Cincinnati Financial Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited consolidated results. Cincinnati Financial is an insurance holding company operating in property-casualty and life insurance, with a substantial investment portfolio. It distributes insurance through independent agencies.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $929 million | $887 million; up 5% |
| Earned premiums | $782 million | $746 million; up 5% |
| Net investment income, pretax | $131 million | $130 million; up 1% |
| Net realized investment gains | $12 million | $8 million |
| Net income | $62 million; $0.38 diluted EPS | $68 million; $0.42 diluted EPS |
| Operating cash flow | $57 million | $110 million |
| Cash and cash equivalents | $379 million | $385 million at Dec. 31, 2010 |
| Total assets / shareholders’ equity | $15.369 billion / $5.118 billion | $15.095 billion / $5.032 billion at Dec. 31, 2010 |
| Debt | $839 million: $790 million long-term and $49 million short-term | Unchanged from year-end |
| Debt-to-total-capital ratio | 14.1% | 14.3% at year-end |
Property-casualty net written premiums increased 3%. The GAAP combined ratio was 103.9% versus 102.6% a year earlier, indicating an underwriting loss. Catastrophe losses added 5.7 percentage points; favorable prior-year reserve development improved the ratio by 7.9 points. The combined ratio excluding catastrophe losses and prior-year reserve development was 106.1%.
Book value per share rose to $31.40 from $30.91 at year-end. The company declared a quarterly dividend of $0.40 per share. Parent-company cash and invested assets totaled $1.156 billion, including $95 million in cash and cash equivalents.
Material changes and drivers
- Revenue growth was led by premiums, especially personal lines; personal lines earned premiums rose 9%, while commercial lines rose 3%. Commercial net written premiums were flat; personal net written premiums rose 12%.
- Net income declined 9%, principally reflecting weaker property-casualty underwriting. Current-year catastrophe losses rose to $42 million from $22 million, and current-year losses before catastrophes also increased.
- Commercial lines reported a $21 million underwriting loss and a 104.0% combined ratio. Personal lines’ $3 million underwriting loss accompanied a 101.4% ratio. Excess and surplus lines reported a $5 million underwriting loss and a 133.0% ratio.
- Investment income was nearly flat: lower bond interest income, amid lower yields, was mostly offset by higher equity dividends. Investment operations profit increased to $123 million from $119 million.
- Net realized gains included $42 million of gains offset by $30 million of impairment charges, principally a write-down of AllianceBernstein common stock. Total unrealized investment gains were $1.409 billion before tax at quarter-end.
- Cash from operations fell to $57 million, while investing cash outflow narrowed to $30 million from $239 million, reflecting lower net investment purchases. Cash dividends paid were $64 million.
Outlook, risks and contingencies
- Management reiterated a long-term strategy focused on improving underwriting profitability and growing premiums. Its 2010–2014 target is an average annual value creation ratio of 12%–15%; the Q1 ratio was 2.9%. Management’s long-term objective is a combined ratio below 100% over any five-year period.
- Management cited weak commercial pricing, competition, a sluggish economic recovery and low interest rates. It described commercial renewal pricing as declining by a low-single-digit average in Q1 and noted that lower yields may constrain investment income as bonds mature.
- Management reported progress on pricing analytics, agency growth and automation initiatives. It targeted approximately 120 new agency appointments in 2011; 40 were appointed in Q1. No specific consolidated full-year earnings guidance is provided in the supplied filing text.
- Risks include catastrophe frequency and severity, reserve-estimation uncertainty, adverse claims trends, investment-market declines or impairments, prolonged low rates, competition, reinsurance availability and counterparty risk, regulation, and litigation. The filing identifies an $8 million estimated loss related to the company’s participation in assumed reinsurance treaties for the March 2011 Japan earthquake.
- The company reported ordinary-course insurance litigation and other legal matters. It said accrued probable and estimable losses were not material, but adverse outcomes materially exceeding accruals could affect results or cash flows; potential losses for certain other matters could not be reasonably estimated.
- Management stated that no material changes had occurred in risk factors since the 2010 Form 10-K, and that disclosure controls were effective at March 31, 2011. The company reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher current-year catastrophe and non-catastrophe losses persist, and how much future results depend on favorable reserve releases.
- Whether commercial, personal and excess-and-surplus underwriting trends improve, particularly workers’ compensation, homeowner and excess-and-surplus loss experience.
- The basis and recoverability of investment valuations, including the $30 million impairment and the portfolio’s concentration in equities and financial-related corporate bonds.
- Whether low interest rates, investment maturities and market movements affect investment income, book value and dividend capacity.
- Developments in material litigation, reinsurance recoveries, and insurance reserve estimates; the filing notes that actual results may differ from estimates.