Growth Prospects
Over the past 10 years, earnings-per-share grew by 2.3% compounded annually. This is not particularly impressive growth. As mentioned earlier in this article, Cincinnati Financial Corporation (NASDAQ:CINF) will write lower margin policies. This has lead to underwriting losses from 2008 through 2012.
It should be noted that the company’s investment income helped the company remain profitable even when underwriting losses were occurring.
Since 2012, Cincinnati Financial has grown quickly. Earnings-per-share have increased from $2.40 in 2012 to $3.56 in 2015. Earnings-per-share are expected to be somewhere around $4.40 per share by 2020.
The most compelling growth catalyst for Cincinnati Financial moving forward is a rise in interest rates…
Cincinnati Financial generates around two thirds of its profits from its investment portfolio (on average). Its investments stood at $14.4 billion at the end of 2015, up 22% over the past five years.
Cincinnati Financial has suffered with eroding net interest income, which is the income earned on its investments. Investment income, net of expenses, rose 4% last year, which was a slower growth rate than the 6% revenue growth from earned premiums.
Higher returns on investments will be critical to Cincinnati Financial’s ability to grow earnings-per-share moving forward. The company is seeing heightened competition and abnormally high catastrophe have suppressed policy pricing and profitability.
That being said, Cincinnati Financial should benefit from the steady economic recovery in the U.S. If (when) interest rates rise, the company will be able to generate higher investment income, which will lead to higher earnings-per-shares and more dividend growth.
Competitive Advantages & Recession Performance
The insurance industry does not lend itself to competitive advantages. There are not very high hurdles to entry in this market. As such, Cincinnati Financial relies upon its decades of experience and that it has built many successful customer relationships in that time. It relies heavily on its brand image as a competitive advantage.
Intelligent management can be a form of competitive advantage in a highly competitive industry. Cincinnati Financial allocates its investment portfolio different than most insurers…
Most insurers are very risk averse. They put almost all their portfolio into lower risk short-term bonds. Cincinnati Financial is different. The company invests around 30% of its investment portfolio in blue chip stocks. This means the company’s investment portfolio is likely to generate superior returns over long periods of time relative to its peers.
Of course, this doesn’t help much in recessions when equity values fall. The lack of a real competitive advantage did not help Cincinnati Financial during the financial crisis:
- 2007 earnings-per-share of $3.54
- 2008 earnings-per-share of $2.10
- 2009 earnings-per-share of $1.32
- 2010 earnings-per-share of $1.68
The company’s long-standing relationship with independent insurance agents make up its competitive advantage. Cincinnati Financial becomes a preferred recommendation for independent agents as they become familiar with the company.
And, the company has significantly recovered in the years following the recession. Last year, Cincinnati Financial reported earnings-per-share of $3.56, up 34% from the previous year.
