Cincinnati Financial Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter report. Cincinnati Financial is an insurer focused on property and casualty coverage sold through independent agencies, alongside life insurance, reinsurance and investment operations.
Financial results and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $6.557 billion | $9.630 billion |
| Net income (loss) | $(486) million | $2.946 billion |
| Diluted earnings (loss) per share | $(3.06) | $18.10 |
| Earned premiums | $7.219 billion | $6.482 billion |
| Net investment income, pretax | $781 million | $714 million |
| Net investment gains (losses), pretax | $(1.467) billion | $2.409 billion |
| Operating cash flow | $2.052 billion | $1.981 billion |
| Total assets | $29.736 billion | $31.387 billion |
| Shareholders’ equity | $10.531 billion | $13.105 billion |
| Book value per share | $67.01 | $81.72 |
| Cash and cash equivalents | $1.264 billion | $1.139 billion |
| Debt-to-total-capital ratio | 7.4% | 6.0% |
Earned premiums increased 11%. Property-casualty net written premiums grew 13%, while its GAAP combined ratio rose to 98.1% from 88.3%; underwriting profit fell to $140 million from $731 million. A ratio below 100% indicates an underwriting profit. The deterioration reflected higher catastrophe losses, inflation-driven claim costs and less favorable prior-year reserve development.
The net loss primarily reflected the reversal of equity-market gains: 2022 included $1.526 billion of unfavorable fair-value changes on equity securities still held, compared with $2.278 billion of favorable changes in 2021. Net unrealized losses on fixed-maturity securities also contributed to a $1.284 billion other comprehensive loss. Pretax investment income nevertheless increased 9%.
At year-end, investments totaled $22.425 billion, including $12.132 billion of fixed maturities and $9.841 billion of equity securities. Net property-casualty reserves were $7.931 billion, up from $6.902 billion; gross reserves were $8.336 billion. Management’s reasonable range for net property-casualty reserves was $7.393 billion to $8.099 billion. Long-term debt principal was $793 million and short-term borrowings were $50 million; the balance sheet also reports $841 million of long-term debt and lease obligations.
Material changes and segment performance
- Investments: Portfolio fair value declined to $21.973 billion from $24.337 billion, mainly due to falling equity values and rising interest rates and credit spreads. Fixed-maturity unrealized losses were $908 million at year-end, compared with $16 million in 2021.
- Commercial lines: Earned premiums rose 10% to $4.024 billion, but underwriting profit declined to $38 million from $598 million; the combined ratio increased to 99.2% from 83.8%. Commercial umbrella claims were a notable pressure.
- Personal lines: Earned premiums rose 10% to $1.689 billion; underwriting profit was $18 million versus $97 million, and the combined ratio increased to 99.2% from 94.0%. High-net-worth premiums grew substantially.
- Excess and surplus lines: Earned premiums increased 22% to $485 million; underwriting profit rose to $48 million from $44 million, with a 90.4% combined ratio.
- Life insurance: Earned premiums edged down 1% to $295 million; the segment reported $28 million profit versus a $16 million loss in 2021.
- Capital returns: The declared dividend rose to $2.76 per share from $2.52. The company repurchased $410 million of shares in 2022 and reported 62 consecutive years of annual dividend increases.
Outlook, risks and unusual items
Management targets a five-year average value creation ratio of 10%–13%; the 2022 ratio was negative 14.6%. Its five-year average through 2022 was 11.2%. Management expects premium growth initiatives and pricing improvements to support results, while noting that outcomes depend on insurance pricing keeping pace with loss costs, economic growth and market valuations. For 2023, the company expected an average personal-auto written-premium rate increase of approximately 10%. It also anticipated continued commercial-lines premium growth and investment-income growth, absent a sharp recession and a reversal in interest rates.
Key uncertainties include elevated inflation and social inflation, catastrophe frequency and severity, climate-related risk, and the adequacy of long-tail claims reserves. Catastrophe losses were $632 million net of reinsurance in 2022, compared with $497 million in 2021. The December 2022 winter storm was the company’s second-largest catastrophe event by estimated gross losses. Reinsurance reduces exposure but does not remove the company’s direct obligation to policyholders.
The company continues to face COVID-19 business-interruption coverage litigation. It disputes coverage and says it cannot reasonably estimate a possible loss or range; adverse aggregate outcomes could be material. Management reported immaterial pandemic-related incurred losses and expenses in 2022. Other risks include reinsurance collectability, agency-channel dependence, competition, investment-market declines, cyber and operational disruption, and regulatory limits on insurer dividends. The company reported no other litigation believed material beyond ordinary-course matters.
The company adopted the long-duration insurance accounting update on January 1, 2023; it estimated an approximately $30 million after-tax increase to equity at adoption, with subsequent quarterly effects potentially material. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; the loss-reserve estimate was identified as a critical audit matter.
Important facts for investors to verify
- Whether pricing actions offset inflation and higher claim severity, particularly in commercial umbrella, auto and homeowner lines.
- How much reserve development, catastrophe losses and reinsurance recoveries change in subsequent periods; review the disclosed reserve range and long-tail exposures.
- Whether equity and bond valuations recover or further affect book value, accumulated other comprehensive income and reported earnings.
- Developments in COVID-19 business-interruption litigation and the adequacy of related estimates and reserves.
- Parent-company liquidity and the ability of insurance subsidiaries to pay dividends under regulatory limits; also monitor debt, share repurchases and the dividend policy.
- The actual financial-statement effects of the 2023 long-duration-contract accounting adoption and subsequent assumption updates.