CINCINNATI FINANCIAL 
By CINCINNATI, Feb. 5, 2014 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Fourth-quarter 2013 net income of $122 million, or 74 cents per share,
compared with $192 million, or $1.17 per share, in the fourth quarter of
2012.
-- Full-year 2013 net income of $517 million, or $3.12 per share, up 23
percent from $421 million, or $2.57, in 2012. Operating income of $463
million, or $2.80 per share, up 18 percent from $393 million, or $2.40
per share.
-- $70 million decrease in fourth-quarter 2013 net income reflected the
after-tax net effect of two primary items: $65 million decrease in the
contribution from property casualty underwriting - primarily due to less
benefit from favorable prior accident year reserve development - and a
$6 million decrease from net realized investment gains.
-- $37.21 book value per share at December 31, 2013, up 11.1 percent from
December 31, 2012.
-- 16.1 percent value creation ratio for full-year 2013, compared with 12.6
percent for 2012.
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Financial Highlights
(In millions except per share data) Three months ended December Twelve months ended December
31, 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Revenue Data
Earned premiums $1,025 $917 12 $3,902 $3,522 11
Investment income, pretax 137 136 1 529 531 0
Total revenues 1,172 1,070 10 4,531 4,111 10
Income Statement Data
Net income $122 $192 (36) $517 $421 23
Net realized investment gains and losses 3 9 (67) 54 28 93
--- ---
Operating income* $119 $183 (35) $463 $393 18
==== ==== ==== ====
Per Share Data (diluted)
Net income $0.74 $1.17 (37) $3.12 $2.57 21
Net realized investment gains and losses 0.02 0.06 (67) 0.32 0.17 88
Operating income* $0.72 $1.11 (35) $2.80 $2.40 17
===== ===== ===== =====
Book value $37.21 $33.48 11
Cash dividend declared $0.42 $0.4075 3 $1.655 $1.62 2
Weighted average shares outstanding 165.7 164.2 1 165.4 163.7 1
----------------------------------- ----- ----- --- ----- ----- ---
* 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 Fourth-Quarter Highlights
-- 93.9 percent fourth-quarter 2013 property casualty combined ratio, up
from 81.9 percent for fourth-quarter 2012. Full-year 2013 property
casualty combined ratio at 93.8%, with a 12 percent increase in net
written premiums.
-- 8 percent increase in fourth-quarter net written premiums, reflecting
higher pricing and growth initiatives.
-- $128 million fourth-quarter 2013 property casualty new business written
premiums. Agencies appointed since the beginning of 2012 contributed $15
million or 12 percent to total fourth-quarter new business written
premiums.
-- 6 cents per share contribution from life insurance operating income to
fourth-quarter results, up 1 cent from 2012.
Investment and Balance Sheet Highlights
-- 1 percent or $1 million rise in fourth-quarter 2013 pretax investment
income, including a 3 percent increase in stock portfolio dividends.
-- 8 percent full-year rise in fair value of invested assets plus cash at
December 31, 2013, including a 28 percent increase for the stock
portfolio and a 1 percent increase for the bond portfolio.
-- $1.532 billion parent company cash and marketable securities at year-end
2013, up 33 percent from a year ago.
Achieving Planned Results
Steven J. Johnston, president and chief executive officer, commented: "Steady growth and improved core underwriting profitability of our insurance business contributed to full-year operating income of $463 million, our best result since 2007. Consolidated direct written premiums passed the $4.3 billion mark, on a pace to reach $5 billion by the end of 2015.
"Our long-term investment approach again produced satisfactory results. Pretax investment income rose to $137 million for the quarter, up slightly from last year's fourth quarter when we benefited from dividend acceleration."
Focusing on Underwriting Profitability
"Our ongoing initiatives to improve property casualty underwriting gained momentum in 2013, assisted by lower-than-average catastrophe losses. Our fourth-quarter and full-year combined ratios both came in at below 94 percent, a healthy result. While we continue to follow our consistent and prudent reserving approach, this quarter didn't have the benefit we had in last year's fourth quarter from high favorable development of reserves. Core underwriting improved substantially, as indicated by 4.0 percentage points of ratio improvement for full-year 2013 loss and loss expenses before catastrophe losses and reserve development for prior accident years.
"Double-digit growth of renewal premiums led the way to strong net written premium growth in 2013, and our agents provided another record year of new business. We successfully maintained commercial lines price increases averaging in the mid-single-digit range in the fourth-quarter and throughout 2013. Use of data analytics and modeling continue to increase our pricing precision and our confidence that we know the appropriate price for each piece of business when competing for accounts. We also have an advantage in our three-year commercial package policy, which reduces administrative burdens for agents and policyholders and supports stable commercial lines pricing.
"Our personal lines operation continues to make progress, producing a satisfactory 96.8 percent 2013 combined ratio. We are seeing benefits roll on from ongoing initiatives to increase our agency representation, geographic diversification and rate adequacy. Personal lines earned premiums in our smaller premium volume states, including several we've targeted for growth due to less catastrophe exposure, in aggregate rose 17 percent for the year, compared with a 6 percent increase in our four highest volume states."
Maintaining Our Momentum
"The positive results we're seeing now reflect diligent execution of deliberate growth and profitability strategies, and we expect further benefits to accrue over time.
"Looking out to the future, we have invested in associates with specialized knowledge in loss control and claims management, launching a robust program of property inspections. This effort benefits policyholders by identifying opportunities to prevent losses, while also identifying risk characteristics that increase the accuracy of our pricing matrix. We are ramping up inspections and internal expertise again in 2014.
"Using the same proven approach that improved results in our workers' compensation and property lines of business in 2012 and 2013, multi-departmental task forces are taking a deep dive into areas where there is room to realize additional benefits. These initiatives have a long runway, and we believe they'll strengthen our future performance."
Confidence in the Future
"Our $13.5 billion investment portfolio, with over 30 percent in stocks, is also well positioned to perform over the long term. In 2013, the portfolio's fair value rose 8 percent, with pretax unrealized gains rising 25 percent to $2.3 billion. Our value creation ratio of 16.1 percent outpaced our target range of averaging 10 to 13 percent over any five-year period. Working together, we are executing on our plans to deliver a great insurance experience to agents and policyholders and to deliver solid rewards for our shareholders, such as the 11 percent rise in book value during 2013 to $37.21 and dividend payments that have increased annually for 53 consecutive years."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Operations
(In millions) Three months ended Twelve months ended
December 31, December 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $960 $869 10 $3,713 $3,344 11
Fee revenues 1 2 (50) 4 6 (33)
--- --- --- ---
Total revenues 961 871 10 3,717 3,350 11
Loss and loss expenses 601 433 39 2,301 2,137 8
Underwriting expenses 300 278 8 1,183 1,076 10
Underwriting profit $60 $160 (63) $233 $137 70
=== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 62.6% 49.9% 12.7 61.9% 63.9% (2.0)
Underwriting expenses 31.3 32.0 (0.7) 31.9 32.2 (0.3)
---- ---- ---- ---- ---- ----
Combined ratio 93.9% 81.9% 12.0 93.8% 96.1% (2.3)
==== ==== ==== ==== ==== ====
% Change % Change
Agency renewal written premiums $854 $771 11 $3,493 $3,138 11
Agency new business written premiums 128 132 (3) 543 501 8
Other written premiums (74) (66) (12) (143) (157) 9
Net written premiums $908 $837 8 $3,893 $3,482 12
==== ==== ====== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 59.9% 59.0% 0.9 60.6% 64.6% (4.0)
Current accident year catastrophe losses 3.5 3.4 0.1 5.4 11.1 (5.7)
Prior accident years before catastrophe losses (0.5) (12.5) 12.0 (3.3) (10.7) 7.4
Prior accident years catastrophe losses (0.3) 0.0 (0.3) (0.8) (1.1) 0.3
Loss and loss expense ratio 62.6% 49.9% 12.7 61.9% 63.9% (2.0)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before
catastrophe losses 91.2% 91.0% 0.2 92.5% 96.8% (4.3)
==== ==== === ==== ==== ====
-- 8 percent and 12 percent growth in fourth-quarter and full-year 2013
property casualty net written premiums. Full?year renewal written
premiums increase of 11 percent reflects higher pricing and premium
growth initiatives.
-- $42 million increase to a record high $543 million in 2013 new business
written by agencies. $31 million of the increase was from standard
market property casualty new business produced by agencies appointed
since the beginning of 2012 and $7 million from appointments before
that, in addition to $4 million from excess and surplus lines.
-- 1,450 agency relationships in 1,823 reporting locations marketing
standard market property casualty insurance products at December 31,
2013, compared with 1,408 agency relationships in 1,758 reporting
locations at year?end 2012. During 2013, 96 new agency appointments were
made.
-- 12.0 percentage-point rise in fourth-quarter 2013 combined ratio,
reflecting an 11.5 point difference between estimates of incurred but
not reported (IBNR) losses and loss expenses for the two time periods.
-- 2.3 percentage-point full-year combined ratio improvement. Benefits from
natural catastrophe losses that were 5.4 points lower, better pricing
and other underwriting and loss cost management efforts were partially
offset by a 4.7 percentage-point increase from higher estimates of IBNR
for noncatastrophe losses and loss expenses.
-- 4.0 percentage-point improvement, to 60.6 percent, for full-year ratio
of 2013 accident year losses and loss expenses before catastrophes.
-- 0.8 and 4.1 percentage-point fourth-quarter and full-year 2013 benefit
from favorable prior accident year reserve development of $8 million and
$148 million, compared with 12.5 points and 11.8 points from $109
million and $396 million of development for the same periods of 2012.
The lower fourth-quarter and full-year favorable reserve development was
primarily due to higher estimates of IBNR losses and loss expenses in
longer-tail lines of business.
-- Slightly lower fourth-quarter and full-year underwriting expense ratios,
largely reflecting expense management efforts and higher earned
premiums.
Commercial Lines Insurance Operations
(In millions) Three months ended Twelve months ended
December 31, December 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $680 $618 10 $2,636 $2,383 11
Fee revenues 1 2 (50) 3 4 (25)
--- --- --- ---
Total revenues 681 620 10 2,639 2,387 11
Loss and loss expenses 411 307 34 1,596 1,420 12
Underwriting expenses 219 206 6 857 786 9
--- --- --- ---
Underwriting profit $51 $107 (52) $186 $181 3
=== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 60.4% 49.7% 10.7 60.5% 59.5% 1.0
Underwriting expenses 32.3 33.2 (0.9) 32.5 33.0 (0.5)
Combined ratio 92.7% 82.9% 9.8 93.0% 92.5% 0.5
==== ==== === ==== ==== ===
% Change % Change
-------- --------
Agency renewal written premiums $606 $549 10 $2,471 $2,229 11
Agency new business written premiums 92 96 (4) 391 352 11
Other written premiums (63) (57) (11) (102) (122) 16
Net written premiums $635 $588 8 $2,760 $2,459 12
==== ==== ====== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 58.8% 59.1% (0.3) 59.8% 62.9% (3.1)
Current accident year catastrophe losses 2.3 3.0 (0.7) 4.3 8.9 (4.6)
Prior accident years before catastrophe losses (0.1) (12.5) 12.4 (3.0) (11.6) 8.6
Prior accident years catastrophe losses (0.6) 0.1 (0.7) (0.6) (0.7) 0.1
Loss and loss expense ratio 60.4% 49.7% 10.7 60.5% 59.5% 1.0
==== ==== ==== ==== ==== ===
Current accident year combined ratio before
catastrophe losses 91.1% 92.3% (1.2) 92.3% 95.9% (3.6)
==== ==== ==== ==== ==== ====
-- 8 percent and 12 percent growth in fourth-quarter and full-year 2013
commercial lines net written premiums, primarily due to higher renewal
written premiums that reflect higher pricing and the effect of premium
growth initiatives.
-- $57 million and $242 million increase in fourth-quarter and full-year
renewal written premiums, reflecting fourth?quarter and full-year 2013
commercial lines pricing changes that increased on average in a
mid-single-digit range in addition to rising insured exposures.
-- $39 million rise in full-year new business written by agencies,
reflecting recent-year growth initiatives, with double?digit growth in
17 of the 39 states where we offer standard market commercial lines
policies.
-- 9.8 percentage-point rise in fourth-quarter 2013 combined ratio,
reflecting an 8.5 point increase from higher estimates of IBNR losses
and loss expenses.
-- 0.5 percentage-point rise in full-year combined ratio, as a 4.5 point
improvement from lower natural catastrophe losses was offset by a 6.4
point increase from higher estimates of IBNR for noncatastrophe losses
and loss expenses.
-- 3.1 percentage-point improvement, to 59.8 percent, for full-year ratio
of 2013 accident year losses and loss expenses before catastrophes.
Better pricing and ongoing effects from other recent-year claims and
loss control initiatives drove the improvement.
-- 0.7 and 3.6 percentage-point fourth-quarter and full-year 2013 benefit
from favorable prior accident year reserve development of $5 million and
$96 million, compared with 12.4 points and 12.3 points from $76 million
and $292 million of development for the same periods of 2012.
Personal Lines Insurance Operations
(In millions) Three months ended December Twelve months ended December
31, 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $249 $226 10 $961 $868 11
Fee revenues - - nm 1 2 (50)
--- --- --- ---
Total revenues 249 226 10 962 870 11
Loss and loss expenses 177 116 53 639 652 (2)
Underwriting expenses 72 64 13 290 261 11
--- --- --- ---
Underwriting profit (loss) $0 $46 nm $33 $(43) nm
=== === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 71.4% 51.5% 19.9 66.6% 75.2% (8.6)
Underwriting expenses 28.9 28.5 0.4 30.2 30.1 0.1
Combined ratio 100.3% 80.0% 20.3 96.8% 105.3% (8.5)
===== ==== ==== ==== ===== ====
% Change % Change
Agency renewal written premiums $224 $203 10 $928 $836 11
Agency new business written premiums 24 27 (11) 110 111 (1)
Other written premiums (9) (8) (13) (33) (29) (14)
Net written premiums $239 $222 8 $1,005 $918 9
==== ==== ====== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 62.6% 59.4% 3.2 61.9% 68.2% (6.3)
Current accident year catastrophe losses 7.4 4.6 2.8 8.8 18.4 (9.6)
Prior accident years before catastrophe losses 1.1 (12.3) 13.4 (3.0) (8.9) 5.9
Prior accident years catastrophe losses 0.3 (0.2) 0.5 (1.1) (2.5) 1.4
Loss and loss expense ratio 71.4% 51.5% 19.9 66.6% 75.2% (8.6)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before
catastrophe losses 91.5% 87.9% 3.6 92.1% 98.3% (6.2)
==== ==== === ==== ==== ====
-- 8 percent and 9 percent growth in fourth-quarter and full-year 2013
personal lines net written premiums, driven by increases in renewal
written premiums.
-- 6 percent increase in full-year 2013 earned premiums in aggregate from
our four highest volume states where we offer personal lines policies,
while rising 17 percent for all other states in aggregate as we progress
toward geographic diversification.
-- 1 percent reduction in full-year 2013 new business written premium,
declining as expected due to underwriting actions such as expanded use
of higher deductibles and actual cash value loss settlement for older
roofs.
-- 20.3 percentage-point rise in fourth-quarter 2013 combined ratio,
reflecting a 19.0 point increase from higher estimates of IBNR losses
and loss expenses.
-- 8.5 percentage-point full-year combined ratio improvement, including 8.2
points from lower natural catastrophe losses.
-- 6.3 percentage-point improvement, to 61.9 percent, for full-year ratio
of 2013 accident year losses and loss expenses before catastrophes,
reflecting better pricing and ongoing effects from other recent-year
initiatives, in addition to a 2.1 point reduction in the ratio for new
losses of $250,000 or more per claim.
-- 1.4 percentage-point fourth-quarter unfavorable effect from prior
accident year reserve development of $3 million, driven by loss
expenses, compared with 12.5 points from $29 million of favorable
development for the fourth quarter of 2012. 4.1 percentage-point
full-year 2013 benefit from favorable development of $39 million,
compared with 11.4 points from $99 million of development for 2012, as
2013 ratios were higher for both IBNR and case?basis experience for
individual claims.
Excess and Surplus Lines Insurance Operations
(In millions) Three months ended Twelve months ended
December 31, December 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $31 $25 24 $116 $93 25
Loss and loss expenses 13 10 30 66 65 2
Underwriting expenses 9 8 13 36 29 24
--- --- --- ---
Underwriting profit (loss) $9 $7 29 $14 $(1) nm
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 41.0% 38.2% 2.8 56.7% 69.4% (12.7)
Underwriting expenses 29.4 33.3 (3.9) 31.1 31.6 (0.5)
---- ---- ---- ---- ---- ----
Combined ratio 70.4% 71.5% (1.1) 87.8% 101.0% (13.2)
==== ==== ==== ==== ==== =====
% Change % Change
Agency renewal written premiums $24 $19 26 $94 $73 29
Agency new business written premiums 12 9 33 42 38 11
Other written premiums (2) (1) (100) (8) (6) (33)
Net written premiums $34 $27 26 $128 $105 22
=== === ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 62.6% 52.3% 10.3 67.1% 72.8% (5.7)
Current accident year catastrophe losses (1.9) 1.4 (3.3) 0.7 2.1 (1.4)
Prior accident years before catastrophe losses (19.9) (15.3) (4.6) (11.2) (5.6) (5.6)
Prior accident years catastrophe losses 0.2 (0.2) 0.4 0.1 0.1 0.0
Loss and loss expense ratio 41.0% 38.2% 2.8 56.7% 69.4% (12.7)
==== ==== === ==== ==== =====
Current accident year combined ratio before
catastrophe losses 92.0% 85.6% 6.4 98.2% 104.4% (6.2)
==== ==== === ==== ==== ====
-- 26 percent and 22 percent growth in fourth-quarter and full-year 2013
excess and surplus lines net written premiums, largely due to the
opportunity to renew many accounts for the first time. Also contributing
to growth were average full-year renewal price increases in a
high-single-digit range.
-- 11 percent increase in full-year 2013 new business written premiums,
reflecting the benefit of additional excess and surplus lines field
marketing representatives.
-- 13.2 percentage-point combined ratio improvement for full-year 2013,
largely due to lower current accident year losses and loss expenses
before catastrophe losses and a larger benefit from favorable prior
accident year reserve development.
-- 5.7 percentage-point improvement, to 67.1 percent, for full-year ratio
of 2013 accident year losses and loss expenses before catastrophes,
including a 3.3 point reduction in the 2013 ratio for new losses of
$250,000 or more per claim.
Life Insurance Operations
(In millions) Three months ended Twelve months ended
December 31, December 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Term life insurance $30 $29 3 $122 $115 6
Universal life insurance 27 12 125 35 34 3
Other life insurance, annuity, and disability income 8 7 14 32 29 10
products
Earned premiums 65 48 35 189 178 6
Investment income, net of expenses 36 35 3 140 138 1
Other income 1 - nm 4 1 300
--- --- --- ---
Total revenues, excluding realized investment gains 102 83 23 333 317 5
and losses
Contract holders' benefits 63 49 29 204 185 10
Operating expenses incurred 24 20 20 60 79 (24)
--- --- --- ---
Total benefits and expenses 87 69 26 264 264 0
--- --- --- ---
Net income before income tax and realized 15 14 7 69 53 30
investment gains and losses
Income tax 6 5 20 25 19 32
Net income before realized investment gains $9 $9 0 $44 $34 29
and losses
-- $11 million or 6 percent increase in full-year 2013 earned premiums,
including a 6 percent increase for term life insurance, our largest life
insurance product line. Fourth-quarter 2013 universal life insurance
premiums rose due to unlocking of actuarial assumptions that increased
the amortization of unearned front-end loads, with a corresponding
increase to operating expenses as less expenses were deferred to future
periods.
-- $11 million decline to $38 million in full-year 2013 fixed annuity
deposits received, slowing as planned. Cincinnati Life does not offer
variable or indexed products.
-- $10 million increase in full-year 2013 profit, primarily due to more
favorable mortality experience and lower operating expenses as
first-quarter 2012 included an actuarial adjustment that decreased
reinsurance-related expenses deferred to future periods.
-- $24 million or 3 percent full-year 2013 decline to $833 million in GAAP
shareholders' equity for The Cincinnati Life Insurance Company,
reflecting a decrease in fair value of the fixed-maturity portfolio due
to a rise in interest rates.
Investment Operations Highlights
(In millions) Three months ended December Twelve months ended
31, December 31,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Total investment income, net of expenses, pretax $137 $136 1 $529 $531 0
---- ---- ---- ----
Investment interest credited to contract holders (20) (20) 0 (80) (82) 2
--- --- --- ---
Realized investment gains and losses summary:
Realized investment gains and losses 4 14 (71) 82 74 11
Change in fair value of securities with embedded 2 - nm 3 1 200
derivatives
Other-than-temporary impairment charges - (1) 100 (2) (33) 94
--- --- --- ---
Total realized investment gains and losses 6 13 (54) 83 42 98
Investment operations profit $123 $129 (5) $532 $491 8
==== ==== ==== ====
Investment income:
Interest $104 $103 1 $413 $420 (2)
Dividends 35 34 3 122 115 6
Other 1 - nm 3 3 0
Investment expenses (3) (1) (200) (9) (7) 29
--- --- --- ---
Total investment income, net of expenses, pretax 137 136 1 529 531 0
Income taxes (33) (33) 0 (128) (129) 1
--- --- ---- ----
Total investment income, net of expenses, after-tax $104 $103 1 $401 $402 0
==== ==== ==== ====
Effective tax rate 23.9% 23.7% 24.1% 24.2%
Average invested assets plus cash and cash $13,290 $12,108 $12,833 $11,847
equivalents
Average yield pretax 4.12% 4.49% 4.12% 4.48%
Average yield after-tax 3.13 3.40 3.12 3.39
Effective fixed-maturity tax rate 27.2 26.9 27.1 26.9
Average fixed-maturity at amortized cost $8,595 $8,228 $8,455 $8,153
Average fixed-maturity yield pretax 4.84% 5.01% 4.88% 5.15%
Average fixed-maturity yield after-tax 3.52 3.66 3.56 3.77
-- 1 percent rise in fourth-quarter 2013 investment income, as continued
dividend growth was accompanied by modest interest income growth. 4.12
percent fourth-quarter 2013 pretax average yield matched third-quarter
2013.
-- $460 million or 25 percent full-year 2013 net increase in pretax
unrealized investment portfolio gains, including an $849 million
increase for the equity portfolio. $76 million of pretax net realized
gains were from investment portfolio security sales or called bonds
during 2013, including $64 million from the equity portfolio.
Balance Sheet Highlights
(In millions except per At At
share data) December December
31, 31,
2013 2012
---- ----
Balance sheet data:
Invested assets $13,564 $12,534
Total assets 17,662 16,548
Short-term debt 104 104
Long-term debt 790 790
Shareholders' equity 6,070 5,453
Book value per share 37.21 33.48
Debt-to-total-capital
ratio 12.8% 14.1%
--------------------- ---- ----
-- $13.997 billion in consolidated cash and invested assets at December 31,
2013, up 7 percent from $13.021 billion at year-end 2012.
-- 1 million shares repurchased during the fourth quarter of 2013, at an
average cost of $52.13.
-- $9.169 billion bond portfolio at December 31, 2013, with an average
rating of A2/A. Fair value increased $131 million or 1 percent during
the fourth quarter of 2013.
-- $4.327 billion equity portfolio was 31.9 percent of invested assets,
including $1.854 billion in pretax net unrealized gains at December 31,
2013. $343 million or 9 percent fourth-quarter 2013 growth in fair
value.
-- $4.326 billion of statutory surplus for the property casualty insurance
group at December 31, 2013, up $412 million from $3.914 billion at
year-end 2012, after declaring $375 million in dividends to the parent
company. The ratio of net written premiums to property casualty
statutory surplus for the 12 months ended December 31, 2013, was
0.9-to-1, unchanged from year-end 2012.
-- Value creation ratio of 16.1 percent for full-year 2013 included 8.5
percent from net income before net realized investment gains and 6.4
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 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 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 (unaudited)
(In millions except per share data) December December
31, 31,
2013 2012
---- ----
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2013-$8,688; 2012-$8,222) $9,169 $9,093
Equity securities, at fair value (cost: 2013-$2,473; 2012-$2,369) 4,327 3,373
Other invested assets 68 68
--- ---
Total investments 13,564 12,534
Cash and cash equivalents 433 487
Investment income receivable 121 115
Finance receivable 85 75
Premiums receivable 1,346 1,214
Reinsurance recoverable 547 615
Prepaid reinsurance premiums 26 26
Deferred policy acquisition costs 565 470
Land, building and equipment, net, for company use (accumulated depreciation: 210 217
2013-$420; 2012-$397)
Other assets 73 61
Separate accounts 692 734
--- ---
Total assets $17,662 $16,548
======= =======
LIABILITIES
Insurance reserves
Loss and loss expense reserves $4,311 $4,230
Life policy and investment contract reserves 2,390 2,295
Unearned premiums 1,976 1,792
Other liabilities 611 660
Deferred income tax 673 453
Note payable 104 104
Long-term debt and capital lease obligations 835 827
Separate accounts 692 734
--- ---
Total liabilities 11,592 11,095
------ ------
SHAREHOLDERS' EQUITY
Common stock, par value-$2 per share; (authorized: 2013 and 2012-500 million shares; 397 394
issued and outstanding: 2013-198 million shares, 2012-197 million shares)
Paid-in capital 1,191 1,134
Retained earnings 4,268 4,021
Accumulated other comprehensive income 1,504 1,129
Treasury stock at cost (2013-35 million shares and 2012-34 million shares) (1,290) (1,225)
------ ------
Total shareholders' equity 6,070 5,453
----- -----
Total liabilities and shareholders' equity $17,662 $16,548
======= =======
Cincinnati Financial Corporation
Condensed Consolidated Statements of Income (unaudited)
(In millions except per share data) Three months ended December Twelve months ended December
31, 31,
2013 2012 2013 2012
---- ---- ---- ----
REVENUES
Earned premiums $1,025 $917 $3,902 $3,522
Investment income, net of expenses 137 136 529 531
Realized investment gains and losses, net 6 13 83 42
Fee revenues 2 3 8 7
Other revenues 2 1 9 9
Total revenues 1,172 1,070 4,531 4,111
----- ----- ----- -----
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits 664 482 2,505 2,322
Underwriting, acquisition and insurance expenses 324 298 1,243 1,155
Interest expense 14 13 54 54
Other operating expenses 3 4 15 14
--- --- --- ---
Total benefits and expenses 1,005 797 3,817 3,545
----- --- ----- -----
INCOME BEFORE INCOME TAXES 167 273 714 566
--- --- --- ---
PROVISION FOR INCOME TAXES
Current 41 59 178 119
Deferred 4 22 19 26
--- --- --- ---
Total provision for income taxes 45 81 197 145
--- --- --- ---
NET INCOME $122 $192 $517 $421
==== ==== ==== ====
PER COMMON SHARE:
Net income-basic $0.75 $1.18 $3.16 $2.59
Net income-diluted 0.74 1.17 3.12 2.57
------------------ ---- ---- ---- ----
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
(Per share data) Three months ended December Twelve months ended December
31, 31,
2013 2012 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 per share data:
End of period book value - as originally reported $37.21 $33.48 $37.21 $33.48
Less beginning of period book value - as originally reported 35.51 32.95 33.48 31.16
----- ----- ----- -----
Change in book value - as originally reported 1.70 0.53 3.73 2.32
Dividend declared to shareholders 0.42 0.4075 1.655 1.62
----- ----
Total contribution to value creation ratio $2.12 $0.9375 $5.385 $3.94
===== ======= ====== =====
Contribution to value creation ratio:
From change in book value* 4.8% 1.6% 11.1% 7.4%
From dividends declared to shareholders** 1.2 1.2 5.0 5.2
Value creation ratio 6.0% 2.8% 16.1% 12.6%
=== === ==== ====
* 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 December Twelve months ended December
31, 31,
2013 2012 2013 2012
---- ---- ---- ----
Net income $122 $192 $517 $421
Net realized investment gains and losses 3 9 54 28
--- --- --- ---
Operating income 119 183 463 393
Less catastrophe losses (20) (19) (112) (217)
----
Operating income before catastrophe losses $139 $202 $575 $610
==== ==== ==== ====
Diluted per share data:
Net income $0.74 $1.17 $3.12 $2.57
Net realized investment gains and losses 0.02 0.06 0.32 0.17
---- ---- ---- ----
Operating income 0.72 1.11 2.80 2.40
Less catastrophe losses (0.12) (0.12) (0.67) (1.33)
Operating income before catastrophe losses $0.84 $1.23 $3.47 $3.73
===== ===== ===== =====
Cincinnati Financial Corporation
Property Casualty Operations Reconciliation
(In millions) Three months ended December 31, 2013
Consolidated Commercial Personal E&S
----------- ---------- -------- ---
Premiums:
Written premiums $908 $635 $239 $34
Unearned premiums change 52 45 10 (3)
--- --- --- ---
Earned premiums $960 $680 $249 $31
==== ==== ==== ===
Statutory ratios:
Statutory combined ratio 95.4% 94.4% 101.5% 70.9%
Contribution from catastrophe losses 3.2 1.7 7.7 (1.7)
Statutory combined ratio excluding catastrophe losses 92.2% 92.7% 93.8% 72.6%
==== ==== ==== ====
Commission expense ratio 19.5% 19.1% 19.5% 25.9%
Other expense ratio 13.3 14.9 10.6 4.0
Statutory expense ratio 32.8% 34.0% 30.1% 29.9%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 93.9% 92.7% 100.3% 70.4%
Contribution from catastrophe losses 3.2 1.7 7.7 (1.7)
Prior accident years before catastrophe losses (0.5) (0.1) 1.1 (19.9)
---- ---- --- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development 91.2% 91.1% 91.5% 92.0%
==== ==== ==== ====
(In millions) Twelve months ended December 31, 2013
Consolidated Commercial Personal E&S
----------- --------- -------- ---
Premiums:
Written premiums $3,893 $2,760 $1,005 $128
Unearned premiums change (180) (124) (44) (12)
---- ---- --- ---
Earned premiums $3,713 $2,636 $961 $116
====== ====== ==== ====
Statutory ratios:
Statutory combined ratio 92.7% 91.8% 96.3% 87.8%
Contribution from catastrophe losses 4.6 3.7 7.7 0.8
Statutory combined ratio excluding catastrophe losses 88.1% 88.1% 88.6% 87.0%
==== ==== ==== ====
Commission expense ratio 18.6% 17.8% 19.7% 26.3%
Other expense ratio 12.2 13.5 10.0 4.8
Statutory expense ratio 30.8% 31.3% 29.7% 31.1%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 93.8% 93.0% 96.8% 87.8%
Contribution from catastrophe losses 4.6 3.7 7.7 0.8
Prior accident years before catastrophe losses (3.3) (3.0) (3.0) (11.2)
---- ---- ---- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development 92.5% 92.3% 92.1% 98.2%
==== ==== ==== ====
SOURCE Cincinnati Financial Corporation
