CINCINNATI FINANCIAL 
By CINCINNATI, July 25, 2013 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Second-quarter 2013 net income of $110 million, or 66 cents per share,
compared with $32 million, or 20 cents per share, in the second quarter
of 2012.
-- $72 million rise in operating income* to $100 million, or 61 cents per
share, more than tripling the second quarter of 2012 at $28 million, or
17 cents per share.
-- $78 million increase in second-quarter 2013 net income reflected the
after-tax net effect of two primary items: $72 million improvement in
the contribution from property casualty underwriting, including a
favorable effect of $46 million from lower natural catastrophe losses;
plus a $6 million increase from net realized investment gains.
-- $34.83 book value per share at June 30, 2013, up 4 percent from December
31, 2012.
-- 6.4 percent value creation ratio for the first six months of 2013,
compared with 4.2 percent for the first half of 2012.
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Financial Highlights
(Dollars in millions except share data in thousands) Three months ended June 30, Six months ended June 30,
---------------------------------------------------
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Revenue Highlights
Earned premiums $954 $877 9 $1,885 $1,716 10
Investment income, pretax 131 132 (1) 259 263 (2)
Total revenues 1,104 1,020 8 2,207 2,006 10
Income Statement Data
Net income $110 $32 244 $264 $118 124
Net realized investment gains and losses 10 4 150 36 13 177
Operating income* $100 $28 257 $228 $105 117
==== === ==== ====
Per Share Data (diluted)
Net income $0.66 $0.20 230 $1.60 $0.72 122
Net realized investment gains and losses 0.05 0.03 67 0.22 0.07 214
Operating income* $0.61 $0.17 259 $1.38 $0.65 112
===== ===== ===== =====
Book value $34.83 $31.66 10
Cash dividend declared $0.4075 $0.4025 1 $0.815 $0.805 1
Weighted average shares outstanding 165,442 163,514 1 165,151 163,328 1
Insurance Operations Second-Quarter Highlights
-- 96.4 percent second-quarter 2013 property casualty combined ratio,
improved from 109.5 percent for second?quarter 2012.
-- 9 percent increase in second-quarter net written premiums, reflecting
higher pricing and planned growth from strategic initiatives.
-- $139 million second-quarter 2013 property casualty new business written
premiums, up $8 million to a record high for any quarter. Agencies
appointed since the beginning of 2012 contributed $12 million or 9
percent to total second-quarter new business written premiums.
-- 8 cents per share contribution from life insurance operating income to
second-quarter results, up 2 cents from 2012.
Investment and Balance Sheet Highlights
-- 1 percent or $1 million decline in second-quarter 2013 pretax investment
income, as higher stock portfolio dividends nearly offset lower interest
income.
-- 2 percent six-month rise in fair value of invested assets plus cash at
June 30, 2013, including a 15 percent increase for the equity portfolio
that offset a 1 percent decrease for the bond portfolio.
-- $1.338 billion parent company cash and marketable securities at June 30,
2013, up 16 percent from year-end 2012.
The Definitions of Non-GAAP
Information and Reconciliation to
Comparable GAAP Measures on Page
11 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 9).
Profits on the Rise
Steven J. Johnston, president and chief executive officer, commented: "On both a net and operating basis, our earnings rose to the best level for any second quarter and any first half since 2007. Higher insurance underwriting profits drove the improvement, with pretax income from our investment portfolio also contributing at nearly the same satisfactory level reported for last year's second quarter. Our $34 million underwriting profit was the first second-quarter gain we've reported in six years, making this the sixth quarter out of the past seven with underwriting profit."
Lower Catastrophe and Non Catastrophe Insurance Losses
"While unfortunately not the case across the country, the weather this spring was milder, compared with last year's severe storms, for policyholders in our 39 states of operation. Lower catastrophe losses accounted for 9.5 percentage points of our overall 13 points of combined ratio improvement over last year's second quarter. We attribute the other 3.5 points of improvement to the pricing precision we are achieving by leveraging data and analytics, refined underwriting guidelines, loss cost containment measures and increased staff expertise. Improvement took place across all of our property casualty segments, for an overall second-quarter combined ratio of 96.4 percent, including 10.1 points of favorable reserve development. Core underwriting for the first half, before catastrophe losses and prior accident year reserve development, improved nearly 7 points over results reported for the 2012 first half."
Continued Investment in Growth and Long-Term Strength
"Our consolidated property casualty net written premiums rose 9 percent compared with the second quarter of 2012. This growth reflects more adequate and precise pricing, exposure growth, product development and expansion of our agency plant. Healthy production from additional agencies appointed since the beginning of 2012 helped increase total new business premiums by 6 percent, with standard market commercial lines new business reaching $100 million for the first time. Excess and surplus lines new business slowed as we exercised the caution appropriate for current market conditions. Total excess and surplus net written premiums grew 22 percent on renewal price increases.
"Personal lines net written premiums rose 9 percent, with retention of renewing policies in line with our high historical average. As expected, growth of our personal lines new business slowed as a result of rate changes as well as other underwriting actions effective in April. These include use of actual cash value endorsements for older roofs, higher deductible options and a ramped-up inspection program to support accurate pricing for each home.
"We continue to invest capital and effort to improve our risk knowledge, our analytics and the technology we need to further streamline pricing, policy processing and customer service. In 2013, we plan to conduct approximately 80,000 commercial and personal lines property inspections, identifying opportunities to help policyholders control losses and to isolate risk factors to integrate into our pricing analytics. We have invested to hire and develop specialists who bring a higher level of experience and skill to specific aspects of claim management, loss control, analytics and other areas. Every quarter - every day - our associates are determined to do things just a little better, strengthening our ability to compete by supporting the advantages of our local independent agencies. That has been and continues to be our plan for achieving solid financial performance and creating shareholder value over the long term."
Managing Interest Rate Risk
"Interest rates rose in the second quarter, putting pressure on the market value of fixed income securities that typically make up the major portion of insurer portfolios. In our bond portfolio, the lower market values at June 30 offset some of the strong unrealized gains added in recent years. As a result, book value per share at June 30 was $34.83 - better than $33.48 we reported at year-end 2012 but not as good as the $35.41 we reported at the end of first-quarter 2013.
"By design, we have built several advantages that should help soften the negative impact of rising interest rates on book value. First, our portfolio is generally laddered so we will capture higher yield as we reinvest proceeds from interest payments and bond redemptions. Secondly, our equity portfolio - strategically outsized relative to many insurers - gives us steady dividend income, and our equity holdings can be an effective hedge against some of the interest rate risk. Unrealized gains in our equity portfolio rose $38 million to over $1.4 billion during the second quarter. Finally and most importantly, our ongoing initiatives to drive premium growth and improve underwriting profitability of our property casualty insurance operations have been successful. We believe their full impact will continue to benefit future periods. Our insurance business is in excellent shape to provide cash for investment and earnings that support our shareholder dividend and add to book value."
Consolidated Property Casualty Insurance Operations
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Earned premiums $910 $826 10 $1,799 $1,624 11
Fee revenues 2 2 0 2 3 (33)
--- --- --- ---
Total revenues 912 828 10 1,801 1,627 11
Loss and loss expenses 583 640 (9) 1,107 1,179 (6)
Underwriting expenses 295 265 11 582 516 13
Underwriting profit (loss) $34 $(77) nm $112 $(68) nm
=== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 64.0% 77.5% (13.5) 61.5% 72.6% (11.1)
Underwriting expenses 32.4 32.0 0.4 32.4 31.8 0.6
Combined ratio 96.4% 109.5% (13.1) 93.9% 104.4% (10.5)
==== ===== ===== ==== ===== =====
Change % Change %
------- -------
Agency renewal written premiums $879 $798 10 $1,724 $1,560 11
Agency new business written premiums 139 131 6 274 239 15
Other written premiums (34) (26) (31) (44) (53) 17
Net written premiums $984 $903 9 $1,954 $1,746 12
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 64.9% 69.5% (4.6) 61.5% 68.8% (7.3)
Current accident year catastrophe losses 9.2 18.4 (9.2) 5.6 16.2 (10.6)
Prior accident years before catastrophe losses (9.2) (9.8) 0.6 (4.8) (10.8) 6.0
Prior accident years catastrophe losses (0.9) (0.6) (0.3) (0.8) (1.6) 0.8
Loss and loss expense ratio 64.0% 77.5% (13.5) 61.5% 72.6% (11.1)
==== ==== ===== ==== ==== =====
Current accident year combined ratio before
catastrophe losses 97.3% 101.5% (4.2) 93.9% 100.6% (6.7)
==== ===== ==== ==== ===== ====
-- $81 million or 9 percent increase in second-quarter 2013 property
casualty net written premiums and six-month growth of 12 percent. Growth
reflected the effects of strategies for premium growth and higher
pricing.
-- $8 million or 6 percent increase in second-quarter new business premiums
written by agencies, reflecting more precise pricing and contributions
from new agency appointments and other growth initiatives. Six-month new
business premiums increased $35 million, including $18 million from
standard market property casualty production from agencies appointed
prior to the beginning of 2012 and $18 million from appointments since
then, partially offset by a $1 million decrease for excess and surplus
lines.
-- 1,437 agency relationships in 1,804 reporting locations marketing
standard market property casualty insurance products at June 30, 2013,
compared with 1,408 agency relationships in 1,758 reporting locations at
year-end 2012. Sixty-three new agency appointments were made during the
first six months of 2013.
-- 13.1 and 10.5 percentage-point second-quarter and first-half 2013
combined ratio improvement, primarily due to 9.5- and 9.8?point
reductions in losses from natural catastrophes. Improved ratios for
current accident year results before catastrophe losses in part reflect
better pricing and ongoing effects from other recent-year claims
management and loss control initiatives.
-- 7.3 percentage-point improvement, to 61.5 percent, for the six-month
2013 ratio of accident year losses and loss expenses before
catastrophes, despite a 0.3 point increase in the ratio for new losses
of $250,000 or more per claim.
-- 10.1 percentage-point second-quarter 2013 benefit from favorable prior
accident year reserve development of $92 million, compared with 10.4
points or $85 million for second-quarter 2012. Six-month 2013 benefit
before catastrophe losses of 4.8 points was lower than the six-month
2012 benefit of 10.8 points. The decline in six-month favorable reserve
development was primarily due to higher estimates of incurred but not
reported (IBNR) losses in the commercial casualty, commercial auto and
personal auto lines of business.
-- 0.4 and 0.6 percentage-point increase in the second-quarter and
six-month underwriting expense ratios, as higher commissions offset the
positive effects of ongoing expense management efforts and higher earned
premiums.
Insurance Operations Highlights
Commercial Lines Insurance Operations
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Earned premiums $645 $590 9 $1,276 $1,158 10
Fee revenues 1 1 0 1 2 (50)
--- --- --- ---
Total revenues 646 591 9 1,277 1,160 10
Loss and loss expenses 399 413 (3) 764 761 0
Underwriting expenses 213 198 8 421 385 9
Underwriting profit (loss) $34 $(20) nm $92 $14 557
=== ==== === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 61.9% 70.1% (8.2) 59.9% 65.7% (5.8)
Underwriting expenses 33.0 33.4 (0.4) 33.0 33.2 (0.2)
Combined ratio 94.9% 103.5% (8.6) 92.9% 98.9% (6.0)
==== ===== ==== ==== ==== ====
Change % Change %
------- -------
Agency renewal written premiums $602 $552 9 $1,233 $1,123 10
Agency new business written premiums 100 91 10 197 166 19
Other written premiums (24) (17) (41) (24) (37) 35
Net written premiums $678 $626 8 $1,406 $1,252 12
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 64.2% 67.2% (3.0) 61.4% 67.5% (6.1)
Current accident year catastrophe losses 7.9 15.0 (7.1) 4.6 12.2 (7.6)
Prior accident years before catastrophe losses (9.4) (12.3) 2.9 (5.3) (13.0) 7.7
Prior accident years catastrophe losses (0.8) 0.2 (1.0) (0.8) (1.0) 0.2
---- --- ---- ---- ---- ---
Loss and loss expense ratio 61.9% 70.1% (8.2) 59.9% 65.7% (5.8)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before
catastrophe losses 97.2% 100.6% (3.4) 94.4% 100.7% (6.3)
==== ===== ==== ==== ===== ====
-- $52 million or 8 percent increase in second-quarter 2013 commercial
lines net written premiums, primarily due to premium growth strategies
and higher pricing. Twelve percent increase in six-month net written
premiums.
-- $50 million and $110 million rise in second-quarter and six-month
renewal written premiums reflected commercial lines renewal pricing
changes, increasing on average in a mid-single-digit range, in addition
to rising insured exposures.
-- $9 million or 10 percent increase in second-quarter new business written
by agencies, reflecting recent agency appointments and higher pricing.
$31 million six-month increase, with a double-digit growth rate in 24 of
the 39 states where we offer standard market commercial lines policies.
-- 8.6 and 6.0 percentage-point second-quarter and first-half 2013 combined
ratio improvement primarily due to 8.1 and 7.4 point reductions in
losses from natural catastrophes.
-- 6.1 percentage-point improvement, to 61.4 percent, for the six-month
2013 ratio of accident year losses and loss expenses before
catastrophes, despite a 2.0 point increase in the ratio for new losses
of $250,000 or more per claim. Better pricing and ongoing effects from
other recent-year claims and loss control initiatives drove the
improvement.
-- 10.2 percentage-point second-quarter 2013 benefit from favorable prior
accident year reserve development of $66 million, compared with 12.1
points or $72 million for second-quarter 2012. Six-month 2013 benefit
before catastrophe losses of 5.3 points was lower than the six-month
2012 benefit of 13.0 points.
Personal Lines Insurance Operations
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Earned premiums $237 $214 11 $468 $423 11
Fee revenues 1 1 0 1 1 0
--- --- --- ---
Total revenues 238 215 11 469 424 11
Loss and loss expenses 166 210 (21) 307 384 (20)
Underwriting expenses 73 60 22 143 117 22
Underwriting profit (loss) $(1) $(55) 98 $19 $(77) nm
=== ==== === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 69.5% 97.9% (28.4) 65.5% 90.8% (25.3)
Underwriting expenses 30.9 28.2 2.7 30.6 27.8 2.8
Combined ratio 100.4% 126.1% (25.7) 96.1% 118.6% (22.5)
===== ===== ===== ==== ===== =====
Change % Change %
------- -------
Agency renewal written premiums $251 $227 11 $446 $402 11
Agency new business written premiums 30 29 3 58 53 9
Other written premiums (8) (6) (33) (16) (12) (33)
Net written premiums $273 $250 9 $488 $443 10
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 66.8% 75.2% (8.4) 60.9% 71.6% (10.7)
Current accident year catastrophe losses 13.7 29.4 (15.7) 9.3 28.8 (19.5)
Prior accident years before catastrophe losses (9.9) (3.9) (6.0) (3.5) (5.8) 2.3
Prior accident years catastrophe losses (1.1) (2.8) 1.7 (1.2) (3.8) 2.6
---- ---- --- ---- ---- ---
Loss and loss expense ratio 69.5% 97.9% (28.4) 65.5% 90.8% (25.3)
==== ==== ===== ==== ==== =====
Current accident year combined ratio before
catastrophe losses 97.7% 103.4% (5.7) 91.5% 99.4% (7.9)
==== ===== ==== ==== ==== ====
-- $23 million or 9 percent increase in second-quarter 2013 personal lines
net written premiums, largely due to higher renewal written premiums
that reflect rate increases. Ten percent increase in six-month net
written premiums was also largely driven by renewal premium growth.
-- $1 million or 3 percent increase in second-quarter new business written
by agencies, with slowing growth as expected due to underwriting actions
such as expanded use of actual cash value loss settlement for older
roofs.
-- 25.7 and 22.5 percentage-point second-quarter and first-half 2013
combined ratio improvement primarily due to 14.0 and 16.9 point
reductions in losses from natural catastrophes, plus lower loss ratios
before catastrophe losses in part reflecting initiatives to improve
pricing precision.
-- 10.7 percentage-point improvement, to 60.9 percent, for the six-month
2013 ratio of accident year losses and loss expenses before
catastrophes, reflecting better pricing and ongoing effects from other
recent-year initiatives, in addition to a 4.8 point reduction in the
ratio for new losses of $250,000 or more per claim.
-- 11.0 percentage-point second-quarter 2013 benefit from favorable prior
accident year reserve development of $26 million, compared with 6.7
points or $13 million for second-quarter 2012. Six-month 2013 benefit
before catastrophe losses of 3.5 points was lower than the six-month
2012 benefit of 5.8 points.
Excess and Surplus Lines Insurance Operations
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Earned premiums $28 $22 27 $55 $43 28
Loss and loss expenses 18 17 6 36 34 6
Underwriting expenses 9 7 29 18 14 29
Underwriting profit (loss) $1 $(2) nm $1 $(5) nm
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 66.9% 78.8% (11.9) 66.1% 80.1% (14.0)
Underwriting expenses 31.8 31.9 (0.1) 32.3 32.0 0.3
Combined ratio 98.7% 110.7% (12.0) 98.4% 112.1% (13.7)
==== ===== ===== ==== ===== =====
Change % Change %
------- -------
Agency renewal written premiums $26 $19 37 $45 $35 29
Agency new business written premiums 9 11 (18) 19 20 (5)
Other written premiums (2) (3) 33 (4) (4) 0
Net written premiums $33 $27 22 $60 $51 18
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 65.7% 74.6% (8.9) 69.6% 76.4% (6.8)
Current accident year catastrophe losses 0.9 3.2 (2.3) 0.6 2.8 (2.2)
Prior accident years before catastrophe losses (0.7) 0.7 (1.4) (4.7) 0.2 (4.9)
Prior accident years catastrophe losses 1.0 0.3 0.7 0.6 0.7 (0.1)
--- --- --- ---
Loss and loss expense ratio 66.9% 78.8% (11.9) 66.1% 80.1% (14.0)
==== ==== ===== ==== ==== =====
Current accident year combined ratio before
catastrophe losses 97.5% 106.5% (9.0) 101.9% 108.4% (6.5)
==== ===== ==== ===== ===== ====
-- $6 million or 22 percent growth in second-quarter 2013 excess and
surplus lines net written premiums, a growth rate similar to six months
at 18 percent, with growth in both periods driven by renewal written
premiums. Average renewal pricing increased in the low-double-digit
range for both 2013 periods.
-- 12.0 and 13.7 percentage-point combined ratio improvement for
second-quarter and first-half of 2013, primarily due to lower current
accident year losses and loss expenses before catastrophe losses that
largely reflected higher pricing and typical variability from new losses
incurred of $250,000 or more per claim.
-- 6.8 percentage-point improvement, to 69.6 percent, for the six-month
2013 ratio of accident year losses and loss expenses before
catastrophes, including a 3.2 percentage point reduction in the ratio
for new losses of $250,000 or more per claim.
Life Insurance Operations
(In millions) Three months ended June 30, Six months ended June 30,
------------
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Term life insurance $31 $30 3 $60 $57 5
Universal life insurance 4 13 (69) 9 20 (55)
Other life insurance, annuity, and disability income products 9 8 13 17 15 13
--- --- --- ---
Earned premiums 44 51 (14) 86 92 (7)
Investment income, net of expenses 34 34 0 69 68 1
Other income 1 - nm 2 - nm
--- --- --- ---
Total revenues, excluding realized investment gains and losses 79 85 (7) 157 160 (2)
--- --- --- ---
Contract holders' benefits 48 47 2 92 90 2
Operating expenses incurred 12 22 (45) 25 44 (43)
--- --- --- ---
Total benefits and expenses 60 69 (13) 117 134 (13)
--- --- --- ---
Net income before income tax and realized investment gains and losses 19 16 19 40 26 54
Income tax 7 5 40 14 9 56
--- --- --- ---
Net income before realized investment gains and losses $12 $11 9 $26 $17 53
=== === === ===
-- $7 million or 14 percent decrease in second-quarter 2013 earned
premiums, including a 3 percent increase for term life insurance, our
largest life insurance product line. Three- and six-month growth rates
for term life insurance were similar. Universal life insurance premiums
declined due to unlocking of interest rate assumptions that slowed
amortization of unearned front-end loads, with a corresponding decrease
to operating expenses as more expenses were deferred to future periods.
-- $9 million decline to $21 million in first-half 2013 fixed annuity
deposits received, slowing as planned. Cincinnati Life does not offer
variable or indexed products.
-- $9 million increase in six-month 2013 profit, primarily due to lower
operating expenses as first-quarter 2012 included an actuarial
adjustment that decreased reinsurance-related expenses deferred to
future periods.
-- $28 million or 3 percent first-half 2013 decline to $828 million in GAAP
shareholders' equity for The Cincinnati Life Insurance Company.
Investment and Balance Sheet Highlights
Investment Operations
(In millions) Three months ended June 30, Six months ended June 30,
------------
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Total investment income, net of expenses, pretax $131 $132 (1) $259 $263 (2)
---- ---- ---- ----
Investment interest credited to contract holders (18) (20) 10 (39) (41) 5
--- --- --- ---
Realized investment gains and losses summary:
Realized investment gains and losses 14 19 (26) 56 44 27
Change in fair value of securities with embedded derivatives - 1 (100) 1 5 (80)
Other-than-temporary impairment charges - (14) 100 (2) (30) 93
Total realized investment gains and losses 14 6 133 55 19 189
--- --- --- ---
Investment operations profit $127 $118 8 $275 $241 14
==== ==== ==== ====
(In millions) Three months ended June 30, Six months ended June 30,
------------
2013 2012 Change % 2013 2012 Change %
---- ---- ------- ---- ---- -------
Investment income:
Interest $103 $106 (3) $205 $212 (3)
Dividends 30 27 11 57 53 8
Other - 1 (100) 1 2 (50)
Investment expenses (2) (2) 0 (4) (4) 0
Total investment income, net of expenses, pretax 131 132 (1) 259 263 (2)
Income taxes (32) (32) 0 (63) (64) 2
Total investment income, net of expenses, after-tax $99 $100 (1) $196 $199 (2)
=== ==== ==== ====
Effective tax rate 24.1% 24.5% 24.2% 24.4%
Average yield pretax 4.14% 4.48% 4.16% 4.52%
Average yield after-tax 3.13% 3.40% 3.15% 3.42%
-- 1 percent decline in second-quarter 2013 pretax investment income,
largely reflecting lower bond interest income and other investment
income from life insurance policy loans.
-- $244 million or 11 percent second-quarter 2013 net decrease in pretax
unrealized investment portfolio gains, including a $38 million increase
for the equity portfolio. $14 million of pretax net realized gains were
from investment portfolio security sales or called bonds during the
second quarter of 2013, including $12 million from the equity portfolio.
(Dollars in millions except share
data) At June 30, At December 31,
---------------------------------
2013 2012
---- ----
Balance sheet data:
Invested assets $12,933 $12,534
Total assets 17,034 16,548
Short-term debt 104 104
Long-term debt 790 790
Shareholders' equity 5,699 5,453
Book value per share 34.83 33.48
Debt-to-total-capital ratio 13.6% 14.1%
-- $13.315 billion in consolidated cash and invested assets at June 30,
2013, up 2 percent from $13.021 billion at year-end 2012.
-- $8.992 billion bond portfolio at June 30, 2013, with an average rating
of A2/A. Fair value declined $177 million or 2 percent during the second
quarter of 2013.
-- $3.875 billion equity portfolio was 30.0 percent of invested assets,
including $1.423 billion in pretax net unrealized gains at June 30,
2013. $74 million or 2 percent second-quarter 2013 growth in fair value.
-- $4.142 billion of statutory surplus for the property casualty insurance
group at June 30, 2013, up $228 million from $3.914 billion at year-end
2012, after declaring $175 million in dividends to the parent company.
The ratio of net written premiums to property casualty statutory surplus
for the 12 months ended June 30, 2013, was 0.9-to-1, unchanged from
year-end 2012.
-- Value creation ratio of 6.4 percent for first six months of 2013
included 4.2 percent from net income before net realized investment
gains and 2.0 percent from investment portfolio realized gains and
changes in unrealized gains.
For additional information or to register for our conference call webcast, please visit cinfin.com/investors.
Cincinnati Financial Corporation offers business, home and auto insurance, our main business, through The Cincinnati Insurance Company and its two standard market property casualty companies. The same local independent insurance agencies that market those policies may offer products of our other subsidiaries, including life and disability income insurance, fixed annuities and surplus lines property and casualty insurance. For additional information about the company, please visit cinfin.com.
Mailing Address: Street Address:
P.O. Box 145496 6200 South Gilmore Road
Cincinnati, Ohio 45250-5496 Fairfield, Ohio 45014-5141
Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2012 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 26.
Factors that could cause or contribute to such differences include, but are not limited to:
-- Unusually high levels of catastrophe losses due to risk concentrations,
changes in weather patterns, environmental events, terrorism incidents
or other causes
-- Increased frequency and/or severity of claims
-- Inadequate estimates or assumptions used for critical accounting
estimates
-- Recession or other economic conditions resulting in lower demand for
insurance products or increased payment delinquencies
-- Declines in overall stock market values negatively affecting the
company's equity portfolio and book value
-- Events resulting in capital market or credit market uncertainty,
followed by prolonged periods of economic instability or recession, that
lead to:
-- Significant or prolonged decline in the value of a particular
security or group of securities and impairment of the asset(s)
-- Significant decline in investment income due to reduced or
eliminated dividend payouts from a particular security or group of
securities
-- Significant rise in losses from surety and director and officer
policies written for financial institutions or other insured
entities
-- Prolonged low interest rate environment or other factors that limit the
company's ability to generate growth in investment income or interest
rate fluctuations that result in declining values of fixed-maturity
investments, including declines in accounts in which we hold bank-owned
life insurance contract assets
-- Increased competition that could result in a significant reduction in
the company's premium volume
-- Delays or performance inadequacies from ongoing development and
implementation of underwriting and pricing methods or technology
projects and enhancements expected to increase our pricing accuracy,
underwriting profit and competitiveness
-- Changing consumer insurance-buying habits and consolidation of
independent insurance agencies that could alter our competitive
advantages
-- Inability to obtain adequate reinsurance on acceptable terms, amount of
reinsurance purchased, financial strength of reinsurers and the
potential for nonpayment or delay in payment by reinsurers
-- Difficulties with technology or data security breaches, including cyber
attacks, that could negatively affect our ability to conduct business
and our relationships with agents, policyholders and others
-- Inability to defer policy acquisition costs for any business segment if
pricing and loss trends would lead management to conclude that segment
could not achieve sustainable profitability
-- Events or conditions that could weaken or harm the company's
relationships with its independent agencies and hamper opportunities to
add new agencies, resulting in limitations on the company's
opportunities for growth, such as:
-- Downgrades of the company's financial strength ratings
-- Concerns that doing business with the company is too difficult
-- Perceptions that the company's level of service, particularly claims
service, is no longer a distinguishing characteristic in the
marketplace
-- Actions of insurance departments, state attorneys general or other
regulatory agencies, including a change to a federal system of
regulation from a state-based system, that:
-- Impose new obligations on us that increase our expenses or change
the assumptions underlying our critical accounting estimates
-- Place the insurance industry under greater regulatory scrutiny or
result in new statutes, rules and regulations
-- Restrict our ability to exit or reduce writings of unprofitable
coverages or lines of business
-- Add assessments for guaranty funds, other insurance related
assessments or mandatory reinsurance arrangements; or that impair
our ability to recover such assessments through future surcharges or
other rate changes
-- Increase our provision for federal income taxes due to changes in
tax law
-- Increase our other expenses
-- Limit our ability to set fair, adequate and reasonable rates
-- Place us at a disadvantage in the marketplace
-- Restrict our ability to execute our business model, including the
way we compensate agents
-- Adverse outcomes from litigation or administrative proceedings
-- Events or actions, including unauthorized intentional circumvention of
controls, that reduce the company's future ability to maintain effective
internal control over financial reporting under the Sarbanes-Oxley Act
of 2002
-- Unforeseen departure of certain executive officers or other key
employees due to retirement, health or other causes that could interrupt
progress toward important strategic goals or diminish the effectiveness
of certain longstanding relationships with insurance agents and others
-- Events, such as an epidemic, natural catastrophe or terrorism, that
could hamper our ability to assemble our workforce at our headquarters
location
Further, the company's insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation
Condensed Consolidated Balance Sheets and Statements of Income (unaudited)
(Dollars in millions) June 30, December 31,
2013 2012
---- ----
Assets
Investments $12,933 $12,534
Cash and cash equivalents 382 487
Premiums receivable 1,350 1,214
Reinsurance recoverable 582 615
Other assets 1,787 1,698
Total assets $17,034 $16,548
======= =======
Liabilities
Insurance reserves $6,629 $6,525
Unearned premiums 1,947 1,792
Deferred income tax 512 453
Long-term debt and capital lease obligations 833 827
Other liabilities 1,414 1,498
----- -----
Total liabilities 11,335 11,095
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,558 1,528
Retained earnings 4,152 4,021
Accumulated other comprehensive income 1,221 1,129
Treasury stock (1,232) (1,225)
------ ------
Total shareholders' equity 5,699 5,453
----- -----
Total liabilities and shareholders' equity $17,034 $16,548
======= =======
(Dollars in millions except per share data) Three months ended June 30, Six months ended June 30,
2013 2012 2013 2012
---- ---- ---- ----
Revenues
Earned premiums $954 $877 $1,885 $1,716
Investment income, net of expenses 131 132 259 263
Realized investment gains and losses, net 14 6 55 19
Other revenues 5 5 8 8
--- --- --- ---
Total revenues 1,104 1,020 2,207 2,006
----- ----- ----- -----
Benefits and Expenses
Insurance losses and policyholder benefits 631 687 1,199 1,269
Underwriting, acquisition and insurance expenses 307 287 607 561
Interest expense 14 13 27 27
Other operating expenses 4 4 9 8
Total benefits and expenses 956 991 1,842 1,865
--- --- ----- -----
Income Before Income Taxes 148 29 365 141
--- --- --- ---
Provision (Benefit) for Income Taxes 38 (3) 101 23
--- --- --- ---
Net Income $110 $32 $264 $118
==== === ==== ====
Per Common Share:
Net income-basic $0.67 $0.20 $1.62 $0.73
Net income-diluted 0.66 0.20 1.60 0.72
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2013 reconciliations; prior-period reconciliations available at cinfin.com/investors.)
Cincinnati Financial Corporation prepares its public financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual, and therefore is not reconciled to GAAP data.
Management uses certain non-GAAP and non-statutory financial measures to evaluate its primary business areas - property casualty insurance, life insurance and investments. Management uses these measures when analyzing both GAAP and non-GAAP measures to improve its understanding of trends in the underlying business and to help avoid incorrect or misleading assumptions and conclusions about the success or failure of company strategies. Management adjustments to GAAP measures generally: apply to non-recurring events that are unrelated to business performance and distort short-term results; involve values that fluctuate based on events outside of management's control; or relate to accounting refinements that affect comparability between periods, creating a need to analyze data on the same basis.
-- Operating income: Operating income is calculated by excluding net
realized investment gains and losses (defined as realized investment
gains and losses after applicable federal and state income taxes) from
net income. Management evaluates operating income to measure the success
of pricing, rate and underwriting strategies. While realized investment
gains (or losses) are integral to the company's insurance operations
over the long term, the determination to realize investment gains or
losses in any period may be subject to management's discretion and is
independent of the insurance underwriting process. Also, under
applicable GAAP accounting requirements, gains and losses can be
recognized from certain changes in market values of securities without
actual realization. Management believes that the level of realized
investment gains or losses for any particular period, while it may be
material, may not fully indicate the performance of ongoing underlying
business operations in that period. For these reasons, many investors
and shareholders consider operating income to be one of the more
meaningful measures for evaluating insurance company performance. Equity
analysts who report on the insurance industry and the company generally
focus on this metric in their analyses. The company presents operating
income so that all investors have what management believes to be a
useful supplement to GAAP information.
-- Value creation ratio: This is a measure of shareholder value creation
that management believes captures the contribution of the company's
insurance operations, the success of its investment strategy and the
importance placed on paying cash dividends to shareholders. The value
creation ratio measure is made up of two primary components: (1) rate of
growth in book value per share plus (2) the ratio of dividends declared
per share to beginning book value per share. Management believes this
non-GAAP measure is a useful supplement to GAAP information, providing a
meaningful measure of long-term progress in creating shareholder value.
It is intended to be all-inclusive regarding changes in book value per
share, and uses originally reported book value per share in cases where
book value per share has been adjusted, such as adoption of Accounting
Standards Updates with a cumulative effect of a change in accounting.
-- Statutory accounting rules: For public reporting, insurance companies
prepare financial statements in accordance with GAAP. However, insurers
also must calculate certain data according to statutory accounting rules
as defined in the NAIC's Accounting Practices and Procedures Manual,
which may be, and has been, modified by various state insurance
departments. Statutory data is publicly available, and various
organizations use it to calculate aggregate industry data, study
industry trends and compare insurance companies.
-- Written premium: Under statutory accounting rules, property casualty
written premium is the amount recorded for policies issued and
recognized on an annualized basis at the effective date of the policy.
Management analyzes trends in written premium to assess business
efforts. Earned premium, used in both statutory and GAAP accounting, is
calculated ratably over the policy term. The difference between written
and earned premium is unearned premium.
Cincinnati Financial Corporation
Balance Sheet Reconciliation
(Dollars are per share) Three months ended June 30, Six months ended June 30,
----------------------
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 ratio:
End of period book value - as originally reported $34.83 $31.66 $34.83 $31.66
Less beginning of period book value - as originally reported 35.41 32.07 33.48 31.16
----- ----- ----- -----
Change in book value - as originally reported (0.58) (0.41) 1.35 0.50
Dividend declared to shareholders 0.4075 0.4025 0.815 0.805
------ -----
Total contribution to value creation ratio $(0.1725) $(0.0075) $2.1650 $1.305
Contribution to value creation ratio from change in book value* (1.6)% (1.3)% 4.0% 1.6%
Contribution to value creation ratio from dividends declared to shareholders** 1.2 1.3 2.4 2.6
Value creation ratio (0.4)% 0.0% 6.4% 4.2%
===== === === ===
* Change in book value divided by the beginning of period book value as originally reported
** Dividend declared to shareholders divided by beginning of period book value as originally reported
Net Income Reconciliation
(In millions except per share data) Three months ended June 30, Six months ended June 30,
2013 2012 2013 2012
---- ---- ---- ----
Net income $110 $32 $264 $118
Net realized investment gains and losses 10 4 36 13
--- --- --- ---
Operating income 100 28 228 105
Less catastrophe losses (49) (96) (56) (154)
Operating income before catastrophe losses $149 $124 $284 $259
==== ==== ==== ====
Diluted per share data:
Net income $0.66 $0.20 $1.60 $0.72
Net realized investment gains and losses 0.05 0.03 0.22 0.07
---- ---- ---- ----
Operating income 0.61 0.17 1.38 0.65
Less catastrophe losses (0.30) (0.59) (0.34) (0.94)
Operating income before catastrophe losses $0.91 $0.76 $1.72 $1.59
===== ===== ===== =====
Cincinnati Financial Corporation
Property Casualty Reconciliation
Three months ended June 30, 2013
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $984 $678 $273 $33
Unearned premiums change (74) (33) (36) (5)
--- --- --- ---
Earned premiums $910 $645 $237 $28
Statutory ratio:
Statutory combined ratio 94.6% 93.4% 98.0% 97.8%
Contribution from catastrophe losses 8.3 7.1 12.6 1.9
Statutory combined ratio excluding catastrophe losses 86.3% 86.3% 85.4% 95.9%
==== ==== ==== ====
Commission expense ratio 18.5% 17.9% 19.0% 26.3%
Other expense ratio 12.1 13.6 9.5 4.6
---- ---- --- ---
Statutory expense ratio 30.6% 31.5% 28.5% 30.9%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 96.4% 94.9% 100.4% 98.7%
Contribution from catastrophe losses 8.3 7.1 12.6 1.9
Prior accident years before catastrophe losses (9.2) (9.4) (9.9) (0.7)
---- ---- ---- ----
GAAP combined ratio excluding catastrophe losses and prior
accident years 97.3% 97.2% 97.7% 97.5%
==== ==== ==== ====
Six months ended June 30, 2013
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $1,954 $1,406 $488 $60
Unearned premiums change (155) (130) (20) (5)
---- ---- --- ---
Earned premiums $1,799 $1,276 $468 $55
Statutory ratio:
Statutory combined ratio 91.8% 90.1% 95.9% 98.1%
Contribution from catastrophe losses 4.8 3.8 8.1 1.2
Statutory combined ratio excluding catastrophe losses 87.0% 86.3% 87.8% 96.9%
==== ==== ==== ====
Commission expense ratio 18.2% 17.2% 20.2% 26.6%
Other expense ratio 12.1 13.0 10.2 5.4
---- ---- ---- ---
Statutory expense ratio 30.3% 30.2% 30.4% 32.0%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 93.9% 92.9% 96.1% 98.4%
Contribution from catastrophe losses 4.8 3.8 8.1 1.2
Prior accident years before catastrophe losses (4.8) (5.3) (3.5) (4.7)
---- ---- ---- ----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development 93.9% 94.4% 91.5% 101.9%
==== ==== ==== =====
Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on dollar amounts in thousands.
SOURCE Cincinnati Financial Corporation
