Cincinnati Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted. Cincinnati Financial operates property-casualty and life insurance businesses and an investment portfolio, distributing insurance primarily through independent agencies.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Earned premiums | $1,294 | $1,241 | $2,554 | $2,449 |
| Investment income, net | $154 | $151 | $304 | $300 |
| Investment gains (losses), net | $105 | $(11) | $(86) | $149 |
| Total revenue | $1,558 | $1,386 | $2,782 | $2,909 |
| Net income | $217 | $100 | $186 | $301 |
| Diluted EPS | $1.32 | $0.60 | $1.12 | $1.81 |
- Q2 revenue increased 12% and net income more than doubled year over year. H1 revenue fell 4% and net income fell 38%, mainly reflecting lower investment gains.
- Q2 included $101 million of unrealized gains on equity securities still held; H1 included $97 million of unrealized losses on those securities. Under newly adopted accounting rules, these fair-value changes now flow through net income rather than other comprehensive income.
- Property-casualty underwriting produced profits of $36 million in Q2 and $65 million in H1, versus $23 million and $29 million, respectively, in 2017. The consolidated combined ratio improved to 97.2% in Q2 and 97.5% in H1 from 98.3% and 99.0%. Favorable prior-year reserve development benefited the H1 ratio by 3.3 percentage points.
- Performance varied by line: commercial lines earned a $47 million Q2 underwriting profit and had a 94.2% combined ratio; personal lines recorded a $32 million underwriting loss and a 110.1% combined ratio. Excess and surplus lines remained profitable, but its Q2 combined ratio rose to 77.6% from 66.2%, largely due to less favorable prior-year reserve development.
- H1 operating cash flow was $464 million, compared with $445 million. Cash and cash equivalents were $521 million at June 30, down from $657 million at year-end.
Financial position and capital
- Total assets were $21.760 billion at June 30, versus $21.843 billion at December 31, 2017. Total investments were $16.944 billion; the investment portfolio’s fair value was $16.836 billion.
- Shareholders’ equity was $7.916 billion, down from $8.243 billion; book value per share was $48.68 versus $50.29. The six-month value creation ratio was negative 1.1%, compared with positive 7.0% a year earlier.
- Total debt was $848 million, including $787 million of long-term debt and $61 million borrowed on the short-term line. Debt-to-total-capital was 9.7%, versus 9.0% at year-end; $164 million remained available on the line of credit.
- H1 cash dividends paid were $166 million, and share repurchases under the authorization used $125 million. The quarterly dividend was raised to $0.53 per share, an indicated annual rate of $2.12.
- Fixed-maturity securities had a net unrealized gain of $84 million, down from $385 million at year-end, primarily as interest rates rose and corporate credit spreads widened. No fixed-maturity security was below 70% of amortized cost; management reported no fixed-maturity impairments in H1.
Changes, outlook, and risks
- Property-casualty net written premiums increased 4% in H1 to $2.607 billion. Catastrophe losses were lower than in H1 2017, but noncatastrophe weather losses increased by $34 million. Personal lines remained unprofitable for the half, with a 106.7% combined ratio; commercial auto and personal auto were identified as lines with loss ratios above management’s desired levels.
- Management reported high-single-digit average renewal price increases for commercial auto and personal auto in H1. It expects pricing actions, improved risk selection, analytics, and agency growth initiatives to support future profitability; the filing provides no specific consolidated earnings or revenue guidance.
- Effective July 1, 2018, the company added a property-catastrophe excess-of-loss treaty with coverage subject to a $50 million aggregate limit. First-year ceded premium was estimated at approximately $7 million.
- ASU 2016-01 was adopted January 1, 2018, shifting fair-value changes on equity securities to net income and reclassifying $2.503 billion of after-tax accumulated unrealized gains from accumulated other comprehensive income to retained earnings. Prior periods were not restated, limiting direct comparability of reported investment gains and comprehensive income.
- Key risks include catastrophe severity and concentration, claims frequency and reserve-estimation uncertainty, equity-market declines, interest-rate and credit-spread changes, low investment yields, reinsurance availability and collectability, competition, regulation, litigation, and cybersecurity or technology disruption. Management said risk factors had not materially changed since the 2017 Form 10-K.
- Management described ordinary-course claims litigation as covered by reserves and not expected to be material; other legal matters were reviewed quarterly. The filing cautions that an adverse judgment or settlement materially exceeding accruals could affect results or cash flows.
Important facts for investors to verify
- Separate underlying operating performance from equity-security fair-value gains and losses now recognized in net income.
- Track personal auto and homeowner loss trends, noncatastrophe weather claims, and whether rate increases improve personal-lines profitability.
- Assess reserve adequacy and the sustainability of favorable prior-year reserve development, particularly against the increase in gross property-casualty reserves to $5.423 billion.
- Monitor investment portfolio sensitivity to interest rates, equity prices, and credit spreads, alongside the effect on book value and capital.
- Review execution and recoveries under the new catastrophe treaty, as well as liquidity, debt, dividend, and repurchase levels.