Cincinnati Financial Balances Risks and Rewards - Analyst Blog

On June 13, we issued an updated research report on the property and casualty insurer Cincinnati Financial Corp. CINF. The company failed to please investors with its first quarter earnings miss as bad weather played a nuisance.    

But we spare Cincinnati Financial from our negative sentiment, given the insurer's positive earnings surprise in 9 consecutive quarters, barring the recently reported one.

The company is traditionally exposed to loss from weather-related calamities given its business concentration in the catastrophe-prone Midwest region. Yet, it boasts superior operating efficiency courtesy of its niche market position, proven underwriting capability and a vast agent network.

In order to protect itself from weather-related vagaries, Cincinnati Financial has set up claims management and risk management tools, such as predictive modeling which will work to improve pricing and risk selection. These initiatives are expected to gradually improve loss ratios.

The company is also witnessing premium growth from its foray into new markets and increased pricing.

A look at the balance sheet reveals the company's sizable capital profile with cash plus marketable securities of $1.6 billion and a moderate financial leverage ratio of 13.4% as of March 31, 2014.

However, low interest rates expected to continue for some time now, might affect investment income, an important component of Cincinnati Financial's revenues and net income. The company has also experienced investment portfolio problems as a result of equity investments, which constituted a significant portion of its portfolio.

Other Stocks to Consider

Cincinnati Financial carries a Zacks Rank #3 (Hold). Better-ranked players include Allied World Assurance Company Holdings, AG AWH, AmTrust Financial Services, Inc. AFSI and Aspen Insurance Holdings Ltd. AHL, all carrying a Zacks Rank #1 (Strong Buy).