Cincinnati Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts are in U.S. dollars; financial results are unaudited. The company primarily writes property-casualty and life insurance and invests insurance-related assets.
Financial results and position
- Q2 revenue: $1.316 billion, up 8% from $1.214 billion. Earned premiums were $1.111 billion, up 5%.
- Q2 earnings: Net income was $176 million versus $84 million; diluted EPS was $1.06 versus $0.51. Net realized investment gains were $60 million versus $14 million.
- First-half results: Revenue of $2.601 billion, up 8%; net income of $304 million versus $175 million; diluted EPS of $1.84 versus $1.06. Net realized investment gains were $107 million versus $36 million.
- Underwriting: Consolidated property-casualty underwriting profit was $83 million in Q2 and $110 million for the first half, versus losses of $7 million and $8 million, respectively, in 2014. Combined ratios improved to 92.4% for Q2 and 94.9% for the first half, from 100.9% and 100.6%.
- Cash flow: First-half operating cash flow was $470 million, compared with $351 million. Investing activities used $389 million and financing activities used $185 million. Cash and cash equivalents ended at $487 million, down from $591 million at year-end 2014.
- Balance sheet and debt: Total assets were $18.888 billion and shareholders’ equity $6.497 billion at June 30. Debt totaled $840 million ($791 million long-term and $49 million short-term); the debt-to-total-capital ratio was 11.4%. Book value per share was $39.60, down from $40.14 at year-end.
- Liquidity and capital returns: $176 million remained available on the revolving credit line. First-half cash dividends paid were $145 million; $20 million was spent on share repurchases. The quarterly dividend was raised to $0.46 per share.
Material changes and drivers
- Higher premiums and lower catastrophe losses supported improved underwriting results. Q2 catastrophe losses were $79 million versus $120 million; first-half losses were $133 million versus $216 million.
- Prior-year property-casualty reserves developed favorably by $70 million in Q2 and $92 million in the first half. Favorable development helped results, but commercial auto developed unfavorably by $11 million in Q2 and $23 million year to date.
- Management reported higher-than-expected paid loss trends in commercial and personal auto and increased its estimates of ultimate losses. Auto net reserves were $78 million above year-end 2014, including $68 million of IBNR.
- Personal lines remained loss-making: its combined ratio was 109.2% in Q2 and 105.3% for the first half. Commercial lines and excess and surplus lines recorded first-half combined ratios of 91.9% and 82.1%, respectively.
- Investment income rose 3% year over year in both Q2 and the first half. Realized investment gains also increased substantially, largely from sales of common and preferred stocks. Conversely, first-half other comprehensive income was a loss of $230 million, mainly reflecting a decline in unrealized investment gains; Q2 comprehensive income was a loss of $26 million.
Outlook, risks and other matters
- No specific full-year earnings guidance is provided. Management reiterated long-term targets of a 95%–100% GAAP combined ratio over a five-year period and a 10%–13% average annual value-creation ratio for 2013–2017. The company also cited a 2015 target of $5 billion in consolidated annual direct written premiums; these are targets, not guarantees.
- Management highlighted continued low interest rates as a constraint on reinvestment yields. It also noted that rising rates can reduce fixed-maturity fair values; a hypothetical 100-basis-point rate increase was estimated to reduce that portfolio’s value by approximately 4.8%.
- Key risks include catastrophe severity and frequency, claim inflation and reserve-estimation uncertainty, auto loss trends, equity-market declines, credit and interest-rate changes, competition, reinsurance availability and collectability, regulatory changes, litigation, and technology or cybersecurity disruptions.
- Investment portfolio unrealized gains were $2.408 billion before tax, while unrealized losses were $51 million. Five securities were impaired in the first half, producing $4 million of pretax noncash impairment charges.
- Management stated ordinary-course litigation was not believed material; estimated exposure for other matters where loss was more than remote but not probable was less than $1 million. The filing notes that a materially adverse judgment or settlement beyond accruals could affect results or cash flows.
- Standard & Poor’s upgraded insurer financial-strength ratings to A+ and the parent debt rating to BBB+ during the period, each with a stable outlook. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the favorable catastrophe experience and prior-year reserve releases persist, and whether auto loss-cost trends require further reserve strengthening.
- How much of earnings growth reflects recurring underwriting and investment income versus realized investment gains and favorable reserve development.
- Developments in personal-lines profitability and the effectiveness of announced auto pricing and underwriting actions.
- Portfolio sensitivity to interest rates and equity-market movements, and the effect of lower reinvestment yields on future investment income.
- Progress against premium-growth and long-term performance targets, alongside capital, dividend and liquidity needs.