Cincinnati Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; dollar amounts are in millions except per-share data.
Business context and key financial metrics
The company is primarily a property-casualty and life insurer distributing products through independent agencies. It also operates reinsurance and investment businesses. COVID-19 and related economic disruption affected premium growth, claims experience and investment markets.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Earned premiums | $1,522 | $1,446 | $4,460 | $4,163 |
| Total revenue | $2,227 | $1,700 | $4,842 | $5,772 |
| Net investment income, after expenses | $167 | $161 | $498 | $478 |
| Investment gains (losses), net | $533 | $86 | $(132) | $1,113 |
| Net income | $484 | $248 | $167 | $1,371 |
| Diluted EPS | $2.99 | $1.49 | $1.03 | $8.30 |
| Property-casualty combined ratio | 103.6% | 94.2% | 101.8% | 94.6% |
Q3 underwriting results were reduced by catastrophe losses, mostly weather-related. Property-casualty catastrophe losses were $267 million for the quarter and $624 million year to date, versus $74 million and $278 million, respectively, in 2019. For the first nine months, favorable prior-year reserve development was $91 million, compared with $203 million in 2019.
At September 30, total assets were $26.370 billion, shareholders’ equity $9.745 billion, cash and equivalents $914 million, and total debt $911 million ($123 million short-term and $788 million long-term). Book value was $60.57 per share, essentially unchanged from $60.55 at year-end 2019; debt-to-total-capital was 8.5%, up from 7.7%.
Operating cash flow was $1.119 billion for the first nine months, versus $880 million in 2019. Cash dividends paid were $280 million and share repurchases were $256 million. The board’s quarterly dividend was $0.60 per share; the indicated annual rate was $2.40.
Material changes versus the comparable period
- Q3 net income rose 95%, principally because after-tax investment gains increased by $352 million; higher catastrophe losses reduced after-tax property-casualty underwriting income by $106 million.
- Nine-month net income fell 88%, primarily reflecting $984 million less in after-tax investment gains and losses and $229 million less in after-tax property-casualty underwriting income.
- Equity market volatility drove a sharp swing in recognized investment results: Q3 gains were $533 million, while the nine-month period recorded a $132 million net investment loss. The company recorded $78 million of fixed-maturity security write-downs year to date, mainly in energy.
- Property-casualty earned premiums grew 7% year to date, but net written premium growth slowed to 3% in Q3 from 10% in Q1. Management cited weaker economic exposure bases and lower new-business premiums in some segments.
Outlook, risks and unusual items
- Management did not provide a numerical earnings or premium forecast. It said future premiums and losses remain difficult to estimate as pandemic effects evolve. Price increases and underwriting initiatives are expected to support future results, but no quantified outcome was provided.
- The company estimated pandemic-related incurred losses and expenses of $72 million through September, including $22 million of business-interruption defense costs, $16 million of Cincinnati Re losses, $10 million of Cincinnati Global losses, $8 million of uncollectible-premium credit losses and a $16 million personal-auto policyholder credit.
- COVID-19 business-interruption litigation and potential legislation or court decisions could extend coverage beyond policy terms. The company said adverse outcomes could materially affect results or cash flows; it considered current related litigation liability immaterial, subject to uncertainty.
- Other key risks include catastrophe severity, reserve-estimate uncertainty, prolonged low interest rates, investment-market and credit volatility, premium-payment deferrals, and potential deterioration in agency or reinsurance relationships. The filing says risk factors were not materially changed other than the added COVID-19 exposure discussion.
- Management reported $177 million available under its revolving credit line, plus a $300 million accordion feature, and stated it did not anticipate a material debt increase beyond available capacity during the rest of 2020. The debt-to-capital covenant threshold was 35%.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $2 million after-tax reduction to retained earnings. It reported no allowance for credit losses on fixed maturities at September 30.
Important facts for investors to verify
- Whether catastrophe losses and reserve development normalize, and how those changes affect the combined ratio and underwriting profitability.
- Developments in COVID-19 business-interruption claims, related litigation and any legislation or court rulings expanding coverage.
- Investment-portfolio performance, including equity valuation swings, fixed-maturity impairments and the effects of low interest rates on future investment income.
- Premium growth and pricing adequacy as insured business activity, payrolls, consumer behavior and premium collections change.
- Liquidity, debt and capital distributions, including continued dividend capacity, share repurchases and subsidiary-dividend limits.