Cincinnati Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The unaudited consolidated financial statements are prepared under U.S. GAAP. Cincinnati Financial primarily operates in property-casualty and life insurance, with an investment portfolio and distribution through independent agencies.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $1.215 billion | $2.227 billion; down 45% |
| Earned premiums | $1.690 billion | $1.544 billion; up 9% |
| Net investment income | $185 million | $174 million; up 6% |
| Net investment gains (losses) | $(666) million | $504 million |
| Net income (loss) | $(273) million; $(1.70) diluted EPS | $620 million; $3.82 diluted EPS |
| Comprehensive income (loss) | $(862) million | $476 million |
| Operating cash flow | $198 million | $354 million |
| Property-casualty combined ratio | 89.9% | 91.2% |
- The quarterly net loss primarily reflected a $683 million pretax unrealized loss on equity securities still held, recorded in earnings. Lower investment gains reduced after-tax results by $924 million year over year; higher premiums, investment income and property-casualty underwriting results partly offset this effect.
- Property-casualty underwriting profit was $165 million, up 24%. Earned premiums grew 10%; net written premiums grew 12%. Catastrophe losses were lower than in Q1 2021, while large losses and underwriting expenses increased. Prior-year reserve development was favorable by $41 million, versus $110 million favorable in Q1 2021.
- By segment, commercial lines earned premiums were $962 million and underwriting profit was $76 million; personal lines earned premiums were $402 million and underwriting profit was $65 million; excess and surplus lines earned premiums were $112 million and underwriting profit was $16 million. The life segment reported a $2 million pretax loss, unchanged from the prior-year quarter.
- Cash and cash equivalents were $987 million at March 31, down from $1.139 billion at year-end. Total investments were $23.399 billion, versus $24.666 billion. Total assets were $30.250 billion.
- Shareholders’ equity was $12.092 billion, down from $13.105 billion; book value per share fell to $75.43 from $81.72. The decline reflected investment valuation losses and other equity movements. The value creation ratio was negative 6.9%, versus positive 4.1% a year earlier.
- Total debt was $838 million: $49 million short-term borrowing and $789 million long-term debt. Debt-to-total-capital was 6.5%, compared with 6.0% at year-end. The company reported $251 million available under its revolving credit line, plus a $300 million accordion feature.
Material changes and management commentary
- Rising U.S. Treasury yields and wider corporate credit spreads reduced fixed-maturity fair value. The fixed-maturity portfolio’s net unrealized gain was $46 million at quarter-end, versus $792 million at year-end; its fair value was 100.4% of amortized cost, versus 106.5%. These changes contributed to the substantial decline in shareholders’ equity and accumulated other comprehensive income.
- Management reported property-casualty net written premium growth of 12%, compared with its cited industry full-year 2022 growth projection of approximately 6%. The GAAP combined ratio of 89.9% included 3.1 percentage points from current-year catastrophe losses, partly offset by 2.5 points of favorable prior-year reserve development. Management’s long-term combined-ratio objective is 95%–100% over a five-year period; this is a target, not quarterly guidance.
- Management said it expects property-casualty underwriting to benefit from price increases and initiatives to improve pricing precision and claims and loss-control results. It also noted higher current-year large losses and increased underwriting expense ratios, including higher agency profit-sharing commissions.
- The board raised the regular quarterly dividend to $0.69 per share, a 10% increase from the comparable quarter. The filing reports the board’s confidence in capital, liquidity and financial flexibility; it does not provide specific earnings or full-year financial guidance.
Outlook, risks and contingencies
- Key risks include equity-market declines, interest-rate and credit-spread movements, inflation and claim-cost increases, catastrophe losses, reinsurance availability and recoverability, and uncertainty in loss-reserve estimates. Management stated actual results may differ materially from forward-looking statements.
- COVID-19 business-interruption coverage lawsuits remain pending. The company disputes coverage and intends to defend the cases, but says it cannot reasonably estimate any potential loss or range of loss; aggregate adverse outcomes could materially affect financial results or condition.
- The company continued to monitor COVID-19 effects and reported no significant premium impact or material change to pandemic-related loss estimates in Q1. It noted pandemic-related death claims contributed to moderately higher life claims and could continue to affect future claims.
- The company plans to adopt long-duration insurance accounting changes on January 1, 2023. Management expects updated discount rates for term and whole-life reserves to materially affect shareholders’ equity at transition, through higher reserves and lower AOCI; other effects remain under evaluation.
- Management said there were no material changes to the risk factors in the 2021 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether equity-market movements and unrealized investment losses continue to materially affect reported earnings, AOCI and book value.
- Whether premium growth is sustained while current accident-year losses, large claims, expense ratios and reserve development evolve.
- Developments in COVID-19 business-interruption litigation and any change in the company’s ability to estimate or accrue potential exposure.
- The magnitude and timing of the 2023 long-duration insurance accounting transition impact on reserves, AOCI and equity.
- Liquidity and capital trends, including operating cash generation, debt usage, subsidiary dividend capacity, shareholder dividends and repurchases.