Cincinnati Financial Corp. (CINF) has reported third quarter 2011 operating earnings of 13 cents per share, in line with the Zacks Consensus Estimate, but down 62% year over year. Year-over-year earnings declined due to high catastrophe incidence during the quarter.
Revenue for the quarter stood at $944, down 12% year over year. After-tax investment income upped a modest 1.0% year over year to $98 million. This growth was driven largely by dividend-paying stocks in the investment portfolio, partly mitigated by the current low-interest rate environment.
Total benefits and expenses increased 9.8% year over year to $933 million led by higher insurance losses and underwriting expense.
Segment Results
The Commercial Lines Insurance segment recorded earned premium of $557 million, up 2% from the prior-year quarter, reflecting growth in both renewal and new business written premiums. Higher loss and loss expenses led to an underwriting loss of $44 million, significantly wider than a loss of $18 million recorded in the year-ago quarter. Combined ratio deteriorated 450 basis points year over year to 107.9% owing to higher catastrophe losses.
Earned premium written in the Personal Lines Insurance segment increased 6.0% year over year to $193 million, aided by strong new business, higher renewal and pricing hikes. The segment, however, incurred an underwriting loss of $37 million versus a loss of $7 million in the year-ago quarter, led by high cat losses.
The Excess and Surplus Lines Insurance segment recorded earned premium of $19 million up 36% 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. Combined ratio improved 3620 basis points year over year due to improved current accident year loss and loss expense ratios and net favorable reserve development on prior accident years.
Earned premiums in the Life Insurance segment increased 5.0% year over year to $43 million, on the back of an increase in Term life insurance premium.
Book value per share, a measure of net worth declined 4% year over year to $29.54. The value creation ratio, which factors both book value growth and dividend contribution deteriorated to negative 3.4% from positive 7.1% in the last year quarter.
Cincinnati has had an average performance during the quarter. We believe its Commercial Lines segment will remain under pressure due to stiff competition and weak pricing environment, although the decline in business is moderating. The company will expectedly face limited investment growth due to continued low yields for investment options.
However, management is appointing agencies and expanding product offerings to offset the business decline. Its Personal Line is witnessing improving business conditions. The Life segment is also performing favorably.
Moreover, low leverage, solid capital and 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 turns completely.
Thus, we maintain an Underperform recommendation on Cincinnati Financial, which closely competes with The Chubb Corp. (CB), The Travelers Companies Inc. (TRV), and Selective Insurance Group Inc. (SIGI).
CHUBB CORP (CB): Free Stock Analysis Report
CINCINNATI FINL (CINF): Free Stock Analysis Report
SELECT INS GRP (SIGI): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
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