Since reaching its peak in net earned premiums in 2006, Cincinnati Financial’s (CINF) top line has steadily declined over the past three years. The company has been challenged by a difficult operating environment over that span. A weak economy, strong price competition, and higher-than-anticipated catastrophe loss levels have led to the slide. However, it appears that 2010 will end the string of top-line setbacks.

Through the first half of 2010, the company’s top line showed improvement due to the strong performance of the Commercial Lines segment and the growing contributions from the Personal Lines business. However, due to large catastrophe losses that have caused the combined ratio (the sum of the loss and expense ratios) to spike upward, Cincinnati Financial did not register the share-net gains we had expected through the first six months of the year.

Cincinnati Financial’s results have been affected by higher-than-anticipated combined ratios the past three years, stemming from record catastrophe losses. A return to historic loss levels would likely alleviate much of the pressure placed on underwriting margins. Another factor contributing to narrowing margins has been weak pricing. In this challenging economy, the P&C industry has become significantly more crowded, leading to pricing competition to garner new business. The company has actively been working to combat these difficulties and lower the combined ratio through cost-containment efforts.  The Personal Lines administrative system is a good first step in eliminating unnecessary costs associated with issuing new policies. This program which was designed to generate policy prices more rapidly, allows for a more efficient process in issuing new policies. It also leads to better communication between offices.

Management has identified the Personal Lines segment as the company’s largest opportunity for growth over the next few years. Personal Lines policies come with higher premiums and wider margins than the high-volume Commercial Lines plans. Cincinnati Financial has laid out the framework for a plan to ramp up the Personal Lines business. First, the company has begun expanding its domestic presence, opening up field offices in untapped regions and bulking up pre-existing offices where growth opportunities seem attractive. Cincinnati currently operates in 37 states, but since 2007 it opened new operations in Texas, Colorado, Wyoming, New Mexico, and Washington. While it may take a few years to get fully acclimated in the new regions, it seems the company has positioned itself well to take advantage of the likely rebound in the property & casualty insurance industry in the coming years. These efforts should create new revenue streams and lead to net earned premiums growth over the coming years as business is ramped up.

Management has stated a focus on creating insurance policies custom-tailored to various regional markets to better serve the differing needs of its consumer base. These unique policies should also drive new business and carry relatively wide margins.

Despite its recent struggles, Cincinnati Financial continues to increase shareholder value though share repurchases. The company has been buying back shares of its common stock at a steady clip over the past decade. With over $1 billion in cash and equivalents on the ledger, we look for further repurchases, which ought to support the bottom line.

The stock has appeal for those investors seeking total-return potential. The company has increased its dividend each of the past 49 years. The equity provides a generous dividend, currently yielding just over 5.5%. However, it seems that most of the price appreciation we project is already discounted in the recent quotation.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.