CINCINNATI FINANCIAL 
By CINCINNATI, April 25, 2013 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- First-quarter 2013 net income of $154 million, or 94 cents per share,
compared with $86 million, or 53 cents per share, in the first quarter
of 2012.
-- 66 percent rise in operating income* to $128 million, or 78 cents per
share, compared with $77 million, or 48 cents per share.
-- $68 million increase in first-quarter 2013 net income reflected the
after-tax net effect of two primary items: $45 million improvement in
the contribution from property casualty underwriting, including a
favorable effect of $51 million from lower natural catastrophe losses,
and a $17 million increase from net realized investment gains.
-- $35.41 book value per share at March 31, 2013, up 6 percent from
December 31, 2012.
-- 7.0 percent value creation ratio for the first quarter of 2013, compared
with 4.2 percent for the first quarter of 2012.
(Logo: http://photos.prnewswire.com/prnh/20110824/CL57087LOGO)
Financial Highlights
(Dollars in millions except
share data in thousands) Three months ended March 31,
---------------------------
2013 2012 Change %
---- ---- -------
Revenue Highlights
Earned premiums $931 $839 11
Investment income, pretax 128 131 (2)
Total revenues 1,103 986 12
Income Statement Data
Net income $154 $86 79
Net realized investment gains
and losses 26 9 189
Operating income* $128 $77 66
==== ===
Per Share Data (diluted)
Net income $0.94 $0.53 77
Net realized investment gains
and losses 0.16 0.05 220
Operating income* $0.78 $0.48 63
===== =====
Book value $35.41 $32.07 10
Cash dividend declared $0.4075 $0.4025 1
Weighted average shares
outstanding 164,924 163,145 1
Insurance Operations First-Quarter Highlights
-- 91.2 percent first-quarter 2013 property casualty combined ratio,
improved from 99.1 percent for first-quarter 2012.
-- 15 percent increase in first-quarter net written premiums, reflecting
higher pricing and planned growth from strategic initiatives.
-- $135 million first-quarter 2013 property casualty new business written
premiums, up $27 million to a record high for any quarter. Agencies
appointed since the beginning of 2012 contributed $12 million or 9
percent to total first-quarter new business written premiums.
-- 8 cents per share contribution from life insurance operating income to
first-quarter results, up 4 cents from 2012.
Investment and Balance Sheet Highlights
-- 2 percent or $3 million decline in first-quarter 2013 pretax investment
income, due to lower interest income and common stock portfolio
dividends received during the fourth quarter of 2012 that ordinarily
would have been paid during the first quarter.
-- 3 percent first-quarter rise in fair value of invested assets plus cash
at March 31, 2013, including a 13 percent increase for the equity
portfolio and a 1 percent increase for the bond portfolio.
-- $1.314 billion parent company cash and marketable securities at March
31, 2013, up 14 percent from year-end 2012.
* 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 Generally Accepted Accounting Principles.
** Forward-looking statements and related assumptions are subject to the risks outlined in the company's safe harbor statement.
Strong First-Quarter Operating Earnings
Steven J. Johnston, president and chief executive officer, commented: "Consolidated operating income for the first quarter reached 78 cents per share, our best first-quarter result since 2007 on a per-share basis. Underwriting profits rose for each of our three property casualty insurance segments and our life insurance segment. The contribution from investment income was slightly below last year's first quarter result, largely due to timing differences as some equity dividends we typically would have received in the first quarter were instead accelerated and received in the fourth-quarter 2012. Despite this timing anomaly, we continue to experience annual dividend increases from the vast majority of our common stock holdings."
Stronger Underwriting Profitability
"We are encouraged by the incremental progress of our strategic initiatives to grow premium revenues, improve pricing precision and adequacy, mitigate losses and achieve efficiencies. Lower catastrophe losses led to $78 million of first-quarter property casualty underwriting profits before taxes, up from $9 million for the first quarter of 2012. The combined ratio improved a very satisfactory 8 percentage points to 91.2 percent. Core underwriting for the first quarter also continued to improve, with 10 percentage points of improvement in our loss and loss expense ratio for the current accident year before catastrophe losses. That ratio improved 2.5 points compared with the second half of 2012.
"The benefits from the lower catastrophes and from core underwriting progress were partially offset by a lower benefit from favorable development on policy reserves for claims that occurred in prior years. We strengthened prior year reserves for some lines of business for losses incurred but not yet reported, consistent with our commitment to target reserve levels in the upper half of the actuarially estimated range."
Stronger Growth
"As planned, we are experiencing strong growth powered by the cumulative effects of higher prices, additional agency appointments and new products introduced in recent periods and still rolling out. Net written premiums rose 15 percent over last year's first-quarter result, with new business up 25 percent. So far in 2013, we have selected 33 new independent insurance agencies to represent us. Those newly appointed agencies, together with the 140 agencies appointed in 2012, contributed one-third of the $27 million increase in first-quarter new business. While their business is new to us, much of it comes from seasoned accounts with known risk quality, as the agents have served these accounts for many years.
"We heightened our efforts during the first quarter to assure pricing precision, using predictive analytics and agent-provided information to identify the right price for new policies and renewals. Commercial and personal lines policies renewed with average price increases in a mid-single-digit range, while our excess and surplus lines policies renewed with average increases in a low-double-digit range.
"To achieve consistent, long-term profitability, we have to do more than seek rate adequacy. We are focusing on ways to mitigate losses while helping our policyholders control their premiums. Our stepped-up program of property inspections and loss control services identifies actions policyholders can take to reduce risk. We expect to complete 16,000 commercial property inspections and 60,000 exterior home inspections in 2013. We are selectively applying wind and hail deductibles and excluding older or damaged roofs from replacement cost coverage, and we are raising minimum deductibles on new business, encouraging policyholders to maintain their property and use insurance for larger losses."
Stronger Balance Sheets
"Our property casualty statutory surplus rose to over $4 billion as of March 31, indicating ample capital to support our growth plans. Book value rose $1.93 to $35.41 per share, with healthy contributions from insurance operations and from unrealized gains in the investment portfolio, which rose 19 percent on a pretax basis since year-end 2012. Our 2013 value creation ratio is 7.0 percent as of March 31, on a good pace to achieve our targeted average annual ratio in the range of 10 to 13 percent."
Consolidated Property Casualty Insurance Operations
(Dollars
in
millions) Three months ended March 31,
2013 2012 Change %
---- ---- -------
Earned
premiums $889 $798 11
Fee
revenues - 1 (100)
--- ---
Total
revenues 889 799 11
Loss
and
loss
expenses 524 539 (3)
Underwriting
expenses 287 251 14
---
Underwriting
profit $78 $9 767
=== ===
Ratios
as
a
percent
of
earned
premiums: Pt. Change
----------
Loss
and
loss
expenses 59.0% 67.5% (8.5)
Underwriting
expenses 32.2 31.6 0.6
Combined
ratio 91.2% 99.1% (7.9)
==== ==== ====
Change %
-------
Agency
renewal
written
premiums $845 $762 11
Agency
new
business
written
premiums 135 108 25
Other
written
premiums (10) (27) 63
Net
written
premiums $970 $843 15
==== ====
Ratios
as
a
percent
of
earned
premiums: Pt. Change
----------
Current
accident
year
before
catastrophe
losses 58.1% 68.1% (10.0)
Current
accident
year
catastrophe
losses 2.0 13.9 (11.9)
Prior
accident
years
before
catastrophe
losses (0.3) (11.7) 11.4
Prior
accident
years
catastrophe
losses (0.8) (2.8) 2.0
Loss
and
loss
expense
ratio 59.0% 67.5% (8.5)
==== ==== ====
Current
accident
year
combined
ratio
before
catastrophe
losses 90.3% 99.7% (9.4)
==== ==== ====
-- $127 million or 15 percent increase in first-quarter 2013 property
casualty net written premiums. Growth reflected the effects of premium
growth strategies, an improving pricing environment and rising insured
exposures from the slowly improving economy.
-- $27 million increase to $135 million in 2013 new business written by
agencies, reflecting more precise pricing and contributions from new
agency appointments or other growth initiatives. $16 million of the
increase was from standard market property casualty production from
agencies appointed prior to the beginning of 2012 and $10 million from
appointments since then, plus $1 million for excess and surplus lines.
-- 1,427 agency relationships in 1,779 reporting locations marketing
standard market property casualty insurance products at March 31, 2013,
compared with 1,408 agency relationships in 1,758 reporting locations at
year-end 2012. Thirty-three new agency appointments were made during the
first three months of 2013.
-- 7.9 percentage-point first-quarter 2013 combined ratio improvement,
reflecting a 9.9 point reduction in losses from natural catastrophes.
Better pricing and ongoing effects from other recent-year claims and
loss control initiatives contributed to improved current accident year
results before catastrophe losses, and were partially offset by
estimates of reserves for prior accident years.
-- 10.0 percentage-point improvement, to 58.1 percent, for the three-month
2013 ratio of accident year losses and loss expenses before
catastrophes, despite a 3.3 point increase in the ratio for new losses
of $250,000 or more per claim.
-- 1.1 percentage-point first-quarter 2013 benefit from favorable prior
accident year reserve development of $10 million, compared with 14.5
percent from $116 million of development for the same period of 2012.
The decline in favorable reserve development was primarily due to higher
estimates of incurred but not reported losses in the commercial
casualty, commercial auto and personal auto lines of business.
-- 0.6 percentage-point increase in the first-quarter underwriting expense
ratio, as ongoing expense management efforts and higher earned premiums
were offset by higher commissions.
Insurance Operations Highlights
Commercial Lines Insurance Operations
(Dollars
in
millions) Three months ended March 31,
2013 2012 Change %
---- ---- -------
Earned
premiums $631 $568 11
Fee
revenues - 1 (100)
--- ---
Total
revenues 631 569 11
Loss
and
loss
expenses 365 348 5
Underwriting
expenses 208 187 11
---
Underwriting
profit $58 $34 71
=== ===
Ratios
as
a
percent
of
earned
premiums: Pt. Change
----------
Loss
and
loss
expenses 57.8% 61.1% (3.3)
Underwriting
expenses 33.0 33.1 (0.1)
Combined
ratio 90.8% 94.2% (3.4)
==== ==== ====
Change %
-------
Agency
renewal
written
premiums $631 $571 11
Agency
new
business
written
premiums 97 75 29
Other
written
premiums - (20) 100
Net
written
premiums $728 $626 16
==== ====
Ratios
as
a
percent
of
earned
premiums: Pt. Change
----------
Current
accident
year
before
catastrophe
losses 58.6% 67.9% (9.3)
Current
accident
year
catastrophe
losses 1.1 9.1 (8.0)
Prior
accident
years
before
catastrophe
losses (1.2) (13.6) 12.4
Prior
accident
years
catastrophe
losses (0.7) (2.3) 1.6
Loss
and
loss
expense
ratio 57.8% 61.1% (3.3)
==== ==== ====
Current
accident
year
combined
ratio
before
catastrophe
losses 91.6% 101.0% (9.4)
==== ===== ====
-- $102 million or 16 percent growth in first-quarter 2013 commercial lines
net written premiums, primarily due to premium growth strategies, higher
average pricing and rising insured exposures.
-- $60 million or 11 percent rise in first-quarter renewal written premiums
reflected commercial lines renewal pricing changes, increasing on
average in a mid-single-digit range, in addition to rising insured
exposures.
-- $22 million increase in first-quarter new business written premiums,
reflecting recent agency appointments and higher pricing. Policies with
annual premiums of $50,000 or more represented just over half of the
increase, and in aggregate their premiums grew at a pace more than
double the rate of smaller policies.
-- $20 million contribution to net written premium growth from other
written premiums, reflecting a small increase in premiums ceded to
reinsurers that was offset by a more favorable adjustment, compared with
the first quarter of 2012, for estimated direct written premiums of
policies in effect but not yet processed.
-- 3.4 percentage-point first-quarter 2013 combined ratio improvement,
reflecting a 6.4 point reduction in losses from natural catastrophes.
-- 9.3 percentage-point improvement, to 58.6 percent, for the three-month
2013 ratio of accident year losses and loss expenses before
catastrophes, despite a 5.0 point increase in the ratio for new losses
of $250,000 or more per claim. Better pricing and ongoing effects from
other recent-year claims and loss control initiatives drove the
improvement.
-- 1.9 percentage-point first-quarter 2013 benefit from favorable prior
accident year reserve development of $12 million, compared with 15.9
percent from $90 million of development for the same period of 2012.
Personal Lines Insurance Operations
(Dollars
in
millions) Three months ended March 31,
2013 2012 Change %
---- ---- -------
Earned
premiums $231 $209 11
Loss
and
loss
expenses 141 174 (19)
Underwriting
expenses 70 57 23
---
Underwriting
profit
(loss) $20 $(22) nm
=== ====
Ratios
as
a
percent
of
earned
premiums: Pt. Change
----------
Loss
and
loss
expenses 61.3% 83.6% (22.3)
Underwriting
expenses 30.3 27.3 3.0
Combined
ratio 91.6% 110.9% (19.3)
==== ===== =====
Change %
-------
Agency
renewal
written
premiums $195 $175 11
Agency
new
business
written
premiums 28 24 17
Other
written
premiums (8) (6) (33)
Net
written
premiums $215 $193 11
==== ====
Ratios
as
a
percent
of
earned
premiums: Pt. Change
----------
Current
accident
year
before
catastrophe
losses 54.7% 67.9% (13.2)
Current
accident
year
catastrophe
losses 4.8 28.2 (23.4)
Prior
accident
years
before
catastrophe
losses 3.1 (7.8) 10.9
Prior
accident
years
catastrophe
losses (1.3) (4.7) 3.4
---- ----
Loss
and
loss
expense
ratio 61.3% 83.6% (22.3)
==== ==== =====
Current
accident
year
combined
ratio
before
catastrophe
losses 85.0% 95.2% (10.2)
==== ==== =====
-- $22 million or 11 percent growth in first-quarter 2013 personal lines
net written premiums, primarily due to higher renewal written premiums
that reflect rate increases.
-- $4 million or 17 percent increase in first-quarter new business written
premiums, in line with the full-year 2012 growth rate and reflecting
recent agency appointments and higher average pricing.
-- 19.3 percentage-point first-quarter 2013 combined ratio improvement,
primarily due to a 20.0 point reduction in losses from natural
catastrophes.
-- 13.2 percentage-point improvement, to 54.7 percent, for the three-month
2013 ratio of accident year losses and loss expenses before
catastrophes, reflecting better pricing and ongoing effects from other
recent-year initiatives.
-- 1.8 percentage-point first-quarter 2013 unfavorable reserve development
on prior accident years netting to $4 million, compared with 12.5 points
or $26 million of favorable development for the same period of 2012.
Excess and Surplus Lines Insurance Operations
(Dollars in
millions) Three months ended March 31,
2013 2012 Change %
---- ---- -------
Earned premiums $27 $21 29
Loss and loss
expenses 18 17 6
Underwriting
expenses 9 7 29
---
Underwriting
profit (loss) $ - $(3) 100
=== ===
Ratios as a
percent of
earned premiums: Pt. Change
----------
Loss and loss
expenses 65.2% 81.6% (16.4)
Underwriting
expenses 32.8 32.0 0.8
Combined ratio 98.0% 113.6% (15.6)
==== ===== =====
Change %
-------
Agency renewal
written premiums $19 $16 19
Agency new
business written
premiums 10 9 11
Other written
premiums (2) (1) (100)
Net written
premiums $27 $24 13
=== ===
Ratios as a
percent of
earned premiums: Pt. Change
----------
Current accident
year before
catastrophe
losses 73.6% 78.3% (4.7)
Current accident
year catastrophe
losses 0.1 2.4 (2.3)
Prior accident
years before
catastrophe
losses (8.8) (0.4) (8.4)
Prior accident
years
catastrophe
losses 0.3 1.3 (1.0)
--- ---
Loss and loss
expense ratio 65.2% 81.6% (16.4)
==== ==== =====
Current accident
year combined
ratio before
catastrophe
losses 106.4% 110.3% (3.9)
===== ===== ====
-- $3 million or 13 percent growth in first-quarter 2013 excess and surplus
lines net written premiums, largely due to average renewal price
increases that rose to a low-double-digit range.
-- 15.6 percentage-point combined ratio improvement for first-quarter 2013,
largely due to a higher level of benefit from favorable development on
prior accident year reserves. Results for the current accident year
before catastrophe losses also improved, reflecting higher pricing.
Life Insurance Operations
(In millions) Three months ended March 31,
------------
2013 2012 Change %
---- ---- -------
Term life insurance $29 $27 7
Universal life insurance 5 7 (29)
Other life insurance, annuity,
and disability income products 8 7 14
--- ---
Earned premiums 42 41 2
Investment income, net of
expenses 35 34 3
Other income 1 - nm
--- ---
Total revenues, excluding
realized investment gains and
losses 78 75 4
--- ---
Contract holders benefits 44 43 2
Underwriting expenses 13 22 (41)
--- ---
Total benefits and expenses 57 65 (12)
--- ---
Net income before income tax and
realized investment gains and
losses 21 10 110
Income tax 7 4 75
Net income before realized
investment gains and losses $14 $6 133
=== ===
-- $1 million or 2 percent growth in first-quarter 2013 earned premiums,
including 7 percent for term life insurance, our largest life insurance
product line.
-- $6 million decline to $11 million in first-quarter 2013 fixed annuity
deposits received, slowing as planned. Cincinnati Life does not offer
variable or indexed products.
-- $8 million rise in first-quarter profit, primarily due to lower
underwriting expenses as first-quarter 2012 included a one-time
actuarial adjustment that decreased the amount of expenses deferred to
future periods.
-- $12 million or 1 percent first-quarter 2013 growth to $869 million in
GAAP shareholders' equity for The Cincinnati Life Insurance Company.
Investment and Balance Sheet Highlights
Investment Operations
(In millions) Three months ended March 31,
------------
2013 2012 Change %
---- ---- -------
Total investment income, net of expenses, pretax $128 $131 (2)
---- ----
Investment interest credited to contract holders (21) (21) 0
--- ---
Realized investment gains and losses summary:
Realized investment gains and losses 42 25 68
Change in fair value of securities with embedded derivatives 1 4 (75)
Other-than-temporary impairment charges (2) (16) 88
Total realized investment gains and losses 41 13 215
--- ---
Investment operations profit $148 $123 20
==== ====
(In millions) Three months ended March 31,
------------
2013 2012 Change %
---- ---- -------
Investment income:
Interest $102 $106 (4)
Dividends 27 26 4
Other 1 1 0
Investment expenses (2) (2) 0
Total investment income, net of expenses, pretax 128 131 (2)
Income taxes (31) (32) 3
Total investment income, net of expenses, after-tax $97 $99 (2)
=== ===
Effective tax rate 24.3% 24.4%
Average yield pretax 4.14% 4.48%
Average yield after-tax 3.14% 3.39%
-- 2 percent decline in first-quarter pretax investment income, as a $1
million increase in dividends was offset by a $4 million decline in
interest income.
-- $356 million or 19 percent first-quarter 2013 net increase in pretax
unrealized investment portfolio gains, including $381 million in the
equity portfolio. $42 million of pretax net realized gains were from
investment portfolio security sales or called bonds during the first
quarter of 2013, including $37 million from the equity portfolio.
(Dollars in millions except share At March
data) 31, At December 31,
---------------------------------
2013 2012
---- ----
Balance sheet data:
Invested assets $13,037 $12,534
Total assets 17,037 16,548
Short-term debt 104 104
Long-term debt 790 790
Shareholders' equity 5,785 5,453
Book value per share 35.41 33.48
Debt-to-total-capital ratio 13.4% 14.1%
-- $13.417 billion in consolidated cash and invested assets at March 31,
2013, up 3 percent from $13.021 billion at year?end 2012.
-- $9.169 billion bond portfolio at March 31, 2013, with an average rating
of A2/A. Fair value rose $76 million or 1 percent during the first
quarter of 2013.
-- $3.801 billion equity portfolio was 29.2 percent of invested assets,
including $1.385 billion in pretax net unrealized gains at March 31,
2013. $428 million or 13 percent first-quarter 2013 growth in fair
value.
-- $4.131 billion of statutory surplus for the property casualty insurance
group at March 31, 2013, up $217 million from $3.914 billion at year-end
2012, after declaring $75 million in dividends to the parent company.
The ratio of net written premiums to property casualty statutory surplus
for the 12 months ended March 31, 2013, was 0.9-to-1, unchanged from
year-end 2012.
-- Value creation ratio of 7.0 percent for first-quarter of 2013 included
2.3 percent from net income before net realized investment gains and 4.7
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 2012 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 26.
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
-- Declines in overall stock market values negatively affecting the
company's equity portfolio and book value
-- 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
-- Increased competition that could result in a significant reduction in
the company's premium volume
-- Delays or performance inadequacies from ongoing development and
implementation of underwriting and pricing methods or technology
projects and enhancements expected to increase our pricing accuracy,
underwriting profit and competitiveness
-- 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
-- Difficulties with technology or data security breaches, including cyber
attacks, that could negatively affect our ability to conduct business
and our relationships with agents, policyholders and others
-- 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
-- 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
-- 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, 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) March 31, December 31,
2013 2012
---- ----
Assets
Investments $13,037 $12,534
Cash and cash
equivalents 380 487
Premiums receivable 1,291 1,214
Reinsurance receivable 620 615
Other assets 1,709 1,698
Total assets $17,037 $16,548
======= =======
Liabilities
Insurance reserves $6,550 $6,525
Unearned premiums 1,875 1,792
Deferred income tax 588 453
Long-term debt and
capital lease
obligations 831 827
Other liabilities 1,408 1,498
----- -----
Total liabilities 11,252 11,095
------ ------
Shareholders' Equity
Common stock and paid-
in capital 1,541 1,528
Retained earnings 4,109 4,021
Accumulated other
comprehensive income 1,362 1,129
Treasury stock (1,227) (1,225)
------ ------
Total shareholders'
equity 5,785 5,453
----- -----
Total liabilities and
shareholders' equity $17,037 $16,548
======= =======
(Dollars in millions
except per share data) Three months ended March 31,
2013 2012
---- ----
Revenues
Earned premiums $931 $839
Investment income, net
of expenses 128 131
Realized investment
gains and losses, net 41 13
Other revenues 3 3
--- ---
Total revenues 1,103 986
----- ---
Benefits and Expenses
Insurance losses and
policyholder benefits 568 582
Underwriting,
acquisition and
insurance expenses 300 274
Interest expense 13 14
Other operating expenses 5 4
Total benefits and
expenses 886 874
--- ---
Income Before Income
Taxes 217 112
--- ---
Provision for Income
Taxes 63 26
--- ---
Net Income $154 $86
==== ===
Per Common Share:
Net income-basic $0.95 $0.53
Net income-diluted 0.94 0.53
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2013 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 share) Three months ended March 31,
----------------------
2013 2012
---- ----
Book value change per share:
Book value as originally reported December 31, 2011 $31.16
Cumulative effect of a change in accounting for deferred policy
acquisition costs, net of tax (0.13)
-----
Book value as adjusted December 31, 2011 $31.03
======
Value creation ratio:
End of period book value - as originally reported $35.41 $32.07
Less beginning of period book value - as originally reported 33.48 31.16
----- -----
Change in book value - as originally reported 1.93 0.91
Dividend declared to shareholders 0.4075 0.4025
------
Total contribution to value creation ratio $2.3375 $1.3125
======= =======
Contribution to value creation ratio from change in book value* 5.8% 2.9%
Contribution to value creation ratio from dividends declared to shareholders** 1.2 1.3
Value creation ratio 7.0% 4.2%
=== ===
* Change in book value divided by the beginning of period book value as originally reported
** Dividend declared to shareholders divided by beginning of period book value as originally reported
Net Income Reconciliation
(In millions except
per share data) Three months ended March 31,
2013 2012
---- ----
Net income $154 $86
Net realized
investment gains and
losses 26 9
--- ---
Operating income 128 77
Less catastrophe
losses (7) (58)
Operating income
before catastrophe
losses $135 $135
==== ====
Diluted per share
data:
Net income $0.94 $0.53
Net realized
investment gains and
losses 0.16 0.05
---- ----
Operating income 0.78 0.48
Less catastrophe
losses (0.04) (0.35)
Operating income
before catastrophe
losses $0.82 $0.83
===== =====
Property Casualty Reconciliation
Three months ended March 31, 2013
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $970 $728 $215 $27
Unearned premiums change (81) (97) 16 -
--- --- --- ---
Earned premiums $889 $631 $231 $27
Statutory ratio:
Statutory combined ratio 88.9% 86.8% 94.1% 98.5%
Contribution from catastrophe losses 1.2 0.4 3.5 0.4
Statutory combined ratio excluding catastrophe losses 87.7% 86.4% 90.6% 98.1%
==== ==== ==== ====
Commission expense ratio 17.9% 16.5% 21.7% 26.9%
Other expense ratio 12.0 12.5 11.1 6.4
---- ---- ---- ---
Statutory expense ratio 29.9% 29.0% 32.8% 33.3%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 91.2% 90.8% 91.6% 98.0%
Contribution from catastrophe losses 1.2 0.4 3.5 0.4
Prior accident years before catastrophe losses (0.3) (1.2) 3.1 (8.8)
---- ---- --- ----
GAAP combined ratio excluding catastrophe losses and prior
accident years 90.3% 91.6% 85.0% 106.4%
==== ==== ==== =====
Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on whole dollar amounts.
SOURCE Cincinnati Financial Corporation
