteriorated to 9.4% from 15.0% 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 business competition, lower renewal and pricing declines led to 3% year-over-year decrease in net premiums written to $511 million in the Commercial Insurance segment. There was an underwriting loss of $19 million compared with gains of $42 million in the prior-year quarter. Combined ratio deteriorated 1,100 basis points year over year to 103.4% due to lower favorable prior-year reserve release and higher catastrophe losses.
Strong new business and pricing increases led to a 9.0% year-over-year increase in net written premiums to $208 million in the Personal Lines segment. Underwriting loss increased 50% to $6.0 million due to higher loss and underwriting expenses. Combined ratio deteriorated 110 basis points to 103.4% due to the incidence of catastrophe losses.
Earned premiums in the Life Insurance segment increased 24% over the prior-year quarter to $41 million, fueled by higher premiums from Universal life insurance products.
Cincinnatiremains well capitalized at the insurance company level in reference to the minimum risk-based capital requirement. Its debt-to-capital ratio stood at 14.3% at the end of September 2010, down from the 2009 year end level of 15%.
Year till date, Cincinnati made 71 new agency appointments, exceeding the full year’s target of 65. Also, reporting locations increased to 1,524 from 1,463 at the end 2009. We believe that new agency appointments and increased footprint will win new business.
But Cincinnati’s Commercial Lines segment – its prime premium contributor – has been suffering from soft market conditions and sluggish economic environment. We don’t expect much good news from this front over the next quarter.
However, low leverage, solid capital and consistent cash flow generation are other positives. Although business growth will stay subdued, the stock will benefit from dividend increases and share repurchases.
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