CINCINNATI FINANCIAL CINCINNATI, Oct. 28, 2014 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Third-quarter 2014 net income of $183 million, or $1.11 per share,
compared with $131 million, or 79 cents per share, in the third quarter
of 2013.
-- $24 million or 21 percent rise in operating income* to $140 million, or
85 cents per share, up from $116 million, or 70 cents per share, in the
third quarter of last year.
-- $52 million increase in third-quarter 2014 net income reflected the
after-tax net effect of two primary items: $21 million improvement in
the contribution from property casualty underwriting, including a
favorable effect of $27 million from lower natural catastrophe losses;
plus a $28 million increase from net realized investment gains.
-- $39.01 book value per share at September 30, 2014, up 4.8 percent from
December 31, 2013.
-- 8.4 percent value creation ratio for the first nine months of 2014,
compared with 9.8 percent for the same period of 2013.
Financial Highlights
(In millions except per share data) Three months ended September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Revenue Highlights
Earned premiums $1,071 $992 8 $3,157 $2,877 10
Investment income, pretax 138 133 4 409 392 4
Total revenues 1,280 1,152 11 3,683 3,359 10
Income Statement Data
Net income $183 $131 40 $358 $395 (9)
Realized investment gains, net 43 15 187 66 51 29
--- ---
Operating income* $140 $116 21 $292 $344 (15)
==== ==== ==== ====
Per Share Data (diluted)
Net income $1.11 $0.79 41 $2.17 $2.39 (9)
Realized investment gains, net 0.26 0.09 189 0.40 0.31 29
Operating income* $0.85 $0.70 21 $1.77 $2.08 (15)
===== ===== ===== =====
Book value $39.01 $35.51 10
Cash dividend declared $0.44 $0.42 5 $1.32 $1.235 7
Weighted average shares outstanding 165.0 165.6 0 165.0 165.3 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 Third-Quarter Highlights
-- 91.0 percent third-quarter 2014 property casualty combined ratio,
improved from 93.7 percent for third-quarter 2013.
-- 1 percent growth in third-quarter net written premiums, reflecting a
previously announced challenge to report growth for our largest property
casualty segment.
-- $125 million third-quarter 2014 property casualty new business written
premiums, down $16 million. Agencies appointed since the beginning of
2013 contributed $7 million or 6 percent of total new business written
premiums.
-- 4 cents per share contribution from life insurance operating income,
down 2 cents from third-quarter 2013.
Investment and Balance Sheet Highlights
-- 4 percent or $5 million rise in third-quarter 2014 pretax investment
income, with strong growth in stock portfolio dividends and slight
growth in interest income.
-- 1 percent three-month rise in fair value of invested assets plus cash at
September 30, 2014, including a 1 percent increase for the equity
portfolio and a 1 percent increase for the bond portfolio.
-- $1.772 billion parent company cash and marketable securities at
September 30, 2014, up 16 percent from year-end 2013.
Strong Third-Quarter Operating Income
Steven J. Johnston, president and chief executive officer, commented: "Strong third-quarter net and operating income has us in good shape heading into the fourth quarter. A 17 percent increase in dividend income from our high-quality stock investments plus a 1 percent increase in interest income from our bond portfolio led to a 4 percent increase in third-quarter 2014 investment income versus a year ago. Positive contributions from our underwriting and investment operations together drove our nine-month value creation ratio of 8.4 percent, on track to reach our longer-term objective of a 10 percent to 13 percent annual average.
"Our property casualty insurance business achieved $94 million of underwriting profit in the third-quarter, more than offsetting the six-month underwriting loss and taking our nine-month underwriting profit to $86 million. Our combined ratio of 91.0 percent - 2.7 points better than last year's third-quarter result - brought the nine-month ratio into profitable territory at 97.3 percent. Before catastrophes, the ratio improved from the first-half 2014 result for both the third quarter and nine months to 89.8 and 90.2 percent, respectively.
"In total, catastrophe losses contributed just 1.2 percentage points to the third-quarter combined ratio, while favorable development on our reserves for prior accident years before catastrophes provided a benefit of 2.0 percentage points. Our consistent approach to reserves produced nine-month favorable reserve development before catastrophes in line with the benefit reported for full-year 2013."
Ongoing Growth Potential
"Nine-month net written premium growth of 6 percent is ahead of reported industry numbers and on track to reach our long-term goals. As expected, our commitment to maintaining pricing and improving profitability slowed third-quarter growth to 1 percent overall, with growth for personal lines and excess and surplus lines premiums offsetting a decrease in commercial lines business. Other factors affecting year-over-year growth comparisons were record-high new business premiums in last year's third quarter coupled with a higher than usual estimate of premiums for policies in effect but not yet processed at this time last year.
"Our field marketing representatives regularly consult with each of our appointed agencies, making sure we are doing what it takes to earn a prominent place for Cincinnati in their agency growth plans. So far this year, we've appointed 75 new agencies to represent us in their communities. As we develop those new relationships, we typically see a steady increase in business, writing an average of 10 percent of an agency's total premiums after 10 years. That gives us confidence in our future opportunities to grow our business, as newer agency relationships mature and as we identify more agencies that share our desire to grow steadily and profitably."
Profitability Initiatives Driving Results
"We continue to develop our ability to optimally segment our business and price risks accordingly. The way we analyze each risk, decide whether to issue a policy and price it determines future profit trends. It boils down to executing on our strategies policy-by-policy, considering data from our models, the local perspective of our agents and information collected in person by our field representatives through our ambitious inspection program and their visits with policyholders.
"Overall, renewal pricing held steady, with average increases for our commercial accounts near the high end of the low-single-digit range; renewal pricing for personal lines and excess and surplus lines increased on average in the mid-single-digit range. We are pleased that our commercial policy retention rate is holding steady as we keep our more profitable accounts and get more aggressive with higher pricing on renewal policies we believe to be underpriced. We believe pricing precision and discipline continue to improve the quality of our overall book."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Operations
(In millions) Three months ended September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $1,025 $954 7 $3,010 $2,753 9
Fee revenues 2 1 100 5 3 67
--- --- --- ---
Total revenues 1,027 955 8 3,015 2,756 9
Loss and loss expenses 622 593 5 2,005 1,700 18
Underwriting expenses 311 301 3 924 883 5
Underwriting profit $94 $61 54 $86 $173 (50)
=== === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 60.7% 62.2% (1.5) 66.6% 61.7% 4.9
Underwriting expenses 30.3 31.5 (1.2) 30.7 32.1 (1.4)
---- ---- ---- ---- ---- ----
Combined ratio 91.0% 93.7% (2.7) 97.3% 93.8% 3.5
==== ==== ==== ==== ==== ===
% Change % Change
Agency renewal written premiums $958 $915 5 $2,888 $2,639 9
Agency new business written premiums 125 141 (11) 381 415 (8)
Other written premiums (46) (25) (84) (113) (69) (64)
Net written premiums $1,037 $1,031 1 $3,156 $2,985 6
====== ====== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 61.5% 59.5% 2.0 62.8% 60.8% 2.0
Current accident year catastrophe losses 1.6 6.7 (5.1) 7.7 6.0 1.7
Prior accident years before catastrophe losses (2.0) (3.0) 1.0 (3.3) (4.2) 0.9
Prior accident years catastrophe losses (0.4) (1.0) 0.6 (0.6) (0.9) 0.3
Loss and loss expense ratio 60.7% 62.2% (1.5) 66.6% 61.7% 4.9
==== ==== ==== ==== ==== ===
Current accident year combined ratio before catastrophe 91.8% 91.0% 0.8 93.5% 92.9% 0.6
losses
-- $6 million or 1 percent growth of third-quarter 2014 property casualty
net written premiums and nine-month growth of 6 percent. Lower
third-quarter 2014 growth reflected an expected modest decrease in net
written premiums for our largest property casualty segment.
-- $16 million or 11 percent decrease in third-quarter 2014 new business
premiums written by agencies, compared with a record-high amount a year
ago. Key factors affecting these results included disciplined pricing
and the impact of underwriting profitability initiatives, as well as
contributions from new agency appointments and other growth initiatives.
Nine-month new business premiums decreased $34 million, offsetting a $15
million increase from standard market property casualty production from
agencies appointed since the beginning of 2013 and an increase of $9
million for excess and surplus lines.
-- 1,469 agency relationships in 1,868 reporting locations marketing
property casualty insurance products at September 30, 2014, compared
with 1,450 agency relationships in 1,823 reporting locations at year-end
2013. Seventy-five new agency appointments were made during the first
nine months of 2014.
-- 2.7 percentage-point third-quarter 2014 combined ratio improvement,
driven by a 4.5 point decrease for losses from natural catastrophes. For
the nine-month 2014 period, the 3.5 percentage-point combined ratio
increase largely reflected a 2.0 point increase for natural catastrophe
losses and a 1.4 point increase for noncatastrophe weather-related
losses.
-- 2.4 percentage-point third-quarter 2014 benefit from favorable prior
accident year reserve development of $25 million, compared with 4.0
points or $38 million for third-quarter 2013. Nine-month 2014 benefit of
3.3 points before prior year catastrophe losses trailed the nine-month
2013 benefit of 4.2 points.
-- 2.0 percentage-point increase, to 62.8 percent, for the nine-month 2014
ratio of current accident year losses and loss expenses before
catastrophes, largely due to a 1.4 percentage-point rise in the ratio
for noncatastrophe weather-related losses and a 0.2 point increase in
the ratio for current accident year losses of $1 million or more per
claim.
-- 1.2 and 1.4 percentage-point improvement in the third-quarter and
nine-month underwriting expense ratios, largely due to higher earned
premiums and ongoing expense management efforts.
Commercial Lines Insurance Operations
(In millions) Three months ended September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $720 $680 6 $2,126 $1,956 9
Fee revenues 1 1 0 3 2 50
--- --- --- ---
Total revenues 721 681 6 2,129 1,958 9
Loss and loss expenses 428 421 2 1,358 1,185 15
Underwriting expenses 226 217 4 674 638 6
--- --- --- ---
Underwriting profit $67 $43 56 $97 $135 (28)
=== === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 59.4% 61.9% (2.5) 63.9% 60.6% 3.3
Underwriting expenses 31.3 31.8 (0.5) 31.7 32.6 (0.9)
Combined ratio 90.7% 93.7% (3.0) 95.6% 93.2% 2.4
==== ==== ==== ==== ==== ===
% Change % Change
-------- --------
Agency renewal written premiums $651 $632 3 $2,033 $1,865 9
Agency new business written premiums 89 102 (13) 274 299 (8)
Other written premiums (36) (15) (140) (84) (39) (115)
Net written premiums $704 $719 (2) $2,223 $2,125 5
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 61.3% 57.9% 3.4 61.4% 60.2% 1.2
Current accident year catastrophe losses 1.4 6.0 (4.6) 6.5 5.1 1.4
Prior accident years before catastrophe losses (2.9) (1.4) (1.5) (3.5) (4.0) 0.5
Prior accident years catastrophe losses (0.4) (0.6) 0.2 (0.5) (0.7) 0.2
Loss and loss expense ratio 59.4% 61.9% (2.5) 63.9% 60.6% 3.3
==== ==== ==== ==== ==== ===
Current accident year combined ratio before catastrophe 92.6% 89.7% 2.9 93.1% 92.8% 0.3
losses
-- $15 million or 2 percent decrease in third-quarter 2014 commercial lines
net written premiums, driven by lower new business and other written
premiums. Nine-month net written premiums rose 5 percent.
-- $19 million and $168 million rise in third-quarter and nine-month
renewal written premiums included commercial lines renewal pricing
changes, increasing in the third quarter of 2014 on average near the
high end of the low-single-digit range, in addition to rising insured
exposures.
-- $13 million or 13 percent decrease in third-quarter 2014 new business
written by agencies, down from a record-high amount a year ago and
reflecting a $6 million decrease for our workers' compensation line of
business. For the nine-month period, the $25 million new business
decrease included $15 million for workers' compensation.
-- $21 million decrease in third-quarter 2014 other written premiums,
primarily due to a higher than usual estimate a year ago for premiums in
the pipeline for policies in effect but not yet processed.
-- 3.0 percentage-point third-quarter 2014 combined ratio improvement,
driven by a 4.4 point decrease for losses from natural catastrophes. For
the nine-month 2014 period, the 2.4 percentage-point combined ratio
increase reflected a 1.6 point increase for natural catastrophe losses
and a 1.4 point increase for noncatastrophe weather-related losses.
-- 3.3 percentage-point third-quarter 2014 benefit from favorable prior
accident year reserve development of $24 million, compared with 2.0
points or $13 million for third-quarter 2013. Nine-month 2014 benefit of
3.5 points before prior year catastrophe losses was slightly less than
the nine-month 2013 benefit of 4.0 points.
-- 1.2 percentage-point increase, to 61.4 percent, for the nine-month 2014
ratio of current accident year losses and loss expenses before
catastrophes, reflecting a 1.4 percentage-point rise in the ratio for
noncatastrophe weather-related losses and a 0.7 point increase in the
ratio for current accident year losses of $1 million or more per claim.
Personal Lines Insurance Operations
(In millions) Three months ended September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $263 $244 8 $775 $712 9
Fee revenues 1 - nm 2 1 100
--- --- --- ---
Total revenues 264 244 8 777 713 9
Loss and loss expenses 177 155 14 592 462 28
Underwriting expenses 73 75 (3) 218 218 0
--- --- --- ---
Underwriting (loss) profit $14 $14 0 $(33) $33 nm
=== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 67.4% 63.7% 3.7 76.3% 64.8% 11.5
Underwriting expenses 27.6 30.8 (3.2) 28.2 30.7 (2.5)
Combined ratio 95.0% 94.5% 0.5 104.5% 95.5% 9.0
==== ==== === ===== ==== ===
% Change % Change
Agency renewal written premiums $278 $258 8 $772 $704 10
Agency new business written premiums 23 28 (18) 68 86 (21)
Other written premiums (7) (8) 13 (21) (24) 13
Net written premiums $294 $278 6 $819 $766 7
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 62.7% 63.0% (0.3) 65.8% 61.5% 4.3
Current accident year catastrophe losses 2.6 9.1 (6.5) 12.2 9.2 3.0
Prior accident years before catastrophe losses 2.7 (6.3) 9.0 (0.5) (4.4) 3.9
Prior accident years catastrophe losses (0.6) (2.1) 1.5 (1.2) (1.5) 0.3
Loss and loss expense ratio 67.4% 63.7% 3.7 76.3% 64.8% 11.5
==== ==== === ==== ==== ====
Current accident year combined ratio before catastrophe 90.3% 93.8% (3.5) 94.0% 92.2% 1.8
losses
-- $16 million or 6 percent increase in third-quarter 2014 personal lines
net written premiums, largely due to higher renewal written premiums
that reflect rate increases. Nine-month net written premiums increased 7
percent.
-- $5 million or 18 percent decrease in third-quarter new business written
by agencies, declining as expected due to underwriting actions such as
higher premium rates and expanded use of higher deductibles, age of roof
limitations and more precise pricing.
-- 0.5 percentage-point rise in the third-quarter 2014 combined ratio, as
unfavorable prior accident year reserve development before catastrophe
losses offset a 5.0 point decrease for losses from natural catastrophes.
For the nine-month 2014 period, the 9.0 percentage-point combined ratio
increase included a 3.3 point rise for natural catastrophe losses, a 1.6
point rise for noncatastrophe weather-related losses and a 3.9 point
rise from less favorable prior accident year reserve development before
catastrophe losses.
-- 2.1 percentage-point third-quarter 2014 effect from unfavorable prior
accident year reserve development of $5 million, compared with a
favorable effect or benefit of 8.4 points or $21 million for
third-quarter 2013. Nine-month 2014 benefit before prior year
catastrophe losses of 0.5 points was less than the nine-month 2013
benefit of 4.4 points.
-- 4.3 percentage-point increase, to 65.8 percent, for the nine-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 September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Earned premiums $42 $30 40 $109 $85 28
Loss and loss expenses 17 17 0 55 53 4
Underwriting expenses 12 9 33 32 27 19
--- --- --- ---
Underwriting profit $13 $4 225 $22 $5 340
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 41.8% 56.0% (14.2) 51.0% 62.5% (11.5)
Underwriting expenses 28.4 30.7 (2.3) 28.9 31.7 (2.8)
---- ---- ---- ---- ---- ----
Combined ratio 70.2% 86.7% (16.5) 79.9% 94.2% (14.3)
==== ==== ===== ==== ==== =====
% Change % Change
Agency renewal written premiums $29 $25 16 $83 $70 19
Agency new business written premiums 13 11 18 39 30 30
Other written premiums (3) (2) (50) (8) (6) (33)
Net written premiums $39 $34 15 $114 $94 21
=== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 57.8% 67.2% (9.4) 70.2% 68.7% 1.5
Current accident year catastrophe losses (0.7) 3.4 (4.1) 1.4 1.6 (0.2)
Prior accident years before catastrophe losses (15.4) (13.7) (1.7) (20.8) (7.9) (12.9)
Prior accident years catastrophe losses 0.1 (0.9) 1.0 0.2 0.1 0.1
Loss and loss expense ratio 41.8% 56.0% (14.2) 51.0% 62.5% (11.5)
==== ==== ===== ==== ==== =====
Current accident year combined ratio before catastrophe 86.2% 97.9% (11.7) 99.1% 100.4% (1.3)
losses
-- $5 million or 15 percent growth in third-quarter 2014 excess and surplus
lines net written premiums and a nine-month growth rate of 21 percent.
Average renewal pricing increased in the mid-single-digit range during
the third quarter.
-- $2 million or 18 percent increase in third-quarter new business written
by agencies, rising in part due to enhanced service to agencies from an
increase in our excess and surplus lines field marketing
representatives.
-- 16.5 and 14.3 percentage-point improvement in third-quarter and
nine-month 2014 combined ratios, primarily due to a lower ratio for
third-quarter current accident year loss experience and more favorable
prior accident year reserve development for the nine-month period.
-- 15.3 percentage-point third-quarter 2014 benefit from favorable prior
accident year reserve development of $6 million, compared with a
favorable 14.6 points or $4 million for third-quarter 2013. Nine-month
2014 benefit before prior year catastrophe losses of 20.8 points was
much more than the nine-month 2013 benefit of 7.9 points.
Life Insurance Operations
(In millions) Three months ended September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Term life insurance $34 $32 6 $99 $92 8
Universal life insurance 5 (1) nm 25 8 213
Other life insurance, annuity, and disability income products 7 7 0 23 24 (4)
--- --- --- ---
Earned premiums 46 38 21 147 124 19
Investment income, net of expenses 36 35 3 108 104 4
Other income 1 1 0 4 3 33
--- --- --- ---
Total revenues, excluding realized investment gains and losses 83 74 12 259 231 12
--- ---
Contract holders' benefits incurred 64 49 31 176 141 25
Operating expenses incurred 8 11 (27) 42 36 17
--- --- --- ---
Total benefits and expenses 72 60 20 218 177 23
--- --- --- ---
Net income before income tax and realized investment gains and losses 11 14 (21) 41 54 (24)
Income tax 4 5 (20) 15 19 (21)
Net income before realized investment gains and losses $7 $9 (22) $26 $35 (26)
=== === === ===
-- $8 million or 21 percent increase in third-quarter 2014 earned premiums,
including a 6 percent increase for term life insurance, our largest life
insurance product line. Three- and nine-month growth rates for term life
insurance were similar. The unlocking of interest rate and other
actuarial assumptions for our universal life insurance contracts during
the third quarter of both 2014 and 2013 slowed the amortization of
unearned front-end loads, reducing universal life insurance premiums
with a corresponding decrease to operating expenses as more expenses
were deferred to future periods.
-- $29 million in nine-month 2014 fixed annuity deposits received, matching
the same period of 2013. Cincinnati Life does not offer variable or
equity-indexed annuities.
-- $9 million decrease in nine-month 2014 profit, primarily due to less
favorable mortality experience.
-- $60 million or 7 percent nine-month 2014 increase to $893 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 September 30, Nine months ended September 30,
2014 2013 % Change 2014 2013 % Change
---- ---- -------- ---- ---- --------
Investment income, net of expenses $138 $133 4 $409 $392 4
Investment interest credited to contract holders (21) (21) 0 (62) (60) (3)
Realized investment gains, net 65 22 195 101 77 31
Investment operations profit, pretax $182 $134 36 $448 $409 10
==== ==== ==== ====
Investment income:
Interest $105 $104 1 $312 $309 1
Dividends 35 30 17 101 87 16
Other - 1 (100) 2 2 0
Less investment expenses 2 2 0 6 6 0
--- --- --- ---
Investment income, net of expenses, pretax 138 133 4 409 392 4
Less income taxes 32 32 0 97 95 2
--- --- --- ---
Investment income, net of expenses, after-tax $106 $101 5 $312 $297 5
==== ==== ==== ====
Pt. Change Pt. Change
---------- ----------
Effective tax rate 23.3% 24.1% (0.8) 23.7% 24.2% (0.5)
Average invested assets plus cash and cash equivalents $13,964 $12,908 - $13,792 $12,607 -
Average yield pretax 3.95% 4.12% (0.17) 3.95% 4.15% (0.20)
Average yield after-tax 3.04 3.13 (0.09) 3.02 3.14 (0.12)
Effective fixed-maturity tax rate 26.6% 27.2% (0.6) 27.0% 27.1% (0.1)
Average fixed-maturity at amortized cost $8,822 $8,465 - $8,781 $8,362 -
Average fixed-maturity yield pretax 4.76% 4.91% (0.15) 4.74% 4.93% (0.19)
Average fixed-maturity yield after-tax 3.49 3.58 (0.09) 3.46 3.59 (0.13)
-- $5 million or 4 percent rise in third-quarter 2014 pretax investment
income, including 17 percent growth in equity portfolio dividends and 1
percent growth in interest income.
-- $120 million or 4 percent third-quarter 2014 decrease in pretax net
unrealized investment portfolio gains, including a $54 million decrease
for the equity portfolio. That net decrease included the offsetting
effect of $65 million of pretax net realized gains from investment
portfolio security sales or called bonds during the third quarter of
2014, including $59 million from the equity portfolio.
(In
millions
except
share
data) At September 30, At December 31,
---------
2014 2013
---- ----
Balance
sheet
data:
Invested
assets $14,255 $13,564
Total
assets 18,474 17,662
Short-
term
debt 49 104
Long-
term
debt 790 790
Shareholders'
equity 6,376 6,070
Book
value
per
share 39.01 37.21
Debt-to-
total-
capital
ratio 11.6% 12.8%
-------- ---- ----
-- $14.667 billion in consolidated cash and invested assets at September
30, 2014, up 5 percent from $13.997 billion at year-end 2013.
-- $9.522 billion bond portfolio at September 30, 2014, with an average
rating of A2/A. Fair value increased $139 million or 1 percent during
the third quarter of 2014.
-- $4.666 billion equity portfolio was 32.7 percent of invested assets,
including $1.969 billion in pretax net unrealized gains at September 30,
2014. Third-quarter 2014 growth in fair value of $61 million or 1
percent.
-- $4.364 billion of statutory surplus for the property casualty insurance
group at September 30, 2014, up $38 million from $4.326 billion at
year-end 2013, after declaring $300 million in dividends to the parent
company. The ratio of net written premiums to property casualty
statutory surplus for the 12 months ended September 30, 2014, was
0.9-to-1, unchanged from year-end 2013.
-- Value creation ratio of 8.4 percent for first nine months of 2014
included 4.8 percent from net income before net realized investment
gains and 3.6 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.
About Cincinnati Financial
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 Fairfield, Ohio
45250-5496 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
-- Inability of our subsidiaries 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)
(In millions) September 30, December 31,
2014 2013
---- ----
Assets
Investments $14,255 $13,564
Cash and cash equivalents 412 433
Premiums receivable 1,447 1,346
Reinsurance recoverable 549 547
Other assets 1,811 1,772
Total assets $18,474 $17,662
======= =======
Liabilities
Insurance reserves $6,919 $6,701
Unearned premiums 2,128 1,976
Deferred income tax 777 673
Long-term debt and capital lease obligations 829 835
Other liabilities 1,445 1,407
Total liabilities 12,098 11,592
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,602 1,588
Retained earnings 4,409 4,268
Accumulated other comprehensive income 1,658 1,504
Treasury stock (1,293) (1,290)
------ ------
Total shareholders' equity 6,376 6,070
----- -----
Total liabilities and shareholders' equity $18,474 $17,662
======= =======
(In millions except per share data) Three months ended September 30, Nine months ended September 30,
2014 2013 2014 2013
---- ---- ---- ----
Revenues
Earned premiums $1,071 $992 $3,157 $2,877
Investment income, net of expenses 138 133 409 392
Realized investment gains, net 65 22 101 77
Other revenues 6 5 16 13
Total revenues 1,280 1,152 3,683 3,359
----- ----- ----- -----
Benefits and Expenses
Insurance losses and policyholder benefits 686 642 2,181 1,841
Underwriting, acquisition and insurance expenses 319 312 967 919
Interest expense 13 13 40 40
Other operating expenses 3 3 10 12
--- --- --- ---
Total benefits and expenses 1,021 970 3,198 2,812
----- --- ----- -----
Income Before Income Taxes 259 182 485 547
--- --- --- ---
Provision for Income Taxes 76 51 127 152
--- --- --- ---
Net Income $183 $131 $358 $395
==== ==== ==== ====
Per Common Share:
Net income-basic $1.12 $0.80 $2.19 $2.42
Net income-diluted 1.11 0.79 2.17 2.39
------------------ ---- ---- ---- ----
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 September 30, Nine months ended September 30,
2014 2013 2014 2013
---- ---- ---- ----
Value creation ratio:
End of period book value $39.01 $35.51 $39.01 $35.51
Less beginning of period book value 38.77 34.83 37.21 33.48
----- ----- ----- -----
Change in book value 0.24 0.68 1.80 2.03
Dividend declared to shareholders 0.44 0.42 1.32 1.235
---- -----
Total contribution to value creation ratio $0.68 $1.10 $3.12 $3.265
===== ===== ===== ======
Contribution to value creation ratio:
From change in book value* 0.6% 2.0% 4.8% 6.1%
From dividends declared to shareholders** 1.2 1.2 3.6 3.7
Value creation ratio 1.8% 3.2% 8.4% 9.8%
=== === === ===
* 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 September 30, Nine months ended September 30,
2014 2013 2014 2013
---- ---- ---- ----
Net income $183 $131 $358 $395
Realized investment gains, net 43 15 66 51
--- --- --- ---
Operating income 140 116 292 344
Less catastrophe losses (8) (36) (139) (92)
--- ---
Operating income before catastrophe losses 148 152 431 436
Less noncatastrophe weather losses (29) (25) (98) (65)
--- --- ---
Operating income before catastrophe and $177 $177 $529 $501
noncatastrophe weather losses
Diluted per share data:
Net income $1.11 $0.79 $2.17 $2.39
Realized investment gains, net 0.26 0.09 0.40 0.31
---- ---- ---- ----
Operating income 0.85 0.70 1.77 2.08
Less catastrophe losses (0.05) (0.21) (0.84) (0.56)
Operating income before catastrophe losses 0.90 0.91 2.61 2.64
Less noncatastrophe weather losses (0.17) (0.15) (0.59) (0.39)
----- ----- ----- -----
Operating income before catastrophe and $1.07 $1.06 $3.20 $3.03
noncatastrophe weather losses
Cincinnati Financial Corporation
Property Casualty Reconciliation
(In millions) Three months ended September 30, 2014
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $1,037 $704 $294 $39
Unearned premiums change (12) 16 (31) 3
--- --- --- ---
Earned premiums $1,025 $720 $263 $42
====== ==== ==== ===
Statutory ratios:
Statutory combined ratio 91.3% 91.6% 93.7% 75.8%
Contribution from catastrophe losses 1.2 1.0 2.0 (0.6)
Statutory combined ratio excluding catastrophe losses 90.1% 90.6% 91.7% 76.4%
==== ==== ==== ====
Commission expense ratio 18.9% 19.0% 17.0% 29.1%
Other expense ratio 11.7 13.2 9.3 4.9
Statutory expense ratio 30.6% 32.2% 26.3% 34.0%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 91.0% 90.7% 95.0% 70.2%
Contribution from catastrophe losses 1.2 1.0 2.0 (0.6)
Prior accident years before catastrophe losses (2.0) (2.9) 2.7 (15.4)
---- ---- --- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development 91.8% 92.6% 90.3% 86.2%
==== ==== ==== ====
(In millions) Nine months ended September 30, 2014
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $3,156 $2,223 $819 $114
Unearned premiums change (146) (97) (44) (5)
---- --- --- ---
Earned premiums $3,010 $2,126 $775 $109
====== ====== ==== ====
Statutory ratios:
Statutory combined ratio 96.3% 94.2% 103.9% 82.2%
Contribution from catastrophe losses 7.1 6.0 11.0 1.6
Statutory combined ratio excluding catastrophe losses 89.2% 88.2% 92.9% 80.6%
==== ==== ==== ====
Commission expense ratio 18.1% 17.7% 18.2% 27.2%
Other expense ratio 11.6 12.6 9.4 4.0
Statutory expense ratio 29.7% 30.3% 27.6% 31.2%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 97.3% 95.6% 104.5% 79.9%
Contribution from catastrophe losses 7.1 6.0 11.0 1.6
Prior accident years before catastrophe losses (3.3) (3.5) (0.5) (20.8)
---- ---- ---- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development 93.5% 93.1% 94.0% 99.1%
==== ==== ==== ====
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 Insurance Company
