CINCINNATI FINANCIAL CINCINNATI, July 29, 2014 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Second-quarter 2014 net income of $84 million, or 51 cents per share,
compared with $110 million, or 66 cents per share, in the second quarter
of 2013.
-- $75 million, or 46 cents per share operating income*, compared with $100
million, or 61 cents per share, in the 2013 second quarter.
-- Second-quarter 2014 net income reflected weather effects on property
casualty insurance results, including the after-tax impact of a $5
million underwriting loss due to $74 million of natural catastrophe
losses with a 45 cent per-share impact. In the comparable period of
2013, we reported $22 million of underwriting profit with a catastrophe
impact of $49 million or 30 cents per share.
-- $38.77 book value per share at June 30, 2014, up 4 percent from December
31, 2013.
-- 6.6 percent value creation ratio for the first six months of 2014,
compared with 6.4 percent for the same period of 2013.
Financial Highlights
--------------------
(In millions except per share data) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Revenue Highlights
Earned premiums $1,059 $954 11 $2,086 $1,885 11
Investment income, pretax 136 131 4 271 259 5
Total revenues 1,214 1,104 10 2,403 2,207 9
Income Statement Data
Net income $84 $110 (24) $175 $264 (34)
Net realized investment gains and losses 9 10 (10) 23 36 (36)
--- ---
Operating income* $75 $100 (25) $152 $228 (33)
=== ==== ==== ====
Per Share Data (diluted)
Net income $0.51 $0.66 (23) $1.06 $1.60 (34)
Net realized investment gains and losses 0.05 0.05 0 0.14 0.22 (36)
Operating income* $0.46 $0.61 (25) $0.92 $1.38 (33)
===== ===== ===== =====
Book value $38.77 $34.83 11
Cash dividend declared $0.44 $0.4075 8 $0.88 $0.815 8
Weighted average shares outstanding 165.1 165.4 0 165.1 165.2 0
----------------------------------- ----- ----- --- ----- ----- ---
* The Definitions of Non-GAAP
Information and Reconciliation to
Comparable GAAP Measures defines
and reconciles measures presented
in this release that are not
based on U. S. Generally Accepted
Accounting Principles.
** Forward-looking statements and
related assumptions are subject
to the risks outlined in the
company's safe harbor statement.
Insurance Operations Second-Quarter Highlights
-- 100.9 percent second-quarter 2014 property casualty combined ratio,
increased from 96.4 percent for second-quarter 2013.
-- 10 percent growth in second-quarter net written premiums, reflecting
higher pricing and planned growth from strategic initiatives.
-- $133 million second-quarter 2014 property casualty new business written
premiums, down $6 million. Agencies appointed since the beginning of
2013 contributed $7 million or 5 percent of total second-quarter new
business written premiums.
-- 6 cents per share contribution from life insurance operating income,
down 2 cents from second-quarter 2013.
Investment and Balance Sheet Highlights
-- 4 percent or $5 million rise in second-quarter 2014 pretax investment
income, with higher stock portfolio dividends and interest income that
matched second-quarter 2013.
-- 2 percent three-month rise in fair value of invested assets plus cash at
June 30, 2014, including a 4 percent increase for the equity portfolio
and a 2 percent increase for the bond portfolio.
-- $1.616 billion parent company cash and marketable securities at June 30,
2014, up 5 percent from year-end 2013.
Driving Profits With Proven Investment Approach
Steven J. Johnston, president and chief executive officer, commented: "Investment income continued to be our main source of profits, supported by the growth of dividends from our stock portfolio and interest from our bond portfolio that matched last year's second-quarter level. Cash and invested assets reached $14.5 billion, reflecting higher valuations and new securities purchased with cash flow from our growing insurance operations. For the first time, total assets exceeded $18 billion at June 30, 2014."
Looking Beyond Stormy Spring Weather
"While catastrophe losses were milder than usual in last year's second quarter, the impact this year was in line with our 10-year second-quarter average of 12.7 points. Weather-related natural catastrophes accounted for 11.4 points of our 100.9 percent quarterly combined ratio and 10.2 points of our 100.6 percent six-month combined ratio.
"To evaluate our current progress beyond that seasonality, we look at our core underwriting results as measured by our second-quarter combined ratio before catastrophe losses and before changes in reserve development for prior accident years. At 95.5 percent, that ratio improved 1.8 points over last year's second quarter. The impact from catastrophe losses offset the benefits in the second-quarter from our ongoing claims and loss control initiatives, even as those initiatives continue to position us to improve profits over time."
Continuing Steady Growth
"In line with our plans for profitable growth, earned premiums for our consolidated property casualty insurance operations exceeded $1 billion for the first time in any quarter and reached nearly $2 billion in the first six months. A combination of factors led to premium growth in our commercial, personal and excess and surplus lines business for the quarter and the first half: new agency appointments, our continued ability to price with precision and an increase in premiums due to the improving economy and business growth.
"We're pleased that we've been able to grow premiums while continuing to manage expenses. Our underwriting expense ratio continued its favorable trend, improving 1.5 percentage points from the first half of 2013 to 30.9 percent.
"To continue driving progress in the second half of the year, we'll stay focused on optimizing predictive analytics and streamlining processes to improve our agency and policyholder service. We'll also move more Target Market programs into our commercial lines policy administration system, making it easier for agents to place these niche accounts with us."
Building Value for Shareholders
"Our value creation ratio, which considers any change to our book value and the dividends we pay to shareholders, is our main means of evaluating the value we are building as a company over time. The board increased our indicated annual dividend in January, and so far this year our book value has grown 4 percent to $38.77. These actions contribute to our six-month value creation ratio of 6.6 percent - well within reach of our 10 percent or better average annual target for this measure."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Operations
(In millions) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $1,006 $910 11 $1,985 $1,799 10
Fee revenues 2 2 0 3 2 50
--- --- --- ---
Total revenues 1,008 912 11 1,988 1,801 10
Loss and loss expenses 707 583 21 1,383 1,107 25
Underwriting expenses 308 295 4 613 582 5
Underwriting (loss) profit $(7) $34 nm $(8) $112 nm
=== === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 70.2% 64.0% 6.2 69.7% 61.5% 8.2
Underwriting expenses 30.7 32.4 (1.7) 30.9 32.4 (1.5)
---- ---- ---- ---- ---- ----
Combined ratio 100.9% 96.4% 4.5 100.6% 93.9% 6.7
===== ==== === ===== ==== ===
% Change % Change
Agency renewal written premiums $974 $879 11 $1,930 $1,724 12
Agency new business written premiums 133 139 (4) 256 274 (7)
Other written premiums (25) (34) 26 (67) (44) (52)
Net written premiums $1,082 $984 10 $2,119 $1,954 8
====== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 64.8% 64.9% (0.1) 63.6% 61.5% 2.1
Current accident year catastrophe losses 11.9 9.2 2.7 10.9 5.6 5.3
Prior accident years before catastrophe losses (6.0) (9.2) 3.2 (4.1) (4.8) 0.7
Prior accident years catastrophe losses (0.5) (0.9) 0.4 (0.7) (0.8) 0.1
Loss and loss expense ratio 70.2% 64.0% 6.2 69.7% 61.5% 8.2
==== ==== === ==== ==== ===
Current accident year combined ratio before catastrophe losses 95.5% 97.3% (1.8) 94.5% 93.9% 0.6
==== ==== ==== ==== ==== ===
-- $98 million or 10 percent growth of second-quarter 2014 property
casualty net written premiums and six-month growth of 8 percent. The
increase reflected the effects of initiatives for premium growth and
higher pricing.
-- $6 million or 4 percent decrease in second-quarter new business premiums
written by agencies, reflecting our disciplined pricing and the effects
of our underwriting profitability initiatives, partially offset by
positive contributions from new agency appointments and other growth
initiatives. Six-month new business premiums decreased $18 million,
offsetting a $10 million increase from standard market property casualty
production from agencies appointed since the beginning of 2013 and a $7
million increase for excess and surplus lines.
-- 1,467 agency relationships in 1,854 reporting locations marketing
property casualty insurance products at June 30, 2014, compared with
1,450 agency relationships in 1,823 reporting locations at year-end
2013. Fifty new agency appointments were made during the first six
months of 2014.
-- 4.5 and 6.7 percentage-point second-quarter and first-half 2014 combined
ratio increase, reflecting increases of 3.1 and 5.4 points for losses
from natural catastrophes.
-- 0.4 and 2.0 percentage-point second-quarter and first-half 2014 increase
in the ratio for noncatastrophe weather-related losses.
-- 6.5 percentage-point second-quarter 2014 benefit from favorable prior
accident year reserve development of $66 million, compared with 10.1
points or $92 million for second-quarter 2013. Six-month 2014 benefit
before catastrophe losses of 4.1 points was slightly less than the
six-month 2013 benefit of 4.8 points.
-- 2.1 percentage-point increase, to 63.6 percent, for the six-month 2014
ratio of current accident year losses and loss expenses before
catastrophes, largely due to higher noncatastrophe weather-related
losses and a 0.4 point increase in the ratio for current accident year
losses of $1 million or more per claim.
-- 1.7 and 1.5 percentage-point improvement in the second-quarter and
six-month underwriting expense ratios, largely due to higher earned
premiums and ongoing expense management efforts.
Commercial Lines Insurance Operations
(In millions) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $714 $645 11 $1,406 $1,276 10
Fee revenues 1 1 0 2 1 100
--- --- --- ---
Total revenues 715 646 11 1,408 1,277 10
Loss and loss expenses 461 399 16 930 764 22
Underwriting expenses 226 213 6 448 421 6
--- --- --- ---
Underwriting profit $28 $34 (18) $30 $92 (67)
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 64.5% 61.9% 2.6 66.2% 59.9% 6.3
Underwriting expenses 31.8 33.0 (1.2) 31.9 33.0 (1.1)
Combined ratio 96.3% 94.9% 1.4 98.1% 92.9% 5.2
==== ==== === ==== ==== ===
% Change % Change
-------- --------
Agency renewal written premiums $669 $602 11 $1,382 $1,233 12
Agency new business written premiums 95 100 (5) 185 197 (6)
Other written premiums (16) (24) 33 (48) (24) (100)
Net written premiums $748 $678 10 $1,519 $1,406 8
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 63.4% 64.2% (0.8) 61.5% 61.4% 0.1
Current accident year catastrophe losses 9.1 7.9 1.2 9.0 4.6 4.4
Prior accident years before catastrophe losses (7.5) (9.4) 1.9 (3.8) (5.3) 1.5
Prior accident years catastrophe losses (0.5) (0.8) 0.3 (0.5) (0.8) 0.3
Loss and loss expense ratio 64.5% 61.9% 2.6 66.2% 59.9% 6.3
==== ==== === ==== ==== ===
Current accident year combined ratio before catastrophe losses 95.2% 97.2% (2.0) 93.4% 94.4% (1.0)
==== ==== ==== ==== ==== ====
-- $70 million or 10 percent increase in second-quarter 2014 commercial
lines net written premiums, primarily due to premium growth initiatives
and higher pricing. Eight percent increase in six-month net written
premiums.
-- $67 million and $149 million rise in second-quarter and six-month
renewal written premiums included commercial lines renewal pricing
changes, increasing in the second quarter of 2014 on average in the
low-single-digit range, in addition to rising insured exposures.
-- $5 million or 5 percent decrease in second-quarter new business written
by agencies, including a $3 million decrease for our workers'
compensation line of business. For the six-month period, the $12 million
new business decrease included $9 million for workers' compensation.
-- 1.4 and 5.2 percentage-point rise in second-quarter and first-half 2014
combined ratio, reflecting increases of 1.5 and 4.7 points for losses
from natural catastrophes.
-- 0.4 and 1.7 percentage-point second-quarter and first-half 2014 increase
in the ratio for noncatastrophe weather-related losses.
-- 8.0 percentage-point second-quarter 2014 benefit from favorable prior
accident year reserve development of $57 million, compared with 10.2
points or $66 million for second-quarter 2013. Six-month 2014 benefit
before catastrophe losses of 3.8 points was less than the six-month 2013
benefit of 5.3 points.
-- 0.1 percentage-point increase, to 61.5 percent, for the six-month 2014
ratio of current accident year losses and loss expenses before
catastrophes, largely due to higher noncatastrophe weather-related
losses.
Personal Lines Insurance Operations
(In millions) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $258 $237 9 $512 $468 9
Fee revenues 1 1 0 1 1 0
--- --- --- ---
Total revenues 259 238 9 513 469 9
Loss and loss expenses 227 166 37 415 307 35
Underwriting expenses 72 73 (1) 145 143 1
--- --- --- ---
Underwriting (loss) profit $(40) $(1) nm $(47) $19 nm
==== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 87.7% 69.5% 18.2 81.0% 65.5% 15.5
Underwriting expenses 28.1 30.9 (2.8) 28.4 30.6 (2.2)
Combined ratio 115.8% 100.4% 15.4 109.4% 96.1% 13.3
===== ===== ==== ===== ==== ====
% Change % Change
Agency renewal written premiums $276 $251 10 $494 $446 11
Agency new business written premiums 24 30 (20) 45 58 (22)
Other written premiums (6) (8) 25 (14) (16) 13
Net written premiums $294 $273 8 $525 $488 8
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 67.1% 66.8% 0.3 67.5% 60.9% 6.6
Current accident year catastrophe losses 21.0 13.7 7.3 17.2 9.3 7.9
Prior accident years before catastrophe losses 0.2 (9.9) 10.1 (2.2) (3.5) 1.3
Prior accident years catastrophe losses (0.6) (1.1) 0.5 (1.5) (1.2) (0.3)
Loss and loss expense ratio 87.7% 69.5% 18.2 81.0% 65.5% 15.5
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe losses 95.2% 97.7% (2.5) 95.9% 91.5% 4.4
==== ==== ==== ==== ==== ===
-- $21 million or 8 percent increase in second-quarter 2014 personal lines
net written premiums, largely due to higher renewal written premiums
that reflect rate increases. Eight percent increase in six-month net
written premiums.
-- $6 million or 20 percent decrease in second-quarter new business written
by agencies, declining as expected due to underwriting actions such as
expanded use of higher deductibles, age of roof limitations and more
precise pricing.
-- 15.4 and 13.3 percentage-point rise in second-quarter and first-half
2014 combined ratio, in part reflecting increases of 7.8 and 7.6 points
for losses from natural catastrophes.
-- 0.7 and 2.9 percentage-point second-quarter and first-half 2014 increase
in the ratio for noncatastrophe weather-related losses.
-- 0.4 percentage-point second-quarter 2014 benefit from favorable prior
accident year reserve development of $1 million, compared with 11.0
points or $26 million for second-quarter 2013. Six-month 2014 benefit
before catastrophe losses of 2.2 points was less than the six-month 2013
benefit of 3.5 points.
-- 6.6 percentage-point increase, to 67.5 percent, for the six-month 2014
ratio of current accident year losses and loss expenses before
catastrophes, in part due to higher noncatastrophe weather-related
losses.
Excess and Surplus Lines Insurance Operations
(In millions) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $34 $28 21 $67 $55 22
Loss and loss expenses 19 18 6 38 36 6
Underwriting expenses 10 9 11 20 18 11
--- --- --- ---
Underwriting profit $5 $1 400 $9 $1 nm
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 57.0% 66.9% (9.9) 56.8% 66.1% (9.3)
Underwriting expenses 28.0 31.8 (3.8) 29.1 32.3 (3.2)
---- ---- ---- ---- ---- ----
Combined ratio 85.0% 98.7% (13.7) 85.9% 98.4% (12.5)
==== ==== ===== ==== ==== =====
% Change % Change
Agency renewal written premiums $29 $26 12 $54 $45 20
Agency new business written premiums 14 9 56 26 19 37
Other written premiums (3) (2) (50) (5) (4) (25)
Net written premiums $40 $33 21 $75 $60 25
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 75.4% 65.7% 9.7 77.9% 69.6% 8.3
Current accident year catastrophe losses 2.3 0.9 1.4 2.6 0.6 2.0
Prior accident years before catastrophe losses (21.3) (0.7) (20.6) (24.1) (4.7) (19.4)
Prior accident years catastrophe losses 0.6 1.0 (0.4) 0.4 0.6 (0.2)
Loss and loss expense ratio 57.0% 66.9% (9.9) 56.8% 66.1% (9.3)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe losses 103.4% 97.5% 5.9 107.0% 101.9% 5.1
===== ==== === ===== ===== ===
-- $7 million or 21 percent growth in second-quarter 2014 excess and
surplus lines net written premiums, a growth rate similar to six months
at 25 percent. Average renewal pricing increased in the mid-single-digit
range during the second quarter.
-- $5 million or 56 percent increase in second-quarter new business written
by agencies, rising as expected due in part to a 60 percent increase in
excess and surplus lines field marketing representatives since March 31,
2013.
-- 13.7 and 12.5 percentage-point improvement in second-quarter and
first-half 2014 combined ratio, primarily due to more favorable prior
accident year reserve development.
-- 20.7 percentage-point second-quarter 2014 benefit from favorable prior
accident year reserve development of $8 million, compared with an
unfavorable 0.3 points or less than $1 million for second-quarter 2013.
Six-month 2014 benefit before catastrophe losses of 24.1 points was more
than the six-month 2013 benefit of 4.7 points.
Life Insurance Operations
(In millions) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Term life insurance $33 $31 6 $65 $60 8
Universal life insurance 12 4 200 20 9 122
Other life insurance, annuity, and
disability income products 8 9 (11) 16 17 (6)
--- --- --- ---
Earned premiums 53 44 20 101 86 17
Investment income, net of expenses 37 34 9 72 69 4
Other income 1 1 0 3 2 50
--- --- --- ---
Total revenues, excluding realized
investment gains and losses 91 79 15 176 157 12
--- ---
Contract holders' benefits incurred 56 48 17 112 92 22
Operating expenses incurred 19 12 58 34 25 36
--- --- --- ---
Total benefits and expenses 75 60 25 146 117 25
--- --- --- ---
Net income before income tax and
realized investment gains and losses 16 19 (16) 30 40 (25)
Income tax 6 7 (14) 11 14 (21)
Net income before realized investment
gains and losses $10 $12 (17) $19 $26 (27)
=== === === ===
-- $9 million or 20 percent increase in second-quarter 2014 earned
premiums, including a 6 percent increase for term life insurance, our
largest life insurance product line. Three- and six-month growth rates
for term life insurance were similar. Universal life insurance premiums
rose due to unlocking of interest rate assumptions that accelerated
amortization of unearned front-end loads, with a corresponding increase
to operating expenses as less expenses were deferred to future periods.
-- $21 million in six-month 2014 fixed annuity deposits received, matching
the same period of 2013. Cincinnati Life does not offer variable or
equity-indexed annuities.
-- $7 million decrease in six-month 2014 profit, due in part to less
favorable mortality experience.
-- $68 million or 8 percent six-month 2014 increase to $901 million in GAAP
shareholders' equity for The Cincinnati Life Insurance Company, largely
reflecting an increase in fair value of the fixed-maturity portfolio due
to a decrease in interest rates.
Investment and Balance Sheet Highlights
Investment Operations
(In millions) Three months ended June 30, Six months ended June 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Total investment income, net of expenses, pretax $136 $131 4 $271 $259 5
---- ---- ---- ----
Investment interest credited to contract holders (20) (18) (11) (41) (39) (5)
--- --- --- ---
Realized investment gains and losses summary:
Realized investment gains and losses 17 14 21 41 56 (27)
Change in fair value of securities with embedded (3) - nm (4) 1 nm
derivatives
Other-than-temporary impairment charges - - nm (1) (2) 50
--- --- --- ---
Total realized investment gains and losses 14 14 0 36 55 (35)
Investment operations profit $130 $127 2 $266 $275 (3)
==== ==== ==== ====
(In millions) Three months ended June 30, Six months ended June 30,
------------
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Investment income:
Interest $103 $103 0 $207 $205 1
Dividends 34 30 13 66 57 16
Other 1 - nm 2 1 100
Less investment expenses 2 2 0 4 4 0
--- --- --- ---
Total investment income, net of expenses, 136 131 4 271 259 5
pretax
Less income taxes 33 32 3 65 63 3
--- --- --- ---
Total investment income, net of expenses, $103 $99 4 $206 $196 5
after-tax
Effective tax rate 23.8% 24.1% 23.9% 24.2%
Average invested assets plus cash and cash $13,743 $12,661 $13,686 $12,451
equivalents
Average yield pretax 3.96% 4.14% 3.96% 4.16%
Average yield after-tax 3.00 3.13 3.10 3.15
Effective fixed-maturity tax rate 27.1% 27.1% 27.1% 27.0%
Average fixed-maturity at amortized cost $8,664 $8,376 $8,679 $8,325
Average fixed-maturity yield pretax 4.76% 4.92% 4.77% 4.92%
Average fixed-maturity yield after-tax 3.47 3.59 3.48 3.60
-- 4 percent rise in second-quarter 2014 pretax investment income,
including 13 percent growth in equity portfolio dividends and interest
income that matched the same period a year ago.
-- $235 million or 10 percent second-quarter 2014 net increase in pretax
unrealized investment portfolio gains, including a $142 million increase
for the equity portfolio. That net increase included the offsetting
effect of $20 million of pretax net realized gains from investment
portfolio security sales or called bonds during the second quarter of
2014, including $16 million from the equity portfolio.
(In millions except
share data) At June 30, At December 31,
-------------------
2014 2013
---- ----
Balance sheet data:
Invested assets $14,060 $13,564
Total assets 18,335 17,662
Short-term debt 49 104
Long-term debt 790 790
Shareholders' equity 6,343 6,070
Book value per share 38.77 37.21
Debt-to-total-
capital ratio 11.7% 12.8%
-------------- ---- ----
-- $14.522 billion in consolidated cash and invested assets at June 30,
2014, up 4 percent from $13.997 billion at year-end 2013.
-- $9.383 billion bond portfolio at June 30, 2014, with an average rating
of A2/A. Fair value increased $203 million or 2 percent during the
second quarter of 2014.
-- $4.605 billion equity portfolio was 32.8 percent of invested assets,
including $2.023 billion in pretax net unrealized gains at June 30,
2014. $179 million or 4 percent second-quarter 2014 growth in fair
value.
-- $4.332 billion of statutory surplus for the property casualty insurance
group at June 30, 2014, up $6 million from $4.326 billion at year-end
2013, after declaring $200 million in dividends to the parent company.
The ratio of net written premiums to property casualty statutory surplus
for the 12 months ended June 30, 2014, was 0.9-to-1, unchanged from
year-end 2013.
-- Value creation ratio of 6.6 percent for first six months of 2014
included 2.5 percent from net income before net realized investment
gains and 4.2 percent from investment portfolio realized gains and
changes in unrealized gains.
For additional information or to register for our conference call webcast, please visit 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, fixed annuities and surplus lines property and casualty insurance. For additional information about the company, please visit 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 2013 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 31.
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 or development of claims
that are unforeseen at the time of policy issuance
-- Inadequate estimates or assumptions used for critical accounting
estimates
-- Declines in overall stock market values negatively affecting the
company's equity portfolio and book value
-- Domestic and global events resulting in capital market or credit market
uncertainty, 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 or other insured
entities
-- 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
-- Recession or other economic conditions resulting in lower demand for
insurance products or increased payment delinquencies
-- Difficulties with technology or data security breaches, including
cyberattacks, that could negatively affect our ability to conduct
business and our relationships with agents, policyholders and others
-- Disruption of the insurance market caused by technology innovations,
such as driverless cars, that could decrease consumer demand for
insurance products
-- Delays or performance inadequacies from ongoing development and
implementation of underwriting and pricing methods, including telematics
and other usage-based insurance methods, or technology projects and
enhancements expected to increase our pricing accuracy, underwriting
profit and competitiveness
-- 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
-- Inability to obtain adequate reinsurance on acceptable terms, amount of
reinsurance purchased, financial strength of reinsurers and the
potential for nonpayment or delay in payment by reinsurers
-- Inability to defer policy acquisition costs for any business segment if
pricing and loss trends would lead management to conclude that segment
could not achieve sustainable profitability
-- Inablity of our subidiaries to pay dividends consistent with current or
past levels
-- 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:
-- 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
-- Inability or unwillingness to nimbly develop and introduce coverage
product updates and innovations that our competitors offer and
consumers expect to find in the marketplace
-- 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:
-- Impose new obligations on us that increase our expenses or change
the assumptions underlying our critical accounting estimates
-- Place the insurance industry under greater regulatory scrutiny or
result in new statutes, rules and regulations
-- Restrict our ability to exit or reduce writings of unprofitable
coverages or lines of business
-- 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
-- Increase our provision for federal income taxes due to changes in
tax law
-- Increase our other expenses
-- 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, global, 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 measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation
Condensed Consolidated Balance Sheets and Statements of Income (unaudited)
(Dollars in millions) June 30, December 31,
2014 2013
---- ----
Assets
Investments $14,060 $13,564
Cash and cash equivalents 462 433
Premiums receivable 1,462 1,346
Reinsurance recoverable 526 547
Other assets 1,825 1,772
Total assets $18,335 $17,662
======= =======
Liabilities
Insurance reserves $6,898 $6,701
Unearned premiums 2,110 1,976
Deferred income tax 810 673
Long-term debt and capital lease obligations 831 835
Other liabilities 1,343 1,407
Total liabilities 11,992 11,592
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,595 1,588
Retained earnings 4,299 4,268
Accumulated other comprehensive income 1,732 1,504
Treasury stock (1,283) (1,290)
------ ------
Total shareholders' equity 6,343 6,070
----- -----
Total liabilities and shareholders' equity $18,335 $17,662
======= =======
(Dollars in millions except per share data) Three months ended June 30, Six months ended June 30,
2014 2013 2014 2013
---- ---- ---- ----
Revenues
Earned premiums $1,059 $954 $2,086 $1,885
Investment income, net of expenses 136 131 271 259
Realized investment gains and losses, net 14 14 36 55
Other revenues 5 5 10 8
Total revenues 1,214 1,104 2,403 2,207
----- ----- ----- -----
Benefits and Expenses
Insurance losses and policyholder benefits 763 631 1,495 1,199
Underwriting, acquisition and insurance expenses 328 307 648 607
Interest expense 13 14 27 27
Other operating expenses 3 4 7 9
--- --- --- ---
Total benefits and expenses 1,107 956 2,177 1,842
----- --- ----- -----
Income Before Income Taxes 107 148 226 365
--- --- --- ---
Provision for Income Taxes 23 38 51 101
--- --- --- ---
Net Income $84 $110 $175 $264
=== ==== ==== ====
Per Common Share:
Net income-basic $0.51 $0.67 $1.07 $1.62
Net income-diluted 0.51 0.66 1.06 1.60
------------------ ---- ---- ---- ----
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2014 reconciliations; prior-period reconciliations available at 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 non-GAAP 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.
-- Value creation ratio: This is a measure of shareholder value creation
that management believes captures the contribution of the company's
insurance operations, the success of its investment strategy and the
importance placed on paying cash dividends to shareholders. The value
creation ratio measure is made up of two primary components: (1) rate of
growth in book value per share plus (2) the ratio of dividends declared
per share to beginning book value per share. Management believes this
non-GAAP measure is a useful supplement to GAAP information, providing a
meaningful measure of long-term progress in creating shareholder value.
It is intended to be all-inclusive regarding changes in book value per
share, and uses originally reported book value per share in cases where
book value per share has been adjusted, such as adoption of Accounting
Standards Updates with a cumulative effect of a change in accounting.
-- 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.
Cincinnati Financial Corporation
Balance Sheet Reconciliation
(Dollars are per outstanding share) Three months ended June 30, Six months ended June 30,
2014 2013 2014 2013
---- ---- ---- ----
Value creation ratio:
End of period book value $38.77 $34.83 $38.77 $34.83
Less beginning of period book value 37.73 35.41 37.21 33.48
----- ----- ----- -----
Change in book value 1.04 (0.58) 1.56 1.35
Dividend declared to shareholders 0.44 0.4075 0.88 0.815
Total contribution to value creation ratio $1.48 $(0.1725) $2.44 $2.165
===== ======== ===== ======
Contribution to value creation ratio:
From change in book value* 2.7% (1.6)% 4.2% 4.0%
From dividends declared to shareholders** 1.2 1.2 2.4 2.4
Value creation ratio 3.9% (0.4)% 6.6% 6.4%
=== ===== === ===
* Change in book value divided by the beginning of period book value
** Dividend declared to shareholders divided by beginning of period book value
Net Income Reconciliation
(In millions except per share data) Three months ended June 30, Six months ended June 30,
2014 2013 2014 2013
---- ---- ---- ----
Net income $84 $110 $175 $264
Net realized investment gains and losses 9 10 23 36
--- --- --- ---
Operating income 75 100 152 228
Less catastrophe losses (74) (49) (131) (56)
---
Operating income before catastrophe losses 149 149 283 284
Less non-catastrophe weather losses (29) (24) (69) (40)
--- --- --- ---
Operating income before catastrophe and $178 $173 $352 $324
non-catastrophe weather losses
Diluted per share data:
Net income $0.51 $0.66 $1.06 $1.60
Net realized investment gains and losses 0.05 0.05 0.14 0.22
---- ---- ---- ----
Operating income 0.46 0.61 0.92 1.38
Less catastrophe losses (0.45) (0.30) (0.79) (0.34)
Operating income before catastrophe losses 0.91 0.91 1.71 1.72
Less non-catastrophe weather losses (0.18) (0.14) (0.42) (0.24)
----- ----- ----- -----
Operating income before catastrophe and $1.09 $1.05 $2.13 $1.96
non-catastrophe weather losses
Cincinnati Financial Corporation
Property Casualty Reconciliation
(In millions) Three months ended June 30,
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $1,082 $748 $294 $40
Unearned premiums change (76) (34) (36) (6)
--- --- --- ---
Earned premiums $1,006 $714 $258 $34
====== ==== ==== ===
Statutory ratios:
Statutory combined ratio 99.6% 95.0% 114.3% 86.1%
Contribution from catastrophe losses 11.4 8.6 20.4 2.9
Statutory combined ratio excluding catastrophe losses 88.2% 86.4% 93.9% 83.2%
==== ==== ==== ====
Commission expense ratio 17.9% 17.7% 17.4% 25.8%
Other expense ratio 11.5 12.8 9.2 3.3
Statutory expense ratio 29.4% 30.5% 26.6% 29.1%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 100.9% 96.3% 115.8% 85.0%
Contribution from catastrophe losses 11.4 8.6 20.4 2.9
Prior accident years before catastrophe losses (6.0) (7.5) 0.2 (21.3)
---- ---- --- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development 95.5% 95.2% 95.2% 103.4%
==== ==== ==== =====
(In millions) Six months ended June 30,
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $2,119 $1,519 $525 $75
Unearned premiums change (134) (113) (13) (8)
---- ---- --- ---
Earned premiums $1,985 $1,406 $512 $67
====== ====== ==== ===
Statutory ratios:
Statutory combined ratio 98.9% 95.7% 109.3% 86.5%
Contribution from catastrophe losses 10.2 8.5 15.7 3.0
Statutory combined ratio excluding catastrophe losses 88.7% 87.2% 93.6% 83.5%
==== ==== ==== ====
Commission expense ratio 17.8% 17.0% 18.8% 26.1%
Other expense ratio 11.4 12.5 9.5 3.6
Statutory expense ratio 29.2% 29.5% 28.3% 29.7%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 100.6% 98.1% 109.4% 85.9%
Contribution from catastrophe losses 10.2 8.5 15.7 3.0
Prior accident years before catastrophe losses (4.1) (3.8) (2.2) (24.1)
---- ---- ---- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development
94.5% 93.4% 95.9% 107.0%
==== ==== ==== =====
Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on dollar amounts in thousands.
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SOURCE Cincinnati Financial Corporation
