Cincinnati Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; amounts are U.S. dollars. Cincinnati Financial is primarily a property-casualty and life insurer, distributing insurance through independent agencies.
Financial performance
- Q3: Earned premiums rose 13% to $1.882 billion and investment income, net, rose 8% to $193 million. Total revenue fell 21% to $1.408 billion, chiefly because net investment losses were $674 million versus $70 million a year earlier. Net loss was $418 million, or $2.64 per diluted share, compared with net income of $153 million, or $0.94 per diluted share.
- First nine months: Earned premiums increased 11% to $5.345 billion and net investment income increased 9% to $573 million. Total revenue declined 45% to $3.443 billion, including net investment losses of $2.494 billion versus gains of $954 million in 2021. Net loss was $1.499 billion, or $9.41 per diluted share, versus net income of $1.476 billion, or $9.07 per diluted share.
- Underwriting: Property-casualty earned premiums grew 13% in Q3 and 12% year to date. The combined ratio was 103.9% in Q3 (underwriting loss $66 million) and 99.2% year to date (underwriting profit $47 million), versus 92.6% and 89.8%, respectively, in 2021. Catastrophe losses and prior-year reserve development contributed 12.8 percentage points to the Q3 ratio and 8.1 points year to date.
- Cash flow: Operating cash flow was $1.421 billion for the first nine months, down from $1.518 billion. Investing activities used $646 million and financing activities used $831 million. Cash and cash equivalents were $1.083 billion at September 30.
- Balance sheet and capital: Total assets were $28.199 billion, down from $31.387 billion at year-end 2021. Shareholders’ equity fell to $9.431 billion from $13.105 billion; book value per share declined to $60.01 from $81.72. Total investments were $20.988 billion. MD&A reported debt of $833 million, including $44 million of short-term borrowing, and a debt-to-total-capital ratio of 8.1%, versus 6.0% at year-end.
- Shareholder returns: The quarterly dividend was $0.69 per share; $316 million of dividends were paid in the first nine months. The company repurchased $399 million of stock year to date.
Material changes and management commentary
- Investment market declines materially reduced earnings and equity. The equity portfolio’s unrealized losses are reflected in earnings; falling fixed-maturity values are generally reflected in other comprehensive income. Year-to-date other comprehensive loss was $1.476 billion, principally from fixed-maturity investments.
- Property-casualty underwriting worsened as current-year losses before catastrophes rose, catastrophe losses increased, and favorable prior-year reserve development was lower than in 2021. Management cited elevated repair and liability costs, inflation, large claims and pandemic-era distortions to paid-loss trends. It said it would remain prudent in reserving while longer-term loss trends become clearer.
- Prior-year reserves still developed favorably by $143 million in the first nine months, compared with $331 million in 2021. Gross property-casualty reserves rose to $8.045 billion from $7.229 billion at year-end, including a $576 million increase in IBNR loss reserves.
- Life insurance segment profit was $22 million year to date, versus a $9 million loss in 2021, reflecting more favorable actuarial assumption updates and mortality experience. The company also noted pandemic-related death claims and the possibility of higher future claims.
- Management described property-casualty premium growth, pricing actions and improved pricing precision as supports for future underwriting performance. It expects an average rate increase of approximately 10% in 2023 written premiums for personal auto. Its long-term combined-ratio objective is 95%–100% over a five-year period; this is an objective, not a near-term earnings forecast.
Outlook, risks and unusual items
- Q3 results included a $34 million income-tax benefit from release of an uncertain tax position after favorable IRS guidance. The company said the Inflation Reduction Act was not expected to have a material financial-statement impact.
- Hurricane Ian losses were estimated at $220 million in the catastrophe table as of September 30, including losses occurring through October 1; estimates relied significantly on third-party models and may change. The filing said Ian losses had not then reached the trigger for Cincinnati Re’s applicable retrocession recovery.
- Unrealized fixed-maturity losses were $1.115 billion at September 30, versus $16 million at year-end 2021, primarily attributed to higher Treasury yields and wider corporate credit spreads. Management said it did not consider those losses to result from credit losses and generally expected issuers to pay interest and principal. Equity-market movements remain a significant source of earnings and book-value volatility.
- The company faces COVID-19 business-interruption coverage litigation. It disputes coverage and intends to defend the cases, but said it could not reasonably estimate a possible loss or range; adverse aggregate outcomes could materially affect financial position, results or cash flows.
- Other risks identified include catastrophe and claim-severity variability, inflation, reserve-estimation uncertainty, reinsurance availability and collectability, market volatility, interest rates, cyber and operational risks, and economic or geopolitical disruption. Management said risk factors had not changed materially from the 2021 Form 10-K.
- Liquidity sources include recurring operating cash flow, investment income and liquid investments, subsidiary dividends and borrowing capacity. The company reported $256 million available under its revolving line plus a $300 million accordion feature; it did not anticipate a material increase in debt beyond available line capacity during 2022.
Important facts for investors to verify
- How subsequent claims development changes Q3 and year-to-date loss estimates, particularly commercial umbrella, large losses and IBNR reserves.
- Whether pricing and rate actions—especially the planned personal-auto increases—offset claim-cost inflation and support underwriting margins.
- Updated Hurricane Ian loss estimates, reinsurance recoveries and any effect on catastrophe results.
- Changes in equity and fixed-maturity valuations, investment income, accumulated other comprehensive income and book value.
- Developments in COVID-19 business-interruption litigation, including any court decisions, class certification or quantifiable loss estimates.
- Capital and liquidity trends, including debt, repurchases, dividends and the impact of future market movements on shareholders’ equity.