Is CINF a missed opportunity?

CINF - Cincinnati Financial Corp

Cincinnati Financial Corporation is a leading financial company providing business, home, auto, and life insurance products. The company operates through three fully owned insurance and financial services subsidiaries as well as two non-insurance subsidiaries. Cincinnati Insurance Company ranks among the top 25 property casualty insurer groups in the U.S.

Cincinnati Financial has over 1,700 agency relationships in more than 2,200 locations across the country. The company’s main business is property casualty insurance which is marketed by independent agencies in 44 U.S. states. The net amount of these agency relationships has increased by 49% since the end of 2009.

Cincinnati Financial Corporation’s business can be divided into five segments: Commercial lines (61% of 2018 premiums), Personal lines (26%), Excess and surplus lines (5%), Life insurance (5%) and Cincinnati Re (3%). Underwriting profit, investment income, and realized investment gains are the company’s main sources of income.

Investment Data

Revenue Growth & Market Exposure

With seven decades of experience, Cincinnati Financial has developed a strong brand name which is essential in the insurance industry. A strong distribution network, good customer reputation, and a comprehensive product portfolio are the company’s biggest competitive strengths. The insurance business is subject to various regulations which makes entry difficult for new entrants.

Over the years, Cincinnati has developed a strong operating structure that shows the strength of its field claims service, underwriting and field support services. The company is focusing on growing lines that are less prone to catastrophe losses. Property casualty insurance underwriting drove the company’s operating performance in the last year. Property casualty net written premium has registered a growth of 5.3% CAGR exceeding industry’s 4.8% over the five year period. Cincinnati offers a broad suite of life insurance products that complement its property casualty business. Growth of Cincinnati Life Insurance Company further provides steady contributions to the company’s earnings. The company is also witnessing an increase in reinsurance contracts as Cincinnati Re matures in the marketplace. The acquisition of MSP Underwriting Limited (London) in February this year has further strengthened Cincinnati’s status as a global insurance player, expanding its market reach and diversifying its earnings. This acquisition is expected to be accretive to earnings in 2019.

Cincinnati is expanding its geographical footprint for its personal lines business. The company is eyeing future growth through new agency appointments and has the financial strength to consistently support the agencies. These agencies will have increased opportunities to cross-serve the clients in order to meet their various insurance needs. The company’s investment in technology development will also support new client acquisition. Investment in technology should further drive improvement in Cincinnati’s operating efficiency.

Dividends

Cincinnati Financial is a dividend king and part of the S&P 500 Dividend Aristocrat, having increased its dividend payout for 58 consecutive years. The company has an annual average yield of 2.1% and it last raised the dividend by 5.7%. It is one of the seven other U.S. public companies to achieve such an impressive dividend growth streak. The company has shown a dividend growth of more than 5% CAGR over the last five years. A low payout of 36% demonstrates additional room for future dividend growth.

Cincinnati Financial is diversified by insurance line, premium mix, and geography which grants it immunity from fluctuations in any one of its business or geography. The company has enough potential for future expansion of relationships as it accounts for just 9% market share of the estimated $61 billion property casualty premiums produced by the agencies.

Cincinnati Financial Corp regularly receives high financial ratings from independent rating agencies like Moody’s and Fitch. Strong capital and cash flow support payout. Cincinnati Financial returned a total of $461 million to its shareholders in 2018, in dividends and through 1.8 million of shares repurchased. The company is targeting an average value creation ratio of 10% to 13% over the next five-year period. It achieved a VCR of 10.7% for the five years ended 2018. Cincinnati’s target combined ratio is 95%-100%, and it has successfully outperformed the industry ratio in the past five years.

Competition

The U.S. property casualty insurance industry is highly competitive. Cincinnati competes with major U.S., Bermuda, European, and other international insurers, reinsurers and underwriting syndicates. Insurance is a highly regulated sector making it a difficult business to be penetrated by new entrants. However, technology is making it relatively easier for newer players to enter. A strong distribution network, proven risk management track record, comprehensive product portfolio, and large scale form a deep moat around Cincinnati’s business.

Bottom Line

Cincinnati maintains a strong capital position which grants it enough flexibility to enter new product lines and to grow other areas of its business, increasing shareholder value over the long term. The company continues to demonstrate excellent performance across both its insurance and investment operations. Excellent relationships with agencies also act as a major growth driver. Cincinnati Financial should continue its dividend growth streak, given its payout ratio is quite safe at 36%.

For some reasons, I never pulled the trigger on CINF but I have considered it many times. It’s probably a missed opportunity but the dividend growth never met my requirements during the growth stage of my portfolio and the yield is too low for the income now.

CINF vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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