The Long and Short
A diversity opportunity in the insurance sector
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Cincinnati Financial’s 2034 debt issue offers name diversity and good overall value versus bonds of property and casualty (P&C) peers, including PGR, BRK and CB. The company has stable A ratings from two of three rating agencies. The bonds are attractive relative to 10-year issues in this segment due to the current flatness/inversion of the 10s/30s investment grade spread curve. While an early tender offer cannot be ruled out given the bond’s 6.125% coupon, it seems highly unlikely as the issuer has not tapped the public debt markets since the early 2000s.
Exhibit 1. CINF vs P&C Comps – A-rated or better
Source: Amherst Pierpont, Bloomberg/TRACE Indications
3.8MM CINF 6.125% 11/01/34 @ +150/10YR; ~G+141; 4.53%; $114.97
A-RATED P&C 10YR LANDSCAPE:
(A3/A-) AFL 3.60 30 ~137/132
(A3/A-) ALL 5.55 35 ~157/152
(A3/A) CB 6.00 37 ~155/150
(A2/A) PGR 6.25 32 ~140/135
(A2/A) TRV 6.375 33 ~130/125
Issuer: Cincinnati Financial Corp.
CUSIP: 172062AE1
AMT OUTSTANDING: $364.5 million
RATING: A3/BBB+/A-
Global Deal (issued as 144a)
CINF is a traditional P&C operator headquartered in the Midwest, where it does the bulk of its business along with the Southeast US. While the company mainly focuses on the commercial market, largely serving small to mid-sized businesses, it has also expanded into personal lines, excess & surplus and life that have helped it diversify outside its core business segment. CINF had over $31 billion in total assets as of year-end 2021 with investments of just under $25 billion. The company generates over $6 billion in annual premiums from its core P&C operations – roughly $4.5 billion commercial and $1.6 billion personal.
CINF is extremely well-capitalized. The company has $6.6 billion in capital and surplus at its P&C operations as of the first quarter of 2022. The statutory risk-based capital ratio was 666% (TAC / ACL RBC) as of year-end 2021. Its strong capital position helps offset the risk of transitory operating losses due to catastrophe exposure.
CINF maintains higher exposure to the stock market than is typical of a domestic P&C operator with approximately 40% of its investment portfolio held in equities. However, the company has demonstrated its ability to weather periods of heightened volatility, booking temporary earnings losses but rebounding predictably during periods of market recovery.
CINF has a solid liquidity profile with $987 million in cash on the balance sheet and $251 million available on its revolving credit facility. The company’s first public debt maturity is in 2028 with just under $420 million outstanding. Free cash flow over the past twelve months was $1.8 billion. CINF is an infrequent issuer in the IG insurance landscape. While its two outstanding public debt issues have higher coupons north of 6%, the company does not seem like a likely candidate to tender and re-issue to manage down its borrowing expenses.
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