Cincinnati Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $1,152 | $1,035 | $3,359 | $3,041 |
| Net income | $131 | $111 | $395 | $229 |
| Diluted EPS | $0.79 | $0.68 | $2.39 | $1.40 |
| Net investment income, pretax | $133 | $132 | $392 | $395 |
| Net realized investment gains | $22 | $10 | $77 | $29 |
| Property-casualty combined ratio | 93.7% | 94.8% | 93.8% | 101.1% |
- Revenue increased 11% in Q3 and 10% year to date; earned premiums grew 12% and 10%, respectively. Nine-month net income rose 72%, principally reflecting improved property-casualty underwriting, fewer catastrophe losses and higher realized investment gains.
- Property-casualty underwriting produced profit of $61 million in Q3 and $173 million year to date, versus $45 million and a $23 million loss in the prior-year periods. Nine-month catastrophe losses were $165 million, down from $343 million. Favorable development on prior accident years was $140 million for the nine months, compared with $287 million in 2012.
- Comprehensive income was $177 million in Q3 versus $272 million a year earlier, despite higher net income; lower investment-related other comprehensive income contributed to the decline. Nine-month comprehensive income was $533 million versus $499 million.
Financial position, cash flow and capital
- At September 30, 2013, total assets were $17.339 billion, shareholders’ equity $5.816 billion and book value per share $35.51, up from $5.453 billion and $33.48 at year-end 2012.
- Cash and cash equivalents were $511 million, compared with $487 million at year-end. Nine-month operating cash flow was $538 million versus $433 million; investing activities used $320 million and financing activities used $194 million.
- Total debt was $894 million: $104 million of short-term borrowings and $790 million of long-term debt. Debt-to-total-capital was 13.3%, down from 14.1% at year-end. Management did not anticipate a material increase in debt during the remainder of 2013.
- Investments totaled $13.090 billion on the balance sheet. The investment portfolio’s fair value was $13.022 billion, including $3.984 billion of equity securities; the filing notes sensitivity to interest rates and equity-market declines.
- Cash dividends paid in the first nine months were $195 million. The quarterly dividend was increased to $0.42 per share in August, supporting a 53rd consecutive year of annual dividend increases.
Material changes and management outlook
- Commercial, personal and excess-and-surplus lines all grew premiums. Property-casualty net written premiums increased 13% year to date. Management cited pricing actions, agency growth and underwriting initiatives as contributors.
- Personal lines returned to underwriting profit: $14 million in Q3 and $33 million year to date, compared with losses of $12 million and $89 million. The nine-month combined ratio improved to 95.5% from 114.2%.
- Investment income remained pressured by low interest rates: nine-month pretax investment income declined 1%, and average pretax yield fell to 4.15% from 4.46%. Rising rates reduced fixed-maturity valuations; the portfolio’s fair value was 106.3% of amortized cost, versus 110.6% at year-end.
- Management’s stated longer-term objectives include a 95%–100% GAAP combined ratio over any five-year period and an average 10%–13% value creation ratio for 2013–2017. The company also targets $5 billion of annual direct written premiums by year-end 2015. The filing does not provide a new near-term earnings forecast.
- Management described continued underwriting and technology initiatives, including property inspections, pricing analytics, rate changes and expansion of agency relationships. It appointed 78 agencies in the first nine months and planned to exceed its initial 2013 appointment target.
Risks, contingencies and unusual items
- Results remain exposed to catastrophe frequency and severity, claims inflation, reserve-estimation uncertainty, competition, reinsurance availability and counterparty risk, regulatory changes, and technology or data-security events.
- The company reported $2 million of other-than-temporary investment impairment charges in the first nine months, versus $32 million in the comparable 2012 period. It reported no such charges in Q3 2013. Unrealized investment losses were $67 million; no securities were below 70% of cost or amortized cost.
- Management said ordinary-course litigation and accrued legal matters were not material to current financial condition or results. It cautioned that an adverse judgment or settlement materially exceeding accruals could affect results or cash flows; estimated exposure for other matters where loss was more than remote but not probable was less than $1 million.
- The filing identifies loss reserves as a significant estimate. Actual claim payments may differ from estimates. Favorable prior-year reserve development boosted current reported underwriting results and may not recur at the same level.
Important facts for investors to verify
- Whether premium growth and current-year underwriting improvements persist after separating catastrophe effects and favorable prior-year reserve development.
- Reserve adequacy and subsequent development, particularly given the uncertainty inherent in loss and loss-expense estimates.
- Investment portfolio exposure to rising interest rates, equity-market declines, credit spreads and future impairment charges.
- Whether investment income can withstand reinvestment at lower yields as bonds mature, and whether realized gains remain a significant contributor to earnings.
- Progress toward the stated combined-ratio, value-creation and premium-growth objectives, alongside dividend and capital requirements.