Unveiling Cincinnati Financial: A Spotlight On Strong Q1 Results And Unique Investment Strategy

seekingalpha04-30

Cincinnati Financial reports impressive first quarter results, with Non-GAAP EPS surpassing expectations and revenue increasing by 59.8% year-over-year.The company's underwriting performance remains ...

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class=\"title\">\nUnveiling Cincinnati Financial: A Spotlight On Strong Q1 Results And Unique Investment Strategy\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-30 00:37 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4687234-unveiling-cincinnati-financial-a-spotlight-on-strong-first-quarter-results-and-unique-investment-strategy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Cincinnati Financial reports impressive first quarter results, with Non-GAAP EPS surpassing expectations and revenue increasing by 59.8% year-over-year.The company's underwriting performance remains ...</p>\n\n<a href=\"https://seekingalpha.com/article/4687234-unveiling-cincinnati-financial-a-spotlight-on-strong-first-quarter-results-and-unique-investment-strategy\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE0004445239.USD","symbol_name":"JANUS HENDERSON US FORTY \"A2\" (USD) 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a good choice for dividend seekers.   JHVEPhoto/iStock Editorial via Getty Images As the earnings season for property and casualty insurers kicked off with Travelers Companies, Inc. (TRV) and Chubb (CB), Cincinnati Financial (NASDAQ:CINF) released its first-quarter results on April 25th. In its latest press release, Cincinnati Financial reported impressive first-quarter results, with Non-GAAP EPS reaching $1.72, exceeding expectations by a penny, and revenue hitting $2.94 billion, marking a 31% increase year-over-year and surpassing estimates by $430 million. The company demonstrated strong performance in the first quarter of 2024, with a robust net income of $755 million, or $4.78 per share, compared to $225 million, or $1.42 per share, in the same period last year. This significant surge was primarily driven by a $484 million after-tax boost in the fair value of held equity securities. Furthermore, there was a notable $530 million increase in net income for the first quarter of 2024 compared to the previous year, largely attributed to a $399 million rise in net investment gains and a $111 million increase in after-tax property and casualty underwriting income. Despite better-than-expected results, it appears the market anticipates stronger performance from the insurance carrier, evidenced by a significant drop in the stock price following the results release. Nonetheless, shareholders of CINF can remain confident despite the market's reaction regarding the first-quarter results. Potential investors might prefer to wait for a more attractive price, given the safety margin remains in the low double-digit range. Cincinnati Financial: An Uncommon Approach Inside Insurance Industry CINF is relatively unique within the insurance sector for having a large equity portfolio, somewhat similar to the dramatically larger Berkshire Hathaway (BRK.B). This portfolio can generate large unrealized gains and losses, which distort GAAP results, resulting in over-optimism or pessimism from some investors. Therefore, it is better to assess the underwriting performance of the insurance carrier before looking into the investment income results. Historically, Cincinnati has excelled as an underwriter, maintaining a combined ratio below 100% for over a decade. As a reminder, a combined ratio of 100% means that an insurance company's costs are equal to its earned premiums. If an insurer has a combined ratio below 100%, it is generating an underwriting profit. CINF has consistently generated underwriting profits, with investment income on top of this, creating solid long-term returns for its investors. In the first quarter, earned premiums rose by 8% to $1.99 billion. CINF is continuing to grow its business, despite the inflation pressures which have affected the full insurance industry since 2022. In response to inflation pressures, insurance companies like Cincinnati have increased premiums to improve their underwriting profits. The price increases have helped to offset recent-year elevated paid losses reflecting economic and social inflation. Elevated inflation was a driver of higher losses and loss expenses in both 2024 and 2023 as costs have increased significantly to repair damaged autos or other property that Cincinnati Financial insures. During the first quarter of 2024, the insurance carrier reported a combined ratio of 93.6%, vs. 100.7% last year in the same period. Cincinnati Financial's Q1 2024 Report The 7.1-point drop was largely driven by the reduction in the loss ratio, due to the lower catastrophe loss impact on the loss ratio, despite a 0.3-point increase in the attritional loss ratio. In Q1 2024, the catastrophe losses amounted only to $111 million on a calendar year basis, while one year ago in the same period, the catastrophe events’ incurred costs were $235 million. Cincinnati Financial's Q1 2024 Report Segment-wise, the underwriting performance of the insurance carrier was driven by the improved margins of the commercial and private insurance businesses, while the excess and surplus insurance segment delivered steady results. For the commercial lines, Cincinnati Financial recorded an underwriting profit of $39 million, or a combined ratio of 96.5%. Cincinnati Financial's Q1 2024 Report The improvement of the combined ratio was largely driven by the lower effects of the catastrophe losses. This effect of reduced catastrophe costs also impacted the personal lines, resulting in an underwriting profit of $37 million, and a reduced loss ratio from 83.3% to 64.5%. Cincinnati Financial's Q1 2024 Report The drop in the loss ratio was partially due to the earned premium growth (27%), reflecting rate increases in selected states, coupled with the changes in policy deductibles or mix of business. The premium rates for the auto insurance lines increased at average percentages in the low-double-digit range during the first three months of 2024. For the homeowners’ insurance business, the rate increased in the high-single digit range. Aside from underwriting, CINF's investment portfolio continued to perform well. Net investment income increased by 16.7% to $245 million. Additionally, pre-tax investment gains totaled $612 million for the quarter. Cincinnati Financial's Q1 2024 Report Overall, the pre-tax investment profit amounted to $826 million for the first quarter of 2024, representing a 189% change compared to the same period last year. The growth of the pre-tax investment profit was driven by two combined effects. First, the pre-tax yield rose from 4.25% to 4.65% over the past year, aided by higher rates. Hence, the fixed-income portfolio delivered higher returns than last year in the same year. Secondly, the investment portfolio benefited from favorable market conditions, leading to an increase in unrealized equity gains. As of March 2024, the fair value of the equity portfolio was $11.6 billion, compared to almost $11 billion in December 2023. The top 15 positions accounted for more than half of the equity portfolio's fair value in March 2024, with a significant dominance of mega-caps. Cincinnati Financial's Q1 2024 Investment Portfolio Report This is a fairly diverse portfolio, with Microsoft (MSFT) and Apple (AAPL) unsurprisingly among its biggest holdings. Interestingly, Cincinnati Financial is one of the shareholders of Chubb Limited, a larger competitor known for its over-the-cycle underwriting overperformance. Essentially, with CINF, investors own a profitable, well-run insurer with a broad-equity market exposure on top. Although the market conditions might be unfavorable on a short or midterm horizons, with potential dropdown of the overall stock markets, Cincinnati Financial’s investment philosophy is long-term oriented and focused on high-quality companies. Valuation & Final Thoughts As of the end of March, the book value per share was $80.83, or a 4.9% surge from December's $77.06. Cincinnati Financial's Q1 2024 Report Given a five-year average price-to-book value ratio of 1.59, it suggests a fair value is approximately $128.5 per share, or a 13% potential increase from the present stock price. An additional method to evaluate Cincinnati Financial's fair value is by assessing its FY2024 earnings. Historically, CINF has aimed for an annual combined ratio between 95-100%. This goal is not just conservative; it is consistently met, with a combined ratio averaging 94.6% over the five-year period from 2019 to 2023. This commitment is now solidified in a 5-year target range of 92-98%, with the midpoint at 95%. With an anticipated premium volume of $8.3 billion and a targeted combined ratio of 95%, pre-tax underwriting income could soar to approximately $416 million. Coupled with an estimated investment income of $1 billion, pre-tax operating results could reach $1.4 billion, excluding any unrealized investment gains or losses. Given favorable market conditions, the potential change in the investment portfolio's market value could further increase pre-tax income by about $0.8 billion annually. This totals to roughly $2.2-2.3 billion pre-tax, with post-tax earnings estimated at around $1.8 billion, adjusted for the 21% statutory federal income tax rate. Based on a 10.5 to 11 times P/E multiple, the market valuation could potentially range between $19 to $20 billion, resulting in $120 to $126.7 per share based on a diluted weighted-average share count of 157.9 million.  With over a 10% potential upside, existing shareholders are advised to maintain their positions in CINF. 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