Cincinnati Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and financial results
The company is primarily a property and casualty insurer, with life insurance and investment operations. It distributes insurance through independent agencies.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1,785 | $2,227 | $6,307 | $4,842 |
| Net income | $153 | $484 | $1,476 | $167 |
| Diluted EPS | $0.94 | $2.99 | $9.07 | $1.03 |
| Earned premiums | $1,669 | $1,522 | $4,806 | $4,460 |
| Net investment income | $179 | $167 | $528 | $498 |
| Net investment gains/(losses) | $(70) | $533 | $954 | $(132) |
Nine-month operating cash flow was $1.518 billion, versus $1.119 billion in 2020. Cash and cash equivalents were $1.085 billion at September 30, 2021. Total assets were $29.907 billion, shareholders’ equity was $11.841 billion, and book value per share was $73.49. The company reported $848 million of total debt and a 6.7% debt-to-total-capital ratio.
Underwriting, margins and material changes
- Consolidated property-casualty underwriting profit was $121 million in Q3 and $475 million for the first nine months, compared with losses of $51 million and $68 million in the comparable 2020 periods.
- The property-casualty combined ratio was 92.6% in Q3 and 89.8% for nine months, improving from 103.6% and 101.8%, respectively. Lower catastrophe losses and stronger favorable prior-year reserve development contributed to the improvement.
- Nine-month property-casualty net written premiums increased 11%; earned premiums increased 8%. Commercial, personal and excess-and-surplus lines all reported nine-month earned-premium growth.
- Prior-year property-casualty reserves developed favorably by $102 million in Q3 and $331 million for nine months, compared with $11 million and $91 million in the 2020 periods. Reserve estimates are inherently uncertain.
- Q3 net income fell substantially year over year largely because net investment gains swung to a loss: equity securities still held had net unrealized losses of $104 million in Q3 2021 versus gains of $475 million in Q3 2020. Nine-month earnings rose sharply as investment gains and underwriting results improved from 2020.
- The personal-lines combined ratio was 102.7% for Q3, but 98.8% for nine months. Life insurance reported a $9 million pretax segment loss for nine months, versus a $9 million profit in 2020, primarily reflecting higher death claims and less favorable mortality.
Liquidity, outlook, risks and contingencies
Management said operating cash flow, liquid investments and borrowing capacity support liquidity. At quarter-end, $241 million was available under the revolving credit line, with a further $300 million available through an accordion feature. The company paid $295 million in shareholder dividends during the first nine months; the quarterly dividend was $0.63 per share. No specific earnings guidance was provided. Management expects pricing and underwriting initiatives to support future property-casualty results, while noting that premium volumes and losses may be affected by economic conditions, exposure levels, catastrophes and claims trends.
COVID-19’s effects remain uncertain. The company faces lawsuits seeking business-interruption coverage for pandemic-related shutdowns. Management cannot reasonably estimate any possible loss or range of loss; adverse outcomes in aggregate could materially affect financial position, results or cash flows. The company denies the allegations and intends to defend the cases. Other highlighted risks include catastrophe losses, claim-cost inflation, investment-market and interest-rate volatility, reinsurance availability, and cyber or operational disruption.
The investment portfolio remains exposed to market movements. At September 30, 2021, equity securities had a fair value of $9.887 billion; fixed maturities had a fair value of $12.908 billion. Management noted that a hypothetical 100-basis-point interest-rate increase could reduce fixed-maturity fair value by approximately 4.9%; this is a sensitivity illustration, not a forecast.
Most important facts for investors to verify
- How sustainable underwriting improvement is after accounting for catastrophe losses and the unusually high favorable reserve development.
- Whether premium growth and pricing keep pace with claim severity, inflation and changing exposure levels.
- How investment gains, equity-market volatility and interest-rate changes affect reported earnings, book value and liquidity.
- Developments in COVID-19 business-interruption litigation, for which the company says potential losses cannot currently be estimated.
- Life segment mortality experience and the company’s capacity to maintain dividends and other capital returns.