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More Pain Ahead For Cincinnati Financial

Don Dion profile picture
Don Dion


  • Cincinnati Financial does not have specific virus exclusion in the vast majority of their business interruption policies.
  • As businesses litigate their claims in the months ahead, we believe that CINF will be especially vulnerable.
  • Risk-tolerant investors should consider shorting CINF for the medium term.

Note: This article was amended on 5/4/2020 to reflect a correction around the company's policy exclusions.

Cincinnati Financial (NASDAQ:CINF) has a problem. As businesses across the country comb through their Business Income / Interruption (BI) policies in the weeks ahead, the majority of CINF customers are going to arrive at a welcome realization: CINF does not, for the vast majority of BI policies, have a specific virus exclusion. We believe that the absence of virus exclusions is going to put CINF at a disadvantage to other insurers as litigation commences in the months ahead. CINF may well find themselves in the unenviable position of having to pay up - or having to pay more to defend themselves from lawsuits - while other insurers,

like Travelers (TRV), hide under the umbrella of a virus exclusion. We believe that this creates a unique opportunity for risk-tolerant investors to establish and benefit from a medium term short position in CINF.

The Landscape

There has been a lot of debate in the insurance industry in recent weeks surrounding the tremendous influx of BI claims being filed across the country by businesses large and small impacted by the coronavirus. Shut down for weeks, these businesses are desperately hoping to get some relief from the insurance companies they have been paying premiums to for years.

For claimants there are two major stumbling blocks. First, in order to trigger BI coverage, the claimant must prove that there has been physical damage to the building. This is a complicated question that involves what your definition of physical damage is. Lawyers are already making the case that contamination of the premises by the virus certainly meets the definition of physical damage.

In one of the first lawsuits filed concerning this issue, Cajun Conti LLC, Cajun Cuisine 1 LLC and Cajun

This article was written by

Don Dion profile picture
Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com

Analyst’s Disclosure: I am/we are short CINF. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (50)

@ don dion
I’m suggest you get familiar with the loss of market exclusion on these property insurance contracts... note it’s property insurance and business income is just supplemental ... just like when your car is in the repair shop and your auto policy covers rental car expenses up to 20 days.
Michael Dolen profile picture
Why isn't $CB being punished? I'm not following the pick and choose punishment for P&C insurers. Almost all of them don't have explicit language on viruses. Why $CINF is getting battered more isn't making a lot of sense to me.
Insurance companies just need.to pay up if they dont have the exclusions in their policies. Pay the big sum now....add the exclusions moving forward and avoid the MASSIVE sum of money they will pay to the courts. Because when all is said and done....the insurance companies will STILL have to settle for some amount of money in court.

Just pay it and get it over with.
IZZKUBE2.5 profile picture
@The Exception ,
I wouldn't bet $10, on that happening. If one caves...they will all cave.
Ain't going to happen
Praveen_Chawla profile picture
95% of the cases are settled before trial. Litigation is mostly negotiations.
ARG1 profile picture
Be aware those who are shorting! CINF is now ip 6% today. It will go much higher as folks cover their shorts. Also, shorts are responsible for the big dividend payments of CINF.
Agree with you on this one... I think we see a short term pump... the short narrative seems too obvious...
However the short float seems to only be at 1.17% according to Finviz. That’s quite low!
Michael Dolen profile picture
Plaintiffs may argue physical damage doesn't need to be something visible. There is nothing in $CINF fine print, nor for any other underwriter, that excludes microscopic physical damage to property. But has damage been done, whether microscopic or not?

If I were on CINF's legal team, in addition to arguing that definition, I would also point out this... how many of these businesses can prove physical damage (even if microscopic) as the reason they shut down?

Very, very few actually closed because of an active outbreak in a building.

They closed because of an abundance of caution or a govt mandated closure. The latter two reasons, I can't see how those qualify, even under the most liberal interpretation of coverage.
IZZKUBE2.5 profile picture
@Michael Dolen ,
I like your argument...non of these insurance will cave. Good buying opportunity, IMO.
@Michael Dolen I agree with you that there most likely isn't substantially BI exposure in the policy language itself. I am slightly concerned that there are discussions to retroactively force insurance companies as a whole to pay BI with the 'Business Interruption Insurance Coverage Act of 2020'. What do you think the likelihood these types of bills gain traction?
IZZKUBE2.5 profile picture
@Chaco Vera ,
All noise, it won't go anywhere. Individual One is shouting at the roof tops to sue, sue, sue...but he's had his hand out now for a lot longer!
IZZKUBE2.5 profile picture
@Don Dion ,

Mr Buffett addressed this subject over the weekend. He mentioned only one company that had a 'pandemic' coverage policy and didn't identify it (but, I believe that it's Llyods' of London). Buffett said that companies just don't insure (or are paid premiums for that). The lawyers will try, hopefully company's like CINF can get their legal costs reimbursed for frivolous claims.

What difference is it what Individual One says, when its just another lie. Is he a lawyer?
xKaotic profile picture
Was on my buy list during the panic but for some reason didn't take a position.
The fact the stock has gotten shellacked since the analysts conference call is clearly an indication of the following:

1. that the risks are far beyond their heavy dividend paying stock portfolio and the fact this will suffer given dividend payout ratios changing going forward.

2. That their business model is going to suffer for the next few years due to the fact they insist on their field reps to constantly be in the field for face to face meetings and

3. As mentioned above, the litigation is a real risk for them.

Do not buy the 50% crash in this dividend king unless you can afford “dead money”.
150Emerson: Couldn't the same be said ("unless you can afford dead money") for most stocks/companies except for Amazon or Facebook or Microsoft or Netflix or Google, on account of this virus pandemic?
Well let’s see how much stock the company buys in Q2 as they have historically been very active buyers when price drops.
It appears you are incorrect regarding CNA. From CNA conference call (CEO Dino Robusto) this morning:

"Our property policies require direct physical damage to the property from a covered peril for coverage through attack and on property policies whether issued in the US or international, all have exclusions barring coverage for viruses. There are a very few policies where coverage made this on small participation in our Lloyd's operation, but with total limit exposed is de minims. So with respect to business interruption, our property policy exclusionary language does not provide coverage for COVID-19 and as such, we never collect the premium for it."
Don Dion profile picture
Thank you for pointing this out. I was able to review an actual policy and did find a virus exclusion buried in the definitions. I will correct.
Probably not true for CINF either. It doesn't seem like you really check your facts. Just winging it like a lot of "research" on this site.
Don Dion profile picture
On their conference call Cincinnati admitted that they do not have a specific virus exclusion. You can read the Q&A section here: seekingalpha.com/...
Lawyers are good at finding loopholes. This will be litigated for years.Guess who will make most of the money.
Dennis rfm: Totally agree with that - will be litigated for year. Meanwhile, the claimants (the business people) go bankrupt with their respective businesses waiting for a decision. My friend who is in the insurance business says that most of these policies also exclude insurance companies from having to pay (it's written in their contract) when a business has been closed due to a civil authority (forced to close by a governor of your state; a local politician, etc.). Therefore, I think the insurance company does have many legal fronts to confront the plaintiff lawyers on this. I think I would rather be on the "insurance side" of this issue vs the "plaintiff side" on this issue.
Multiple courts have ruled that it is not a physical loss if the 'damage' can be remediated by cleaning. Additionally, the only reason any company has specific virus exclusions has been due to a court ruling against them as in the case with Traveler's, Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America.

The business would have to prove that the reason they are claiming BI was due to the fact that the building was contaminated with COVID-19; therefore, any business claiming Business Interruption coverage would have to prove that contamination existed that directly related to the interruption of business. This is not the same as a quarantine, voluntary or involuntary, because quarantines are not physical damage to the premises.

In the unlikely event a court rules in favor of the plaintiff, then the likely payout would be minimal as the insured would only be paid for the time that Business was Interrupted for cleaning. If it takes less than 24 hours to clean a Wal-Mart supercenter then I find it unlikely the payout for any of the CINF/CNA policyholders will be substantial.

Chaco Vera: Thank you for that wonderful (it's "wonderful" because I am a shareholder of CNA Financial and don't want their business to be affected by this virus, by having to payout claims that are clearly excluded from the policies that they write. Of course, if they -CNA - have written contracts that cover this type of occurrence, then they should pay without litigation), clarification and explanation of why their is a strong likelihood that CNA and other insurance companies that write business interruption insurance would not be legally liable for COVID-19 related losses.
"I can’t speak to what people’s manuscript forms look like and therefore whether they’re correcting weaknesses with that. I can’t speak to that. But generally, no, I think COVID-19 or pandemic-related exclusions are just belt and suspenders on policies -- on the basic policies that require direct physical loss."

Chubb ceo on Transpcript.

Why is not Chubb included in the problematic view?
I enjoyed your article. Insurance companies have experienced insurance lawyers on staff. They love to fight claims! As a business can you hire as good of a lawyer as they employ?

My wife was T boned by an uninsured guy in a borrowed Van. She was medivaced to ER. The guy that hit her was allowed to drive on to work and not even cited for no insurance despite running the red light witnessed by others! USAA quickly offered a low ball settlement on our totalled almost new car! We had to hire a lawyer who immediately raised cane with USAA and got full value price for our car! USAA tried to offer a settlement on the accident much less than the contract stated they owed! Our lawyer politely pointed out the contract provisions to USAA, who said their settlement offered was the best they would do!!!! The lawyer filed a lawsuit against USAA for not fully honoring their own contract!

What happened? As our lawyer was opening the door for my wife to enter court, the USAA lawyer came up to our lawyer and wanted to settle out of court for the full amount the contract specified! Our lawyer said the court would not award more so we settled on the court house steps. I asked the lawyer why they do that. He laughed and said it was very common for companies to try to settle claims for less than they contracted!!! He said it would have been better for all for them to be honest! When I see TV advertisement for USAA and how they are there for the military I just want to vomit.

I just won't invest in companies that actively try to cheat people. I could go on to tell you about how MetLife cheats military dependents in the survivors benefit annuity but that's an even longer sad tale!
Ice_Kold profile picture
Sorry to hear about your wife. Hopefully she's ok now.
@ jasonjones
I hope more people read your post and come to conclusion that is why you don’t want to bankrupt an insurance company with ridiculous pandemic claims. If USAA had to pay pandemic claims and go bankrupt what would have happened to your wife? Remember that pandemic claims represent a much bigger payout for the BAR clique so they won’t care about one claimant missing on their payout
Don Dion profile picture
Warren Buffett mentioned at his annual meeting on Saturday that some property and casualty insurance companies had exposure to Covid 19 and many insurance companies would have litigation expenses.
Yep. Insurance companies are investment companies to collect premiums not to pay out what is owed on their contracts claims. Buffett is seen as a genius investor. Why because he is a buy and hold investor with a continuous stream of money flowing in from policy holders in Geico! A rather stodgy CEF holds a 25% ownership of Plymouth Rock insurance and does pretty much the same thing although the insurance company has a terrible record of paying claims!
and since then CINF is up 10 points, not down your article was written when it was $58
@Don Dion: They just continued their new quarterly dividend from last quarter which was a 7% increase. Appreciate your thoughts on this.
Business interruption policies require physical damage to property in order to pay out losses. The legal battles involve if governments have the right to force insurers to retroactively change their policy language and cover business interruption without property loss
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

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