01—Abstract
Summary
Summary of the 10-K filed March 30, 1994. Cited figures are marked; the original filing is the authoritative source.
Cincinnati Financial Corporation (CINF) reported a strong 1993, with net income rising 26.1% to $216.0 milliona ($4.20 per share) from $171.3 million ($3.39 per share) in 1992.
Total revenues grew 10.6% to $1.44 billionb, driven by a 10% increase in property/casualty net premiums earned to $1.09 billion and a 9.4% rise in net investment income to $239.4 million. Results were helped by a $13.8 million cumulative tax accounting credit and $51.5 million in realized investment gains, partly offset by an $11.2 million charge tied to the 1993 tax rate increase. Underwriting remained solidly profitable, with the combined loss and expense ratio improving to 100.1% from 101.8%, and the company outperformed an industry average estimated at 108-109%.
The balance sheet is dominated by a large equity portfolio whose unrealized appreciation reached $1.135 billionc, or 38% of shareholders' equity after deferred taxes. Shareholders' equity rose to $1.947 billion from $1.714 billion, and total assets grew to $4.60 billion. Investors should note the concentration in a few holdings: Fifth Third Bancorp, Alltel, and PNC Financial together represent a significant share of equity securities, and Fifth Third alone was carried at $476.6 million at year-end.
Liabilities are modest, with debt under 2% of assets, and operating cash flow of $363 milliond comfortably covers needs. Loss reserve development was favorable: a $39.8 million redundancy was recognized on the 1992 reserve base, and the ten-year development table shows cumulative redundancy on most accident years. Reserves are undiscounted, and reinsurance retention was held at $1 million.
Management flagged coastal catastrophe exposure, and it closed four South Carolina agencies to limit it. Growth targets remain in the 15% range, with plans to enter Maryland and Arkansas in 1994.
02—Key points
Key Highlights
- Net income up 26.1% to $216.0 million, or $4.20 per share, versus $3.39 in 1992; excluding realized gains and the tax items, EPS was about $3.75.
- Property/casualty net premiums earned rose 10% to $1.09 billion, with gross written premiums of the three P/C affiliates up 11.6% to $1.217 billion.
- Combined loss and expense ratio improved to 100.1% from 101.8%, versus an estimated industry average of 108-109%; 1993 catastrophe losses were $22.6 million, down from $27.4 million.
- Shareholders' equity reached $1.947 billion, up from $1.714 billion, and unrealized appreciation on equities totaled $1.135 billion, or 38% of equity after deferred taxes.
- Equity portfolio concentration is significant: Fifth Third Bancorp ($476.6 million carried), Alltel ($222.6 million carried at parent level), and PNC are large positions relative to shareholders' equity.
- Reserve development was favorable, with a $39.8 million redundancy recognized on prior-year liabilities, and the company does not discount its P/C reserves.
- Total assets grew 12.3% to $4.60 billion, with cash and marketable securities at 89.7% of assets; debt remains under 2% of assets.
03—Questions
Frequently Asked Questions
What drove the increase in 1993 earnings?
Net income rose $44.7 million, or 26.1%, to $216.0 million. Key drivers were 10% growth in net premiums earned, a 9.4% increase in net investment income to $239.4 million, realized gains of $51.5 million (up from $35.9 million), and a $13.8 million cumulative effect credit from adopting SFAS No. 109. These were partly offset by a $11.2 million tax charge from the 1993 tax rate increase on unrealized appreciation.
How profitable is the core insurance underwriting business?
The property/casualty segment still posted a pre-tax loss of $3.4 million in 1993, though this improved from a $22.7 million loss in 1992. The combined loss and expense ratio of 100.1% means claims and expenses slightly exceeded premiums, but the company outperformed the estimated industry average of 108-109%. Investment income, which is substantial, is what made overall results profitable.
How much of the company's value depends on its equity holdings?
Equity securities were carried at $2.32 billion, against total investments of about $4.1 billion, and unrealized appreciation on equities was $1.135 billion. Holdings are concentrated in a few companies, including Fifth Third Bancorp and Alltel. Because the company follows a buy-and-hold strategy, its book equity and earnings are sensitive to the performance and market prices of these positions, and the stock may be affected by changes in those prices.
Is the company's loss reserving conservative?
Based on the ten-year development table, reserves have generally proved adequate. The company recognized a $39.8 million redundancy on the December 31, 1992 liability in 1993, with cumulative redundancies on most accident years since 1987. Management attributes this partly to settling case reserves for less than expected. However, the filing cautions that past development trends may not continue, and reserves are undiscounted and subject to trends in claim severity, which has been rising because of medical costs and litigation.
What are the main risks and growth plans?
The main risks include catastrophe exposure in coastal areas. Management closed four South Carolina agencies in November 1993 to limit exposure there, which it estimated at $2-3 billion. Growth plans include entering Maryland and Arkansas in 1994 and considering Michigan and Missouri. The company keeps its retention limit at $1 million and reinsures with financially sound companies, and it expects that new statutory risk-based capital rules will not significantly affect operations.
04—Continue