Cincinnati Financial Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial results are consolidated unless stated otherwise.
Business context
Cincinnati Financial is an insurance holding company whose principal business is property and casualty insurance distributed through independent agencies in 39 states. Its operations include commercial, personal, excess and surplus lines, life insurance, investments, and commercial leasing and financing.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Earned premiums | $4.243 billion | $3.902 billion |
| Total revenues | $4.945 billion | $4.531 billion |
| Income before income taxes | $721 million | $714 million |
| Net income | $525 million | $517 million |
| Diluted earnings per share | $3.18 | $3.12 |
| Operating cash flow | $873 million | $796 million |
| Total assets | $18.753 billion | $17.662 billion |
| Shareholders’ equity | $6.573 billion | $6.070 billion |
| Book value per share | $40.14 | $37.21 |
Property-casualty earned premiums increased 9% to $4.045 billion; net written premiums rose 6% to $4.143 billion. The GAAP combined ratio was 95.6%, versus 93.8% in 2013, and underwriting profit declined 20% to $186 million. A ratio below 100% indicates an underwriting profit.
Investment income, net of expenses, increased 4% to $549 million. Net realized investment gains rose to $133 million from $83 million; 2014 included $136 million of equity-sale gains and $24 million of other-than-temporary impairment charges. Total investment return before tax was 7.8%, compared with 8.4% in 2013.
At year-end, cash and cash equivalents were $591 million and total investments were $14.386 billion. Long-term debt was $791 million; short-term borrowings were $49 million. Total debt was $840 million and debt-to-total-capital was 11.3%, down from 12.8%. The company declared dividends of $1.76 per share, a 6% increase, and reported 54 consecutive years of annual dividend increases through 2014.
Fourth-quarter 2014 revenue was $1.262 billion, income before tax was $236 million, net income was $167 million and diluted EPS was $1.02. Fourth-quarter 2013 net income was $122 million and diluted EPS was $0.74.
Material changes versus 2013
- Net income rose 2%, while revenue increased 9%; higher investment income and realized gains largely offset weaker property-casualty underwriting results.
- Property-casualty underwriting profit fell to $186 million from $233 million. Weather-related losses increased, including $32 million more from natural catastrophes and $52 million more from noncatastrophe weather losses. The combined ratio increased 1.8 percentage points.
- Prior-year property-casualty reserve development remained favorable at $98 million, but was less favorable than $147 million in 2013 and $396 million in 2012. Commercial auto had $39 million of adverse prior-year development; commercial casualty also experienced less favorable development and higher IBNR estimates.
- Excess and surplus lines earned premiums rose 28% to $148 million and underwriting profit increased to $30 million from $14 million. Personal lines earned premiums rose 8%, but underwriting profit fell to $10 million from $33 million. Commercial lines earned premiums rose 8%, while underwriting profit declined to $146 million from $186 million.
- Shareholders’ equity increased 8%; debt declined by $54 million, primarily reflecting repayment of short-term borrowings.
Outlook, management commentary and risks
- Management’s long-term targets include a GAAP combined ratio averaging 95%–100% over five-year periods and $5 billion of annual direct written premiums across property-casualty and life insurance by year-end 2015. Direct written premiums were $4.577 billion in 2014. The five-year 2010–2014 GAAP combined ratio averaged 99.3%.
- Management said 2015 value creation could fall below its 10%–13% annual target range for 2013–2017, citing potential financial-market weakness, softer insurance pricing, economic uncertainty and the timing of growth initiatives and investments.
- For 2015, the company planned continued pricing and underwriting improvements, technology and process investments, about 100 property-casualty agency appointments, and expansion of high-net-worth personal-lines offerings. Management expected low interest rates to continue pressuring investment income.
- Key exposures include catastrophe and severe-weather losses, concentrated Midwest and Southeast business, reserve-estimation uncertainty, competitive pricing, and potential reinsurance nonpayment. Management highlighted adverse development in commercial auto and increased commercial-casualty IBNR estimates. Gross property-casualty reserves were $4.485 billion; management’s reasonably likely net reserve range was $3.922 billion–$4.296 billion, compared with $4.156 billion carried.
- The investment portfolio includes substantial equity exposure: equity securities had a fair value of $4.858 billion, and fixed maturities totaled $9.460 billion. Management disclosed sensitivity to market declines and interest-rate increases; a 100-basis-point rate increase would reduce fixed-maturity fair value by approximately 4.4% under its model.
- Insurance subsidiary dividends are subject to state regulation. The company said up to approximately $447 million could be declared to the parent in 2015 without prior regulatory approval. The filing reports no material litigation outside ordinary-course matters and no subsequent events requiring adjustment or disclosure.
Most important facts for investors to verify
- Whether catastrophe and noncatastrophe weather losses, plus adverse commercial-auto and commercial-casualty reserve development, continue to pressure underwriting profitability.
- Whether premium growth and pricing remain adequate as commercial-market competition increases and management pursues the $5 billion direct-premium target.
- Whether the $98 million of favorable prior-year reserve development and the carried reserve estimate prove sustainable as claims mature.
- How equity-market movements, interest rates and realized investment gains affect reported earnings, book value and the value-creation measure.
- Whether parent-company liquidity, regulated subsidiary dividends, reinsurance recoverables and the dividend policy remain supported by operating cash flow and capital strength.