Cincinnati Financial Corporation (CINF) — Second-Quarter 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts are in millions unless noted.
Business context and financial performance
Cincinnati Financial is an insurer operating through commercial, personal, excess and surplus, and life insurance businesses, alongside its investment portfolio. Its insurance products are marketed primarily through independent agencies.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $2,714 | $1,913 | $2,615 | $4,072 |
| Net income (loss) | $909 | $428 | $(317) | $1,123 |
| Diluted EPS | $5.63 | $2.59 | $(1.96) | $6.81 |
| Earned premiums | $1,482 | $1,384 | $2,938 | $2,717 |
| Net investment income | $166 | $160 | $331 | $317 |
| Net investment gains (losses) | $1,060 | $364 | $(665) | $1,027 |
Second-quarter earnings benefited from $1.060 billion of net investment gains, mostly unrealized equity-security gains. First-half results reflected first-quarter market declines and $77 million of fixed-maturity security write-downs, leaving a six-month net investment loss. Net income therefore moved sharply with investment-market valuations.
Underwriting, cash flow, debt and liquidity
- Property-casualty net written premiums grew 6% in Q2 and 8% in the first half year over year. The consolidated property-casualty combined ratio was 103.1% for Q2 and 100.8% for the first half, compared with 96.5% and 94.8%, respectively, in 2019. Ratios above 100% indicate underwriting losses.
- Higher catastrophe losses were a principal pressure: $237 million in Q2 and $368 million in the first half, versus $145 million and $216 million in the comparable 2019 periods. Favorable prior-year reserve development was $47 million in Q2 and $80 million in the first half, below the prior-year first-half benefit of $151 million.
- Operating cash flow was $614 million for the first half, versus $476 million a year earlier. Cash and cash equivalents were $706 million at June 30, compared with $767 million at year-end 2019.
- Total debt was $910 million, including $122 million drawn on the short-term revolving line and $788 million of long-term debt. The debt-to-total-capital ratio was 8.9%, up from 7.7% at year-end. The company reported $178 million of remaining general line capacity and an additional $300 million accordion feature.
- Shareholders’ equity was $9.258 billion, down from $9.864 billion at year-end; book value per share fell to $57.56 from $60.55. First-half cash dividends paid were $185 million; the declared quarterly dividend was $0.60 per share.
Material changes, outlook and risks
- COVID-19-related incurred losses and expenses were estimated at $71 million for the first half, including approximately $65 million in Q2. Q2 components included business-interruption legal costs, reinsurance and Cincinnati Global losses, uncollectible premium losses, and a $16 million personal-auto policyholder credit.
- The pandemic slowed premium growth, particularly new business activity, and could further affect premiums through lower business sales and payrolls, payment deferrals, or distribution disruption. Reduced driving also lowered some reported claims, but future premium and loss effects were uncertain.
- Management cited potential material exposure if legislation or court decisions expand business-interruption coverage to COVID-19 claims without direct physical damage. The company also highlighted market volatility, catastrophe losses, reserve-estimate uncertainty, low interest rates, credit risk and economic weakness as risks.
- The company reported $80 million of favorable prior-year reserve development for the first half, while excess and surplus lines had $9 million of unfavorable development, partly reflecting claims remaining open longer than anticipated. Gross property-casualty reserves increased $321 million from year-end, including a $263 million increase in IBNR reserves.
- No quantified full-year earnings guidance was provided. Long-term objectives include a property-casualty combined ratio of 95%–100% over a five-year period and premium growth that exceeds the industry over five years. Management said pricing and underwriting initiatives should support future results, but it could not determine the pandemic’s future effects.
- The board increased the quarterly dividend to $0.60 in January, setting the stage for a 60th consecutive year of annual dividend increases. Management said the increase reflected confidence in capital, liquidity and financial flexibility; future dividends and repurchases remain subject to board review.
- The company stated ordinary-course litigation was not believed material and that risk factors were not materially changed apart from the specified COVID-19 coverage risk. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and book-value movement reflects volatile investment marks versus recurring insurance and investment income.
- Whether pandemic-related business-interruption claims, litigation and any coverage rulings create losses beyond current estimates.
- Whether catastrophe experience, elevated IBNR reserves and reserve development support the adequacy of loss reserves and future combined ratios.
- Whether premium growth, policyholder payment deferrals and the $122 million revolving-line balance affect cash flows, capital flexibility or dividends.
- How low interest rates, credit conditions and equity-market changes affect portfolio income, unrealized gains and capital.