CINCINNATI FINANCIAL 
By CINCINNATI, Oct. 24, 2013 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Third-quarter 2013 net income of $131 million, or 79 cents per share,
compared with $111 million, or 68 cents per share, in the third quarter
of 2012.
-- $11 million rise in operating income* to $116 million, or 70 cents per
share, up from $105 million, or 64 cents per share.
-- $20 million increase in third-quarter 2013 net income reflected the
after-tax net effect of two primary items: $10 million improvement in
the contribution from property casualty underwriting, including a
favorable effect of $9 million from lower natural catastrophe losses;
plus a $9 million increase from net realized investment gains.
-- $35.51 book value per share at September 30, 2013, up 6.1 percent from
December 31, 2012.
-- 9.8 percent value creation ratio for the first nine months of 2013,
compared with 9.6 percent for the same period of 2012.
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Financial Highlights
(Dollars in millions except share data in thousands)
Three months ended September 30, Nine months ended September 30,
---
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Revenue Highlights
Earned premiums $992 $889 12 $2,877 $2,605 10
Investment income, pretax 133 132 1 392 395 (1)
Total revenues 1,152 1,035 11 3,359 3,041 10
Income Statement Data
Net income $131 $111 18 $395 $229 72
Net realized investment gains and losses 15 6 150 51 19 168
--- ---
Operating income* $116 $105 10 $344 $210 64
==== ==== ==== ====
Per Share Data (diluted)
Net income $0.79 $0.68 16 $2.39 $1.40 71
Net realized investment gains and losses 0.09 0.04 125 0.31 0.11 182
Operating income* $0.70 $0.64 9 $2.08 $1.29 61
===== ===== ===== =====
Book value $35.51 $32.95 8
Cash dividend declared $0.4200 $0.4075 3 $1.2350 $1.2125 2
Weighted average shares outstanding 165,601 163,857 1 165,304 163,507 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 Third-Quarter Highlights
-- 93.7 percent third-quarter 2013 property casualty combined ratio,
improved from 94.8 percent for third-quarter 2012.
-- 15 percent increase in third-quarter net written premiums, reflecting
higher pricing and planned growth from strategic initiatives.
-- $141 million third-quarter 2013 property casualty new business written
premiums, up $11 million to a record high for any quarter. Agencies
appointed since the beginning of 2012 contributed $13 million or 9
percent to total third-quarter new business written premiums.
-- 6 cents per share contribution from life insurance operating income to
third-quarter results, up 1 cent from 2012.
Investment and Balance Sheet Highlights
-- 1 percent or $1 million rise in third-quarter 2013 pretax investment
income, as higher stock portfolio dividends offset lower interest
income.
-- 4 percent nine-month rise in fair value of invested assets plus cash at
September 30, 2013, including an 18 percent increase for the equity
portfolio that offset a 1 percent decrease for the bond portfolio.
-- $1.539 billion parent company cash and marketable securities at
September 30, 2013, up 33 percent from year-end 2012.
Strong Third-Quarter Performance
Steven J. Johnston, president and chief executive officer, commented: "Our operating income rose to our best-ever third-quarter result. Initiatives to increase the profitability and growth of our insurance business led our strong performance as property casualty net written premiums surpassed $1 billion for the first time in any quarter.
"Pretax income from our investment portfolio also continued to contribute at a satisfactory level slightly above what we reported for last year's third quarter, reflecting our relatively large allocation to high-quality, dividend-paying stocks. The equity portfolio represents approximately 30 percent of our invested assets.
"Our strong 93.7 percent combined ratio benefited from improved weather, with catastrophes adding just 5.7 percentage points - an impact in line with long-term historical averages. Our consistent approach to setting loss reserves resulted in 4.0 points in favorable development on losses from prior accident years.
"Our improved combined ratio translated to a $173 million underwriting profit for the first nine months of 2013 compared with a $23 million underwriting loss for the same period of 2012. We are achieving better quality core underwriting, as indicated by 5.8 percentage points of improvement in our nine-month loss and loss expense ratio for the current accident year before catastrophe losses."
High-Quality Insurance Business
"As our use of analytics and modeling matures for our property casualty insurance business, we are looking more granularly at pricing for each risk. While price increases may average in the mid-single digits overall, we're getting more rate on the policies that need it and succeeding at retaining policies that have already achieved price adequacy.
"Improvement in personal lines, evident in the segment's 18.7-percentage-point drop in the nine-month combined ratio, reflects higher rates in addition to recent initiatives to improve pricing precision and risk selection. Lower catastrophe losses also contributed to the combined ratio improvement. The current accident year loss and loss expense ratio before catastrophe losses improved 9.8 percentage points over last year's nine-month result. As expected, our successful initiatives to improve profitability are slowing the growth of new personal lines business.
"Overall, Cincinnati-style service continues to win record new business from our independent agents. We are taking this opportunity to reinvest in our business. We're hiring specialists who bring additional value to our agents and their clients in the forms of loss mitigation and inspection services. We're developing new product suites that arm our agents with advantages to attract certain niche business.
"Our steady advances in technology also are making it easier for our agents to do business with us. We are working to make our CinciPak(TM) and workers' compensation products available through our commercial lines policy administration system in additional states, increasing efficiency for agents in order to earn a larger share of their good business."
Delivering Results for Investors
"At September 30, our book value per share rose 6 percent from the year-end value with healthy contributions from both operating earnings and gains in our stock portfolio. Our year-to-date value creation ratio, reflecting book value changes and dividends declared, rose from 6.4 percent at June 30 to 9.8 percent at September 30.
"During the third quarter, our board of directors recognized the improvements our initiatives are bringing by increasing the fourth-quarter shareholder dividend to 42 cents per share, raising the indicated annual dividend for a 53(rd) consecutive year - a record only nine other U.S. publicly owned companies can claim."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Operations
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $954 $851 12 $2,753 $2,475 11
Fee revenues 1 1 0 3 4 (25)
--- --- --- ---
Total revenues 955 852 12 2,756 2,479 11
Loss and loss expenses 593 525 13 1,700 1,704 0
Underwriting expenses 301 282 7 883 798 11
Underwriting profit (loss) $61 $45 36 $173 $(23) nm
=== === ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 62.2% 61.7% 0.5 61.7% 68.9% (7.2)
Underwriting expenses 31.5 33.1 (1.6) 32.1 32.2 (0.1)
---- ---- ---- ---- ---- ----
Combined ratio 93.7% 94.8% (1.1) 93.8% 101.1% (7.3)
==== ==== ==== ==== ===== ====
% Change % Change
Agency renewal written premiums $915 $807 13 $2,639 $2,367 11
Agency new business written premiums 141 130 8 415 369 12
Other written premiums (25) (38) 34 (69) (91) 24
Net written premiums $1,031 $899 15 $2,985 $2,645 13
====== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 59.5% 62.3% (2.8) 60.8% 66.6% (5.8)
Current accident year catastrophe losses 6.7 9.4 (2.7) 6.0 13.9 (7.9)
Prior accident years before catastrophe losses (3.0) (8.6) 5.6 (4.2) (10.0) 5.8
Prior accident years catastrophe losses (1.0) (1.4) 0.4 (0.9) (1.6) 0.7
Loss and loss expense ratio 62.2% 61.7% 0.5 61.7% 68.9% (7.2)
==== ==== === ==== ==== ====
Current accident year combined ratio before
catastrophe losses 91.0% 95.4% (4.4) 92.9% 98.8% (5.9)
==== ==== ==== ==== ==== ====
-- $132 million or 15 percent increase in third-quarter 2013 property
casualty net written premiums and nine-month growth of 13 percent.
Growth reflected the effects of initiatives for premium growth and
higher pricing.
-- $11 million or 8 percent increase in third-quarter new business premiums
written by agencies, reflecting more precise pricing and contributions
from new agency appointments and other growth initiatives. Nine-month
new business premiums increased $46 million, including $25 million from
standard market property casualty production from agencies appointed
prior to the beginning of 2012 and $20 million from appointments since
then, in addition to $1 million from excess and surplus lines.
-- 1,439 agency relationships in 1,811 reporting locations marketing
standard market property casualty insurance products at September 30,
2013, compared with 1,408 agency relationships in 1,758 reporting
locations at year-end 2012. Seventy-eight new agency appointments were
made during the first nine months of 2013.
-- 1.1 and 7.3 percentage-point third-quarter and nine-month 2013 combined
ratio improvement, reflecting 2.3- and 7.2-point reductions in losses
from natural catastrophes.
-- 5.8 percentage-point improvement, to 60.8 percent, for the nine-month
2013 ratio of accident year losses and loss expenses before
catastrophes, in part due to better pricing and ongoing effects from
other recent-year claims management and loss control initiatives.
-- 4.0 percentage-point third-quarter 2013 benefit from favorable prior
accident year reserve development of $38 million, compared with 10.0
points or $86 million for third-quarter 2012. Nine-month 2013 benefit
before catastrophe losses of 4.2 points was lower than the nine-month
2012 benefit of 10.0 points. The lower third-quarter and nine-month
favorable reserve development was primarily due to higher estimates of
incurred but not reported (IBNR) losses in the commercial casualty and
workers' compensation lines of business.
-- 1.6 percentage-point decrease in the third-quarter underwriting expense
ratio, as third-quarter 2012 included unusually high costs for assigned
risk insurance pools.
Commercial Lines Insurance Operations
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $680 $607 12 $1,956 $1,765 11
Fee revenues 1 - nm 2 2 0
--- --- --- ---
Total revenues 681 607 12 1,958 1,767 11
Loss and loss expenses 421 352 20 1,185 1,113 6
Underwriting expenses 217 195 11 638 580 10
--- --- --- ---
Underwriting profit $43 $60 (28) $135 $74 82
=== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 61.9% 58.0% 3.9 60.6% 63.0% (2.4)
Underwriting expenses 31.8 32.2 (0.4) 32.6 32.9 (0.3)
Combined ratio 93.7% 90.2% 3.5 93.2% 95.9% (2.7)
==== ==== === ==== ==== ====
% Change % Change
-------- --------
Agency renewal written premiums $632 $557 13 $1,865 $1,680 11
Agency new business written premiums 102 90 13 299 256 17
Other written premiums (15) (28) 46 (39) (65) 40
Net written premiums $719 $619 16 $2,125 $1,871 14
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 57.9% 58.3% (0.4) 60.2% 64.3% (4.1)
Current accident year catastrophe losses 6.0 8.6 (2.6) 5.1 10.9 (5.8)
Prior accident years before catastrophe losses (1.4) (7.8) 6.4 (4.0) (11.2) 7.2
Prior accident years catastrophe losses (0.6) (1.1) 0.5 (0.7) (1.0) 0.3
Loss and loss expense ratio 61.9% 58.0% 3.9 60.6% 63.0% (2.4)
==== ==== === ==== ==== ====
Current accident year combined ratio before
catastrophe losses 89.7% 90.5% (0.8) 92.8% 97.2% (4.4)
==== ==== ==== ==== ==== ====
-- $100 million or 16 percent increase in third-quarter 2013 commercial
lines net written premiums, primarily due to premium growth initiatives
and higher pricing. Fourteen percent increase in nine-month net written
premiums.
-- $75 million and $185 million rise in third-quarter and nine-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.
-- $12 million or 13 percent increase in third-quarter new business written
by agencies, reflecting recent agency appointments and higher pricing.
$43 million nine-month increase, with a double-digit growth rate in 23
of the 39 states where we offer standard market commercial lines
policies.
-- 3.5 percentage-point rise in third-quarter 2013 combined ratio,
primarily due to less benefit from favorable prior accident year reserve
development for the commercial casualty and workers' compensation lines
of business. The 2.7 percentage-point improvement in the nine-month 2013
ratio reflected a 5.5 point reduction in losses from natural
catastrophes.
-- 4.1 percentage-point improvement, to 60.2 percent, for the nine-month
2013 ratio of 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.
-- 2.0 percentage-point third-quarter 2013 benefit from favorable prior
accident year reserve development of $13 million, compared with 8.9
points or $54 million for third-quarter 2012. Nine-month 2013 benefit
before catastrophe losses of 4.0 points was lower than the nine-month
2012 benefit of 11.2 points.
Personal Lines Insurance Operations
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $244 $219 11 $712 $642 11
Fee revenues - 1 (100) 1 2 (50)
--- --- --- ---
Total revenues 244 220 11 713 644 11
Loss and loss expenses 155 152 2 462 536 (14)
Underwriting expenses 75 80 (6) 218 197 11
--- --- --- ---
Underwriting profit (loss) $14 $(12) nm $33 $(89) nm
=== ==== === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 63.7% 69.5% (5.8) 64.8% 83.6% (18.8)
Underwriting expenses 30.8 36.2 (5.4) 30.7 30.6 0.1
Combined ratio 94.5% 105.7% (11.2) 95.5% 114.2% (18.7)
==== ===== ===== ==== ===== =====
% Change % Change
Agency renewal written premiums $258 $231 12 $704 $633 11
Agency new business written premiums 28 31 (10) 86 84 2
Other written premiums (8) (9) 11 (24) (21) (14)
Net written premiums $278 $253 10 $766 $696 10
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 63.0% 70.5% (7.5) 61.5% 71.3% (9.8)
Current accident year catastrophe losses 9.1 12.5 (3.4) 9.2 23.2 (14.0)
Prior accident years before catastrophe losses (6.3) (11.2) 4.9 (4.4) (7.6) 3.2
Prior accident years catastrophe losses (2.1) (2.3) 0.2 (1.5) (3.3) 1.8
Loss and loss expense ratio 63.7% 69.5% (5.8) 64.8% 83.6% (18.8)
==== ==== ==== ==== ==== =====
Current accident year combined ratio before
catastrophe losses 93.8% 106.7% (12.9) 92.2% 101.9% (9.7)
==== ===== ===== ==== ===== ====
-- $25 million or 10 percent increase in third-quarter 2013 personal lines
net written premiums, largely due to higher renewal written premiums
that reflect rate increases. The 10 percent increase in nine-month net
written premiums was also largely driven by renewal premium growth.
-- $3 million or 10 percent decrease in third-quarter new business written
by agencies, declining as expected due to underwriting actions such as
expanded use of higher deductibles and actual cash value loss settlement
for older roofs.
-- 11.2 and 18.7 percentage-point third-quarter and nine-month 2013
combined ratio improvement including 3.2 and 12.2 point reductions in
losses from natural catastrophes, with lower loss ratios before
catastrophe losses in part reflecting initiatives to improve pricing
precision.
-- 9.8 percentage-point improvement, to 61.5 percent, for the nine-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 2.7 point reduction in the
ratio for new losses of $250,000 or more per claim.
-- 8.4 percentage-point third-quarter 2013 benefit from favorable prior
accident year reserve development of $21 million, compared with 13.5
points or $31 million for third-quarter 2012. Nine-month 2013 benefit
before catastrophe losses of 4.4 points was lower than the nine-month
2012 benefit of 7.6 points.
Excess and Surplus Lines Insurance Operations
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Earned premiums $30 $25 20 $85 $68 25
Loss and loss expenses 17 21 (19) 53 55 (4)
Underwriting expenses 9 7 29 27 21 29
--- --- --- ---
Underwriting profit (loss) $4 $(3) nm $5 $(8) nm
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 56.0% 82.2% (26.2) 62.5% 80.9% (18.4)
Underwriting expenses 30.7 29.3 1.4 31.7 31.0 0.7
---- ---- --- ---- ---- ---
Combined ratio 86.7% 111.5% (24.8) 94.2% 111.9% (17.7)
==== ===== ===== ==== ===== =====
% Change % Change
Agency renewal written premiums $25 $19 32 $70 $54 30
Agency new business written premiums 11 9 22 30 29 3
Other written premiums (2) (1) (100) (6) (5) (20)
Net written premiums $34 $27 26 $94 $78 21
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 67.2% 87.5% (20.3) 68.7% 80.4% (11.7)
Current accident year catastrophe losses 3.4 1.4 2.0 1.6 2.3 (0.7)
Prior accident years before catastrophe losses (13.7) (6.0) (7.7) (7.9) (2.0) (5.9)
Prior accident years catastrophe losses (0.9) (0.7) (0.2) 0.1 0.2 (0.1)
Loss and loss expense ratio 56.0% 82.2% (26.2) 62.5% 80.9% (18.4)
==== ==== ===== ==== ==== =====
Current accident year combined ratio before
catastrophe losses 97.9% 116.8% (18.9) 100.4% 111.4% (11.0)
==== ===== ===== ===== ===== =====
-- $7 million or 26 percent growth in third-quarter 2013 excess and surplus
lines net written premiums, a growth rate similar to nine months at 21
percent, with growth in both periods driven by renewal written premiums.
Average renewal pricing increased in the high-single-digit range for
both 2013 periods.
-- 24.8 and 17.7 percentage-point combined ratio improvement for the
third-quarter and first nine months of 2013, primarily due to lower
current accident year losses and loss expenses before catastrophe
losses, which largely reflected higher pricing and typical variability
from new losses incurred of $250,000 or more per claim.
-- 11.7 percentage-point improvement, to 68.7 percent, for the nine-month
2013 ratio of accident year losses and loss expenses before
catastrophes, including a 5.0 percentage-point reduction in the ratio
for new losses of $250,000 or more per claim.
Life Insurance Operations
(In millions) Three months ended September 30, Nine months ended September 30,
------------
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Term life insurance $32 $29 10 $92 $86 7
Universal life insurance (1) 2 nm 8 22 (64)
Other life insurance, annuity, and disability income products 7 7 0 24 22 9
--- --- --- ---
Earned premiums 38 38 0 124 130 (5)
Investment income, net of expenses 35 35 0 104 103 1
Other income 1 1 0 3 1 200
--- --- --- ---
Total revenues, excluding realized investment gains and losses 74 74 0 231 234 (1)
--- ---
Contract holders' benefits 49 46 7 141 136 4
Operating expenses incurred 11 14 (21) 36 59 (39)
--- --- --- ---
Total benefits and expenses 60 60 0 177 195 (9)
--- --- --- ---
Net income before income tax and realized investment gains and losses 14 14 0 54 39 38
Income tax 5 5 0 19 14 36
Net income before realized investment gains and losses $9 $9 0 $35 $25 40
=== === === ===
-- $6 million or 5 percent decrease in nine-month 2013 earned premiums,
including a 7 percent increase for term life insurance, our largest life
insurance product line. Third-quarter 2013 term life insurance premium
growth was offset by a decline in universal life insurance premiums.
Nine-month 2013 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.
-- $13 million decline to $29 million in nine-month 2013 fixed annuity
deposits received, slowing as planned. Cincinnati Life does not offer
variable or indexed products.
-- $10 million increase in nine-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.
-- $22 million or 3 percent nine-month 2013 decline to $835 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 and Balance Sheet Highlights
Investment Operations
(In millions) Three months ended September 30, Nine months ended September 30,
------------
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Total investment income, net of expenses, pretax $133 $132 1 $392 $395 (1)
---- ---- ---- ----
Investment interest credited to contract holders (21) (21) 0 (60) (62) 3
--- --- --- ---
Realized investment gains and losses summary:
Realized investment gains and losses 22 16 38 78 60 30
Change in fair value of securities with embedded derivatives - (4) 100 1 1 0
Other-than-temporary impairment charges - (2) 100 (2) (32) 94
--- --- --- ---
Total realized investment gains and losses 22 10 120 77 29 166
Investment operations profit $134 $121 11 $409 $362 13
==== ==== ==== ====
(In millions) Three months ended September 30, Nine months ended September 30,
------------
2013 2012 % Change 2013 2012 % Change
---- ---- -------- ---- ---- --------
Investment income:
Interest $104 $105 (1) $309 $317 (3)
Dividends 30 28 7 87 81 7
Other 1 1 0 2 3 (33)
Investment expenses (2) (2) 0 (6) (6) 0
--- --- --- ---
Total investment income, net of expenses, pretax 133 132 1 392 395 (1)
Income taxes (32) (32) 0 (95) (96) 1
--- --- --- ---
Total investment income, net of expenses, after-tax $101 $100 1 $297 $299 (1)
==== ==== ==== ====
Effective tax rate 24.1% 24.4% 24.2% 24.4%
Average yield pretax 4.12 4.44 4.15 4.46
Average yield after-tax 3.13 3.36 3.14 3.38
-- 1 percent rise in third-quarter 2013 pretax investment income, as 7
percent growth in equity portfolio dividends offset a 1 percent decline
in interest income.
-- $62 million or 3 percent third-quarter 2013 net increase in pretax
unrealized investment portfolio gains, including a $90 million increase
for the equity portfolio. $20 million of pretax net realized gains were
from investment portfolio security sales or called bonds during the
third quarter of 2013, including $15 million from the equity portfolio.
(Dollars in millions except share data) At September 30, At December 31,
--------------------------------------
2013 2012
---- ----
Balance sheet data:
Invested assets $13,090 $12,534
Total assets 17,339 16,548
Short-term debt 104 104
Long-term debt 790 790
Shareholders' equity 5,816 5,453
Book value per share 35.51 33.48
Debt-to-total-capital ratio 13.3% 14.1%
--------------------------- ---- ----
-- $13.601 billion in consolidated cash and invested assets at September
30, 2013, up 4 percent from $13.021 billion at year-end 2012.
-- $9.038 billion bond portfolio at September 30, 2013, with an average
rating of A3/A. Fair value increased $46 million or 1 percent during the
third quarter of 2013.
-- $3.984 billion equity portfolio was 30.4 percent of invested assets,
including $1.513 billion in pretax net unrealized gains at September 30,
2013. $109 million or 3 percent third-quarter 2013 growth in fair value.
-- $4.173 billion of statutory surplus for the property casualty insurance
group at September 30, 2013, up $259 million from $3.914 billion at
year-end 2012, after declaring $275 million in dividends to the parent
company. The ratio of net written premiums to property casualty
statutory surplus for the 12 months ended September 30, 2013, was
0.9-to-1, unchanged from year-end 2012.
-- Value creation ratio of 9.8 percent for first nine months of 2013
included 6.3 percent from net income before net realized investment
gains and 2.9 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) September 30, December 31,
2013 2012
---- ----
Assets
Investments $13,090 $12,534
Cash and cash equivalents 511 487
Premiums receivable 1,393 1,214
Reinsurance recoverable 584 615
Other assets 1,761 1,698
Total assets $17,339 $16,548
======= =======
Liabilities
Insurance reserves $6,680 $6,525
Unearned premiums 2,026 1,792
Deferred income tax 542 453
Long-term debt and capital lease obligations 832 827
Other liabilities 1,443 1,498
Total liabilities 11,523 11,095
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,573 1,528
Retained earnings 4,214 4,021
Accumulated other comprehensive income 1,267 1,129
Treasury stock (1,238) (1,225)
------ ------
Total shareholders' equity 5,816 5,453
----- -----
Total liabilities and shareholders' equity $17,339 $16,548
======= =======
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
2013 2012 2013 2012
---- ---- ---- ----
Revenues
Earned premiums $992 $889 $2,877 $2,605
Investment income, net of expenses 133 132 392 395
Realized investment gains and losses, net 22 10 77 29
Other revenues 5 4 13 12
Total revenues 1,152 1,035 3,359 3,041
----- ----- ----- -----
Benefits and Expenses
Insurance losses and policyholder benefits 642 571 1,841 1,840
Underwriting, acquisition and insurance expenses 312 296 919 857
Interest expense 13 14 40 41
Other operating expenses 3 2 12 10
--- --- --- ---
Total benefits and expenses 970 883 2,812 2,748
--- --- ----- -----
Income Before Income Taxes 182 152 547 293
--- --- --- ---
Provision for Income Taxes 51 41 152 64
--- --- --- ---
Net Income $131 $111 $395 $229
==== ==== ==== ====
Per Common Share:
Net income-basic $0.80 $0.69 $2.42 $1.41
Net income-diluted 0.79 0.68 2.39 1.40
------------------ ---- ---- ---- ----
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 September 30, Nine months ended September 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 $35.51 $32.95 $35.51 $32.95
Less beginning of period book value - as originally reported 34.83 31.66 33.48 31.16
----- ----- ----- -----
Change in book value - as originally reported 0.68 1.29 2.03 1.79
Dividend declared to shareholders 0.42 0.4075 1.235 1.2125
Total contribution to value creation ratio $1.10 $1.6975 $3.265 $3.0025
===== ======= ====== =======
Contribution to value creation ratio:
From change in book value* 2.0% 4.1% 6.1% 5.7%
From dividends declared to shareholders** 1.2 1.3 3.7 3.9
Value creation ratio 3.2% 5.4% 9.8% 9.6%
=== === === ===
* 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 September 30, Nine months ended September 30,
2013 2012 2013 2012
---- ---- ---- ----
Net income $131 $111 $395 $229
Net realized investment gains and losses 15 6 51 19
--- --- --- ---
Operating income 116 105 344 210
Less catastrophe losses (36) (44) (92) (198)
Operating income before catastrophe losses $152 $149 $436 $408
==== ==== ==== ====
Diluted per share data:
Net income $0.79 $0.68 $2.39 $1.40
Net realized investment gains and losses 0.09 0.04 0.31 0.11
---- ---- ---- ----
Operating income 0.70 0.64 2.08 1.29
Less catastrophe losses (0.21) (0.27) (0.56) (1.21)
Operating income before catastrophe losses $0.91 $0.91 $2.64 $2.50
===== ===== ===== =====
Cincinnati Financial Corporation
Property Casualty Reconciliation
Three months ended September 30,
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $1,031 $719 $278 $34
Unearned premiums change (77) (39) (34) (4)
--- --- --- ---
Earned premiums $954 $680 $244 $30
==== ==== ==== ===
Statutory ratios:
Statutory combined ratio 92.3% 92.7% 92.1% 86.9%
Contribution from catastrophe losses 5.7 5.4 7.0 2.5
Statutory combined ratio excluding catastrophe losses 86.6% 87.3% 85.1% 84.4%
==== ==== ==== ====
Commission expense ratio 18.5% 18.0% 19.0% 26.3%
Other expense ratio 11.6 12.8 9.4 4.6
Statutory expense ratio 30.1% 30.8% 28.4% 30.9%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 93.7% 93.7% 94.5% 86.7%
Contribution from catastrophe losses 5.7 5.4 7.0 2.5
Prior accident years before catastrophe losses (3.0) (1.4) (6.3) (13.7)
---- ---- ---- -----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development
91.0% 89.7% 93.8% 97.9%
==== ==== ==== ====
Nine months ended September 30,
-------------------------------
Consolidated
Commercial
Personal E&S
---
Premiums:
Written premiums $2,985 $2,125 $766 $94
Unearned premiums change (232) (169) (54) (9)
---- ---- --- ---
Earned premiums $2,753 $1,956 $712 $85
====== ====== ==== ===
Statutory ratios:
Statutory combined ratio 92.0% 91.0% 94.5% 94.1%
Contribution from catastrophe losses 5.1 4.4 7.7 1.7
Statutory combined ratio excluding catastrophe losses 86.9% 86.6% 86.8% 92.4%
==== ==== ==== ====
Commission expense ratio 18.3% 17.4% 19.7% 26.5%
Other expense ratio 12.0 13.0 10.0 5.1
Statutory expense ratio 30.3% 30.4% 29.7% 31.6%
==== ==== ==== ====
GAAP ratio:
GAAP combined ratio 93.8% 93.2% 95.5% 94.2%
Contribution from catastrophe losses 5.1 4.4 7.7 1.7
Prior accident years before catastrophe losses (4.2) (4.0) (4.4) (7.9)
---- ---- ---- ----
GAAP combined ratio excluding catastrophe losses and prior
years reserve development
92.9% 92.8% 92.2% 100.4%
==== ==== ==== =====
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
