Cincinnati Financial Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; comparisons are with the three months ended March 31, 2017, unless otherwise stated. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Earned premiums | $1,260 | $1,208 |
| Net investment income | $150 | $149 |
| Investment gains (losses), net | $(191) | $160 |
| Total revenues | $1,224 | $1,523 |
| Net income (loss) | $(31) | $201 |
| Diluted EPS | $(0.19) | $1.21 |
| Operating cash flow | $154 | $136 |
- Earned premiums rose 4%, while total revenue fell 20% and the company reported a net loss, primarily because investment gains swung to losses.
- Adoption of ASU 2016-01 moved fair-value changes on equity securities still held into net income. The quarter’s investment loss included a $198 loss from those changes; under the prior accounting, such changes generally would have been reported in other comprehensive income. Management attributed $156 of the $254 year-over-year decline in after-tax investment gains to this presentation change. The transition reclassification itself moved $2.503 billion, after tax, from accumulated other comprehensive income to retained earnings and did not change total equity at adoption.
- Property-casualty underwriting produced a $29 profit, versus $6, with a 97.9% combined ratio versus 99.7%. Lower catastrophe losses and $48 of favorable prior-year reserve development helped results; the current-accident-year loss ratio before catastrophe losses worsened.
- By segment, commercial lines earned a $15 underwriting profit and had a 98.3% combined ratio; personal lines had a $9 underwriting loss and a 103.2% combined ratio; excess and surplus lines earned $18 with a 68.8% combined ratio. Life segment profit was $2.
- Comprehensive loss was $201, versus comprehensive income of $288 in Q1 2017, including a $170 other comprehensive loss. Cash and cash equivalents declined to $604 from $657 at year-end; cash flow from operations was $154, investing activities used $54, and financing activities used $153.
Balance sheet, debt and liquidity
- At March 31, total assets were $21.470 billion, investments $16.721 billion, shareholders’ equity $7.946 billion, and book value per share $48.42, compared with $8.243 billion and $50.29 per share at year-end 2017.
- Management reported total debt of $811, including $787 of long-term debt and $24 of short-term borrowing; the balance sheet separately presents $829 of long-term debt and capital lease obligations. Debt-to-total-capital was 9.3%, versus 9.0% at year-end.
- $201 remained available on the revolving line of credit. The lead insurance subsidiary declared $100 in dividends to the parent during the quarter; approximately $509 could be paid to the parent during 2018 without regulatory approval.
- Operating cash flow for property-casualty insurance was $144, down from $155. Cash dividends paid to shareholders were $80; the quarterly dividend was increased to $0.53 per share, an indicated annual rate of $2.12.
Changes, outlook and risks
- Property-casualty earned premiums increased 4%; net written premiums increased 2%. Personal lines earned premiums rose 8%, commercial lines 1%, and excess and surplus lines 17%.
- Management cited a 2% year-over-year increase in consolidated property-casualty net written premiums, compared with an industry full-year 2018 growth estimate of approximately 4% from A.M. Best. It continued to pursue pricing and underwriting improvements, including high-single-digit average renewal price increases in commercial and personal auto during the quarter.
- Management said 2018 performance could be below its long-term targets. It expected no material increase in debt during the remainder of 2018 and planned approximately 100 appointments each of multi-line independent agencies and agencies focused on personal lines.
- Key exposures include catastrophe and other claims volatility, uncertainty in loss-reserve estimates, equity-market declines, rising interest rates and fixed-income valuation changes, credit-spread movements, competition, reinsurance availability and regulatory or tax changes. The fixed-income portfolio’s effective duration was 5.3 years; management estimated a parallel 100-basis-point rate increase could reduce its fair value by approximately 5.4%.
- The company reported $48 of favorable prior-accident-year reserve development, compared with $38 in Q1 2017. It cautioned that actual claim payments may differ materially from estimates. Ordinary-course litigation was considered immaterial after reserves, but an adverse judgment or settlement materially above accruals could affect results or cash flows.
- The Tax Cuts and Jobs Act accounting remained subject to further interpretation; management expected to complete its assessment through the annual tax-return process. No material changes to the risk factors were reported. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Separate recurring underwriting and investment-income performance from equity fair-value losses newly recognized in net income under ASU 2016-01.
- Monitor whether current-year loss costs, particularly in commercial and personal auto, improve as rate increases and underwriting actions take effect.
- Review reserve development and reserve growth against subsequent claims experience; reserve estimates are inherently uncertain.
- Track equity-market and interest-rate sensitivity, book value, liquidity, debt levels, and the capacity of insurance subsidiaries to pay dividends to the parent.
- Check subsequent disclosures for updated Tax Act estimates, legal contingencies, catastrophe losses, and any changes in management’s 2018 outlook.