CINCINNATI FINANCIAL 
By CINCINNATI, Feb. 6, 2013 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
(Logo: http://photos.prnewswire.com/prnh/20110824/CL57087LOGO )
-- Fourth-quarter 2012 net income of $192 million, or $1.17 per share,
compared with $134 million, or 83 cents per share, in the fourth quarter
of 2011; operating income* of $183 million, or $1.11 per share, up 32
percent compared with $139 million, or 86 cents per share. Net income
and operating income for the fourth quarter of 2012 benefited from
property casualty underwriting profits that increased by $40 million
after taxes.
-- Full-year 2012 net income of $421 million, or $2.57 per share, compared
with $164 million, or $1.01, in 2011. Operating income of $393 million,
or $2.40 per share, up 230 percent from $119 million, or 73 cents per
share.
-- $257 million increase in full-year 2012 net income reflected the
after-tax net effect of two primary items: $270 million improvement in
the contribution from property casualty underwriting - including a
favorable effect of $44 million from lower natural catastrophe losses,
partially offset by a $17 million decrease from net realized investment
gains.
-- $33.48 book value per share at December 31, 2012, up 8 percent for the
year and 2 percent for the quarter.
-- 12.6 percent value creation ratio for full-year 2012, compared with 6.0
percent for 2011.
Financial Highlights
--------------------
(Dollars in
millions except
share data in
thousands) Three months ended December 31, Twelve months ended December 31,
----------------
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Revenue
Highlights
Earned premiums $917 $827 11 $3,522 $3,194 10
Investment
income, pretax 136 132 3 531 525 1
Total revenues 1,070 955 12 4,111 3,803 8
Income Statement
Data
Net income $192 $134 43 $421 $164 157
Net realized
investment
gains and
losses 9 (5) nm 28 45 (38)
Operating
income* $183 $139 32 $393 $119 230
==== ==== ==== ====
Per Share Data
(diluted)
Net income $1.17 $0.83 41 $2.57 $1.01 154
Net realized
investment
gains and
losses 0.06 (0.03) nm 0.17 0.28 (39)
Operating
income* $1.11 $0.86 29 $2.40 $0.73 229
===== ===== ===== =====
Book value $33.48 $31.03 8
Cash dividend
declared $0.4075 $0.4025 1 $1.62 $1.605 1
Weighted average
shares
outstanding 164,160 162,679 0 163,661 163,259 0
Insurance Operations Fourth-Quarter Highlights
-- 81.9 percent fourth-quarter 2012 property casualty combined ratio,
improved from 87.5 percent fourth-quarter 2011. Full-year 2012 property
casualty combined ratio at 96.1 percent, with a 12 percent increase in
net written premiums.
-- 10 percent increase in fourth-quarter net written premiums, reflecting
higher pricing and planned growth from strategic initiatives.
-- $132 million fourth-quarter 2012 property casualty new business written
premiums, up $29 million to a record high for any quarter. Full-year
2012 property casualty new business written premiums of $501 million,
another record high.
-- 5 cents per share contribution from life insurance operating income to
fourth-quarter results, up 1 cent from 2011.
Investment and Balance Sheet Highlights
-- 1 percent full-year 2012 growth in before-tax investment income, driven
by an $11 million or 11 percent increase in common stock portfolio
dividends - including $5 million not typically paid in the fourth
quarter - that offset a 1 percent decline in interest income.
-- 6 percent full-year rise in fair value of invested assets plus cash at
December 31, 2012, including 14 percent for the equity portfolio and a 4
percent increase for the bond portfolio.
-- $1.151 billion parent company cash and marketable securities at December
31, 2012, up 10 percent from a year ago.
* The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 13 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 (see Page 10).
Strong Fourth-Quarter and Full-Year 2012 Operating Earnings
Steven J. Johnston, president and chief executive officer, commented: "Consolidated operating income for the fourth quarter and full-year 2012 was higher than for any quarter since at least 2002 and any year since 2007.
"Our investment income rose 3 percent in the fourth quarter, thanks to increased dividend income from stocks in the portfolio, which helped offset the impact of low interest rates on bonds. Our dividend income for the fourth quarter spiked from special payments and dividends that were accelerated from future quarters into 2012. These payments are unlikely to be repeated in 2013."
Core Underwriting Progress
"Property casualty insurance underwriting results were outstanding, as positive trends seen in the third quarter continued to gain momentum. Underwriting profits before taxes rose to $160 million in the fourth quarter and $137 million for the full year. The combined ratio of 81.9 percent was our best quarterly result in 10 years, and the full-year ratio of 96.1 percent was our best in five years.
"The $30 million impact of catastrophes was lower in the fourth quarter than in any other 2012 quarter, even though it included our relatively modest Superstorm Sandy losses announced in November. Still, that impact was more than average for a fourth quarter, when we typically report low catastrophe losses. For the full year, catastrophes contributed 10.0 percentage points to the combined ratio, well above the 10-year average of 6.1 percent.
"Factors other than catastrophes drove our improved property casualty underwriting results. We achieved better core underwriting, as indicated by 8.4 percentage points of improvement in our loss and loss expense ratio for the current accident year before catastrophe losses. This progress is arising incrementally from sustained efforts of our associates and agents to increase our premium revenues, improve price adequacy, control losses and increase efficiencies."
Ongoing, Cumulative Benefits
"The growth and profitability initiatives that produced the current results were designed to improve our competitive position and opportunities over the long term. We still have more work to do to build on our progress - and more upside to realize from the cumulative effects of our efforts.
"For the first time, full-year new business premiums written with our independent agencies exceeded $500 million. Property casualty total written premiums grew at a double-digit pace, rising for each of our property casualty insurance segments for both the fourth quarter and the full year. We continue our careful, measured expansion of our product lines, marketing territory and independent agency force, with an eye toward gradual geographical diversification of our premium sources. During the fourth quarter, written premiums from our excess and surplus lines operation, launched in 2008, passed the $100 million mark. We introduced two additional target market programs of commercial insurance and appointed additional agencies, bringing total new agency appointments for the year to 140, with more than half located outside of our 10 highest volume states.
"We made great strides in 2012 toward pricing precision, using models and agent-provided information to identify the right price for new business and to take action on selected renewal accounts to improve price adequacy. During the fourth quarter, commercial lines policies that renewed had price increases that averaged in the mid-single digits; price increases averaged in the low-single digits for personal auto renewals and in the high-single digits for homeowner policies and excess and surplus lines business.
"During 2012, we ramped up loss control services for commercial policyholders and field inspections of commercial and personal property. These services help policyholders avoid loss by correcting unsafe conditions, while also allowing us to note characteristics that require underwriting attention, such as roof age or type. We also continued building out our commercial lines policy administration system. Approximately 75 percent of our commercial lines policies, excluding workers' compensation, now can be processed through this efficient system. We will add workers' compensation capabilities to the system in two states in 2013, following up with a staged rollout to all other states where we offer workers' compensation policies."
Clarity and Confidence
"Our solid performance in 2012 was supported by communication of clear goals for every associate of our company and every agency that represents us. Those goals feed up to our primary performance target, a value creation ratio that measures our ability to pay cash dividends to shareholders and to increase the book value of the company over time. With a fourth-quarter ratio of 2.8 percent and a full-year ratio of 12.6 percent, this year's performance is consistent with our long-term target of a 12 percent to 15 percent annual average for the period of 2010-2014. While the current investment environment and its near-term prospects are challenging, we are confident that our ongoing improvements position our insurance operations to perform through all economic and market cycles."
Consolidated Property Casualty Insurance Operations
---------------------------------------------------
(Dollars in
millions) Three months ended December 31, Twelve months ended December 31,
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Earned premiums $869 $785 11 $3,344 $3,029 10
Fee revenues 2 1 100 6 4 50
--- --- --- ---
Total revenues 871 786 11 3,350 3,033 10
Loss and loss
expenses 433 437 (1) 2,137 2,335 (8)
Underwriting
expenses 278 250 11 1,076 976 10
Underwriting
profit (loss) $160 $99 62 $137 $(278) nm
==== === ==== =====
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss
expenses 49.9% 55.6% (5.7) 63.9% 77.0% (13.1)
Underwriting
expenses 32.0 31.9 0.1 32.2 32.3 (0.1)
---- ---- ---- ----
Combined ratio 81.9% 87.5% (5.6) 96.1% 109.3% (13.2)
==== ==== ==== ==== ===== =====
Change % Change %
------- -------
Agency renewal
written premiums $771 $712 8 $3,138 $2,867 9
Agency new
business written
premiums 132 103 28 501 437 15
Other written
premiums (66) (55) (20) (157) (206) 24
Net written
premiums $837 $760 10 $3,482 $3,098 12
==== ==== ====== ======
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident
year before
catastrophe
losses 59.0% 65.7% (6.7) 64.6% 73.0% (8.4)
Current accident
year catastrophe
losses 3.4 (1.9) 5.3 11.1 13.4 (2.3)
Prior accident
years before
catastrophe
losses (12.5) (7.3) (5.2) (10.7) (9.3) (1.4)
Prior accident
years
catastrophe
losses 0.0 (0.9) 0.9 (1.1) (0.1) (1.0)
Total loss and
loss expenses 49.9% 55.6% (5.7) 63.9% 77.0% (13.1)
==== ==== ==== ==== ==== =====
Current accident
year combined
ratio before
catastrophe
losses 91.0% 97.6% (6.6) 96.8% 105.3% (8.5)
==== ==== ==== ==== ===== ====
-- 10 percent and 12 percent growth in fourth-quarter and full-year 2012
property casualty net written premiums. Full-year renewal written
premiums increase of 9 percent reflects higher pricing and rising
insured exposures from the gradually improving economy. Ceded premiums
of $42 million in 2011 to reinstate property catastrophe reinsurance
coverage were largely responsible for the $49 million change in
full-year other written premiums.
-- $64 million increase to $501 million in 2012 new business written by
agencies, reflecting contributions from new agency appointments and
other growth initiatives in recent years. $35 million of the increase
was from standard market property casualty new business produced by
agencies appointed since the beginning of 2011.
-- 1,408 agency relationships in 1,758 reporting locations marketing
standard market property casualty insurance products at December 31,
2012, compared with 1,312 agency relationships in 1,648 reporting
locations at year-end 2011. One hundred forty new agency appointments
were made during 2012, exceeding the initial full-year target of
approximately 130.
-- 5.6 percentage-point fourth-quarter 2012 combined ratio improvement,
largely reflecting better pricing and other efforts that are improving
loss ratios before catastrophe losses.
-- 13.2 percentage-point full-year combined ratio improvement, including
3.3 points from lower natural catastrophe losses in addition to lower
weather losses not part of an industry-designated catastrophe event,
plus benefits from better pricing.
-- 8.4 percentage-point improvement, to 64.6 percent, for full-year ratio
of 2012 accident year losses and loss expenses before catastrophes,
including 1.9 points of improvement in the 2012 ratio for new losses of
$250,000 or more per claim and 1.0 point of improvement due to the
effect of the 2011 reinsurance reinstatement premium.
-- 12.5 and 11.8 percentage point fourth-quarter and full-year 2012 benefit
from favorable prior accident year reserve development of $109 million
and $396 million, compared with 8.2 percent and 9.4 percent from $64
million and $285 million of development for the same periods of 2011.
Development from catastrophe losses accounted for 1.0 percentage point
of the 2.4 point full-year improvement.
-- Relatively flat fourth-quarter and full-year underwriting expense
ratios, reflecting expense management efforts and higher earned premiums
that essentially offset a 0.8 percentage point full-year increase in
profit-sharing commissions.
The following table shows incurred catastrophe losses for 2012 and 2011.
------------------------------------------------------------------------
(In millions, net of reinsurance) Three months ended December 31, Twelve months ended December 31,
Comm. Pers. E&S Comm. Pers. E&S
Dates Event Region lines lines lines Total lines lines lines Total
----- ----- ------ ----- ----- ----- ----- ----- ----- ----- -----
2012
First quarter catastrophes $(1) $ - $ - $(1) $52 $62 $ - $114
Second quarter catastrophes (3) (1) - (4) 117 62 1 180
Third quarter catastrophes 2 1 1 4 23 25 1 49
Oct. 28 - 31 Sandy Midwest, Northeast, South 20 10 - 30 20 10 - 30
Development on 2011 and prior catastrophes 1 - - 1 (17) (22) - (39)
Calendar year incurred total $19 $10 $1 $30 $195 $137 $2 $334
=== === === === ==== ==== === ====
2011
First quarter catastrophes $(3) $(1) $ - $(4) $22 $16 $ - $38
Second quarter catastrophes (4) - - (4) 148 139 1 288
Third quarter catastrophes (6) (7) - (13) 52 23 - 75
Oct. 28 - 31 Freezing, wind East 1 1 - 2 1 1 - 2
Nov. 30 - Dec. 2 Wind West 2 2 - 4 2 2 - 4
Development on 2010 and prior catastrophes (7) - - (7) 2 (7) - (5)
Calendar year incurred total $(17) $(5) $ - $(22) $227 $174 $1 $402
==== === === ==== ==== ==== === ====
Insurance Operations Highlights
Commercial Lines Insurance Operations
-------------------------------------
(Dollars in
millions) Three months ended December 31, Twelve months ended December 31,
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Earned premiums $618 $567 9 $2,383 $2,197 8
Fee revenues 2 1 100 4 3 33
--- --- --- ---
Total revenues 620 568 9 2,387 2,200 9
Loss and loss
expenses 307 284 8 1,420 1,570 (10)
Underwriting
expenses 206 191 8 786 732 7
Underwriting
profit (loss) $107 $93 15 $181 $(102) nm
==== === ==== =====
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss
expenses 49.7% 50.1% (0.4) 59.5% 71.4% (11.9)
Underwriting
expenses 33.2 33.8 (0.6) 33.0 33.4 (0.4)
Combined ratio 82.9% 83.9% (1.0) 92.5% 104.8% (12.3)
==== ==== ==== ==== ===== =====
Change % Change %
------- -------
Agency renewal
written premiums $549 $514 7 $2,229 $2,063 8
Agency new
business written
premiums 96 74 30 352 307 15
Other written
premiums (57) (42) (36) (122) (152) 20
Net written
premiums $588 $546 8 $2,459 $2,218 11
==== ==== ====== ======
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident
year before
catastrophe
losses 59.1% 60.9% (1.8) 62.9% 71.8% (8.9)
Current accident
year catastrophe
losses 3.0 (1.7) 4.7 8.9 10.3 (1.4)
Prior accident
years before
catastrophe
losses (12.5) (7.9) (4.6) (11.6) (10.8) (0.8)
Prior accident
years
catastrophe
losses 0.1 (1.2) 1.3 (0.7) 0.1 (0.8)
--- ---- ---- ---
Total loss and
loss expenses 49.7% 50.1% (0.4) 59.5% 71.4% (11.9)
==== ==== ==== ==== ==== =====
Current accident
year combined
ratio before
catastrophe
losses 92.3% 94.7% (2.4) 95.9% 105.2% (9.3)
==== ==== ==== ==== ===== ====
-- 8 percent and 11 percent growth in fourth-quarter and full-year 2012
commercial lines net written premiums, primarily due to higher renewal
written premiums that continued to reflect improved pricing.
-- $35 million and $166 million increase in fourth-quarter and full-year
renewal written premiums, reflecting full-year 2012 commercial lines
pricing changes that increased on average in a mid-single-digit range.
-- $22 million and $45 million rise in fourth-quarter and full-year new
business written by agencies, reflecting recent-year growth initiatives,
rising for the year in 30 of the 39 states where we offer standard
market commercial lines policies.
-- 1.0 percentage-point fourth-quarter 2012 combined ratio improvement, as
higher catastrophe losses were largely offset by more favorable prior
accident year reserve development.
-- 12.3 percentage-point full-year combined ratio improvement, including
2.2 points from lower natural catastrophe losses in addition to lower
noncatastrophe weather losses and improving loss ratios. The lower
ratios reflected initiatives to improve pricing precision and loss
experience related to claims and loss control practices.
-- 8.9 percentage-point improvement, to 62.9 percent, for full-year ratio
of 2012 accident year losses and loss expenses before catastrophes,
including 2.6 points of improvement in the 2012 ratio for new losses of
$250,000 or more per claim and 0.8 points of improvement due to the
effect of 2011 reinsurance reinstatement premiums.
-- 12.4 and 12.3 percentage-point fourth-quarter and full-year 2012 benefit
from favorable prior accident year reserve development of $76 million
and $292 million, compared with 9.1 percent and 10.7 percent from $52
million and $235 million of development for the same periods of 2011.
Personal Lines Insurance Operations
(Dollars in
millions) Three months ended December 31, Twelve months ended December 31,
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Earned premiums $226 $199 14 $868 $762 14
Fee revenues - - nm 2 1 100
--- --- --- ---
Total revenues 226 199 14 870 763 14
Loss and loss
expenses 116 145 (20) 652 723 (10)
Underwriting
expenses 64 53 21 261 222 18
Underwriting
profit (loss) $46 $1 nm $(43) $(182) 76
=== === ==== =====
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss
expenses 51.5% 72.9% (21.4) 75.2% 94.9% (19.7)
Underwriting
expenses 28.5 26.5 2.0 30.1 29.1 1.0
Combined ratio 80.0% 99.4% (19.4) 105.3% 124.0% (18.7)
==== ==== ===== ===== ===== =====
Change % Change %
------- -------
Agency renewal
written premiums $203 $185 10 $836 $755 11
Agency new
business written
premiums 27 22 23 111 95 17
Other written
premiums (8) (11) 27 (29) (49) 41
Net written
premiums $222 $196 13 $918 $801 15
==== ==== ==== ====
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident
year before
catastrophe
losses 59.4% 81.0% (21.6) 68.2% 76.7% (8.5)
Current accident
year catastrophe
losses 4.6 (2.6) 7.2 18.4 23.6 (5.2)
Prior accident
years before
catastrophe
losses (12.3) (5.4) (6.9) (8.9) (4.5) (4.4)
Prior accident
years
catastrophe
losses (0.2) (0.1) (0.1) (2.5) (0.9) (1.6)
---- ---- ---- ---- ---- ----
Total loss and
loss expenses 51.5% 72.9% (21.4) 75.2% 94.9% (19.7)
==== ==== ===== ==== ==== =====
Current accident
year combined
ratio before
catastrophe
losses 87.9% 107.5% (19.6) 98.3% 105.8% (7.5)
==== ===== ===== ==== ===== ====
-- 13 percent and 15 percent growth in fourth-quarter and full-year 2012
personal lines net written premiums, primarily due to increases in
renewal written premiums. Ceded premiums of $18 million in 2011 to
reinstate property catastrophe reinsurance coverage drove the $20
million change in full-year other written premiums.
-- $16 million or 17 percent increase in full-year 2012 new business
written premium. New business from our six highest volume states where
we offer personal lines policies declined on average by 2 percent, while
it rose 34 percent in all other states as we progress toward geographic
diversification.
-- 19.4 percentage-point fourth-quarter 2012 combined ratio improvement, as
higher catastrophe losses were largely offset by more favorable prior
accident year reserve development. A refined allocation process for loss
expenses related primarily to salaries of claims associates added
approximately 12 points to the fourth-quarter 2011 ratio.
-- 18.7 percentage-point full-year combined ratio improvement, including
6.8 points from lower natural catastrophe losses in addition to lower
noncatastrophe weather losses that decreased 2012 homeowner losses by
approximately $10 million. Improved loss ratios before catastrophe
losses also reflect pricing precision improvement initiatives and higher
market pricing in general.
-- 8.5 percentage-point improvement, to 68.2 percent, for full-year ratio
of 2012 accident year losses and loss expenses before catastrophes,
including 1.8 points of improvement due to the effect of 2011
reinsurance reinstatement premiums. Better pricing drove most of the
remaining improvement as lower non-catastrophe weather losses were
essentially offset by higher new losses of $250,000 or more per claim.
-- 12.5 and 11.4 percentage-point fourth-quarter and full-year 2012 benefit
from favorable prior accident year reserve development of $29 million
and $99 million, compared with 5.5 percent and 5.4 percent from $11
million and $41 million of development for the same periods of 2011. The
homeowner line of business represented more than half of the $57 million
increase in full-year personal lines favorable prior accident year
reserve development.
Excess and Surplus Lines Insurance Operations
(Dollars in
millions) Three months ended December 31, Twelve months ended December 31,
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Earned premiums $25 $19 32 $93 $70 33
Loss and loss
expenses 10 8 25 65 42 55
Underwriting
expenses 8 6 33 29 22 32
Underwriting
(loss) profit $7 $5 40 $(1) $6 nm
=== === === ===
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss
expenses 38.2% 42.4% (4.2) 69.4% 60.3% 9.1
Underwriting
expenses 33.3 31.3 2.0 31.6 31.9 (0.3)
Combined ratio 71.5% 73.7% (2.2) 101.0% 92.2% 8.8
==== ==== ==== ===== ==== ===
Change % Change %
------- -------
Agency renewal
written premiums $19 $13 46 $73 $49 49
Agency new
business written
premiums 9 7 29 38 35 9
Other written
premiums (1) (2) 50 (6) (5) (20)
Net written
premiums $27 $18 50 $105 $79 33
=== === ==== ===
Ratios as a
percent of
earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident
year before
catastrophe
losses 52.3% 50.6% 1.7 72.8% 71.0% 1.8
Current accident
year catastrophe
losses 1.4 (0.3) 1.7 2.1 2.1 0.0
Prior accident
years before
catastrophe
losses (15.3) (7.9) (7.4) (5.6) (12.9) 7.3
Prior accident
years
catastrophe
losses (0.2) 0.0 (0.2) 0.1 0.1 0.0
---- --- ---- --- --- ---
Total loss and
loss expenses 38.2% 42.4% (4.2) 69.4% 60.3% 9.1
==== ==== ==== ==== ==== ===
Current accident
year combined
ratio before
catastrophe
losses 85.6% 81.9% 3.7 104.4% 102.9% 1.5
==== ==== === ===== ===== ===
-- $9 million and $26 million growth in fourth-quarter and full-year 2012
excess and surplus lines net written premiums, largely due to the
opportunity to renew many accounts for the first time. Growth was also
from average full-year renewal price increases in a high-single-digit
range. Full-year net written premiums exceeded $100 million level.
-- 9 percent increase in full-year 2012 new business written premiums,
reflecting higher pricing in a market that remains competitive and more
larger-premium accounts, particularly in the fourth quarter.
-- 8.8 percentage-point combined ratio increase for full-year 2012,
reflecting lower net favorable reserve development on prior accident
years as 2011 included an unusually large reduction in IBNR loss and
loss expense estimates.
-- 2.5 percentage-point loss ratio increase for full-year 2012, including a
1.3 point increase in the 2012 ratio for total large losses of $250,000
or more per claim, while the ratio for loss expenses rose 6.6 points.
-- 1.8 percentage-point rise, to 72.8 percent, for full-year ratio of 2012
accident year losses and loss expenses before catastrophes, driven by a
1.2 point increase in the 2012 ratio for new losses of $250,000 or more
per claim.
Life Insurance Operations
(In millions) Three months ended December 31, Twelve months ended December 31,
------------
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Term life insurance $29 $26 12 $115 $105 10
Universal life insurance 12 8 50 34 32 6
Other life insurance, annuity,
and disability income products 7 8 (13) 29 28 4
--- --- --- ---
Earned premiums 48 42 14 178 165 8
Investment income, net of
expenses 35 33 6 138 134 3
Other income - - nm 1 2 (50)
--- --- --- ---
Total revenues, excluding
realized investment gains and
losses 83 75 11 317 301 5
--- --- --- ---
Contract holders benefits 49 51 (4) 185 189 (2)
Underwriting expenses 20 13 54 79 62 27
--- --- --- ---
Total benefits and expenses 69 64 8 264 251 5
--- --- --- ---
Net income before income tax and
realized investment gains and
losses 14 11 27 53 50 6
Income tax 5 4 25 19 18 6
Net income before realized
investment gains and losses $9 $7 29 $34 $32 6
=== === === ===
-- $13 million or 8 percent growth in full-year 2012 earned premiums,
including 10 percent for term life insurance, our largest life insurance
product line.
-- 5 percent rise in face amount of life policies in force to $81.467
billion at December 31, 2012, from $77.691 billion at year-end 2011.
-- $73 million decline to $49 million in full-year 2012 fixed annuity
deposits received, slowing as planned. Cincinnati Life does not offer
variable or indexed products.
-- $2 million higher full-year profit as increased earned premiums,
increased investment income revenues and decreased contract holders
benefits slightly offset increased underwriting expenses. Increased
levels of net death claims, still within our pricing expectations, were
offset by less growth in policy reserves.
-- $87 million or 11 percent full-year 2012 growth to $857 million in GAAP
shareholders' equity for The Cincinnati Life Insurance Company.
Investment and Balance Sheet Highlights
Investment Operations
---------------------
(In millions) Three months ended December 31, Twelve months ended December 31,
------------
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Total investment income, net
of expenses, pretax $136 $132 3 $531 $525 1
---- ---- ---- ----
Investment interest credited
to contract holders (20) (20) 0 (82) (81) (1)
--- --- --- ---
Realized investment gains and
losses summary:
Realized investment gains and
losses 14 18 (22) 74 128 (42)
Change in fair value of
securities with embedded
derivatives - (1) 100 1 (1) 200
Other-than-temporary
impairment charges (1) (24) 96 (33) (57) 42
Total realized investment
gains and losses 13 (7) nm 42 70 (40)
--- --- --- ---
Investment operations profit $129 $105 23 $491 $514 (4)
==== ==== ==== ====
(In millions) Three months ended December 31, Twelve months ended December 31,
------------
2012 2011 Change % 2012 2011 Change %
---- ---- ------- ---- ---- -------
Interest $103 $105 (2) $420 $424 (1)
Dividends 34 27 26 115 104 11
Other - 1 (100) 3 4 (25)
Investment expenses (1) (1) 0 (7) (7) 0
Total investment income, net
of expenses, pretax 136 132 3 531 525 1
Income taxes (33) (32) (3) (129) (129) 0
Total investment income, net
of expenses, after tax $103 $100 3 $402 $396 2
==== ==== ==== ====
Effective tax rate 23.7% 24.4% 24.2% 24.6%
Average invested assets plus
cash and cash equivalents $12,108 $11,353 $11,847 $11,471
Average yield pretax 4.49% 4.65% 4.48% 4.58%
Average yield after tax 3.40% 3.52% 3.39% 3.45%
-- 3 percent and 1 percent growth in fourth-quarter and full-year 2012
pretax investment income, as higher dividends offset a 1 percent decline
in full-year interest income.
-- $386 million or 26 percent full-year 2012 net increase in pretax
unrealized investment portfolio gains, including $210 million in the
equity portfolio. $74 million of pretax net realized gains were
harvested from the investment portfolio during 2012, including $37
million from the equity portfolio.
(Dollars in millions except share At December
data) 31, At December 31,
---------------------------------
2012 2011
---- ----
Balance sheet data
Invested assets $12,534 $11,801
Total assets 16,548 15,635
Short-term debt 104 104
Long-term debt 790 790
Shareholders' equity 5,453 5,033
Book value per share 33.48 31.03
Debt-to-total-capital ratio 14.1% 15.1%
-- $13.021 billion in consolidated cash and invested assets at December 31,
2012, up 6 percent from $12.239 billion at year?end 2011.
-- $9.093 billion bond portfolio at December 31, 2012, with an average
rating of A2/A. Fair value rose $314 million or 4 percent during the
year 2012.
-- $3.373 billion equity portfolio was 26.9 percent of invested assets,
including $1.004 billion in pretax net unrealized gains at December 31,
2012. $417 million or 14 percent full-year 2012 growth in fair value.
-- $3.914 billion of statutory surplus for the property casualty insurance
group at December 31, 2012, up $167 million from $3.747 billion at
year-end 2011, after declaring $300 million in dividends to the parent
company. Ratio of net written premiums to property casualty statutory
surplus for the 12 months ended December 31, 2012, of 0.9-to-1, up from
0.8-to-1 at year-end 2011.
-- Value creation ratio of 12.6 percent for full-year 2012 is the total of
5.2 percent from shareholder dividends and 7.4 percent from the change
in book value per share.
For additional information or to register for our conference call webcast, please visit www.cinfin.com/investors.
Cincinnati Financial Corporation offers business, home and auto insurance, our main business, through The Cincinnati Insurance Company and its two standard market property casualty companies. The same local independent insurance agencies that market those policies may offer products of our other subsidiaries, including life and disability income insurance, fixed annuities and surplus lines property and casualty insurance. For additional information about the company, please visit www.cinfin.com.
Mailing Address: Street Address:
P.O. Box 145496 6200 South Gilmore Road
Cincinnati, Ohio 45250-5496 Fairfield, Ohio 45014-5141
Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2011 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 non-payment 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
-- 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
-- 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
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 (unaudited)
(In millions except per share data) December 31, December 31,
----------------------------------
2012 2011
---- ----
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost: 2012-$8,222; 2011-$8,084) $9,093 $8,779
Equity securities, at fair value (cost:
2012-$2,369; 2011-$2,162) 3,373 2,956
Other invested assets 68 66
Total investments 12,534 11,801
Cash and cash equivalents 487 438
Investment income receivable 115 119
Finance receivable 75 76
Premiums receivable 1,214 1,087
Reinsurance recoverable 615 622
Prepaid reinsurance premiums 26 24
Deferred policy acquisition costs 470 477
Land, building and equipment, net, for
company use (accumulated depreciation:
2012-$397; 2011-$376) 217 227
Other assets 61 93
Separate accounts 734 671
--- ---
Total assets $16,548 $15,635
======= =======
LIABILITIES
Insurance reserves
Loss and loss expense reserves $4,230 $4,339
Life policy and investment contract reserves 2,295 2,214
Unearned premiums 1,792 1,633
Other liabilities 644 517
Deferred income tax 469 303
Note payable 104 104
Long-term debt and capital lease obligations 827 821
Separate accounts 734 671
--- ---
Total liabilities 11,095 10,602
------ ------
SHAREHOLDERS' EQUITY
Common stock, par value-$2 per share;
(authorized: 2012 and 2011-500 million
shares; issued and outstanding: 2012-197
million shares, 2011-196 million shares) 394 393
Paid-in capital 1,134 1,096
Retained earnings 4,021 3,863
Accumulated other comprehensive income 1,129 901
Treasury stock at cost (2012 and 2011-34
million shares) (1,225) (1,220)
------ ------
Total shareholders' equity 5,453 5,033
----- -----
Total liabilities and shareholders' equity $16,548 $15,635
======= =======
Cincinnati Financial Corporation
Condensed Consolidated Statements of Income (unaudited)
------------------------------------------------------
(Dollars in
millions except
per share data) Three months ended Twelve months ended
December 31, December 31,
2012 2011 2012 2011
---- ---- ---- ----
Revenues
Earned premiums $917 $827 $3,522 $3,194
Investment income,
net of expenses 136 132 531 525
Realized investment
gains and
(losses), net 13 (7) 42 70
Fee revenues 2 1 6 4
Other revenues 2 2 10 10
--- --- --- ---
Total revenues 1,070 955 4,111 3,803
----- --- ----- -----
Benefits and
Expenses
Insurance losses
and policyholder
benefits 482 488 2,322 2,524
Underwriting,
acquisition and
insurance expenses 298 264 1,155 1,039
Interest expense 13 14 54 54
Other operating
expenses 4 3 14 13
Total benefits and
expenses 797 769 3,545 3,630
--- --- ----- -----
Income Before
Income Taxes 273 186 566 173
--- --- --- ---
Provision (Benefit)
for Income Taxes
Current 42 36 102 27
Deferred 39 16 43 (18)
Total provision for
income taxes 81 52 145 9
--- --- --- ---
Net Income $192 $134 $421 $164
==== ==== ==== ====
Per Common Share:
Net income-basic $1.18 $0.83 $2.59 $1.01
Net income-diluted $1.17 $0.83 $2.57 $1.01
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2012 reconciliations; prior-period reconciliations available at www.cinfin.com/investors.)
Cincinnati Financial Corporation prepares its public financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual, and therefore is not reconciled to GAAP data.
Management uses certain non-GAAP and non-statutory financial measures to evaluate its primary business areas - property casualty insurance, life insurance and investments. Management uses these measures when analyzing both GAAP and 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 December 31, Twelve months ended December 31,
----------------------
2012 2011 2012 2011
---- ---- ---- ----
Book value change per share
Book value as originally reported December
31, 2011 $31.16 $31.16
Cumulative effect of a change in accounting
for deferred policy
acquisition costs, net of tax (0.13) (0.13)
----- -----
Book value as adjusted December 31, 2011 $31.03 $31.03
====== ======
End of period book value -as
adjusted $33.48 $31.03 $33.48 $31.03
Less beginning of period book value -as
adjusted 32.95 29.41 31.03 30.79
----- ----- ----- -----
Change in book value -as adjusted $0.53 $1.62 $2.45 $0.24
Value creation ratio
End of period book value -as
originally reported $33.48 $31.16 $33.48 $31.16
Less beginning of period book value -as
originally reported 32.95 29.54 31.16 30.91
----- ----- ----- -----
Change in book value -as originally reported 0.53 1.62 2.32 0.25
Dividend declared to shareholders 0.4075 0.4025 1.62 1.6050
------ ------
Total contribution to value
creation ratio $0.9375 $2.0225 $3.94 $1.8550
Contribution to value creation ratio from
change in book value* 1.6% 5.5% 7.4% 0.8%
Contribution to value creation ratio from
dividends declared to shareholders** 1.2 1.3 5.2 5.2
Value creation ratio 2.8% 6.8% 12.6% 6.0%
=== === ==== ===
* 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 Twelve months ended
December 31, December 31,
2012 2011 2012 2011
---- ---- ---- ----
Net
income $192 $134 $421 $164
Net
realized
investment
gains
and
losses 9 (5) 28 45
--- --- --- ---
Operating
income 183 139 393 119
Less
catastrophe
losses (19) 14 (217) (261)
Operating
income
before
catastrophe
losses $202 $125 $610 $380
==== ==== ==== ====
Diluted
per
share
data:
Net
income $1.17 $0.83 $2.57 $1.01
Net
realized
investment
gains
and
losses 0.06 (0.03) 0.17 0.28
---- ----- ---- ----
Operating
income 1.11 0.86 2.40 0.73
Less
catastrophe
losses (0.12) 0.09 (1.33) (1.60)
Operating
income
before
catastrophe
losses $1.23 $0.77 $3.73 $2.33
===== ===== ===== =====
Cincinnati Financial Corporation
Property Casualty Reconciliation
Three months ended December 31, 2012
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $837 $588 $222 $27
Unearned premiums change 32 30 4 (2)
--- --- --- ---
Earned premiums $869 $618 $226 $25
Statutory ratio:
Statutory combined ratio 82.9% 84.1% 80.7% 70.5%
Contribution from catastrophe
losses 3.4 3.1 4.4 1.2
Statutory combined ratio
excluding catastrophe losses 79.5% 81.0% 76.3% 69.3%
==== ==== ==== ====
Commission expense ratio 20.4% 20.2% 20.4% 26.4%
Other expense ratio 12.6 14.2 8.8 5.9
---- ---- --- ---
Statutory expense ratio 33.0% 34.4% 29.2% 32.3%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 81.9% 82.9% 80.0% 71.5%
Contribution from catastrophe
losses 3.4 3.1 4.4 1.2
Prior accident years before
catastrophe losses (12.5) (12.5) (12.3) (15.3)
----- ----- ----- -----
GAAP combined ratio excluding
catastrophe losses and prior
years reserve development 91.0% 92.3% 87.9% 85.6%
==== ==== ==== ====
Twelve months ended December 31, 2012
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $3,482 $2,459 $918 $105
Unearned premiums change (138) (76) (50) (12)
---- --- --- ---
Earned premiums $3,344 $2,383 $868 $93
Statutory ratio:
Statutory combined ratio 95.4% 92.1% 104.0% 100.8%
Contribution from catastrophe
losses 10.0 8.2 15.9 2.2
Statutory combined ratio
excluding catastrophe losses 85.4% 83.9% 88.1% 98.6%
==== ==== ==== ====
Commission expense ratio 18.9% 18.5% 19.3% 25.9%
Other expense ratio 12.6 14.1 9.5 5.5
---- ---- --- ---
Statutory expense ratio 31.5% 32.6% 28.8% 31.4%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 96.1% 92.5% 105.3% 101.0%
Contribution from catastrophe
losses 10.0 8.2 15.9 2.2
Prior accident years before
catastrophe losses (10.7) (11.6) (8.9) (5.6)
----- ----- ---- ----
GAAP combined ratio excluding
catastrophe losses and prior
years reserve development 96.8% 95.9% 98.3% 104.4%
==== ==== ==== =====
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
