The Long and Short
Cincinnati Financial
This material is a Marketing Communication and does not constitute Independent Investment Research.
Cincinnati Financial (CINF: A3/BBB+/A-) offers an attractive way for index investors to diversity away from heavily weighted P&C bellwethers such as BRK, CB, ALL and TRV. All of CINF’s outstanding bonds are currently included in the investment grade index. Compared to many of its well-rated P&C peers, CINF balances moderate quarter-to-quarter earnings volatility with strong capitalization, diligent expense management and conservative operating leverage.
At current valuation, the credit trades closely in-line with the lower-rated CNA (Baa2/A-/BBB+) and at a discount to the comparably rated AIG (Baa1/A-/A-) and lower-rated ALL (A3/BBB+/BBB) across the credit curve (Exhibit 1).
Exhibit 1: CINF and its P&C peer group (BBB+ and higher ratings)
Source: Santander US Capital Markets LLC, Bloomber/TRACE BVAL g-spread indciations
CINF is a Midwest-based P&C operator that is well-diversified by both business lines and by geographic risk exposure. While commercial lines make up nearly half of the company’s business mix, those are divided across property, casualty and auto categories. CINF also has some exposure to excess & surplus lines and moderately sized life insurance and reinsurance operations. The largest geographic concentration is in its home state of Ohio at about 13% of net premiums earned, with no other state accounting for double-digit exposure.
CINF maintains an attractive liquidity profile relative to near-term debt maturities. The company has $375 million available on its revolving credit facility through 2030 with only $25 million currently drawn down. The only other public debt maturity ahead of the 2034s is the $418.56 million due in 2028. The company is a highly infrequent issuer in the investment grade primary market (the’28s and ’34s were both issued with original 30-year maturities) and is therefore less likely to come with a new deal in the months ahead.
CINF maintains A1/A+ insurance financial strength ratings at its operating subsidiaries. The company is very well capitalized for its ratings and maintains conservative leverage relative to peers. Statutory P&C capital and surplus is around $9.5 billion, which is currently around 35% of total assets and has been maintained in a similar range over the previous five years. CINF’s statutory P&C risk-based capital ratio has been steadily in the mid-500% range over the past several years. Comparatively, peers CNA, ALL and AIG have all maintained their risk-based capital ratios in the mid-400% range over the same time frame.
Given the nature of the company’s P&C lines, CINF has a degree of tail risk in quarterly earnings volatility due to catastrophe losses from Midwest storms, California wildfires, and so on. However, weather-related losses have been manageable during recent periods of heightened activity, in-line with similarly positioned P&C peers. CINF had catastrophe losses of about $904 million in the first half of last year, with about half that amount coming from the January California wildfires. The company has a small but growing exposure to the region mainly through its high-net-worth homeowners business niche, but again those risks appear highly manageable.
Though CINF has experienced temporary spikes in their combined ratio (all-in losses as a percentage of premiums earned) on a quarterly basis due to catastrophe losses, they have averaged in the low-90s range over the past several years (five-year average 93.55%). That level is attractively positioned versus many peers in the segment. In fact, CINF outperformed the P&C five-year average combined ratios of ALL (99.59%), AIG (96.63%) and CNA (107.78%) since 2021.
CINF touts a very low risk fixed income investment portfolio, with very limited non-investment grade holdings (~2%). Those strengths are somewhat tempered by a relatively higher percentage of holdings in common equities (about 39% of investment portfolio), although those risks appear adequately priced in at current spread valuation.
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