We are downgrading our recommendation on Cincinnati Financial Corp. (CINF) to Neutral from Outperform, reflecting our concern regarding potential first-quarter earnings drain due to weather-related losses. Cincinnati Financial currently carries a Zacks Rank #3 (Hold).
Why the Downgrade?
We are concerned with weather losses that are expected to adversely affect Cincinnati Financial’s first-quarter 2014 results. Two winter storms in the first week of Jan 2014 will cost an estimated $65 million to $85 million in catastrophe losses in the company’s property casualty segments.
Moreover, low interest rates expected to continue for some time now, might adversely 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.
While weather conditions have always rendered the company’s financial results volatile, we believe efficient execution of Cincinnati Financial’s strategic initiatives will continue to generate returns over time.
Last week, Cincinnati Financial reported fourth-quarter 2013 operating earnings of 72 cents per share, exceeding the Zacks Consensus Estimate of 69 cents. Earnings, however, declined 35% year over year.
The earnings beat came on the back of increased premium income and strong contribution from all of the company’s Personal, Commercial as well as Excess and Surplus lines.
Other Stocks to Consider
Better-ranked property and casualty insurers like Greenlight Capital Re, Ltd. (GLRE), Navigators Group Inc. (NAVG) and RLI Corp. (RLI), all with a Zacks Rank #1 (Strong Buy), are worth considering.
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