Cincinnati Financial Reports Third-Quarter 2009 Results
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CINCINNATI, Oct. 29 /PRNewswire-FirstCall/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Net income of $171 million, or $1.05 per share, in the third quarter of
2009, compared with $247 million, or $1.50 per share, in the 2008 third
quarter. Net realized investment gains contributed $75 million, or 46
cents per share, compared with $173 million, or $1.05 per share.
-- Operating income* of $96 million, or 59 cents per share, in the 2009
third quarter, compared with operating income of $74 million, or 45
cents per share.
-- Net income and operating income for the third-quarter of 2009 reflected
a property casualty insurance underwriting profit, contributing 14 cents
per share, compared with a third-quarter 2008 underwriting loss that
decreased income by 4 cents per share. The property casualty
contribution rose primarily on lower weather-related catastrophe losses.
-- Book value per share of $28.44 at September 30, 2009, up 11.6 percent
during the quarter.
-- Value creation ratio reached 13.1 percent for the third quarter and 15.0
percent for the first nine months of 2009.
Financial Highlights
---------------------------------------------------------------
(Dollars in millions except share data)
Three months ended September 30,
2009 2008 change %
---------------------------------------------------------------
Revenue Highlights
Earned premiums $766 $781 (1.9)
Investment income 127 130 (2.4)
Total revenues 1,007 1,186 (15.1)
Income Statement Data
Net income $171 $247 (31.0)
Net realized investment
gains and losses 75 173 (57.2)
--- ---
Operating income* $96 $74 30.7
=== ===
Per Share Data (diluted)
Net income $1.05 $1.50 (30.0)
Net realized
investment gains
and losses 0.46 1.05 (56.2)
---- ----
Operating income* $0.59 $0.45 31.1
==== ====
Cash dividend declared 0.395 0.39 1.3
Diluted weighted
average shares
outstanding 162,901,396 164,242,185 (0.8)
Financial Highlights
---------------------------------------------------------------
(Dollars in millions except share data)
Nine months ended September 30,
2009 2008 change %
---------------------------------------------------------------
Revenue Highlights
Earned premiums $2,301 $2,355 (2.3)
Investment income 370 412 (10.3)
Total revenues 2,770 2,806 (1.3)
Income Statement Data
Net income $187 $268 (30.1)
Net realized investment
gains and losses 58 16 263.8
-- -- ----
Operating income* $129 $252 (48.9)
=== === ====
Per Share Data (diluted)
Net income $1.15 $1.64 (29.9)
Net realized
investment gains
and losses 0.36 0.10 260.0
---- ---- ----
Operating income* $0.79 $1.54 (48.7)
===== ===== =====
Book value $28.44 $28.87 (1.5)
Cash dividend declared 1.175 1.17 0.4
Diluted weighted
average shares
outstanding 162,794,767 163,834,163 (0.6)
Insurance Operations Highlights
-- 95.1 percent third-quarter 2009 property casualty combined ratio
improved from 101.3 percent in the third quarter of 2008.
-- Property casualty net written premiums grew $3 million or 0.5 percent,
with new business from growth initiatives and lower ceded premiums for
reinsurance offsetting the negative premium effects of the slow economy
and a disciplined underwriting response to lower market pricing.
-- $14 million increase in property casualty new business written by
agencies in the third quarter of 2009, with $9 million from standard
market geographic expansion initiatives and $4 million from surplus
lines.
-- 4 cents per share contribution from life insurance operations to
third-quarter operating income, up from 3 cents per share.
Balance Sheet and Investment Highlights
-- $28.44 book value, up 10.4 percent from $25.75 at December 31, 2008.
Property casualty statutory surplus rose 3.3 percent to $3.472 billion.
-- Invested assets fair value increased 7.4 percent and 17.3 percent during
the third quarter and first nine months of 2009.
-- Investment income for the third quarter declined 2.4 percent and is
approaching a growth pace following portfolio changes during 2008 and
early 2009 to execute a capital preservation diversification strategy.
-- Strong capital position includes financial flexibility from parent
company cash and marketable securities of $1.061 billion.
* The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 10 defines and reconciles measures presented in this release that are not based on Generally Accepted Accounting Principles or Statutory Accounting Principles.
** Forward-looking statements and related assumptions are subject to the risks outlined in the company's safe harbor statement (see Page 7).
Return to Profitability and Positive Direction
Kenneth W. Stecher, president and chief executive officer, commented, "While the economy and price competition continue to challenge our insurance business, the metrics we use to measure our success moved in a distinctly positive direction in the third quarter. Operating income of $96 million or 59 cents per share surpassed the amounts reported since the first quarter of 2008. Pre-tax investment income nearly reached the level of the 2008 third quarter, on track to resume a growth trend by year-end 2009.
"Our property casualty insurance operations benefitted from atypically low catastrophe losses, strong reserves and some stabilization of pricing. We achieved $36 million of pre-tax underwriting profit and a combined ratio of 95.1 percent for the third quarter, our best result since the fourth quarter of 2007. As expected, our workers' compensation and homeowner lines of business continued to underperform. For both of these lines, we are using predictive modeling techniques to improve the accuracy of our pricing for each account and to target best-of-class accounts. Early results show positive impacts on pricing and verify the trend to higher quality accounts, which should, over time, return these lines to profitability.
"We are satisfied with third-quarter results relative to other recent quarters, recognizing that we still have work to do. As we navigate through a difficult period for our company, our industry and economy, we continue to sharply focus on initiatives that have just begun to bear fruit and have strong potential to drive future profitable growth," Stecher said. "During the third quarter, we saw clear indications that these efforts are increasing current opportunities and opening new ones. Among those indications was a healthy amount of new business that directly resulted from our initiatives, helping offset lower premiums resulting from lower policyholder sales and payrolls used to calculate premiums. We continue to decline underpriced business, giving up short-term revenue to protect long-term profitability."
Current Progress and Potential for Profitable Growth
Stecher continued, "We are making good progress in expanding our product lines and pursuing geographic diversification. Our new surplus lines subsidiary has been well received by our independent agent representatives, and it is contributing steadily to new business. Our entry into additional states is going well, with business building at a good pace in Texas, New Mexico and eastern Washington. In September, we appointed our first Wyoming agency, expanding the marketing territory that includes northern Colorado. We're receiving rollover books of personal lines business in areas where we recently expanded that product line.
"Our technology initiatives also are proceeding on time and on budget. In October, we put our new policy administration system for commercial packages and auto policies into production in five states accounting for approximately 40 percent of our commercial lines premium. The system makes it easier for agents to serve the insurance needs of the businesses in their communities, offering efficiencies such as direct billing by the company and the ability to quote and issue policies in real time directly from their agency systems. We expect to have this system in six more states before year-end, with 19 additional states scheduled for 2010.
"Our expansion and technology initiatives support our long-term strategies. First, we are working to improve profitability by introducing more efficient systems and enhancing our underwriting capabilities. Second, we are driving premium growth by making it more attractive for agents to do business with us and by moving toward a larger footprint that also reduces volatility of our results associated with weather-related catastrophes. We also continue to make progress with the third part of our long-term strategy, to preserve capital. Our investment portfolio is actively managed, with an eye toward the appropriate balance between current income and the potential for capital appreciation that benefits shareholders."
Shareholder Rewards
Stecher concluded, "Significantly exceeding year-end 2008 levels, shareholders' equity rose to $4.626 billion and book value per share rose to $28.44 at the end of the third quarter. The increase helped take our value creation ratio for the year-to-date period to the 15 percent level earlier than anticipated. Our target for this measure is a 12 percent to 15 percent average for the five-year period of 2010 through 2014. The value creation ratio is the sum of our rate of growth in book value per share plus the ratio of dividends declared per share to beginning book value. It captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders.
"During the third quarter, our board of directors increased the indicated annual dividend for a 49th consecutive year, raising the quarterly dividend paid October 15 by a half cent to 39.5 cents. This gesture signaled their confidence that we are moving steadily in the right direction, as verified by underwriting profit in the third quarter. We are eager to further pursue the new opportunities we have just begun to tap."
Consolidated Property Casualty Insurance Operations
---------------------------------------------------------------------
(Dollars in millions; percent
change given for dollar amounts
and point change given for ratios)
Three months ended Nine months ended
September 30, September 30,
change change
2009 2008 % 2009 2008 %
---------------------------------------------------------------------
Earned premiums $733 $751 (2.4) $2,198 $2,262 (2.9)
Loss and loss
expenses before
catastrophe losses 453 460 (1.5) 1,446 1,362 6.1
Loss and loss
expenses from
catastrophe losses 6 63 (89.7) 177 219 (19.2)
-- -- --- ---
Total loss and
loss expenses 459 523 (12.2) 1,623 1,581 2.6
Underwriting expenses 238 237 0.2 716 707 1.4
--- --- --- ---
Underwriting
profit (loss) $36 $(9) nm $(141) $(26) (449.3)
=== ==== ==== ====
Other premium metrics:
Agency renewal
written premiums $669 $687 (2.7) $2,030 $2,159 (6.0)
Agency new business
written premiums 107 93 15.4 311 268 16.0
Net written premiums 730 727 0.5 2,231 2,292 (2.7)
Ratios as a percent
of earned premiums:
Points Points
------ ------
Loss and loss
expenses 62.7% 69.7% (7.0) 73.8% 69.9% 3.9
Underwriting
expenses 32.4 31.6 0.8 32.6 31.2 1.4
---- ---- --- ---- ---- ---
Combined ratio 95.1% 101.3% (6.2) 106.4% 101.1% 5.3
==== ===== === ===== ===== ===
Other metrics within
combined ratio:
Contribution from
catastrophe losses 0.9 8.4 (7.5) 8.1 9.7 (1.6)
Contribution from
prior period
reserve
development (12.4) (13.6) 1.2 (5.2) (8.9) 3.7
-- $3 million or 0.5 percent increase in third-quarter property casualty
net written premiums as the effects of insured exposure decreases, soft
pricing and disciplined renewal underwriting were offset by growth in
new business and lower ceded premiums on reinsurance, including $8
million less for reinstatement premiums on catastrophe reinsurance.
-- $14 million increase in third-quarter 2009 new business written by
agencies includes a $4 million increase from surplus lines operations
that began in 2008 and a $10 million increase from personal lines
operations.
-- 1,174 agency relationships with 1,455 reporting locations marketing
standard market property casualty insurance products at September 30,
2009, up from 1,133 agency relationships with 1,387 reporting locations
at year-end 2008.
-- Third-quarter 2009 GAAP combined ratio decreased primarily due to lower
catastrophe losses.
-- Underwriting results benefitted from the impact of favorable prior
accident year reserve development of $91 million for the third quarter
of 2009 and $102 million for the third quarter of 2008.
-----------------------------------------------------------------------
(In millions, net of reinsurance)
Three months ended September 30,
Cause Commercial Personal
Dates of loss Region lines lines Total
-----------------------------------------------------------------------
2009
First quarter
catastrophes (1) 1 -
Second quarter
catastrophes (10) 1 (9)
Sep. 18-22 Flood, South
hail,
wind 1 4 5
All other 2009
catastrophes 6 6 12
Development on
2008 and prior
catastrophes (3) 1 (2)
-- -- --
Calendar year
incurred
total $(7) $13 $6
== == ==
2008
First quarter
catastrophes (1) - (1)
Second quarter
catastrophes (2) (10) (12)
Jul. 19 Wind, Midwest
hail,
flood 3 3 6
Jul. 26 Wind, Midwest
hail,
flood 1 8 9
Sep. 12-14 Hurricane South,
Ike Midwest 20 37 57
All other 2008
catastrophes 1 - 1
Development on 2007
and prior
catastrophes 1 2 3
-- -- --
Calendar year
incurred
total $23 $40 $63
=== === ===
Nine months ended September 30,
Cause Commercial Personal
Dates of loss Region lines lines Total
-----------------------------------------------------------------------
2009
First quarter
catastrophes 20 47 67
Second quarter
catastrophes 42 45 87
Sep. 18-22 Flood, South
hail,
wind 1 4 5
All other 2009
catastrophes 11 13 24
Development on 2008
and prior
catastrophes (10) 4 (6)
-- -- --
Calendar year
incurred
total $64 $113 $177
== === ===
2008
First quarter
catastrophes 21 21 42
Second quarter
catastrophes 66 34 100
Jul. 19 Wind, Midwest
hail,
flood 3 3 6
Jul. 26 Wind, Midwest
hail,
flood 1 8 9
Sep. 12-14 Hurricane South,
Ike Midwest 20 37 57
All other 2008
catastrophes 3 3 6
Development on
2007 and prior
catastrophes (2) 1 (1)
-- -- --
Calendar year
incurred
total $112 $107 $219
==== ==== ====
Insurance Segments Highlights
Commercial Lines Insurance Operations
-----------------------------------------------------------------------
(Dollars in millions;
percent change given
for dollar amounts
and point change given
for ratios) Three months ended Nine months ended
September 30, September 30,
change change
2009 2008 % 2009 2008 %
-----------------------------------------------------------------------
Earned premiums $555 $582 (4.7) $1,667 $1,743 (4.4)
Loss and loss
expenses before
catastrophe
losses 336 348 (3.6) 1,095 1,034 5.9
Loss and loss
expenses from
catastrophe losses (7) 23 nm 64 112 (42.8)
-- -- -- ---
Total loss and
loss expenses 329 371 (11.5) 1,159 1,146 1.2
Underwriting
expenses 184 181 1.6 539 538 0.2
--- --- --- ---
Underwriting
profit (loss) $42 $30 41.5 $(31) $59 (152.1)
=== === ==== ===
Other premium
metrics:
Agency renewal
written
premiums $489 $502 (2.5) $1,535 $1,642 (6.5)
Agency new
business
written premiums 76 77 (0.4) 231 229 0.8
Net written
premiums 528 538 (1.8) 1,678 1,759 (4.7)
Ratios as a
percent of earned
premiums: Points Points
------ ------
Loss and loss
expenses 59.3% 63.8% (4.5) 69.6% 65.7% 3.9
Underwriting
expenses 33.1 31.1 2.0 32.3 30.9 1.4
---- ---- --- ---- ---- ---
Combined
Ratio 92.4% 94.9% (2.5) 101.9% 96.6% 5.3
==== ==== === ===== ==== ===
Other metrics
within combined
ratio:
Contribution from
catastrophe
losses (1.2) 4.0 (5.2) 3.8 6.4 (2.6)
Contribution from
prior period
reserve
development (13.4) (15.0) 1.6 (5.2) (10.1) 4.9
----------------------------------------------------------------------
-- $10 million or 1.8 percent decrease in third-quarter commercial lines
net written premiums. Lower renewal premiums reflected modest pricing
declines and lower insured exposure levels such as business sales or
payroll volume, due to the weak economy. Lower new business premiums
reflected decisions to decline business considered underpriced,
partially offset by growth initiatives including $4 million from Texas,
a market we entered in December 2008.
-- 2.5 percentage-point improvement in third-quarter combined ratio due
primarily to lower weather-related catastrophe losses.
-- Favorable prior accident year reserve development benefitted
third-quarter underwriting results by $74 million for 2009 compared with
$88 million for 2008, with umbrella liability coverages driving the
majority of the 2009 benefit.
Personal Lines Insurance Operations
----------------------------------------------------------------------
(Dollars in millions; percent change given for dollar amounts
and point change given for ratios)
Three months ended Nine months ended
September 30, September 30,
change change
2009 2008 % 2009 2008 %
----------------------------------------------------------------------
Earned premiums $170 $167 1.8 $513 $518 (0.9)
Loss and loss
expenses before
catastrophe
losses 112 111 0.3 337 328 2.7
Loss and loss
expenses from
catastrophe losses 13 40 (66.2) 113 107 5.3
-- -- --- ---
Total loss and
loss expenses 125 151 (17.2) 450 435 3.3
Underwriting
expenses 49 54 (8.8) 159 165 (3.2)
-- -- --- ---
Underwriting
loss $(4) $(38) 89.8 $(96) $(82) (16.6)
=== === === ===
Other premium metrics:
Agency renewal
direct written
premiums $177 $185 (4.7) $490 $517 (5.3)
Agency new
business direct
written premiums 21 11 90.9 55 30 82.0
Net written
premiums 190 184 3.2 524 525 (0.1)
Ratios as a percent
of earned premiums: Points Points
------ ------
Loss and loss
expenses 73.3% 90.1% (16.8) 87.5% 84.0% 3.5
Underwriting
expenses 29.0 32.4 (3.4) 31.2 31.9 (0.7)
---- ---- --- ---- ---- ---
Combined
Ratio 102.3% 122.5% (20.2) 118.7% 115.9% 2.8
===== ===== ==== ===== ===== ===
Other metrics
within combined
ratio:
Contribution
from catastrophe
losses 7.9 23.8 (15.9) 22.0 20.7 1.3
Contribution
from prior
period reserve
development (10.1) (9.1) (1.0) (5.0) (5.2) 0.2
----------------------------------------------------------------------
-- $6 million or 3.2 percent increase in third-quarter personal lines net
written premiums, including $6 million lower catastrophe reinsurance
reinstatement premiums. Lower renewal premiums were offset by higher new
business premiums.
-- $10 million increase in third-quarter personal lines new business
including $4 million from seven states where we began in 2008 to market
personal lines or significantly expanded our personal lines product
offerings and automation capabilities.
-- 20.2 percentage-point decrease in the combined ratio largely due to a
15.9 percentage-point decrease in catastrophe losses.
-- Favorable prior accident year reserve development benefitted
third-quarter underwriting results by $17 million for 2009 compared with
$15 million for 2008, with umbrella liability coverages driving the
majority of the 2009 benefit.
Life Insurance Operations
-----------------------------------------------------------------------
(In millions) Three months ended Nine months ended
September 30, September 30,
2009 2008 change % 2009 2008 change %
----------------------------------------------------------------------
Written premiums $110 $44 150.1 $233 $135 73.2
==== === ==== ====
Earned premiums $33 $30 10.7 $103 $93 11.0
Investment income,
net of expenses 31 30 3.4 90 89 2.0
Other income - - nm 1 1 (56.3)
-- -- -- --
Total revenues,
excluding realized
investment gains
and losses 64 60 7.7 194 183 6.1
-- -- --- ---
Contract holders
benefits 40 41 (1.0) 118 115 3.1
Underwriting
expenses 9 11 (16.7) 34 33 4.6
-- -- -- --
Total benefits
and expenses 49 52 (4.4) 152 148 3.4
-- -- --- ---
Net income before
income tax and
realized investment
gains and losses 15 8 90.1 42 35 17.6
Income tax 8 3 175.8 15 12 23.5
-- -- -- --
Net income before
realized investment
gains and losses $7 $5 43.2 $27 $23 14.6
== == === ===
-- $66 million three-month and $98 million nine-month growth in 2009 life
insurance segment net written premiums primarily due to increased fixed
annuity sales. Written premiums include life insurance, annuity and
accident and health premiums.
-- Net written premiums from life insurance products grew 10.1 percent
during the third quarter of 2009 and 8.5 percent to $117 million for the
first nine months of 2009.
-- 12.0 percent rise to $65 million in term life insurance written premiums
for the first nine months of 2009, reflecting marketing advantages of
competitive, up-to-date products, close personal attention and policies
backed by financial strength and stability.
-- Growth in earned premiums drove improved profitability for the third
quarter and first nine months of 2009 as life insurance operations
continue to provide a steady contribution to overall earnings. Reduced
underwriting expenses also contributed to higher profitability for the
third quarter of 2009.
-- 4.6 percent rise in face amount of life policies in force to $68.895
billion at September 30, 2009, from $65.888 billion at year-end 2008.
Investment and Balance Sheet Highlights
Investment Operations
-----------------------------------------------------------------------
(In millions) Three months ended Nine months ended
September 30, September 30,
change change
2009 2008 % 2009 2008 %
-----------------------------------------------------------------------
Investment income:
Interest $104 $83 26.0 $296 $238 24.5
Dividends 24 46 (48.0) 74 169 (56.2)
Other 1 3 (70.4) 6 10 (47.3)
Investment
expenses (2) (2) (18.0) (6) (5) (11.3)
-- -- -- --
Total
investment
income, net
of expenses 127 130 (2.4) 370 412 (10.3)
--- --- --- ---
Investment interest
credited to
contract holders (17) (16) (10.1) (50) (47) (7.6)
-- -- -- --
Realized investment
gains and losses
summary:
Realized
investment gains
and losses, net 106 401 (73.6) 180 441 (59.1)
Change in fair
value of
securities
with embedded
derivatives 15 (8) 296.0 23 (13) 268.0
Other-than-
temporary
impairment
charges (11) (121) 90.8 (113) (400) 71.7
-- --- --- ---
Total realized
investment gains
and losses, net 110 272 (59.6) 90 28 218.1
--- --- -- --
Investment
operations income $220 $386 (43.2) $410 $393 4.0
=== === === ===
-- 2.4 percent decline in third-quarter 2009 net investment income, as
higher interest income only partially offset dividend reductions by
equity security holdings. Those dividend reductions occurred primarily
during late 2008 and early 2009.
-- $572 million third-quarter 2009 increase in pre-tax unrealized
investment gains, including $407 million for the fixed maturities
portfolio.
-- Pre-tax realized investment gain for the first nine months of 2009
included $205 million in net gains from sales of equity securities as
the company actively managed sector and issue diversification.
-----------------------------------------------------------------------
(Dollars in millions except share data)
At September 30, At December 31,
2009 2008
Balance sheet data
Invested assets $10,428 $8,890
Total assets 14,226 13,369
Short-term debt 49 49
Long-term debt 790 791
Shareholders' equity 4,626 4,182
Book value per share 28.44 25.75
Debt-to-capital ratio 15.3% 16.7%
-----------------------------------------------------------------------
Nine months ended September 30,
2009 2008
-----------------------------------------------------------------------
Performance measures
Value creation ratio 15.0% (15.9)%
-----------------------------------------------------------------------
-- $10.876 billion in cash and invested assets at September 30, 2009, up
from $9.899 billion at December 31, 2008. Cash and equivalents of $448
million at September 30, 2009, compared with $1.009 billion at December
31, 2008.
-- $7.668 billion bond portfolio at September 30, 2009, with an average
rating of A2/A and with a 7.6 percent rise in fair value during the
third quarter of 2009.
-- $2.669 billion equity portfolio was 25.6 percent of invested assets,
including $697 million in pre-tax unrealized gains at September 30,
2009. Fair value of the equity portfolio rose 7.1 percent during the
third quarter of 2009.
-- $3.472 billion of statutory surplus for the property casualty insurance
group at September 30, 2009, up from $3.360 billion at December 31,
2008. Ratio of net written premiums to property casualty statutory
surplus for the 12 months ended September 30, 2009, of 0.85-to-1,
further improved from 0.89-to-1 for the 12 months ended December 31,
2008.
-- Value creation ratio for the first nine months of 2009 includes 4.6
percent from shareholder dividends and 10.4 percent growth in book value
per share.
For additional information or to register for this morning's conference call webcast, please visit www.cinfin.com/investors.
Cincinnati Financial Corporation offers business, home and auto
insurance, our main business, through The Cincinnati Insurance Company
and its two standard market property casualty companies. The same local
independent insurance agencies that market those policies may offer
products of our other subsidiaries, including life and disability
income insurance, annuities and surplus lines property and casualty
insurance. For additional information about the company, please visit
www.cinfin.com.
Mailing Address: Street Address:
P.O. Box 145496 6200 South Gilmore Road
Cincinnati, Ohio 45250-5496 Fairfield, Ohio 45014-5141
Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2008 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 25. Although we often review or update our forward-looking statements when events warrant, we caution our readers that we undertake no obligation to do so.
Factors that could cause or contribute to such differences include, but are not limited to:
-- Unusually high levels of catastrophe losses due to risk concentrations,
changes in weather patterns, environmental events, terrorism incidents
or other causes
-- Increased frequency and/or severity of claims
-- Inadequate estimates or assumptions used for critical accounting
estimates
-- Recession or other economic conditions resulting in lower demand for
insurance products or increased payment delinquencies
-- Delays in adoption and implementation of underwriting and pricing
methods that could increase our pricing accuracy, underwriting profit
and competitiveness
-- Inability to defer policy acquisition costs for our personal lines
segment if pricing and loss trends would lead management to conclude
this segment could not achieve sustainable profitability
-- Declines in overall stock market values negatively affecting the
company's equity portfolio and book value
-- Events, such as the credit crisis, followed by prolonged periods of
economic instability or recession, that lead to:
-- Significant or prolonged decline in the value of a particular
security or group of securities and impairment of the asset(s)
-- Significant decline in investment income due to reduced or
eliminated dividend payouts from a particular security or group of
securities
-- Significant rise in losses from surety and director and officer
policies written for financial institutions
-- Prolonged low interest rate environment or other factors that limit the
company's ability to generate growth in investment income or interest
rate fluctuations that result in declining values of fixed-maturity
investments, including declines in accounts in which we hold bank-owned
life insurance contract assets
-- Increased competition that could result in a significant reduction in
the company's premium volume
-- Changing consumer insurance-buying habits and consolidation of
independent insurance agencies that could alter our competitive
advantages
-- Ability to obtain adequate reinsurance on acceptable terms, amount of
reinsurance purchased, financial strength of reinsurers and the
potential for non-payment or delay in payment by reinsurers
-- Events or conditions that could weaken or harm the company's
relationships with its independent agencies and hamper opportunities to
add new agencies, resulting in limitations on the company's
opportunities for growth, such as:
-- Multi-notch downgrades of the company's financial strength ratings
-- Concerns that doing business with the company is too difficult
-- Perceptions that the company's level of service, particularly claims
service, is no longer a distinguishing characteristic in the
marketplace
-- Delays or inadequacies in the development, implementation,
performance and benefits of technology projects and enhancements
-- Actions of insurance departments, state attorneys general or other
regulatory agencies, including a change to a federal system of
regulation from a state-based system, that:
-- Restrict our ability to exit or reduce writings of unprofitable
coverages or lines of business
-- Place the insurance industry under greater regulatory scrutiny or
result in new statutes, rules and regulations
-- Increase our expenses
-- Add assessments for guaranty funds, other insurance related
assessments or mandatory reinsurance arrangements; or that impair
our ability to recover such assessments through future surcharges or
other rate changes
-- Limit our ability to set fair, adequate and reasonable rates
-- Place us at a disadvantage in the marketplace
-- Restrict our ability to execute our business model, including the
way we compensate agents
-- Adverse outcomes from litigation or administrative proceedings
-- Events or actions, including unauthorized intentional circumvention of
controls, that reduce the company's future ability to maintain effective
internal control over financial reporting under the Sarbanes-Oxley Act
of 2002
-- Unforeseen departure of certain executive officers or other key
employees due to retirement, health or other causes that could interrupt
progress toward important strategic goals or diminish the effectiveness
of certain longstanding relationships with insurance agents and others
-- Events, such as an epidemic, natural catastrophe or terrorism, that
could hamper our ability to assemble our workforce at our headquarters
location
Further, the company's insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as recent measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation
Condensed Balance Sheets and Statements of Income (unaudited)
---------------------------------------------------------------------
(Dollars in millions) September 30, December 31,
2009 2008
---------------------------------------------------------------------
Assets
Investments $10,428 $8,890
Cash and cash equivalents 448 1,009
Premiums receivable 1,046 1,059
Reinsurance receivable 707 759
Other assets 1,597 1,652
----- -----
Total assets $14,226 $13,369
====== ======
Liabilities
Insurance reserves $5,893 $5,637
Unearned premiums 1,557 1,544
6.125% senior notes due 2034 371 371
6.9% senior debentures due 2028 28 28
6.92% senior debentures due 2028 391 392
Other liabilities 1,360 1,215
----- -----
Total liabilities 9,600 9,187
----- -----
Shareholders' Equity
Common stock and paid-in capital 1,471 1,462
Retained earnings 3,681 3,579
Accumulated other comprehensive income 675 347
Treasury stock (1,201) (1,206)
----- -----
Total shareholders' equity 4,626 4,182
----- -----
Total liabilities and shareholders'
equity $14,226 $13,369
====== ======
---------------------------------------------------------------------
(Dollars in millions except per share data)
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
---------------------------------------------------------------------
Revenues
Earned premiums $766 $781 $2,301 $2,355
Investment income, net
of expenses 127 130 370 412
Realized investment gains
and losses 110 272 90 28
Other income 4 3 9 11
-- -- -- --
Total revenues 1,007 1,186 2,770 2,806
----- ----- ----- -----
Benefits and Expenses
Insurance losses and
policyholder benefits 498 563 1,737 1,693
Underwriting, acquisition
and insurance expenses 247 248 750 738
Other operating expenses 4 5 14 16
Interest expense 14 14 42 39
-- -- -- --
Total benefits and
expenses 763 830 2,543 2,486
--- --- ----- -----
Income before Income Taxes 244 356 227 320
Provision for Income Taxes 73 109 40 52
-- --- -- --
Net Income $171 $247 $187 $268
=== === === ===
Per Common Share:
Net income-basic $1.05 $1.51 $1.15 $1.64
Net income-diluted $1.05 $1.50 $1.15 $1.64
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2009 reconciliations; prior-period reconciliations available at www.cinfin.com/investors.)
Cincinnati Financial Corporation prepares its public financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual and therefore is not reconciled to GAAP data.
Management uses certain non-GAAP and non-statutory financial measures to evaluate its primary business areas - property casualty insurance, life insurance and investments. Management uses these measures when analyzing both GAAP and nonGAAP measures to improve its understanding of trends in the underlying business and to help avoid incorrect or misleading assumptions and conclusions about the success or failure of company strategies. Management adjustments to GAAP measures generally: apply to non-recurring events that are unrelated to business performance and distort short-term results; involve values that fluctuate based on events outside of management's control; or relate to accounting refinements that affect comparability between periods, creating a need to analyze data on the same basis.
-- Operating income: Operating income is calculated by excluding net
realized investment gains and losses (defined as realized investment
gains and losses after applicable federal and state income taxes) from
net income. Management evaluates operating income to measure the success
of pricing, rate and underwriting strategies. While realized investment
gains (or losses) are integral to the company's insurance operations
over the long term, the determination to realize investment gains or
losses in any period may be subject to management's discretion and is
independent of the insurance underwriting process. Also, under
applicable GAAP accounting requirements, gains and losses can be
recognized from certain changes in market values of securities without
actual realization. Management believes that the level of realized
investment gains or losses for any particular period, while it may be
material, may not fully indicate the performance of ongoing underlying
business operations in that period.
-- For these reasons, many investors and shareholders consider operating
income to be one of the more meaningful measures for evaluating
insurance company performance. Equity analysts who report on the
insurance industry and the company generally focus on this metric in
their analyses. The company presents operating income so that all
investors have what management believes to be a useful supplement to
GAAP information.
-- Statutory accounting rules: For public reporting, insurance companies
prepare financial statements in accordance with GAAP. However, insurers
also must calculate certain data according to statutory accounting rules
as defined in the NAIC's Accounting Practices and Procedures Manual,
which may be, and has been, modified by various state insurance
departments. Statutory data is publicly available, and various
organizations use it to calculate aggregate industry data, study
industry trends and compare insurance companies.
-- Written premium: Under statutory accounting rules, property casualty
written premium is the amount recorded for policies issued and
recognized on an annualized basis at the effective date of the policy.
Management analyzes trends in written premium to assess business
efforts. Earned premium, used in both statutory and GAAP accounting, is
calculated ratably over the policy term. The difference between written
and earned premium is unearned premium.
-- Written premium adjustment - statutory basis only: In 2002, the company
refined its estimation process for matching property casualty written
premiums to policy effective dates, which added $117 million to 2002
written premiums. To better assess ongoing business trends, management
may exclude this adjustment when analyzing trends in written premiums
and statutory ratios that make use of written premiums.
Cincinnati Financial Corporation
Net Income Reconciliation
-------------------------------------------------------------------
(In millions except per share data)
Three months ended Nine months ended
September 30, 2009 September 30, 2009
-------------------------------------------------------------------
Net income $171 $187
Net realized investment
gains and losses 75 58
-- --
Operating income 96 129
Less catastrophe losses (4) (115)
--- ---
Operating income before
catastrophe losses $100 $244
=== ===
Diluted per share data:
Net income $1.05 $1.15
Net realized investment
gains and losses 0.46 0.36
---- ----
Operating income 0.59 0.79
Less catastrophe losses (0.03) (0.71)
---- ----
Operating income before
catastrophe losses $0.62 $1.50
==== ====
-------------------------------------------------------------------
Property Casualty Reconciliation
-------------------------------------------------------------------
(Dollars in millions) Three months ended September 30, 2009
Consolidated* Commercial Personal
-------------------------------------------------------------------
Premiums:
Adjusted written premiums
- statutory $736 534 190
Written premium adjustment (6) (6) 0
-- -- --
Reported written premiums
- statutory 730 528 190
Unearned premiums change 3 27 (20)
-- -- --
Earned premiums $733 $555 $170
=== === ===
-------------------------------------------------------------------
Statutory combined ratio:
Statutory combined ratio 96.9% 94.9% 102.8%
Contribution from
catastrophe losses 0.9 (1.2) 7.9
--- --- ---
Statutory combined ratio
excluding catastrophe
losses 96.0% 96.1% 94.9%
==== ==== ====
Commission expense ratio 20.1% 20.3% 19.1%
Other expense ratio 14.1 15.3 10.4
---- ---- ----
Statutory expense ratio 34.2% 35.6% 29.5%
==== ==== ====
GAAP combined ratio:
GAAP combined ratio 95.1% 92.4% 102.3%
Contribution from
catastrophe losses 0.9 (1.2) 7.9
Prior accident years
before catastrophe
losses (12.1) (12.8) (10.7)
---- ---- ----
GAAP combined ratio
excluding catastrophe
losses and prior
years reserve development 106.3% 106.4% 105.1%
===== ===== =====
-------------------------------------------------------------------
(Dollars in millions) Nine months ended September 30, 2009
Consolidated* Commercial Personal
-------------------------------------------------------------------
Premiums:
Adjusted written
premiums - statutory $2,226 $1,674 $523
Written premium adjustment 5 4 1
-- -- --
Reported written premiums
- statutory 2,231 1,678 524
Unearned premiums change (33) (11) (11)
-- -- --
Earned premiums $2,198 $1,667 $513
===== ===== ===
-------------------------------------------------------------------
Statutory combined ratio:
Statutory combined ratio 106.2% 101.8% 118.7%
Contribution from
catastrophe losses 8.1 3.8 22.0
--- --- ----
Statutory combined
ratio excluding catastrophe
losses 98.1% 98.0% 96.7%
==== ==== ====
Commission expense ratio 18.7% 18.2% 19.6%
Other expense ratio 13.7 14.1 11.6
---- ---- ----
Statutory expense ratio 32.4% 32.3% 31.2%
==== ==== ====
GAAP combined ratio:
GAAP combined ratio 106.4% 101.9% 118.7%
Contribution from
catastrophe losses 8.1 3.8 22.0
Prior accident years
before catastrophe losses (4.9) (4.6) (5.8)
--- --- ---
GAAP combined ratio
excluding catastrophe
losses and prior
years reserve development 103.2% 102.7% 102.5
===== ===== =====
-------------------------------------------------------------------
Dollar amounts shown are rounded to millions; certain amounts may not
add due to rounding. Ratios are calculated based on whole dollar
amounts.
* Consolidated property casualty data includes results from our surplus
line of business.
SOURCE Cincinnati Financial Corporation
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