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Cincinnati Financial Estimates Cat Loss for Q4; Stock Down

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Cincinnati Financial Corporation (CINF - Free Report) projects pre-tax catastrophe loss between $75 million and $85 million for fourth quarter of 2016. Shares of the company lost about 6.65% to close the trading session at $69.91 on Jan 12.

The insurer noted that the catastrophe loss will lead to deterioration of the combined ratio by 650–750 basis points (bps). This is much higher than a 10-year average of 70 bps dilution the company has experienced in any fourth quarter.

The insurer estimates pre-tax cat loss from Hurricane Matthew to be between $40 million and $65 million in the fourth quarter, including a net effect of $5 million to $10 million from its reassurance assumed operation. This apart, the company expects catastrophe losses stemming from wildfire and storm in Gatlinburg, TN to be about $55 million. Commercial lines insurance and personal lines insurance will bear the brunt of the loss equally.

As a property and casualty insurer, Cincinnati Financial remains exposed to losses from natural disasters. This in turn adversely affects its underwriting results. The cat loss incurred will weigh on underwriting profitability and combined ratio in the fourth quarter. Cincinnati Financial expects combined ratio between 96% and 98% in the fourth quarter. This is about 300 bps above the combined ratio reported for the first three quarters of 2016 owing to less favorable reserve development on prior accident years. The less favorable reserve development was attributable to higher reserve estimates of losses and loss expenses for commercial casualty line of business as paid loss trends were higher than expected.

Shares of Cincinnati Financial lost 7.95% in the last three months, underperforming the Zacks categorized Property, Casualty and Title Insurance Insurance industry that gained 10.32% in the last three months.



The Zacks Consensus Estimate for Cincinnati Financial’s fourth-quarter earnings is currently pegged at 83 cents, which translates to a year-over-year decrease of 25%. We expect the estimate to move down as analysts incorporate the impact of catastrophe loss.

Cincinnati Financial is scheduled to release fourth-quarter results on Feb 8. Our proven model shows that the company is likely to beat on earnings as it has a Zacks Rank #3 (Hold) and Earnings ESP of +6.02%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Given that the property and casualty insurance industry is threatened by the vagaries of catastrophe, insurers regularly come up with their catastrophe loss estimates. The industry is likely to incur between $3 billion and $9 billion in loss in the fourth quarter. Recently, XL Group plc projects pre-tax catastrophe loss of $245 million, while Alleghany Corporation projects fourth-quarter catastrophe loss to be less than million $75 million. Chubb Limited (CB - Free Report) , on the other hand, projects catastrophe loss of $200 million pre tax.

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