Cincinnati Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results; dollar figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Earned premiums | $1,943 | $1,773 | $3,861 | $3,466 |
| Investment income, net | $220 | $195 | $430 | $380 |
| Investment gains (losses), net | $434 | $(1,154) | $540 | $(1,820) |
| Total revenues | $2,605 | $820 | $4,846 | $2,038 |
| Net income (loss) | $534 | $(818) | $759 | $(1,084) |
| Diluted EPS | $3.38 | $(5.12) | $4.80 | $(6.77) |
| Property-casualty combined ratio | 97.6% | 103.2% | 99.2% | 96.7% |
| Operating cash flow | Not separately stated | Not separately stated | $825 | $755 |
Balance sheet and capital at June 30: Total assets were $31.352 billion and shareholders’ equity was $11.030 billion. Book value per share was $70.33, up from $67.21 at year-end 2022. Cash and cash equivalents were $748 million, down from $1.264 billion. Total debt was $814 million, including $789 million of long-term debt and $25 million drawn on the revolving line. Debt-to-total-capital was 6.9%, compared with 7.4% at year-end.
Material changes and operating drivers
- Net income’s sharp year-over-year improvement primarily reflected the swing in equity investment gains and losses: unrealized gains on equity securities held were $459 million in Q2 2023 versus unrealized losses of $1.175 billion in Q2 2022. Investment gains are market-sensitive and may be volatile.
- Property-casualty earned premiums grew 10% in Q2 and 12% in the first half. The first-half underwriting profit was $37 million, down from $113 million; catastrophe losses increased $220 million year over year. The Q2 underwriting result improved to a $47 million profit from a $52 million loss.
- Personal lines remained challenged: its first-half combined ratio rose to 110.0% from 98.2%, primarily reflecting higher catastrophe losses. Commercial lines’ first-half combined ratio improved to 98.6% from 99.4%. Excess and surplus lines’ ratio increased to 91.1% from 85.5%.
- First-half net favorable development on prior-year property-casualty reserves was $160 million, versus $100 million a year earlier. First-half catastrophe losses were $489 million, compared with $285 million.
- First-half pretax investment income increased 13%, to $430 million, supported by higher interest income and reinvestment yields.
Outlook, risks and unusual items
- No company-wide earnings or revenue guidance is provided in the supplied filing text. Management expects full-year 2023 personal-auto written premiums to include an average rate increase of approximately 10% and says it plans more aggressive rate increases in future quarters.
- Management says inflation is raising repair, property and liability claim costs and increasing uncertainty about ultimate losses. It intends to remain prudent in reserving until longer-term loss-cost trends become clearer. Pricing increases and improved pricing precision are expected to help underwriting over time.
- Management cites weather-related catastrophe risk, market declines, interest-rate and credit-spread movements, recession and persistent inflation, competition, cyber and technology risks, reinsurance availability, and regulatory and litigation uncertainty. These include risks that may affect investment values, claims costs, premium growth and results.
- Fixed maturities had $900 million of gross unrealized losses at June 30, primarily attributed to interest rates and credit spreads; management concluded the losses were not credit losses under its impairment policy. The equity portfolio was $10.502 billion, with Apple the largest holding at $892 million.
- COVID-19 business-interruption lawsuits remain pending. The company says it cannot reasonably estimate any possible loss or range; adverse outcomes in aggregate could materially affect financial condition, results or cash flows.
- Adoption of long-duration insurance accounting guidance (ASU 2018-12) increased opening shareholders’ equity by $31 million after tax. The company states the adoption did not materially affect cash flows.
- Declared dividends were $0.75 per share for Q2 and $1.50 per share for the first half. The filing reports no material change in risk factors since the 2022 Form 10-K.
Important facts for investors to verify
- How much earnings and book-value movement is attributable to equity-market gains and losses, versus recurring underwriting and investment income.
- Whether personal-lines pricing and claim-cost trends improve, and whether catastrophe activity remains elevated.
- Future reserve development and adequacy of loss reserves given inflation and the larger IBNR reserve balance.
- Unrealized fixed-maturity losses, interest-rate sensitivity, and concentration in major equity holdings.
- Developments in COVID-19 coverage litigation and any change in the company’s ability to estimate potential exposure.
- Liquidity and capital flexibility, including cash balances, subsidiary dividend limits, and debt availability.