Cincinnati Financial Corporation — Third-Quarter 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated results are compared with the same 2022 periods unless noted.
Financial results and key metrics
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Earned premiums | $2.033 billion, up 8% | $5.894 billion, up 10% |
| Investment income, net | $225 million, up 17% | $655 million, up 14% |
| Investment gains (losses), net | $(456) million | $84 million |
| Total revenue | $1.811 billion | $6.657 billion |
| Net income (loss) | $(99) million; $(0.63) diluted EPS | $660 million; $4.17 diluted EPS |
| Property-casualty combined ratio | 94.4% | 97.5% |
| Operating cash flow | Not separately stated here | $1.475 billion |
At September 30, total assets were $30.915 billion, shareholders’ equity was $10.624 billion, and book value was $67.72 per share. Cash and cash equivalents were $899 million. Total debt was $815 million ($25 million short-term and $790 million long-term); debt-to-total-capital was 7.1%. The company reported $275 million available under its revolving line, plus a $300 million accordion feature.
Changes versus the prior comparable period
- Q3 net loss narrowed by $317 million from the 2022 quarter’s $416 million loss. The improvement reflected a smaller investment loss, higher investment income and stronger property-casualty underwriting.
- Nine-month net income improved by $2.160 billion from the 2022 period’s $1.500 billion loss. Investment gains and losses were a major driver: the comparison was $84 million of gains in 2023 versus $2.494 billion of losses in 2022.
- Q3 property-casualty underwriting improved to $112 million profit from a $66 million loss; the combined ratio improved to 94.4% from 103.9%. For nine months, underwriting profit was $149 million versus $47 million, and the combined ratio improved to 97.5% from 99.2%.
- Personal lines remained pressured year to date: its nine-month combined ratio rose to 106.4% from 100.4%, with catastrophe losses a key factor. Commercial lines’ ratio improved to 97.5% from 99.3%; excess and surplus lines’ ratio worsened to 90.9% from 88.4%.
- Shareholders’ equity rose 1% from year-end 2022 and book value per share increased from $67.21. Cash declined from $1.264 billion. The fixed-maturity portfolio’s net unrealized loss increased to $1.207 billion from $847 million at year-end.
Outlook, commentary, risks and unusual items
- Management said pricing increases and underwriting initiatives are expected to support future property-casualty results, but it will remain prudent in reserving until longer-term loss-cost trends become clearer. Elevated inflation is increasing repair and liability claim costs.
- Management expected full-year 2023 personal-auto written premiums to include an average rate increase of approximately 10% and said it planned further aggressive rate increases. The filing provides no consolidated earnings guidance.
- Current-year catastrophe losses were $673 million for the first nine months, up from $560 million. Favorable prior-year reserve development was $213 million for the period, versus $143 million in 2022; such development reduced reported losses.
- Equity securities’ unrealized changes flow through earnings: Q3 investment losses were $456 million, primarily reflecting unrealized losses on securities still held. Separately, rising Treasury yields contributed to fixed-maturity unrealized losses recorded in other comprehensive income. Management attributed the fixed-income marks primarily to interest rates, not credit losses.
- Market exposure is material: the portfolio included $10.031 billion of equity securities and $12.843 billion of fixed maturities. Management’s sensitivity analysis estimated that a parallel 100-basis-point rate increase could reduce fixed-maturity fair value by approximately 4.8%; a 10% equity-market decline would reduce equity portfolio value by about $1.003 billion, before any offsetting actions.
- The company is defending COVID-19 business-interruption coverage lawsuits. Most have been dismissed, and appellate rulings to date were described as favorable, but management cannot reasonably estimate any possible loss; adverse outcomes in aggregate could materially affect results or financial condition.
- The company adopted long-duration insurance accounting guidance in January 2023, increasing opening shareholders’ equity by $31 million after tax. The filing says adoption did not materially affect cash flows.
Important facts for investors to verify
- Whether premium and rate increases keep pace with claims inflation, particularly in personal auto and homeowner lines.
- Whether personal-lines underwriting improves after the elevated year-to-date catastrophe losses and 106.4% combined ratio.
- How much reported earnings continue to depend on volatile equity-market gains and losses, and how interest rates affect book value and fixed-maturity marks.
- Whether favorable prior-year reserve development persists and whether current loss reserves adequately reflect inflation and growing IBNR balances.
- Developments in COVID-19 coverage litigation, catastrophe exposure, and the company’s ability to maintain liquidity and shareholder distributions.