Cincinnati Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2021, compared with Q1 2020. Cincinnati Financial primarily writes property-casualty insurance through independent agencies and also operates life insurance and investment businesses.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Earned premiums | $1.544 billion | $1.456 billion |
| Total revenue | $2.227 billion | $(99) million |
| Net income (loss) | $620 million | $(1.226) billion |
| Diluted EPS | $3.82 | $(7.56) |
| Operating cash flow | $354 million | $167 million |
| Cash and equivalents, March 31 | $947 million | $900 million at Dec. 31, 2020 |
| Total investments, March 31 | $22.018 billion | $21.542 billion at Dec. 31, 2020 |
| Shareholders’ equity, March 31 | $11.138 billion | $10.789 billion at Dec. 31, 2020 |
| Debt-to-total-capital ratio | 7.1% | 7.2% at Dec. 31, 2020 |
Investment results drove the year-over-year earnings swing. Net investment gains were $504 million, versus a $1.725 billion loss in Q1 2020; most of the 2021 gain was unrealized appreciation in equity securities still held. Net investment income rose 5% to $174 million. The large prior-year loss included $77 million of fixed-maturity impairment charges; none were recorded in Q1 2021. Accordingly, headline revenue and profit comparisons are not representative of underlying operating trends.
Property-casualty underwriting. Net written premiums increased 12% and earned premiums increased 6%. Underwriting profit was $133 million, versus $24 million; the combined ratio improved to 91.2% from 98.5% (below 100% indicates underwriting profit). Results included $110 million of favorable prior-year reserve development, versus $33 million, and $183 million of current-year catastrophe losses, versus $131 million. The reported combined ratio also benefited from favorable development on prior catastrophe losses.
- Commercial lines: $130 million underwriting profit versus a $20 million loss; combined ratio 85.4% versus 102.5%.
- Personal lines: $3 million underwriting loss versus $21 million profit; combined ratio 101.1% versus 94.3%, reflecting higher catastrophe losses.
- Excess and surplus lines: $8 million underwriting profit versus $9 million; combined ratio 92.0% versus 89.1%.
- Life insurance: $2 million segment loss versus $2 million profit, with higher death claims contributing to the decline.
Other balance-sheet and shareholder measures. Book value per share was $69.16, up from $67.04 at year-end 2020. The company declared a quarterly dividend of $0.63 per share, up 5% year over year. It repurchased 283,633 shares during the quarter for $28 million.
Material changes versus the prior comparable period
- Net income improved by $1.846 billion, primarily because investment results shifted from substantial losses in Q1 2020 to gains in Q1 2021; after-tax investment gains increased by $1.761 billion.
- Property-casualty underwriting improved, with lower current accident-year losses before catastrophes, a lower expense ratio, and more favorable prior-year reserve development. Catastrophe losses were higher and particularly affected personal lines.
- Operating cash flow increased to $354 million from $167 million. The company cited higher premiums collected and lower loss payments as key contributors.
- Fixed-maturity fair value was $12.308 billion, down $30 million from year-end, while equity securities increased in value; accumulated other comprehensive income fell to $625 million from $769 million, largely reflecting unrealized fixed-maturity investment changes.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management said premium growth could be pressured by pandemic-related economic effects, including reduced insured sales and payrolls, and uncertainty over premium payment deferrals. It cited pricing increases and underwriting initiatives as potential support for future profitability.
- Management reported no material change in its estimate of pandemic-related incurred losses and expenses during Q1 2021. It cautioned that future pandemic effects on premiums and losses remain uncertain.
- COVID-19 business-interruption lawsuits remain a significant contingency. The company denies coverage in the cases described, but litigation is at an early stage and management said it cannot reasonably estimate any possible loss or range of loss; aggregate adverse outcomes could materially affect results or financial condition.
- Investment risks include equity-market declines, interest-rate changes, credit spreads and the challenge of reinvesting maturing bonds at yields comparable to existing holdings. A modeled parallel 100-basis-point rate increase would reduce fixed-maturity fair value by approximately 4.7%; this is a sensitivity analysis, not a forecast.
- Management reported $845 million of total debt, a 7.1% debt-to-capital ratio, and $243 million available under its revolving credit line, plus a $300 million accordion feature. It did not anticipate a material increase in debt exceeding available line capacity during the rest of 2021.
- Property-casualty reserves are based on actuarial estimates and are the company’s most significant estimate; actual claim payments may differ. Gross property-casualty reserves increased $203 million from year-end, including a $180 million increase in IBNR reserves.
Important facts for investors to verify
- Separate recurring underwriting and investment-income performance from volatile equity-security gains and losses when assessing the earnings rebound.
- Track catastrophe losses, reserve development and reserve adequacy, especially the favorable $110 million prior-year development and the increase in IBNR reserves.
- Monitor personal-lines profitability and the effect of catastrophe activity, alongside commercial-lines results and premium growth.
- Follow COVID-19 business-interruption litigation, including court rulings and any change in the company’s ability to estimate potential exposure.
- Review equity-portfolio concentration and sensitivity to market declines, as well as fixed-maturity reinvestment yields and interest-rate exposure.