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How Safe Is the Cincinnati Financial Dividend?

Summary

  • Cincinnati Financial acquired MSP Underwriting for an all-cash deal worth $134 million

  • Innovation and technology investments will be needed in the future to compete in the highly competitive insurance market

  • Cincinnati Financial is on track to raise their 2020 annual dividend, keeping their pristine track record of dividend increases.

Business Model

Cincinnati Financial ($CINF) is among the top 25 largest insurers in the nation. They specialize in commercial line insurance, personal lines insurance, excess and surplus lines insurance, life insurance, and investments. They are headquartered in Fairfield, Ohio, and utilize locally-based agents to provide the best customer service possible. Locally based agents, since they are well acquainted with the area, are able to serve the communities that they are in (as they know the landscape and social aspects of the city) better than anyone else. Cincinnati Financial is broken up between their financial services and its insurance services. The Cincinnati Insurance company consists of four subsidiaries: The Cincinnati Casualty Company, The Cincinnati Indemnity Company, The Cincinnati Life Insurance Company, and The Cincinnati Specialty Underwriters Company. Their financial branch also has three principal subsidiaries: CFC Investment Company, CSU Producer Resources, and Cincinnati Global Underwriting Ltd (based in London). 

Strengths

Large Domestic Presence

Cincinnati has a large domestic presence within the United States. Currently, Cincinnati Financial can operate all  their business segments in 45 states; although they have a presence in 50. With a primary focus on p&c insurance, Cincinnati Financial has extensive outreach.

2019 Consolidated Revenue
2019 Consolidated Revenue

2020 was a fantastic year across the board for all the niche insurance markets that Cincinnati Financial caters to. 

Property Casualty Insurance Results 

Property and Casualty Insurance: Helps protect you and the property you own such as auto, home insurance and liability insurance if you are found guilty of causing injuries

Their property-casualty insurance saw a significant boost in earnings in 2020. In the second quarter of 2020, Cincinnati Financial was able to open up 95 new agencies in the first six months of 2020, of those 95, 23 promote only Cincinnati Financials products. In addition to opening up more lines of business, 2020 resulted in $83 million of property-casualty net written premiums. Although COVID-19 impacted all sectors of the economy, new business for Cincinnati Financial did not take a severe toll; the second quarter resulted in only a 1% decrease in new business premiums.  

Commercial Lines Insurance Results 

Commercial Insurance: Covers businesses, their owners and employees. Such examples are insurance against crime, liability, business interruption insurance and workers compensation

Cincinnati Financials’ commercial lines also saw a boost in numbers. In the second quarter of 2020, they saw a $29 million increase in net written premiums due to higher renewal written policies. Since Cincinnati Financial carefully analyzes every insurance deal, with statewide restrictions, they saw a decline of 2% in new business premiums due to a lower volume of submissions by their agents.  

Personal Lines Insurance Results 

Personal Insurance: Covers personal assets and liability against an individual

High net worth clients accounted for a large portion of Cincinnati Financials’ growth in personal lines. In the second quarter of 2020, the net written premium for high net worth individuals grew 24% to $144 million. Overall, this segment of their business still took a toll due to government restrictions. New insurance submissions were slowed down, and this caused a loss of 6% in personal lines insurance.

Excess and Surplus Lines Insurance Results 

Excess and Surplus insurance refers to objects or businesses that a conventional insurer won’t cover. Some examples of this are daycare centers, mobile homes, or even oil rigs in the pacific ocean.

Due to the high risk involved in insuring such objects or businesses, the premium is typically more extensive than those of conventional insurances. As 2020 has been a turbulent year for many companies, this segment of Cincinnati Financial saw the best results. There was a 17% increase in net written premiums and a 14% increase in new business

Life Insurance Results 

Life Insurance: A life insurance policy is an exchange that you pay premium payments and in return the insurance company provides a lump sum payment to your beneficiaries in case of death.

The life insurance business segment saw an increase of 18% in earned premiums in the second quarter of 2020. Although they experienced an increase in earned premiums, the life insurance subsidiary saw a decrease of $19 million in the first six-months of 2020 due to losses from the impairment of fixed-maturity securities

Investments Line 

Investments for Cincinnati Financial saw a substantial gain as the stock market roared back after a slight dip in May. In the second quarter of 2020, they had a pretax total investment gain of $1.566 billion

Weaknesses

The Overall Insurance Market

The insurance market is a very competitive field. The barrier to entry is low compared to many specialized sectors, and competitions are fierce. Brand recognition and coverage are two of the most important aspects to be successful in insurance. A downturn in economic conditions poses an extreme threat to the insurance field, as fewer policies are made. Cincinnati Financial had a significant drop in EPS during the 2008 financial crisis.

A 2020 study done by Deloitte noted that the insurance industry is scrambling to grow and maintain probability in this volatile market. Changing consumer habits will force insurance agencies to integrate more technology into their ecosystems. Regulatory changes that are on track to come will force insurance companies to make significant changes in their fundamental business, such as tax policy, account, sale standards, and privacy protection.  

Annual EPS
Annual EPS

Opportunities

Technological Developments

Technology is an essential tool that will be desired by many consumers in the coming years. When it comes to insurance, technology can have a massive effect on the way the insurance process is streamlined. Robo advisory is the next sought-after feature for many taxes and insurance carriers, 58% of Americans expect to use Robo advisers by 2025 along with human service. Leveraging the power of automation and AI could cut down costs across the board and improve customer satisfaction. Utilizing powerful upcoming tools for data analytics and service to customers will be the needed addition to many insurance carriers to surpass their competition and stay relevant to changing consumer behaviors.

Acquisitions or Organic Growth

In 2019, Cincinnati Financials acquired MSP Underwriting for an all-cash deal of $134 million. MSP Underwriting had great success in the underwriting business as they generated a profit in 20 of the last 24 years. This move was made to support Cincinnati’s effort to expand its presence outside of the U.S. and bring in experts to its already developing insurance domain. MSP is based in London, which allows Cincinnati Financial to enter the emerging European market.So far, MSP Underwriting is the biggest and most recent acquisition made by Cincinnati Financial. 

Revenue Growth

Annual Revenue Growth
Annual Revenue Growth

Cincinnati Financials has had outstanding revenue growth over the past five years. From 2105 to 2018, their revenue was stagnant, but in 2019 their acquisition of MSP underwriting increased their revenues tremendously. The addition of MSP opened up new markets for Cincinnati Financials to enter as well as acquiring top talent in the industry that was able to produce a profit consistently. Their acquisition was a move in the right direction, and although giant leaps such as 2019 are not to be expected moving forward, their revenue growth is projected to increase in the coming years. 

Long-Term Debt

Long-Term Debt
Long-Term Debt

Long-Term debt seems to flatten out over the years; the MSP underwriting acquisition was an all-cash deal that required no debt financing. Steady levels of debt show that Cincinnati Financial can maintain its operations without financing, which is always a healthy sign. 

Debt-To-Equity

Debt to Equity Ratio
Debt to Equity Ratio

Overall, Cincinnati Financial maintains an outstanding debt to equity ratio. Industry standards to have a healthy obligation to equity ratio is around 1 to 1.5. Throughout the four years that we’ve analyzed Cincinnati Financial, their debt to equity ratio averaged around .11. As we saw, the sudden decrease in 2019 was due to the merger that boosted shareholder equity. Since it was an all-cash deal, their long-term debt stayed the same. Cincinnati Financials is only in debt around 11 cents for every $1 of equity. 

Earnings Per Share

Annual EPS
Annual EPS

Earnings per share have fluctuated over the years, although 2019 was a tremendous year for Cincinnati Financial across all their metrics. Fluctuations in EPS can be due to a variety of reasons, but Cincinnati Financials seems to be able to uphold its EPS in a very  competitive industry. Their brand name recognition and competitive rates have  fared well over the past four years. As the impact of 2020 becomes evident by the end of the fiscal year, we will see if Cincinnati Financial will be able to continue its upward trend. 

Cash Flow Metric

Annual Cash Flow For CINF
Annual Cash Flow For CINF

Free cash flow is a critical metric, especially for dividend aristocrats, as it shows the health level of the company and their potential to pay their dividends. Cincinnati Financial maintained a good Cashflow  over the last four years. This cash can be used for many purposes besides paying dividends. Since automation and data analytics become a necessary aspect for big companies to succeed, CINF will have the ability to invest and grow without acquiring too much debt. 

Dividend Growth

Annual Dividend Growth
Annual Dividend Growth

Strong free cash flow and steady debt allowed Cincinnati Financials to uphold its promise to its investors by raising their dividends annually. They have a five-year growth rate of 4.03% and a three-year growth rate of 5.28%. 2020 was another year of growth, as their expected annual dividend is set to be $2.40. 

Payout Ratio

Cincinnati Financial boasts a trailing payout ratio of 57.14%. Based on this year’s estimate, it is expected to have a payout ratio of 76.68%. This year’s payout ratio is considered slightly above the healthy payout ratio, which usually ranges between 35% to 55%. 

Final Thoughts

Cincinnati Financial has been able to raise its dividend modestly for the past 28 years. Strong fundamentals and solidly profitable business models have allowed Cincinnati Financial to acquire MSP Underwriting for all cash and raise its dividends. From a value standpoint, Cincinnati offers a very stable dividend, although, from a growth perspective, Cincinnati does not provide the same returns that many popular stocks do. 

Written by: Armand Bogdan
Published on: Tuesday, September 15, 2020 4:00 PM

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