matthias

$CINF and $AFG long investment

Long
matthias Updated   
NASDAQ:CINF   Cincinnati Financial Corporation
UPDATE: The image I embedded in the TV chart for this idea was somehow rejected on the post. So I posted it on Imgur instead.
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The chart I present for this idea doesn't look like a normal TradingView chart. The reason is that this is not a trade, based on chart technicals, but an investment, which I intend to hold for years. So, I don't care quite so much whether the stock wiggles upward or downward or sideways over the next two weeks. If you're looking for a trade, stop reading now. This idea is not for you.

If you're still reading, you're waiting for an explanation of the above chart. I I'll get to that, but first I want to step back a bit further.

I spent the last week looking through US-listed insurance companies for a candidate to invest for the long haul.

Why?

First: Real yields are at 2.5%, a level not seen since the GFC. This favors owning low-risk bond portfolios -- the kind insurance companies have. Both AFG and CINF have about $1.50 in investments for every dollar in market cap.

Second: As rates plateau, the AOCI losses that depress the tangible equity of insurance companies can gradually reverse, becoming a value creation tailwind. AOCI is 6% of CINF 's tangible BV, and 14% of AFG 's. This is very modest. Other insurance companies ($LNC...) ignored duration risk and had their portfolio bludgeoned half to death. From a short-term point of view, that makes LNC perversely intriguing. If that stock survives its could get quite the bounce. But owning insurance stock shouldn't be a thrilling experience.

Third: Insurers are raking in big rate increases as they reprice catastrophe risks, inflation, and "social inflation". Florida homeowners know what I'm talking about.

And lastly: CINF has a beta of 0.65, AFG has a beta of 0.8. In other words these are "defensive" stocks, unlike banks, say. In uncertain times, insurers may suffer less than other industries. Though, the record is a bit uneven on that: During the dotcom crash they did well, in the GFC and pandemic, not so much.


So, to finally get to the chart: What even is the Tangible Value Creation Ratio? It's a modification of a key metric that CINF uses to manage their business. Here's their definition:
“Value Creation Ratio” means the total of 1) rate of growth in book value per share plus 2) the ratio of dividends declared per share to beginning book value per share.

I prefer tangible book value to book value, so that's what I use. But that quibble aside, I really like this metric: It captures what I am truly interested in as an investor: Dividends and growth in the value of common shareholder's tangible equity. And the ratio also doesn't penalize companies for their choices with respect to dividend policy, capital structure, stock splits, and so on. It simply holds management responsible for the outcome to common shareholders. So, I calculate that ratio on a quarterly basis, aggregate it over multi-period spans and then annualize it. I think this ratio is particularly suited for a long-term analysis, since there's a certain variability in the short term, due to catastrophe losses and/or rate fluctiations. I actually did create the chart for a full 20-year span. If anyone wants to see it, let me know. But CINF 's executive team came on in 2011, and it seems that the performance of the company has improved substantially since then.

Obviously, Berkshire Hathaway is the biggest insurer in the group. And based on this chart it looks very fairly priced for its excellent long-term performance. So why don't I want it? It's not that I don't trust Buffett & Munger, or their eventual replacements. I am more concerned about investors' reaction to these legends passing the baton. Whenever and however that might happen. To me, this just seems like a big event risk. As for PGR , I'd love to own it, if it ever comes back from the valuation stratosphere. RLI also seems like a very well-run insurer. But the slight edge in long-term performance doesn't seem to justify the huge bump in valuation.

A word about my data: I calculated these metrics programmatically, using financial statements downloaded from public sources. I did verify some of the data and calculations, but the testing is limited at this point. If anyone wants to compare notes, I am happy to.

As a last note: CINF will report earnings after the close today. (Thursday, 2023-10-26). I bought some yesterday. But I doubt that the stock will jump in a meaningful way after earnings, even if they turn out to be brilliant. This thesis will likely take several years to play out one way or the other.
Comment:
The chart I embedded as an image didn't seem to make it into the idea. So, here it is again, as a link:
imgur.com/a/0oTxwp4
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