Business context and reporting period
Cincinnati Financial Corporation (Nasdaq: CINF) filed this Form 10-K for the fiscal year ended December 31, 2021. It is primarily a property-casualty insurer, distributing through independent agencies in 46 states, with life insurance, reinsurance, Lloyd’s specialty underwriting and investment operations. Comparisons below are primarily with 2020.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $9.630 billion | $7.536 billion |
| Net income | $2.946 billion | $1.216 billion |
| Diluted EPS | $18.10 | $7.49 |
| Operating cash flow | $1.981 billion | $1.491 billion |
| Total investments | $24.666 billion | $21.542 billion |
| Shareholders’ equity | $13.105 billion | $10.789 billion |
| Book value per share | $81.72 | $67.04 |
| Debt-to-total-capital ratio | 6.0% | 7.2% |
- Earned premiums increased 8% to $6.482 billion; net written premiums increased 10% to $6.825 billion. Net property-casualty written premiums grew 10%.
- Investment income, net of expenses, rose 7% to $714 million. Net investment gains rose to $2.409 billion from $865 million, primarily reflecting $2.278 billion of unrealized gains on equity securities still held.
- Property-casualty underwriting profit was $731 million, versus $119 million. The GAAP combined ratio improved to 88.3% from 98.1%; below 100% indicates an underwriting profit. The 2021 ratio benefited from lower catastrophe losses and stronger favorable prior-year reserve development.
- By insurance segment, pretax underwriting results were: commercial lines profit of $598 million (2020: $64 million); personal lines profit of $97 million ($47 million); excess and surplus lines profit of $44 million ($34 million); and life insurance loss of $16 million (2020: profit of $11 million).
- Cash and cash equivalents were $1.139 billion at year-end, versus $900 million. The parent company reported $5.053 billion in cash and marketable securities for liquidity purposes. A $300 million revolving credit facility had $54 million drawn.
- Long-term debt principal was $793 million; the balance-sheet long-term debt and lease-obligation line was $843 million. The filing reports total debt of $843 million and a low 6.0% debt-to-total-capital ratio.
Material changes versus the prior comparable period
- Net income increased 142%, driven by higher investment gains and improved property-casualty underwriting. Investment gains after tax increased by $1.220 billion; property-casualty underwriting income after tax increased by $483 million.
- Net catastrophe losses were $497 million, down from $692 million in 2020. Favorable development on prior accident-year reserves was $428 million, compared with $131 million in 2020.
- Equity markets boosted investment values, while rising interest rates reduced the portfolio’s unrealized gains on fixed maturities. Comprehensive income was $2.825 billion, up from $1.537 billion.
- Life insurance results weakened, mainly because death claims rose above projected mortality. Life net in-force policy face amounts increased 5% to $77.493 billion.
- Declared dividends per share increased 5% to $2.52. The company repurchased 1.25 million shares during 2021 for $144 million.
Outlook, management commentary and risks
- Management targets a five-year average value creation ratio of 10%–13%; the 2021 result was 25.7%. Its stated long-term underwriting objective is a five-year average GAAP combined ratio of 95%–100%; the 2017–2021 average was 94.8%.
- Management expects continued property-casualty premium growth and believes pricing precision, risk selection and claims and loss-control initiatives can support profitability. It did not provide a specific 2022 earnings or revenue forecast.
- Management expects interest-rate increases could pressure bond values while improving yields on future investments; equity-market volatility may also rise. Fixed maturities were $13.022 billion at fair value and equities were $11.315 billion at year-end.
- Key risks include catastrophe frequency and severity, inflation and social inflation affecting claims and reserves, investment-market declines, interest-rate exposure, reinsurance availability and counterparty collectability, and dependence on independent agencies. Net property-casualty reserves were $6.902 billion; management’s reasonably likely range was $6.446 billion–$7.014 billion.
- COVID-19-related business-interruption litigation remains uncertain. The company disputes coverage, but says it cannot reasonably estimate a possible loss or range; adverse aggregate outcomes could materially affect financial position, results or cash flows. COVID-related incurred losses and expenses were negative $7 million in 2021, compared with $85 million in 2020.
- The company plans to adopt long-duration insurance accounting changes on January 1, 2023. Management expects the updated discount-rate requirement to materially affect shareholders’ equity at transition; other effects remain under evaluation.
Important facts for investors to verify
- How much of the 2021 earnings increase reflects recurring underwriting and investment income versus market-sensitive equity gains and favorable reserve development.
- Whether catastrophe losses, claim severity and inflation trends remain consistent with pricing and reserve assumptions, particularly for long-tail commercial lines.
- Developments in COVID-19 business-interruption cases, including any rulings, class certification or changes to the currently unquantifiable exposure.
- Whether the large equity allocation and interest-rate sensitivity remain appropriate for insurer capital and liquidity needs; the filing estimates that a 100-basis-point rate change would move fixed-maturity fair value by approximately 4.8%.
- Reinsurance recoverables and counterparty strength, as well as the impact of the 2022 reinsurance program and catastrophe retention.
- Implementation effects of the 2023 long-duration insurance accounting standard and any resulting change to equity, earnings or disclosures.