Cincinnati Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results cover property-casualty insurance, life insurance, investments and other operations. Cincinnati Global, acquired February 28, 2019, is included from its acquisition date.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Earned premiums | $1.446 billion | $1.298 billion | $4.163 billion | $3.852 billion |
| Total revenue | $1.700 billion | $1.915 billion | $5.772 billion | $4.697 billion |
| Net income | $248 million | $553 million | $1.371 billion | $739 million |
| Diluted EPS | $1.49 | $3.38 | $8.30 | $4.49 |
| Net cash from operating activities | Not provided for the quarter in the cash flow statement | $880 million | $826 million |
- Q3 revenue fell 11% and net income fell 55% year over year, largely because net investment gains were $86 million versus $458 million a year earlier. The prior-year quarter also benefited from tax accounting changes that did not recur.
- For the first nine months, revenue rose 23% and net income rose 86%, driven primarily by higher earned premiums and investment gains. Net investment gains were $1.113 billion versus $372 million; much of the 2019 amount reflected unrealized equity-security gains recognized in earnings.
- Property-casualty earned premiums increased 11% in Q3 and 8% year to date. Net written premiums grew 8% and 9%, respectively. The consolidated property-casualty combined ratio was 94.2% for Q3 and 94.6% year to date, compared with 96.8% and 97.3% in 2018. Underwriting profit was $83 million for Q3 and $222 million year to date.
- Year-to-date favorable prior-year reserve development was $203 million, versus $123 million in 2018. Current-year catastrophe losses were $303 million, up from $272 million year to date, although Q3 catastrophe losses were lower than in the prior-year quarter.
- Net investment income increased 5% in Q3 and 4% year to date. The average pretax investment yield was 3.37% for Q3 and 3.47% year to date. Management noted that low interest rates challenge reinvestment yields.
Financial position, debt and liquidity
- At September 30, total assets were $24.742 billion, total investments $19.059 billion, cash and cash equivalents $787 million, and shareholders’ equity $9.371 billion. Book value per share was $57.37, up from $48.10 at year-end 2018.
- Total debt was $826 million: $788 million of long-term debt and $38 million outstanding on the short-term credit line. Debt-to-total-capital was 8.1%, down from 9.5% at year-end 2018.
- Year-to-date cash flow was $880 million from operations, $(526) million from investing, and $(351) million from financing; cash increased $3 million. Cash dividends paid were $265 million. The quarterly dividend was $0.56 per share.
- The company reported $262 million available under its revolving credit line, plus a $300 million accordion feature. It also had a $234 million unsecured letter of credit supporting Cincinnati Global’s obligations at Lloyd’s.
- The investment portfolio’s fair value was $18.776 billion in the market-risk discussion, up $2.167 billion from year-end. Equity securities were a substantial portion of invested assets; rising equity values contributed to earnings and book value growth.
Material changes, outlook and risks
- The February acquisition of Cincinnati Global cost $63 million after a purchase-price adjustment and added $103 million of property-casualty net written premiums since acquisition. The company expects the business to support geographic and product diversification; its reported financial contribution was described as immaterial to consolidated results so far.
- Management described continued pricing and underwriting initiatives, including high-single-digit estimated renewal price increases in commercial and personal auto during the stated periods. It planned about 100 standard-agency appointments and 80 personal-lines-focused appointments in 2019; 88 and 58, respectively, had been made by September 30. It also planned an excess-and-surplus homeowner offering in California by early 2020.
- No new numerical full-year earnings or revenue guidance is stated in the supplied filing text. Management cited potential performance below long-term targets in its prior annual report, while emphasizing premium growth, underwriting discipline and investment contribution as long-term drivers.
- Key risks include catastrophe frequency and severity, reserve-estimate uncertainty, equity-market declines, low interest rates and credit-market stress, reinsurance availability and collectability, competition, cyber and technology risks, regulation, and integration of Cincinnati Global. Management said property-casualty reserves are its most significant estimate.
- Two fixed-maturity securities incurred $6 million of other-than-temporary impairment charges in 2019, both associated with energy securities. The IRS notified the company it would examine tax year 2017; gross unrecognized tax benefits were $34 million at September 30.
- Management considered ordinary-course litigation and other accrued legal matters not material based on its review, but warned that an adverse judgment or settlement materially above accruals could affect results or cash flows. The company reported no material change in risk factors and no material change in internal controls during the quarter.
Important facts for investors to verify
- How much future earnings depend on equity-market gains, and how results look excluding investment gains and losses.
- Whether favorable reserve development continues and whether current accident-year loss trends, catastrophe exposure and homeowner results remain within expectations.
- Cincinnati Global’s contribution, integration progress, Lloyd’s capital requirements and ability to deliver the expected diversification benefits.
- Investment portfolio sensitivity to interest rates and equity prices, including the effect of market movements on earnings, other comprehensive income and book value.
- Developments in the IRS examination, tax assets and valuation allowances, as well as material changes in legal contingencies or reinsurance recoverables.