Cincinnati Revises Cat Loss Est - Analyst Blog
14 June 2011 - 10:45PM
Zacks
Yesterday, property and casualty insurer Cincinnati
Financial Corp. (CINF) made an upward revision to its
preliminary estimate of catastrophe losses (cat losses) from
property damages caused by adverse weather conditions that
continued into May.
After the revision, the company expects pre-tax cat losses in
the range of $240–$290 million. The revised range is $90 million
north of the preliminary estimate announced during mid-May, which
reflected only the April storms in the southern states of the
U.S.
Cincinnati stated that catastrophes had affected its second
quarter loss ratio by an average of 8.5% over the past decade.
However, the impact of the recent catastrophes on the second
quarter results will be approximately 33–40% (up from 21–28%),
beating the historical average.
During the first quarter, Cincinnati’s loss ratio was adversely
affected by 5.5%, including 1.1% from the Japan earthquake.
However, in comparison, cat losses contributed only 2.1% to the
first quarter 2010 loss ratio. The first quarter 2011 operating
income was lowered by 10 cents per share year over year owing to
substantial cat losses.
For the Commercial Lines, the largest contributor to
Cincinnati’s business, the first quarter of 2011 was an unusual
one, with 50% higher cat loss ratio compared with the annual
average over the past decade. The ratio was even above the cat loss
ratio recorded in each of the years over the decade.
However, Cincinnati’s use of reinsurance cover will limit its
loss as the company will be reimbursed for losses exceeding $45
million. Its geographic concentration ties its performance to
business, economic, environmental and regulatory conditions in
certain states. Though the company markets its property casualty
insurance products in 35 states, its business is significantly
concentrated in the catastrophe-prone Midwest region, which keeps
its earnings under pressure.
Cincinnati relies on more than one modeling firm to estimate its
exposure to catastrophe losses. One such firm is RMS, which has
made a public revision to its model. The new version has increased
estimated losses from hurricanes for Cincinnati, as well as for
much of the industry.
The top-line growth at Cincinnati Financial has been sluggish
for the past five years, with an average revenue growth rate of
mere 2% since 2004. The decline was completely due to weak markets
and economic pressures. The lingering effects of a soft insurance
market pricing are expected to influence growth rates and earned
premium levels in 2011 or perhaps later, depending on when the
insurance market conditions improve. These conditions continue to
weaken loss ratios and hamper the near-term profitability. The
Commercial Lines, which accounted for 73% of 2010 net written
premiums, is still experiencing a strong competition in the market,
along with pricing decline in low single digits and reduced insured
exposure levels that include negative effects on audit premium.
However, net written premiums were down $26 million or 1% in 2010,
reflecting an improvement from the 6% decline in 2009. We expect
the segment to remain somewhat weak until the economy strengthens
significantly.
We maintain a Neutral recommendation on the shares of Cincinnati
Financial. The stock carries a Zacks #3 Rank (near-term Hold
recommendation), indicating no clear directional pressure on the
shares. Cincinnati competes with Harleysville Group
Inc. (HGIC), and
Selective Insurance Group Inc.
(SIGI), both of which have
significant market presence in Midwestern United States.
CINCINNATI FINL (CINF): Free Stock Analysis Report
HARLEYSVILLE GP (HGIC): Free Stock Analysis Report
SELECT INS GRP (SIGI): Free Stock Analysis Report
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