Cincinnati Financial Corporation — Q2 2019 Form 10-Q
Business context and period. Cincinnati Financial is a property-casualty and life insurer operating through independent agencies, with an investment portfolio that is a major earnings contributor. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless stated otherwise. The company acquired London-based MSP Underwriting, rebranded Cincinnati Global, on February 28, 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Earned premiums | $1.384 billion | $1.294 billion | $2.717 billion | $2.554 billion |
| Total revenue | $1.913 billion | $1.558 billion | $4.072 billion | $2.782 billion |
| Net investment gains (losses) | $364 million | $105 million | $1.027 billion | $(86) million |
| Net income | $428 million | $217 million | $1.123 billion | $186 million |
| Diluted EPS | $2.59 | $1.32 | $6.81 | $1.12 |
| Operating cash flow | Not stated separately | Not stated separately | $476 million | $464 million |
- Underwriting: Property-casualty underwriting profit was $48 million in Q2 and $139 million in the first half. The combined ratio was 96.5% and 94.8%, respectively, versus 97.2% and 97.5% a year earlier; below 100% indicates underwriting profit.
- Catastrophe losses and reserves: Property-casualty catastrophe losses were $130 million in Q2 and $204 million year to date, versus $87 million and $140 million. Favorable prior-accident-year reserve development was $84 million in Q2 and $151 million year to date, versus $31 million and $79 million.
- Segments: First-half underwriting results were $88 million for commercial lines, $1 million for personal lines, and $28 million for excess and surplus lines. Life insurance reported a $3 million loss, versus $10 million profit a year earlier; management cited higher mortality expense and less favorable actuarial assumption unlocking.
- Investment income and margins: Net investment income rose 4% to $160 million in Q2 and $317 million in the first half. The six-month pretax investment yield was 3.48%, versus 3.50% in 2018. Much of the earnings increase came from investment gains, especially unrealized equity gains: $355 million in Q2 and $999 million in the first half.
- Cash flow: First-half operating cash flow was $476 million; investing activities used $216 million and financing activities used $241 million. Cash and cash equivalents were $803 million at June 30, versus $784 million at year-end 2018.
- Balance sheet and debt: Total assets were $24.337 billion and shareholders’ equity $9.131 billion, compared with $21.935 billion and $7.833 billion at December 31, 2018. Book value per share rose to $55.92 from $48.10. The reported debt-to-total-capital ratio declined to 8.3% from 9.5%. Debt was $825 million under management’s liquidity presentation; balance-sheet long-term debt and lease obligations were $847 million, plus $37 million of note payable.
Changes, outlook and risks
- Total revenue increased 23% in Q2 and 46% in the first half, while net income rose 97% and 504%. These comparisons were substantially affected by equity-market gains recognized in earnings; results should not be read as solely reflecting recurring insurance or investment income.
- Property-casualty net written premiums grew 9% in Q2 and 10% year to date. Cincinnati Re and Cincinnati Global contributed to growth; Cincinnati Global recorded $65 million of net written premiums since acquisition. The acquisition consideration was $64 million, with $31 million of goodwill recorded; purchase-price allocation remained subject to adjustment.
- Management described ongoing commercial and personal auto pricing increases, generally in the high-single-digit range for policies renewing during the first half, and continued pricing and underwriting initiatives. The filing does not provide a specific new full-year earnings forecast. Management’s long-term combined-ratio objective is 95%–100% over a five-year period.
- Management noted that low interest rates may constrain reinvestment income as bonds mature or are called. Equity and fixed-maturity valuations are exposed to market changes; a hypothetical 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by approximately 5%.
- Key risks include catastrophe severity and frequency, reserve-estimation uncertainty, market and interest-rate movements, competition, reinsurance availability and collectability, cyber and technology risks, regulation, and integration of Cincinnati Global. Integration of that subsidiary’s internal controls was in progress, with completion expected by December 31, 2019; it was excluded from the company’s June 30 internal-control evaluation.
- The company reported no material litigation beyond ordinary-course matters. It cautioned that an adverse judgment or settlement materially above accrued amounts could affect results or cash flows. The renewed property catastrophe treaty became effective July 1, 2019; estimated ceded premium was approximately $9 million, with up to $50 million of combined coverage subject to stated retentions.
Investor verification priorities
- Separate recurring underwriting and investment income from equity-market gains when assessing the unusually large earnings increase.
- Track catastrophe losses, favorable prior-year reserve development, and reserve adequacy, particularly in homeowner and other lines exposed to weather events.
- Assess whether premium growth and rate increases translate into sustainable underwriting margins, including the personal-lines result near break-even in the first half.
- Review the Cincinnati Global integration, purchase-price adjustments, Lloyd’s capital requirements, and the subsidiary’s eventual contribution to earnings.
- Monitor market valuation exposure, investment-income reinvestment yields, liquidity, and the distinction between debt and lease obligations.