We recently published a list of The 10 best property and casualty insurance stocks to buy. In this article, we take a look at where Cincinnati Financial Corporation (NASDAQ:CINF) is performing compared to other property and casualty insurance stocks.
Property and casualty insurers face the most difficult market, mainly due to rising costs, high claims payments and discounts from insureds. To reignite growth, they must move to a more proactive strategy and take advantage of new developments and opportunities in auto, home and renters insurance.
With several insurers reporting solid profitability in 2023 and in response to some notable improvements in the reinsurance market, the insurance market was growth-oriented but disciplined in Q2 2024. Insurers’ strategies focused on underwriting and pricing for profitability and program stability. As we approach the middle of the decade, the property and casualty insurance industry continues to experience significant change driven by technological advances, fluctuating consumer preferences and evolving regulatory environments.
Property and casualty insurers are expected to leverage digital technologies to improve the customer experience. This will take the form of interactive digital ecosystems that build unique customer insights and integrate products and services to meet the demands of a digital world. Insurers plan to use technologies such as artificial intelligence (AI), machine learning and the Internet of Things (IoT) to improve customer service and optimize processes.
Climate change and property and casualty insurers
The increase in weather-related losses and the inflation-related costs of restoring the damaged assets continue to weigh on the profitability of home insurers. As we all know, this is a segment that was already under pressure due to years of persistently high loss ratios. Deloitte reported that in 2022, approximately 75% of insured losses in the property and casualty sector, or $74 billion, were attributable to the U.S. home segment.
As the severity and frequency of losses from natural disasters continues to increase at an estimated average annual growth rate of 5 to 7 percent, experts predict that U.S. homeowners could face losses of up to $118 billion as a result of weather events by the end of 2030. What approach should property and casualty insurers take in this situation?
Insurers, in collaboration with government agencies and policyholders, should invest approximately $3.35 billion in home resiliency measures. It is said that two-thirds of U.S. homes that are built sub-code can be built to withstand weather-related loss.
Deloitte also stated that such measures could save property and casualty insurers around $37 billion by the end of 2030.
Increasing insurance premiums is the preferred method for property insurers to offset the higher costs of disasters. Property and casualty insurers are increasing their premiums for homeowners to offset rising losses. This can mean big profits for the leading property and casualty insurers.
S&P Global said that across the U.S., most property and casualty insurers increased their home insurance premiums by about double digits last year. According to NOAA, there were about 28 weather and climate disasters in the U.S. last year, surpassing the previous high of about 22 disasters in 2020. Atmospheric and oceanic conditions may lead to an extremely active hurricane season. NOAA also said the hurricane season got off to a violent start with Hurricane Beryl, the earliest Category 5 Atlantic hurricane on record.
Higher costs and weather-related disaster damage
Every year, more and more natural disasters cause asset damage. The number of disasters in the US increased by ~32% between 2019 and 2022. As a result, property and casualty insurers’ losses increased from $25 billion in 2019 to $99 billion in 2022. This represents a whopping ~80% of global natural disaster losses. A recent report from Swiss RE suggests that total insured losses worldwide due to weather-related natural disasters exceeded $122 billion last year.
In addition, Capgemini revealed that economic losses have increased by a staggering ~250% over the past three decades due to climate and extreme weather events.
In 2020 and 2023, replacement costs for property damage and bodily injury increased by approximately 45%. This occurred when general inflation growth was around 15%. While some believe climate change could lead to disasters, housing needs are also driving risk.
Although climate-related risk remains, Americans still prefer to move to disaster-prone areas. In addition, they also build higher-quality homes in such regions. For example, between 1990 and 2020, about 44 million homes were built in regions where wildfires are quite common, such as California and Colorado. As a result of these factors, the combined loss ratio of the U.S. property and casualty insurance industry has worsened from about 98.8% in 2020 to about 102.7% in 2022.
What should property and casualty insurers do in the midst of this chaos?
Property and casualty insurers should look for alternative strategies such as loss prevention and loss mitigation if they want to survive in regions prone to extreme weather conditions.
The new homes built with modern building materials such as engineered wood, impact-resistant glass windows, and improved roofing can sustain damage from severe weather compared to the existing homes. For example, the average annual cost of wind damage for the home built in 2022 to building codes was about 84% lower than for a home built in the 1990s. According to the Federal Emergency Management Agency, the average annual damage from climate change could decrease by about 48% for homes that meet the specified criteria/codes.
To date, about 35% of residential buildings nationwide have been built according to the desired standards and regulations.
This means that property and casualty insurers can help the remaining 65% or so of homeowners upgrade their homes to meet desired standards.
For example, insurers can offer homeowners discounts on their insurance premiums. This will encourage them to upgrade their buildings to hazard-resistant standards and regulations. Property and casualty insurers can also make homeowners aware of applicable government incentives.
Our methodology
To compile the list of the 10 best property and casualty insurance stocks to buy, we used the Finviz stock screener and extracted the stocks related to the property and casualty insurance industry. Once we had our filtered list, we ranked the stocks based on the average analyst price target as of August 14.
At Insider Monkey, we are obsessed with the stocks that hedge funds invest in. The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (Further details can be found here).
A close-up of a hand signing a contract for a property and casualty insurance product.
Cincinnati Financial Corporation (NASDAQ:CINNF)
Average upside potential: 8.20%
Cincinnati Financial Corporation (NASDAQ:CINF) is a property and casualty insurance company that generates revenue through premiums collected. A select group of independent agencies actively markets the company’s commercial, home and auto insurance policies.
The company released its Q2 2024 results and the outlook for this property and casualty insurance company is optimistic. Revenue came in at $2.5 billion, beating analysts’ expectations by 3.9%. It also reported statutory earnings of $1.98 per share, beating analysts’ expectations by ~107%.
The strength of Cincinnati Financial Corporation (NASDAQ:CINF) lies in its consistent premium growth, which exceeds the industry average. Premiums earned have seen a significant increase, from $1,943 million in Q2 2023 to $2,156 million in Q2 2024, demonstrating the company’s effectiveness in managing its distribution channels and its strong relationships with independent agencies.
In addition to a healthy combined ratio of 98.5% in Q2 2024, the Company enjoys stable and growing investment income. The Company’s investment income increased from $220 million in Q2 2023 to $242 million in Q2 2024. The Company’s financial prudence and asset management strategies are expected to continue to provide overall financial stability.
Analysts at Keefe, Bruyette & Woods increased their price target on shares of Cincinnati Financial Corporation (NASDAQ:CINF) from $146.00 to $150.00 and gave the stock an “outperform” rating on March 1, 2020.st August. On average, 4 research analysts gave Cincinnati Financial Corporation (NASDAQ:CINF) a hold rating and 5 analysts gave a buy rating.
At the end of the first quarter of 2024, 24 hedge funds in Insider Monkey’s database held shares in Cincinnati Financial Corporation (NASDAQ:CINF). The total value of these shares is $625.8 million.
Total CINF takes 10th place on our list of the best property and casualty insurance stocks to buy. While we recognize CINF’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than CINF but trades at less than 5 times its earnings, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
