Growth Prospects
Cincinnati Financial has realized solid growth since 2011. From 2011 through 2014, the company has compounded premium revenue at 11.9% a year. Better yet, the company’s combined ratio was under 100% in fiscal 2013 and 2014; this was profitable growth.
The company has revitalized its growth after virtually no premium growth from 2005 through 2011. While the insurance industry is stable, it is also very competitive. Cincinnati Financial’s growth has not been steady. Rather, it has been off-and-on over the last decade due to the competitiveness of the industry.
Cincinnati Financial has 2 growth initiatives to continue propelling growth forward:
– Focus on reinsurance business
– Capstone for high net worth individuals
Cincinnati Financial’s management has decided to focus on opportunities in the property and casualty reinsurance market. To this end, the company has added several new high level management members to spearhead the initiative. Reinsurance currently makes up a small portion of Cincinnati Financial’s revenue, but should see solid growth over the next several years.
The Capstone initiative provides customer insurance plans. Cincinnati Financial describes its Capstone program as follows:
“The Executive Capstone program offers coverage features, limits and options to help agents tailor insurance programs for the more complex insurance needs of clients with homes valued up to $50 million, yachts, high-end cars or collector cars and personal articles to include fine arts and jewelry. Additional options include green coverage, employment practices liability endorsement for umbrella liability, excess flood when primary plans are purchased and family shield recovery expenses.”
The Capstone program will likely not provide a significant boost to the company’s total premium revenue. It will likely be highly profitable as custom insurance policies for unusual situations tend to have more beneficial pricing for insurers.
Cincinnati Financial has significant organic growth potential. The image below shows that the company has not even come close to full expansion in the United States, despite its long operating history.
Source: Cincinnati Financial September 2015 Investor Handout
Recession Performance
Cincinnati Financial’s large exposure to equities causes it to suffer worse losses to book value during recessions than less aggressive insurers. High quality dividend growth stocks tend to avoid cutting dividends, even during recessions. As a result, the company’s investment income did not fall precipitously during the Great Recession of 2007 to 2009.
Premium income is another matter. The Great Recession of 2007 to 2009 significantly impacted Cincinnati Financial’s core insurance business. The company realized steep underwriting losses in 2008, 2009, 2010, 2011, and 2012. As a result, Cincinnati Financial is not a recession resistant business.
Final Thoughts
Cincinnati Financial’s large fluctuations in its combined ratio show the company has not been disciplined enough in the past with its insurance business.
On the other hand, the company’s investment methodology is very beneficial; this is the real growth engine of the company.
Cincinnati Financial Corporation (NASDAQ:CINF) does not rank very highly using The 8 Rules of Dividend Investing. The company has a poor growth rate over the last decade (though growth has improved in recent years). Additionally the company has shown it does not stand up well to recessions. The company’s stock is also fairly pricey for an insurer; it is currently trading for a price-to-earnings ratio of 15.5. Compare this to fellow Dividend Aristocrat insurer Aflac’s price-to-earnings ratio of just 10.8.
Disclosure: None
