Cincinnati Financial Corporation — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Cincinnati Financial is principally a property-casualty and life insurer operating through independent agencies, with a substantial investment portfolio.
Financial results and key metrics
- Revenue: $2.159 billion, up 76% from $1.224 billion. Earned premiums rose 6% to $1.333 billion; net investment income rose 5% to $157 million.
- Investment gains: Net gains were $663 million, versus a $191 million loss in Q1 2018. The 2019 amount included $652 million of unrealized gains on equity securities still held, making reported revenue and profit highly sensitive to market prices.
- Profit: Net income was $695 million ($4.22 diluted per share), versus a $31 million net loss ($0.19 loss per share). Comprehensive income was $883 million, versus a $201 million loss.
- Property-casualty underwriting: Earned premiums increased 6% to $1.267 billion; underwriting profit was $91 million versus $29 million. The combined ratio improved to 93.0% from 97.9% (below 100% indicates underwriting profit). Results included $67 million favorable prior-year reserve development and $74 million of catastrophe losses, net of reinsurance. Personal lines remained unprofitable, with a 101.3% combined ratio; commercial lines were 90.8% and excess and surplus lines 83.5%.
- Cash flow: Operating cash flow was $200 million versus $154 million. Investing activities used $56 million and financing activities used $126 million. Cash and cash equivalents ended the quarter at $802 million.
- Capital and liquidity: Total assets were $23.352 billion and shareholders’ equity $8.630 billion. Book value per share rose to $52.88 from $48.10 at year-end 2018. Debt was $820 million, and the debt-to-total-capital ratio was 8.7%, down from 9.5%. The revolving credit line had $268 million available, plus a $300 million accordion feature.
- Shareholder returns: The quarterly dividend increased to $0.56 per share; $85 million of dividends were paid in the quarter. No shares were repurchased.
Material changes versus Q1 2018 and year-end 2018
- The swing from investment losses to substantial equity-market gains was the principal reason for the sharp increase in net income. Fixed-maturity unrealized gains also increased as interest rates declined and corporate credit spreads narrowed.
- Property-casualty net written premiums increased 10%. Management attributed growth to renewals, new business, Cincinnati Re and the newly acquired MSP operation. Catastrophe losses increased, but lower non-catastrophe weather losses and favorable reserve development supported underwriting results.
- Equity increased 10% from year-end, and book value per share increased 10%. The reported value creation ratio was 11.1%, compared with negative 2.7% in Q1 2018, largely reflecting investment gains.
- The company acquired London-based specialty underwriter MSP on February 28 for $64 million in cash, subject to post-closing adjustments. MSP’s results were included from the acquisition date and were described as immaterial for the quarter. The purchase allocation included $31 million of goodwill and $50 million of identifiable intangible assets.
Outlook, management commentary, risks and contingencies
- No specific consolidated earnings or revenue guidance was provided. Management said 2019 performance could be below its long-term targets. Its stated long-term objectives include property-casualty premium growth above industry levels over five years and a GAAP combined ratio of 95%–100% over five years.
- Management cited continued pricing and underwriting initiatives, including high-single-digit average renewal increases in commercial and personal auto during the quarter, and described plans to continue agency appointments and integrate MSP. It expects no material increase in debt beyond available credit capacity during the remainder of 2019.
- Key exposures include catastrophe severity and frequency, uncertain loss-reserve estimates, equity-market declines, interest-rate and credit-spread movements, low rates limiting investment income, reinsurance availability and collection, competition, technology and cyber risks, regulation, and successful integration of MSP.
- Property-casualty loss reserves are the company’s most significant estimate. Management reported $67 million of favorable prior-year development, but noted unfavorable homeowner development from higher-than-anticipated losses on known claims. Future reserve changes could materially affect results.
- MSP had $192 million of operating loss carryforwards subject to limitations; they may be used only within the MSP group. The company’s MSP internal-control integration was in progress and expected to be completed by December 31, 2019; MSP was excluded from the quarter-end internal-control evaluation as permitted by SEC rules.
- Ordinary-course insurance litigation was not considered material. The company said other legal matters were accrued when probable and estimable; a substantially larger-than-accrued judgment or settlement could affect results or cash flows. No material change in risk factors was reported.
Most important facts for investors to verify
- How much of reported earnings and book-value growth reflects market-driven, unrealized equity gains rather than recurring underwriting and investment income.
- Whether premium growth and pricing actions translate into sustained underwriting profitability, particularly in personal lines and homeowner coverage.
- The adequacy and development of loss reserves, including catastrophe and wildfire-related claims, and the sustainability of favorable prior-year development.
- MSP’s post-closing purchase-price adjustments, contribution to earnings, integration progress and capital requirements at Lloyd’s.
- Portfolio sensitivity to equity prices, interest rates and credit spreads, alongside the company’s debt, available credit and dividend capacity.