Cincinnati Financial Corporation — Q2 2017 Form 10-Q
Business context and period. Cincinnati Financial is an insurance and investment holding company, with property-casualty and life insurance operations. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Dollar amounts are in millions except per-share data.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $1,386 | $1,371 | $2,909 | $2,735 |
| Net income | $100 | $123 | $301 | $311 |
| Diluted EPS | $0.60 | $0.74 | $1.81 | $1.87 |
| Net investment income | $151 | $149 | $300 | $294 |
| Net realized investment gains (losses) | ($11) | $44 | $149 | $105 |
| Property-casualty combined ratio | 98.3% | 99.3% | 99.0% | 95.4% |
| Property-casualty underwriting profit | $23 | $10 | $29 | $106 |
- Q2 revenue rose 1%, as higher earned premiums offset lower realized investment results; first-half revenue rose 6%, reflecting premium growth and higher realized gains.
- Q2 net income declined 19%. Management attributed the decrease primarily to a $35 million after-tax reduction in realized investment gains and losses, partly offset by improved property-casualty underwriting and lower catastrophe losses.
- First-half net income fell 3%. A $50 million after-tax decline in property-casualty underwriting income more than offset a $28 million after-tax increase in net realized investment gains. Higher catastrophe losses adversely affected first-half underwriting.
- First-half property-casualty premiums earned increased 6% to $2,332 million; net written premiums rose 7% to $2,502 million. The combined ratio worsened 3.6 percentage points year over year, despite remaining below 100%. It included 10.1 points of current-year catastrophe losses and a 3.3-point benefit from favorable prior-year reserve development.
- Personal lines reported a first-half underwriting loss of $39 million, versus an $8 million profit a year earlier; its combined ratio increased to 107.0%. Commercial lines earned premiums grew 3%, but first-half underwriting profit fell to $22 million from $76 million. Excess and surplus lines earned premiums grew 14% and underwriting profit rose to $37 million from $22 million.
Cash flow, capital and liquidity
- First-half operating cash flow was $445 million, compared with $499 million in 2016. Investing activities used $333 million and financing activities used $283 million. Cash and cash equivalents ended June at $606 million, down from $777 million at year-end 2016.
- At June 30, total assets were $21.238 billion, shareholders’ equity was $7.373 billion and book value was $44.97 per share. Book value per share was $42.95 at year-end 2016.
- Total debt was $804 million: $787 million long-term and $17 million short-term. Debt-to-total-capital was 9.8%, versus 10.3% at year-end. The company reported $208 million available on its revolving credit line and said it did not anticipate a material debt increase during the remainder of 2017.
- Total investments were $16.394 billion on the balance sheet. The investment portfolio’s fair value was $16.301 billion, including $5.799 billion in equity securities. Shareholders’ equity includes substantial unrealized investment gains.
Material changes, outlook and risks
- Reserves: First-half prior-accident-year reserve development was favorable by $76 million, less than the $111 million favorable development in first-half 2016. Commercial auto and commercial casualty had unfavorable development, attributed to higher recent loss costs and large-loss activity. Management identifies reserve estimation as its most significant estimate and notes actual claim payments may differ materially.
- Catastrophes and underwriting: First-half catastrophe losses were $235 million, up from $206 million. Q2 catastrophe losses were lower year over year, but personal-lines catastrophe losses increased. Management cited pricing, risk selection and underwriting initiatives, including rate increases in commercial and personal auto, as efforts to improve future profitability; results remain exposed to claims severity, weather and large losses.
- Investment risks: Management cited a prolonged low-rate environment as a constraint on investment income and reinvestment yields. The fixed-maturity portfolio had an average effective duration of 5.2 years; the filing’s modeled 100-basis-point rate rise implied an approximately 5.3% decline in fair value. Equity-market declines could also reduce portfolio values and book value. First-half other-than-temporary impairment charges were $9 million.
- Outlook and capital returns: No new quantified full-year earnings or revenue guidance is provided in the supplied filing text. Management described continued premium growth, pricing and underwriting initiatives, and investment in agency relationships. The company declared quarterly dividends of $0.50 per share, consistent with an indicated annual rate of $2.00, and paid $158 million in dividends in the first half. It repurchased 1.0 million shares under its authorization during the first half; 2.54 million shares remained available at June 30.
- Accounting and contingencies: Adoption of share-based compensation guidance reduced first-half income tax provision by $6 million. Pending equity-investment accounting guidance is expected to move equity fair-value changes into net income; the company estimated $1.677 billion of after-tax unrealized gains would have been reclassified to retained earnings if adopted at June 30. The company reported no material change in risk factors, no material litigation beyond ordinary-course matters, and said any significantly adverse legal judgment or settlement beyond accruals could affect results or cash flows.
Important facts for investors to verify
- Whether auto pricing and risk-selection actions improve personal- and commercial-auto loss experience, particularly given the personal-lines underwriting loss and commercial-auto reserve deterioration.
- How catastrophe losses, large claims and reserve development evolve; favorable prior-year development was smaller than in the prior-year period.
- The sustainability of investment income and book value given interest-rate, equity-market and credit-spread exposure, and the potential earnings effect of the pending equity-securities accounting change.
- Cash generation, capital returns and available liquidity, including subsidiary dividend restrictions and use of the remaining share-repurchase authorization.