Cincinnati Financial Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited. The company primarily operates in property-casualty and life insurance, with investments a major source of earnings; it distributes insurance through independent agencies.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1.371 billion | $1.316 billion | $2.735 billion | $2.601 billion |
| Net income | $123 million | $176 million | $311 million | $304 million |
| Diluted EPS | $0.74 | $1.06 | $1.87 | $1.84 |
| P&C underwriting profit | $10 million | $83 million | $106 million | $110 million |
| P&C combined ratio | 99.3% | 92.4% | 95.4% | 94.9% |
| Operating cash flow | Not stated by quarter in the provided cash-flow statement | $490 million | $470 million |
Q2 revenue increased 4%, while net income fell 30%. Management attributed the earnings decline principally to weaker P&C underwriting, including $56 million of additional after-tax catastrophe losses, and lower after-tax realized investment gains. First-half revenue rose 5% and net income rose 2%; higher after-tax investment income more than offset weaker P&C underwriting, which was pressured by catastrophe losses.
For the first half, P&C earned premiums grew 5% to $2.210 billion, and net written premiums grew 6% to $2.341 billion. Catastrophe losses contributed 14.8 percentage points to the Q2 combined ratio and 9.3 points for the first half. Favorable prior-year reserve development was $49 million in Q2 and $111 million for the first half; commercial auto had unfavorable development in both periods.
Financial position and liquidity
- At June 30, total assets were $20.151 billion and shareholders’ equity was $6.971 billion, versus $18.888 billion and $6.427 billion at year-end 2015. Book value per share was $42.37, up from $39.20.
- Cash and cash equivalents were $547 million, compared with $544 million at year-end. First-half operating cash flow was $490 million; investing cash outflow was $307 million and financing cash outflow was $180 million.
- Total debt was $814 million: $786 million long-term debt and $28 million on the revolving line. Debt-to-total-capital was 10.5%, down from 11.3%; $197 million remained available on the line. Management did not anticipate a material increase in debt during the remainder of 2016.
- Investments had a fair value of $15.380 billion, including $10.138 billion of fixed maturities and $5.242 billion of equity securities. Net unrealized investment gains were $2.673 billion before tax. The portfolio’s appreciation helped lift first-half comprehensive income to $681 million, versus $74 million a year earlier.
Outlook, risks and unusual items
- No formal full-year earnings guidance is provided in the supplied filing text. Management said 2016 performance could be below its long-term targets. Long-term objectives include P&C premium growth above the industry over five-year periods, a GAAP combined ratio of 95%–100% over five-year periods, and equity-portfolio returns above the S&P 500 over five-year periods; these are objectives, not near-term forecasts.
- Management highlighted pricing and underwriting initiatives, especially for commercial auto and personal auto. It reported mid-single-digit average renewal price increases for commercial auto and increases near the low end of the high-single-digit range for personal auto during the first half.
- The company declared a regular quarterly dividend of $0.48 per share, an indicated annual rate of $1.92. First-half cash dividends paid were $151 million. The board’s January increase marked a 56th consecutive year of increases in the indicated annual dividend rate.
- Low interest rates may constrain reinvestment income as bonds mature or are called. The portfolio is also exposed to equity-market declines, interest-rate movements, credit spreads, catastrophe losses, claims inflation, reserve-estimation uncertainty, reinsurance availability and regulatory, litigation, cyber and competitive risks.
- Ordinary-course insurance litigation is covered through claims reserves. Management said other probable and estimable legal accruals were not material; its estimate for matters that were not probable but more than remote was less than $1 million. It cautioned that an adverse judgment or settlement materially above accruals could affect results or cash flows.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. Risk factors were reported as not materially changed from the 2015 Form 10-K.
Important facts for investors to verify
- Whether catastrophe losses and large claims remain elevated, and how they affect combined ratios and underwriting profitability.
- Whether commercial auto and personal auto pricing actions improve loss experience; monitor adverse development and reserve adequacy, particularly for those lines.
- How much earnings depend on favorable prior-year reserve development, realized investment gains and unrealized portfolio appreciation.
- The effect of low rates, interest-rate changes and equity-market volatility on investment income, book value and capital.
- Premium growth, capital and liquidity trends, including the capacity to sustain dividends and any future use of debt or share repurchases.