Cincinnati Financial Corporation — Q2 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2021, compared with the same periods in 2020. Cincinnati Financial is an insurer operating in commercial, personal, excess and surplus, and life insurance, alongside its investment business. It distributes insurance primarily through independent agencies.
Financial and operating results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Earned premiums | $1.593B | $1.482B | $3.137B | $2.938B |
| Total revenues | $2.295B | $2.714B | $4.522B | $2.615B |
| Net income (loss) | $703M | $909M | $1.323B | ($317M) |
| Diluted EPS | $4.31 | $5.63 | $8.13 | ($1.96) |
| Net investment income | $175M | $166M | $349M | $331M |
| Net investment gains (losses) in income | $520M | $1.060B | $1.024B | ($665M) |
Q2 revenue and earnings fell year over year, principally because investment gains were lower, partly offset by higher premiums and investment income. First-half revenue and earnings increased substantially from 2020, when the company recorded investment losses, including $77 million of fixed-maturity impairment charges. Investment gains in 2021 were driven chiefly by unrealized gains on equity securities still held: $489 million in Q2 and $974 million in the first half.
Property-casualty earned premiums rose 8% in Q2 and 7% in the first half. The consolidated property-casualty combined ratio was 85.5% for Q2 and 88.3% for the first half, versus 103.1% and 100.8%, respectively, a year earlier. Ratios below 100% indicate underwriting profit. First-half underwriting profit was $354 million, compared with a $17 million loss in 2020. Results benefited from lower catastrophe losses and favorable prior-year reserve development; catastrophe losses were $271 million for the first half versus $368 million a year earlier, and favorable prior-year development totaled $229 million versus $80 million.
At June 30, total investments were $23.061 billion, total assets $29.677 billion, and shareholders’ equity $11.858 billion. Book value per share was $73.57, up from $67.04 at year-end 2020. Cash and cash equivalents were $1.003 billion. Debt totaled $848 million, comprising $59 million of short-term borrowing and $789 million of long-term debt; the debt-to-total-capital ratio was 6.7%.
For the first six months, operating cash flow was $917 million, compared with $614 million in 2020. Investing activities used $526 million and financing activities used $288 million. Cash dividends paid were $195 million. The board raised the quarterly dividend to $0.63 per share, or an indicated annual rate of $2.52.
Outlook, commentary, risks and unusual items
- Management provided no specific full-year earnings or revenue guidance. Its stated long-term objectives include property-casualty premium growth above the industry over five-year periods, a GAAP combined ratio generally between 95% and 100% over five-year periods, and equity portfolio returns exceeding the S&P 500 over five-year periods.
- Management said economic recovery supported premium growth, but future premiums and losses remain uncertain and could be affected by changes in business sales and payrolls, driving activity, the pandemic, and economic conditions. The company said COVID-19 had not materially affected first-half 2021 cash flows or premium revenues in Q2.
- COVID-19 business interruption lawsuits remain a material uncertainty. The company disputes coverage, reported some favorable rulings, and said it cannot reasonably estimate potential losses; adverse aggregate outcomes could materially affect financial condition, results, or cash flows.
- Insurance reserves require significant actuarial estimates. First-half favorable prior-year development of $229 million materially benefited underwriting results and may not recur. Current-period catastrophe losses were also lower than in 2020.
- The investment portfolio exposes results and equity to market movements. At June 30, common equities had a fair value of $9.897 billion; management reported that a hypothetical 10% equity-price decline would reduce that value by about $990 million before any consequential actions or tax effects. A parallel 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by approximately 4.8%.
- Management cited the prolonged low-rate environment as a constraint on reinvestment yields. New fixed-maturity purchases in the first half yielded an average 3.47%, below the 4.12% year-end 2020 portfolio yield.
- The company discontinued a combined property catastrophe treaty effective June 1, 2021, because management judged it no longer cost-effective; it restructured coverage for Cincinnati Re. The company also carries a $52 million valuation allowance against Cincinnati Global deferred tax assets and reported $34 million of unrecognized tax benefits.
Most important facts for investors to verify
- Whether underwriting performance remains strong after accounting for favorable reserve development and below-average catastrophe losses.
- Developments in COVID-19 business interruption litigation, including appellate rulings, potential class certification, and any change in the company’s ability to estimate exposure.
- Whether premium growth and pricing gains persist, and how claims inflation, catastrophes, and economic changes affect combined ratios.
- Equity-market concentration and interest-rate sensitivity, including the effects of investment gains and losses on reported earnings and book value.
- Progress integrating and underwriting Cincinnati Re and Cincinnati Global, and the cost and adequacy of the revised catastrophe reinsurance protection.