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Cincinnati Financial: A Potential COVID-19 Casualty

Paul Franke profile picture
Paul Franke


  • If courts rule Cincinnati's business interruption policies must pay for the COVID-19 situation, the stock may have little value.
  • Weakening trading momentum suggests a tough road may lie ahead for common equity investors.
  • Listing the stock as an Avoid, Sell, or Short idea is a caution-based approach, measured against thousands of safer investment choices.

Cincinnati Financial (NASDAQ:CINF) is a diversified insurer, with a focus on commercial property & casualty coverage and policies. Cincinnati’s biggest operating dilemma is its potential exposure to billions in business interruption insurance claims from the COVID-19 business shutdown ordered by U.S. and state government agencies.

Image Source: Company Website

While the company does not have a specific exclusion for pandemics in its written policies, like some other issuers, management believes they can skirt major business interruption payouts as “property damage” or “loss to property” is a written requirement for policyholders. CEO Steven Johnston explained this rationale in the latest conference call with analysts. Nevertheless, investors are starting to believe judges and jury trials will classify a loss to property to include the lost use of property from government-mandated closure. With 63% of premiums from commercial and excess/surplus lines generally in 2019 (including 37% of premiums derived from basic commercial property & casualty policies), Cincinnati could have one of the biggest insurance company exposures to COVID-19 claims.

Page 109 of the 10-K lists a potential claims amount of roughly $1 billion on its regular property & casualty policies, given a once every 250-year catastrophe in a single city. On top of that, the company is involved in the reinsurance market. Page 30 of the 10-K describes potential losses of $180 million in a once every 250-year hurricane event from this unit, using standardized industry catastrophe models. I have personally explained the economic losses from the coronavirus as similar to a natural disaster like a hurricane, but on a scale of 10 or even 100 times, hitting cities all over the planet. Using this line of reasoning, if legal claims and arguments on business interruption fail for Cincinnati, the hit could be enormous.

Business interruption payouts will likely be litigated in the

This article was written by

Paul Franke profile picture
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in CINF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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Comments (9)

Physical damage = physical damage. Period. If aliens land and circle the city of Indianapolis, placing it under siege, and none of your customers can enter your business, you don't need specific "alien siege exclusion" language. You still have your physical warehouse or store standing.
If you believe "Mr. Market tells more to the story", than what did Mr. Market tell you on March 23, and what did Mr. Market tell you the 30+ days thereafter? The answer is an exuberance of behavior fueled by current suppositions directing cash flows. CINF is high quality, well capitalized, and a top Dividend King on the list. The Insurance Contract will speak for itself in the midst of all the fluff.
The CEO can say whatever he wants to say and the lawyers can say the same thing BUT Mr. Market is telling you there is a lot more to the story than what the CINF lawyers say. The fact it is so underperforming other insurance stocks the last few weeks says there is a skunk under the porch.
Analysts have slashed their revenue forecasts and the short sellers are circling the wagons.
@Paul Franke: Hey Paul, a heads-up for you: Pandemics are not covered under business interruption insurance policies since there is no direct PHYSICAL loss to the property.
cplui profile picture
Aloha Paul - I love your line "courts rule its business interruption insurance really isn’t business interruption insurance". If the courts rule in the insurance company's favor, isn't that deceptive practices? Comes to the point where you need to hire a lawyer to read the fine print of what is truly covered and not. In general, the reason why folks don't like insurance companies, no problem in taking your premiums but give you a hard time in paying out claims. Take care and stay safe!
Thanks for writeup!

However why not mention Chubb in this context? . As looked through their transcript.

"Secondly, the insurance industry, for the most part, except for those customers who discreetly purchased it, BI insurance doesn’t cover COVID-19. It covers and requires direct physical loss to a property. And the regulators who’ve approved these forms, because we’re highly regulated, confirm that themselves that it’s not contemplated. Now, lawyers and the trial bar will attempt to torture the language on standard industry forms and try to prove something exists that actually doesn’t exist and try to twist the intent when the intent is very clear and the industry will fight this tooth and nail."

So they seem to follow similar contracts. Except they actually having those businesses paying up for the extra coverage. And there they have to pay claim of course. I would just assume premium paid would been much higher if such cover would be part of policy from beginning.
So here is what the CEO actually said on the earnings call about liability due to pandemic business disruption the earning call:

“Virtually, all of our commercial property policies do not provide coverage for business interruption claims unless there is direct physical damage or loss to property. Because the virus does not produce direct physical damage or loss to property, no coverage exists for this peril, rendering an exclusion unnecessary. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific exclusion for COVID-19. ”

There is also risk to explicit wording in contracts, e.g., when was it declared a pandemic, is the term “pandemic” a legal term or “term of art”.
InsuranceShark profile picture
Interesting; no virus exclusion what were they thinking? Even if they come out of this alive - Not good underwriters and wouldn't touch them. It's easy to grow an insurance or reinsurance company - anyone can do it. But grow it profitably with prudent underwriting, that's the value creation I'm looking for.
ARG1 profile picture
Shark there was an exclusion of nonphysical damage which would exclude virus epidemic. Legally there would be no grounds to make a claim unless there was physical damage loss to property.
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