Cincinnati Financial Corporation (NASDAQ:CINF) has increased its dividend for 54 consecutive years, an impressive streak that only eight U.S. public companies can match.
With a 3.4% dividend yield, a large base of recurring revenue, and excellent free cash flow generation, CINF is the type of stock we like to own in our Top 20 Dividend Stocks portfolio.
Even though the number of funds with long positions in CINF went up by five during the third quarter of the last year, the stock remains to be overlooked by the majority of investors in the Insider Monkey database. A total of 23 funds reported owning shares of the company as of the end of September, amassing 7.40% of the company. First Eagle Investment Management disclosed holding 9.56 million shares of CINF in its last 13F filing.
Business Overview
CINF was formed in 1950 and is among the top 25 U.S. property casualty insurers today, offering business, home, and auto insurance. Insurance companies make money by writing and selling insurance policies (which typically breaks even or loses money for most insurers), and investing policy proceeds for income until claims need to be paid out (this is where the money is really made). Local independent insurance agencies market CINF’s policies within their communities, which span across nearly 40 states.
The company’s mix by premiums written in 2014 was 67% commercial, 25% personal, 5% life, and 3% excess & surplus. By state, 18% of CINF’s premiums came from Ohio, 7% from Illinois, 6% from Indiana, 6% from Pennsylvania, 5% from North Carolina, 5% from Georgia, and 5% from Michigan.
Business Analysis
Insurance companies live and die by managing risk. If insurers fail to price risk accordingly in their policies, they won’t be around for long. Compared to some insurers, CINF’s underwriting process is somewhat more aggressive because the company targets a combined ratio of 95% to 100%, which means that it expects its policies to be slightly profitable at best (when a combined ratio is below 100%, the company achieves an underwriting profit).
However, as seen below, CINF’s combined ratio has outperformed the industry all but one of the past five years. The company has also produced 26 years of favorable loss reserve developments, which means it has conservatively booked more losses than it has actually realized each year. CINF’s reinsurance program also limits its losses beyond certain thresholds, and its pristine balance sheet provides additional comfort.
Source: CINF Investor Presentation
In addition to CINF’s proven risk management track record, the company has several other competitive advantages. Its large size (CINF is one of the 25 biggest U.S. P&C insurers) provides economies of scale in marketing, administrative operations, and support staff. CINF is able to spread these costs over a sizable pool of insurance policies to keep its prices very competitive. CINF is also able to price its premiums lower than smaller competitors because its risk is reduced with a larger pool of policies.
Furthermore, the company’s long operating history, range of insurance products, and size provides branding benefits and trust with the agencies that market CINF’s policies. Establishing and supporting relationships with agencies takes significant time and cost but provides CINF with relatively low-cost distribution advantages.
CINF has over 1,500 agency relationships in nearly 2,000 locations across the country and does everything possible to support them. The company doesn’t compete with agencies by selling online or direct to consumers and employs nearly 3,000 associates who provide support to field associates. As a result, CINF is the number one or number two carrier by premium volume in nearly 75% of agencies partnered with it for five years or more, although an agency may represent dozens of carriers.
