Cincinnati Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; dollar figures below are in millions except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenues | $1,915 | $1,412 | $4,697 | $4,321 |
| Earned premiums | $1,298 | $1,247 | $3,852 | $3,696 |
| Net investment income | $154 | $153 | $458 | $453 |
| Net investment gains | $458 | $7 | $372 | $156 |
| Income before taxes | $618 | $129 | $832 | $533 |
| Net income | $553 | $102 | $739 | $403 |
| Diluted EPS | $3.38 | $0.61 | $4.49 | $2.42 |
| Property-casualty combined ratio | 96.8% | 99.3% | 97.3% | 99.1% |
Revenue rose 36% in the quarter and 9% year to date; net income increased 442% and 83%, respectively. The earnings comparison is substantially affected by the 2018 accounting change for equity securities: fair-value changes on equity securities still held are now recognized in net income. Those changes contributed $450 million of Q3 and $351 million of nine-month investment gains. The company says the comparable gains previously would generally have appeared in other comprehensive income, not net income. Q3 net income also included approximately $56 million after tax from certain nonrecurring items, primarily tax accounting method changes.
Property-casualty underwriting produced a $42 million Q3 profit and $107 million for the first nine months. Nine-month combined ratio improved 1.8 percentage points year over year. Results included 7.4 points of current-year catastrophe losses and a 3.3-point benefit from favorable prior-year reserve development. Personal lines remained unprofitable, with a 105.4% nine-month combined ratio; commercial lines and excess-and-surplus lines were profitable.
Balance sheet, cash flow and capital
- At September 30, total assets were $22.480 billion, shareholders’ equity $8.334 billion, investments $17.433 billion and cash and cash equivalents $616 million.
- Book value per share was $51.22, up from $50.29 at year-end 2017. Debt-to-total-capital was 8.9%, versus 9.0% at year-end. Management reported $817 million total debt, including $787 million long-term debt and $30 million short-term borrowing; $195 million remained available on its revolving line.
- Nine-month operating cash flow was $826 million, compared with $746 million in 2017. Investing activities used $380 million and financing activities used $487 million; cash declined $41 million from year-end.
- Dividends declared were $1.59 per share for the first nine months. The company paid $251 million in dividends and repurchased $125 million of shares during the period.
Changes, outlook and risks
- Earned premiums rose 4% in both the quarter and year to date. Nine-month net written property-casualty premiums grew 4%. Management cited renewal pricing, agency growth and Cincinnati Re expansion as contributors.
- The combined-ratio improvement benefited from lower catastrophe losses year to date, but noncatastrophe weather losses rose, and current accident-year loss ratios before catastrophe losses increased. Prior-year reserve releases were larger than in 2017; reserve estimates remain inherently uncertain.
- Management cited high-single-digit average renewal price increases in commercial and personal auto, and ongoing pricing, segmentation and underwriting initiatives. Personal auto and commercial auto were identified as areas needing improved profitability. No new quantified full-year earnings or revenue guidance is provided in the supplied filing text.
- Investment income grew only 1% year to date. Management noted reinvestment pressure from low yields and reported that rising rates and wider credit spreads reduced fixed-maturity unrealized gains. Equity-market declines could also materially affect portfolio values and book value.
- On October 12, the company announced an agreement to acquire MSP Underwriting Limited for £102 million (approximately $134 million at the cited exchange rate), subject to approvals and other conditions, with closing expected in Q1 2019. The company hedged currency exposure. Risks include failure or delay to close, integration costs, international regulation and currency, political and Brexit-related uncertainty.
- Tax expense benefited from the lower federal statutory rate and IRS-approved accounting-method changes. The latter reduced the effective tax rate by 8.1 percentage points in Q3 and 6.0 points year to date; management expected to complete its Tax Act accounting in Q4 2018.
- Ordinary-course claims litigation was described as not material after reserves; other legal matters could have a material effect if outcomes exceed accruals. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Separate underlying operating earnings from the large equity fair-value gains now reported in net income, and assess the effect of the accounting change on year-over-year comparability.
- Review the sustainability of favorable prior-year reserve development and monitor personal-auto and commercial-auto loss trends, catastrophe experience and weather losses.
- Track investment portfolio sensitivity to interest rates, credit spreads and equity markets, including effects on book value and future investment income.
- Confirm MSP transaction approval, purchase economics, integration progress and any Brexit-related operational or regulatory impacts.
- Assess the extent to which the tax benefit from accounting-method changes is nonrecurring and whether final Tax Act accounting changes the reported tax position.