Cincinnati Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited consolidated results; comparisons are with Q1 2022 unless otherwise noted. The company operates primarily in property-casualty and life insurance and invests the resulting funds.
Financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $2.241 billion | $1.218 billion |
| Earned premiums | $1.918 billion | $1.693 billion |
| Net investment income | $210 million | $185 million |
| Investment gains (losses) recognized in income | $106 million | ($666 million) |
| Net income (loss) | $225 million; diluted EPS $1.42 | ($266 million); diluted EPS ($1.66) |
| Operating cash flow | $250 million | $198 million |
- Revenue increased 84%, but the comparison was heavily affected by equity-market marks: unrealized equity gains contributed to Q1 2023 investment gains, whereas Q1 2022 recorded substantial unrealized losses. Management attributed the $491 million improvement in net income primarily to a $610 million after-tax improvement in investment gains and losses.
- Property-casualty underwriting recorded a $10 million loss, versus $165 million profit. Its combined ratio rose to 100.7% from 89.9%; catastrophe losses contributed 13.8 percentage points, compared with 3.1 points a year earlier. Favorable prior-year reserve development was $59 million, versus $41 million.
- Commercial lines recorded a $2 million underwriting loss and a 100.4% combined ratio. Personal lines recorded a $57 million loss and a 112.5% combined ratio. Excess and surplus lines earned $13 million, with an 89.9% combined ratio. Life insurance segment profit was $8 million, versus $7 million.
- Property-casualty earned premiums grew 14%; net written premiums increased 6%. Management cited rate increases, exposure growth and new business, while noting higher claim costs from inflation and greater uncertainty about ultimate losses.
- Balance-sheet investments were $23.123 billion, total assets $30.474 billion and shareholders’ equity $10.741 billion at March 31. Book value per share was $68.33, up from $67.21 at year-end 2022. Cash and cash equivalents were $955 million, down from $1.264 billion.
- Total debt was $839 million: $789 million long-term debt and $50 million under the revolving credit line. Debt-to-total-capital was 7.2%, below the 35% covenant threshold. The company reported $250 million of general line capacity and a further $300 million accordion feature.
Material changes and notable items
- Catastrophe losses, mostly weather-related, increased materially year over year and were a central factor in the property-casualty underwriting decline. Q1 catastrophe losses in the consolidated segment table were $253 million, versus $50 million.
- Fixed-maturity securities had $776 million of gross unrealized losses at quarter-end, down from $908 million at December 31, 2022. Management attributed these losses primarily to interest rates and credit spreads, and concluded they did not represent credit losses. The portfolio’s fair value was 94.9% of amortized cost.
- The company adopted the long-duration insurance accounting standard ASU 2018-12 on January 1, 2023. Adoption increased opening shareholders’ equity by $31 million after tax; management said it did not materially affect cash flows.
- Cash dividends declared were $0.75 per share, up 9% year over year. The board raised the quarterly dividend to that amount in January. The company repurchased 201,874 shares during the quarter.
Outlook, risks and contingencies
- Management expects personal auto written premiums to include an average rate increase of approximately 10% for full-year 2023 and said it planned more aggressive rate increases in coming quarters. The filing does not provide a specific full-year earnings forecast.
- Management cited inflation-driven repair and liability claim costs and said it would remain prudent in reserving until longer-term loss-cost trends become clearer. It expects pricing actions and underwriting initiatives to support long-term profitability. Its stated long-term GAAP combined-ratio objective is 95%–100% over a five-year period; Q1 was 100.7%.
- COVID-19 business-interruption coverage litigation remains unresolved. The company disputes coverage and intends to defend the cases, but says the number, scope and outcomes cannot be reasonably estimated; adverse aggregate outcomes could materially affect financial position, results or cash flows.
- Other principal risks include catastrophe severity and frequency, further inflation or recession, interest-rate and equity-market volatility, credit-market disruption, reserve-estimation uncertainty, reinsurance availability and recoverability, cyber and operational disruptions, competition, and regulatory or litigation developments. The company said its risk factors had not materially changed since its 2022 Form 10-K.
Important facts for investors to verify
- Whether premium-rate increases, particularly in personal auto, keep pace with claims inflation and improve underwriting results.
- How catastrophe losses and current-year loss trends develop, and whether reserve development remains favorable.
- Whether unrealized investment losses reflect market-rate movements or emerging credit deterioration; monitor the sizable equity portfolio and investment concentration.
- Developments in COVID-19 business-interruption litigation and any changes to the company’s ability to estimate potential exposure.
- Liquidity, debt capacity, capital strength and dividend sustainability, including the impact of insurance-subsidiary dividend restrictions.