Dj Cincinnati Financial Corp. Stock Underperforms Thursday When Compared To Competitors

The Zacks Property and Casualty Insurance (P&C) industry is likely to benefit from better pricing, prudent underwriting and exposure growth. Industry players like The Progressive Corporation PGR, Chubb Limited CB, The Travelers Companies TRV, The Allstate Corporation ALL and Cincinnati Financial Corporation CINF are poised to grow despite a rise in catastrophic activities. Given an active catastrophe environment, the policy renewal rate should accelerate. Also, the increasing adoption of technology and the emergence of insurtech will help the industry players function smoothly.

However, the third quarter of 2024 witnessed a decline in pricing after more than seven years of rate rise. Also, the two interest rate cuts and the possibility of more later remain concerns as insurers are direct beneficiaries of an improved rate environment. Nonetheless, an improvement in surplus and accelerated economic activities set the stage for a better M&A environment. Per a report in Carrier Management, AM Best expects profitable commercial lines and improving personal lines, coupled with higher investment returns on increased yields and strong cash flow, to drive the industry’s performance in 2024.

About the Industry

The Zacks Property and Casualty Insurance industry comprises companies that provide commercial and personal property insurance, and casualty insurance products and services. Such insurance helps to safeguard property in case of any natural or man-made disasters. Liability coverages are also provided by some industry players. The insurance coverage offered also includes automobiles, professional risk, marine, excess casualty, aviation, personal accident, commercial multi-peril, and professional indemnity and surety. Premiums are the primary source of revenues for these insurers. Better pricing and increased exposure drive premiums. These companies invest a portion of premiums to meet their commitments to policyholders. However, a likely interest rate cut in September and prospects of more later in the year raise concerns.

4 Trends Shaping the Future of the Property and Casualty Insurance Industry

Better pricing to help navigate claims: Catastrophes are a concern for insurers due to the high degree of losses incurred. Insurers implement price hikes to ensure uninterrupted claims payment. Global commercial insurance prices declined for the first time in seven years in the third quarter of 2024, attributable to heightened competition among insurers in the global property market, per Marsh Global Insurance Market Index. Per Fitch Ratings, personal auto is likely to deliver better performance in 2024. Per Deloitte Insights, gross premiums are estimated to increase sixfold to $722 billion by 2030. China and North America should account for more than two-thirds of the global market, per the report. Analysts at Swiss Re Institute predict premiums to grow 7% in 2024 and 4.5% in 2025.

Catastrophe loss induces volatility in underwriting profits: The property and casualty insurance industry is susceptible to catastrophe events, which drag down underwriting profits. Per a Colorado State University (CSU) report, 2024 will have a very active hurricane season. While AccuWeather estimates Hurricane Helene to induce $225 to $250 billion in economic loss and damage in the United States, it estimates $160 to $180 billion in economic loss from Hurricane Milton. AM Best estimates cat loss to contribute 680 basis points to the expected combined ratio of 100.7 in 2024. Swiss Re estimates the combined ratio to improve from 2023 to 98.5% in 2024 and 2025. Underwriting profitability is expected to be under pressure, primarily due to soft performance in personal lines, which are expected to witness higher catastrophe losses per Insurance Information Institute and Milliman. Nonetheless, they expect profitability in 2025. Exposure growth, better pricing, prudent underwriting and favorable reserve development will help withstand the blow. Also, frequent occurrences of natural disasters should accelerate the policy renewal rate.

Merger and acquisitions: Consolidation in the property and casualty industry is likely to continue as players look to diversify their operations into new business lines and geography. Buying businesses along the same lines will also continue as players look to gain market share and grow in their niche areas. With a sturdy capital level, the industry is witnessing a number of mergers, acquisitions and consolidations. Deloitte estimates more mergers and acquisitions in the reinsurance space in 2024.

Increased adoption of technology: The industry is witnessing increased use of technology like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing and robotic process automation that expedite business operations and save costs. The industry has also witnessed the emergence of insurtechs or technology-led insurers. The focus of insurtech is mainly on the property and casualty insurance industry. Insurers continue to invest heavily in technology, generative AI in particular, as it is expected to improve basis points, scale and efficiencies. However, the use of technology poses cyber threats.

Zacks Industry Rank Indicates Bright Prospects

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates rosy prospects in the near term. The Zacks Property and Casualty Insurance industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #40, which places it in the top 16% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Earnings estimates for the current year have increased 10.2% year over year.

Before we present a few property and casualty stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector and the S&P 500

The Property and Casualty Insurance industry has performed better than its sector and the Zacks S&P 500 composite year to date. The stocks in this industry have collectively risen 30.7% compared with the Zacks S&P 500 composite’s increase of 26% and the sector’s increase of 21.7%.

Year to Date Price Performance

Current Valuation

On the basis of the trailing 12-month price-to-book (P/B), which is commonly used for valuing insurance stocks, the industry is currently trading at 1.5X compared with the S&P 500’s 8.66X and the sector’s 3.82X.

Over the past five years, the industry has traded as high as 1.67X, as low as 0.96X and at the median of 1.38X.

Price-to-Book (P/B) Ratio (TTM)

Price-to-Book (P/B) Ratio (TTM)

5 Property and Casualty Insurance Stocks to Focus On

Here, we are discussing four Zacks Rank #2 (Buy) stocks and one Zacks Rank #3 (Hold) stock from the P&C Insurance industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Allstate: Headquartered in Northbrook, IL, Allstate is the third-largest property-casualty (P&C) insurer and the largest publicly-held personal lines carrier in the United States. Its premiums are poised to improve courtesy of rate increases in auto and home insurance businesses as well as an enhanced distribution strategy. The company keeps expanding its Protection Services business with strategic acquisitions, which position it for long-term growth. Divestments and cost-cutting measures are expected to enhance margins of this Zacks Rank #2 insurer.

The Zacks Consensus Estimate for ALL’s 2024 and 2025 earnings suggests 1,586% and 19% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 has moved up 5.7% and 2.8%, respectively, in the past seven days. The company delivered a four-quarter average earnings surprise of 135.21%. The expected long-term earnings growth rate is pegged at 7%. It has a VGM Score of A.

Price and Consensus: ALL

Travelers Companies: Based in New York, NY, Travelers Companies is one of the leading writers of auto and homeowners’ insurance plus commercial U.S. property-casualty insurance. High levels of retention, improved pricing, increased new business and a positive renewal premium change, banking on the strength of a compelling product portfolio of coverages across nine lines of business, poise it well for growth. Travelers’ commercial businesses should continue to perform well on the back of stability in the markets where it operates as well as the execution of its strategies. It carries a Zacks Rank #2.

The Zacks Consensus Estimate for TRV’s 2024 and 2025 earnings suggests 42% and 9.5% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 has moved up 0.6% and 0.1%, respectively, in the past seven days. It delivered a four-quarter average earnings surprise of 25.40%. It has a VGM Score of A. The expected long-term earnings growth rate is pegged at 11.2%

Price and Consensus: TRV

Progressive Corporation: Based in Mayfield Village, OH, The Progressive Corporation is one of the major auto insurers in the country. It is the largest seller of motorcycle and boat policies, the market leader in commercial auto insurance and one of the top 15 homeowners carriers based on premiums written. A solid market presence, a convincing portfolio of products and services, and underwriting and operational expertise should help this insurer deliver steady profitability. It carries a Zacks Rank #2.

The Zacks Consensus Estimate for PGR’s 2024 and 2025 earnings suggests 115.2% and 4.6.% year-over-year growth, respectively. The consensus estimate for 2024 and 2025 earnings has moved 2.9% and 0.9% north, respectively, in the past 30 days. It delivered a four-quarter average earnings surprise of 19.85%. It has a VGM Score of B. The expected long-term earnings growth rate is pegged at 27.5%, better than the industry average of 11.3%.

Price and Consensus: PGR

Chubb Limited: Headquartered in Zurich, Switzerland, Chubb is one of the world’s largest providers of property and casualty insurance and reinsurance and the largest publicly traded P&C insurer based on market capitalization. Chubb is poised for long-term growth as it capitalizes on the potential of middle-market businesses (both domestic and international) as well as enhances traditional core packages and specialty products. Investments in various strategic initiatives bode well for growth. It focuses on cyber insurance, which has immense room for growth. This Zacks Rank #2 insurer has increased dividends for 31 straight years.

The Zacks Consensus Estimate for CB’s 2025 earnings suggests 6.8% year-over-year growth. The expected long-term earnings growth rate is 2%. The consensus estimate for 2024 and 2025 earnings has moved 1.6% and 0.5% north, respectively, in the past 30 days. It delivered a four-quarter average earnings surprise of 22.19%. It has a VGM Score of B.

Price and Consensus: CB

Cincinnati Financial: Headquarters in Fairfield, OH, Cincinnati Financial markets property and casualty insurance. Prudent pricing, an agent-centric model, a higher level of insured exposures and disciplined expansion of Cincinnati Re should benefit premiums. This Zacks Rank #3 boasts above-average industry premium growth. The board of directors had increased the annual cash dividend rate for 64 consecutive years, a record which is believed to be matched by only seven other U.S. publicly traded companies.

The Zacks Consensus Estimate for CINF’s 2024 and 2025 earnings suggests 5.3% and 13.01% year-over-year growth, respectively. The expected long-term earnings growth rate is 8.3%. It delivered a four-quarter average earnings surprise of 12.54%.

Price and Consensus: CINF

Zacks Investment Research

Shares of Cincinnati Financial Corporation CINF have rallied 43.7% year to date (YTD), outperforming the industry’s 29.9% growth. The insurer also outperformed the Zacks S&P 500 composite and the Finance sector’s return of 26.2% and 21.5%, respectively, YTD. With a market capitalization of $23.24 billion, the average volume of shares traded in the past three months was 0.5 million. Currently priced at $148.69, the stock is marginally below its 52-week high of $150.96.

CINF Outperforms Industry, Sector & S&P YTD

This Zacks Rank #3 (Hold) property and casualty insurance's bottom line outpaced estimates in three of the trailing four quarters while missed in one, the average surprise being 12.54%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The rally was driven by a higher level of insured exposure, rate increases, agent-focused business models, consistent cash flow and effective capital deployment.

CINF Trading Above 50-Day and 200-Day Moving Average

The stock is trading above its 50-day and 200-day simple moving average (SMA) of $138.14 and $123.74, respectively, indicating solid upward momentum. SMA is a widely used technical analysis tool to predict future price trends by analyzing historical price data.

CINF’s Growth Projection Encourages

The Zacks Consensus Estimate for Cincinnati Financial’s 2024 earnings per share indicates a year-over-year increase of 5.3%. The consensus estimate for revenues is pegged at $9.89 billion, implying a year-over-year improvement of 11.3%. The consensus estimate for 2025 earnings per share and revenues indicates an increase of 13.1% and 12%, respectively, from the 2024 estimates.

CINF’s Favorable Return on Capital

Return on equity in the trailing 12 months was 8.2%, better than the industry average of 7.9%. This highlights the company’s efficiency in utilizing shareholders’ funds.

Will the Bull Run Continue?

Prudent pricing, an agent-centric model, a higher level of insured exposures and disciplined expansion of Cincinnati Re should benefit premiums, the primary driver of an insurer’s top line. CINF boasts above-average industry premium growth.

The Excess and Surplus line has been performing well since its inception in 2008. This segment should continue to benefit from new business-written premiums, higher renewal-written premiums and higher average renewal estimated pricing. Technology and data are also used to identify new exposures in emerging businesses.

Improving interest income from fixed-maturity securities and a decrease in equity portfolio dividends in an improved rate environment should drive net investment income.

Notably, its free cash flow conversion has remained more than 150% over the last few quarters, reflecting its solid earnings.

CINF’s Wealth Distribution

In terms of capital management, Cincinnati Financial has returned capital to its shareholders through share buybacks, regular cash dividends as well as special dividends. The board of directors had increased the annual cash dividend rate for 64 consecutive years. Its dividend yield of 2% is better than the industry average of 0.2%, making the stock an attractive pick for yield-seeking investors. The dividend increase reflected strong operating performance and signaled management's and the board's positive outlook and confidence in outstanding capital, liquidity and financial flexibility.

CINF’s Expensive Valuation

CINF is currently expensive. It is trading at a P/B multiple of 1.68, higher than the industry average of 1.64.

However, shares of First American Financial Corporation FAF, CNA Financial Corporation CNA and Axis Capital Holdings Limited AXS are trading at a multiple lower than the industry average.

Zacks Investment Research

Investors in Cincinnati Financial Corporation CINF need to pay close attention to the stock based on moves in the options market lately. That is because the Nov 15, 2024 $160.00 Put had some of the highest implied volatility of all equity options today.

What is Implied Volatility?

Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.

What do the Analysts Think?

Clearly, options traders are pricing in a big move for Cincinnati Financial shares, but what is the fundamental picture for the company? Currently, Cincinnati Financial is a Zacks Rank #3 (Hold) in the Insurance- Property and Casualty industry that ranks in the Top 18% of our Zacks Industry Rank. Over the last 60 days, no analyst has increased his estimate for the current quarter, while four have revised their estimates downward. Our Zacks Consensus Estimate for the current quarter has moved from $2.20 per share to $1.94 in the same time period.

Given the way analysts feel about Cincinnati Financial right now, this huge implied volatility could mean there’s a trade developing. Often times, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.

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Zacks Investment Research