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U.S. property and casualty insurer Cincinnati Financial Corp. (CINF - Analyst Report) expects its bottom line result to suffer on account of cat losses incurred during the quarter, though the top line is expected to perform comparatively well.
The company said that it expects second quarter 2012 combined ratio to be in the range of 108% – 112%. Combined ratio, which represents an insurer’s underwriting profitability, calculates the money spent on claims and expenses as a percentage of premium. A ratio above 100% signifies underwriting loss. Thus, the lower the ratio, the better.
The insurer expects to incur pretax catastrophe losses of approximately $140 million – $160 million, primarily as a result of two storms in the Midwest and Mid-Atlantic states. These losses are expected to add approximately 17% –19% to the quarter’s combined ratio, which are above the historical range. On a five-year average basis, the company has witnessed a weightage of approximately 16.9% on account of cat losses in second quarter.
Despite a tepid bottom-line performance expectation for second quarter 2012, Cincinnati disclosed that it expects the top line to record growth on account of an 18% increase in net premiums written. This growth comes primarily on the back of several growth initiatives undertaken by the company in the recent past, which includes expansion of its marketing capabilities, appointment of new agents, pricing precision using predictive analytics along with improvements in internal processes.
Cincinnati also made a disclosure about its investment portfolio. Investment income is an important component of Cincinnati Financial’s revenues and net income. Cincinnati’s investment portfolio contains a significant concentration of equities forming approximately 23% of the total investment portfolio, compared to its peers Chubb Corp. (CB - Analyst Report), Travelers Companies Inc. (TRV - Analyst Report) and Hanover Insurance Group, Inc. (THG - Snapshot Report), which hold 10% or lesser equity investments. Its largest equity shareholder continues to be PepsiCo Inc. (PEP - Analyst Report) constituting approximately 1.1% of the investment portfolio.
Cincinnati’s high equity concentrated investment portfolio is like a double-edged sword. While its high quality dividend paying stocks help to boost investment income, the inherent volatility associated with the stock markets may cause the company’s book value to decline.
Cincinnati is scheduled to release its second quarter 2012 earnings on July 26, 2012, after markets close. The Zacks Consensus Estimate of earnings is $1.25 per share, indicating a year-over-year decline of 7.2%.
Cincinnati currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.