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Ask the Rational Investor: "Are insurance companies good investments?"

By: Ryan T. Fulmer
Wednesday, May 8, 2019

Many of our readers likely have home and auto insurance through Cincinnati Financial (CINF).  When I made the switch to Cincinnati Financial, I was told that prices may be a little more expensive, but if you ever have a claim, their service far exceeds other carriers.

Cincinnati Financial was founded in 1950, and in 2018 had net written premiums of over $5 billion, with 60% being in commercial lines, 26% personal lines, and the remainder from excess and surplus and life insurance.

Cincinnati Financial works with independent insurance firms, rather than captive insurance firms like Allstate or State Farm. Independent insurance firms usually work with 6 to 12 different carriers who are bidding for your insurance and may have more competitive prices than captive insurers.

At year-end 2018, Cincinnati Financial had 2,344 relationships in about 40 states. Once a new agency starts carrying Cincinnati Financials’ insurance, their market share of premiums written within the agency generally rises to an average of over 14% after ten years. As an investor, we appreciate the highly predictable revenue growth from expanding these relationships.

The company targets a “Value Creation Ratio (VCR)” of 10% to 13% over the next five-year period, which they define as the “annual rate of growth in book value plus the percentages of dividends to beginning book value” which is probably one of the reasons shareholders have done so well in CINF’s stock. From 2014 to 2018, the VCR averaged almost 11% per year!

With 58 consecutive years of shareholder dividend increases, and a 2.6% dividend yield (as of early March, 2019) investors have multiple ways to grow their investment over the long-run.

CINF’s stock has risen almost 24% year-to-date, compared to 18% for the S&P 500 (May 1, 2019). Investors should carefully weigh the current valuation of 1.6x book value—the valuation is in-line with the past few years, but looks more expensive over 15 years.

Source: Cincinnati Financial Company Reports

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