CINCINNATI FINANCIAL CINCINNATI, July 28, 2015 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Second-quarter 2015 net income of $176 million, or $1.06 per share,
compared with $84 million, or 51 cents per share, in the second quarter
of 2014.
-- $63 million or 84 percent rise in operating income* to $138 million, or
83 cents per share, up from $75 million, or 46 cents per share, in the
second quarter of last year.
-- $92 million increase in second-quarter 2015 net income, reflecting the
after-tax net effect of two primary items: $59 million improvement in
the contribution from property casualty underwriting, including a
favorable effect of $23 million from lower natural catastrophe losses;
and a $29 million increase from net realized investment gains.
-- $39.60 book value per share at June 30, 2015, down 54 cents or 1 percent
since December 31, 2014.
-- 0.9 percent value creation ratio for the first six months of 2015,
compared with 6.6 percent for the same period of 2014.
Financial Highlights
(Dollars in millions except per share data) Three months ended June 30, Six months ended June 30,
------------------------------------------
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Revenue Data
Earned premiums $1,111 $1,059 5 $2,205 $2,086 6
Investment income, net of expenses 140 136 3 279 271 3
Total revenues 1,316 1,214 8 2,601 2,403 8
Income Statement Data
Net income $176 $84 110 $304 $175 74
Realized investment gains, net 38 9 322 69 23 200
--- ---
Operating income* $138 $75 84 $235 $152 55
==== === ==== ====
Per Share Data (diluted)
Net income $1.06 $0.51 108 $1.84 $1.06 74
Realized investment gains, net 0.23 0.05 360 0.42 0.14 200
Operating income* $0.83 $0.46 80 $1.42 $0.92 54
===== ===== ===== =====
Book value $39.60 $38.77 2
Cash dividend declared $0.46 $0.44 5 $0.92 $0.88 5
Diluted weighted average shares outstanding 165.5 165.1 0 165.5 165.1 0
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* 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 Second-Quarter Highlights
-- 92.4 percent second-quarter 2015 property casualty combined ratio,
improved from 100.9 percent for second-quarter 2014.
-- 6 percent growth in second-quarter net written premiums, reflecting
price increases and insured exposure growth.
-- $138 million second-quarter 2015 property casualty new business written
premiums, up $5 million. Agencies appointed since the beginning of 2014
contributed $9 million or 7 percent of total new business written
premiums.
-- 7 cents per share contribution from life insurance operating income, up
1 cent from second-quarter 2014.
Investment and Balance Sheet Highlights
-- 3 percent or $4 million increase in second-quarter 2015 pretax
investment income, including 3 percent growth for both stock portfolio
dividends and bond interest income.
-- Three-month increase of less than 1 percent in fair value of total
investments plus cash at June 30, 2015, including a 1 percent increase
for the bond portfolio and a 1 percent decrease for the equity
portfolio.
-- $1.787 billion parent company cash and marketable securities at June 30,
2015, up approximately $3 million from year-end 2014.
Improving Underwriting Results
Steven J. Johnston, president and chief executive officer, commented: "Operating income rose 84 percent and net income more than doubled last year's second-quarter result. Property casualty insurance underwriting profits rose $90 million before taxes, taking net income to the highest level for any second quarter since 2007. Pretax income from our investment portfolio also contributed, growing 3 percent above the total reported for last year's second quarter.
"A relatively quiet spring storm season helped our steady progress on insurance profitability initiatives shine through. Our second-quarter combined ratio improved to 92.4 percent - 8.5 points better than the same quarter a year ago. While roughly half of the improvement came from lower weather-related catastrophe losses, we attribute much of the remainder to the positive effects of further pricing precision and segmentation, continued use of data analytics, increasing staff expertise and our ongoing underwriting programs.
"Favorable prior accident year reserve releases for the quarter improved the combined ratio by 6.6 percentage points, essentially matching last year's benefit. Based on our assessment of paid loss trends for our auto lines of business, we prudently increased loss reserves, mostly for the more subjective component of reserves known as IBNR, representing losses our policyholders have incurred but not yet reported. For auto claims that were reported to us, or case incurred claims, the good news is that we have achieved small decreases for two quarters in a row in the ratio for losses and loss expenses, which may indicate an improving trend."
Continued Steady Growth
"The growth rate for our consolidated property casualty net written premiums rebounded, doubling our first-quarter 2015 pace. Total net written premiums grew by 4 percent for the first half of 2015 compared with the first half of 2014, reflecting the combined effects of modest pricing increases, strategic expansion of our independent agency force and overall insured exposure growth.
"Personal lines net written premiums rose 5 percent in the first half as the growth in personal lines new business accelerated to 20 percent. Agents are responding favorably to our broadened underwriting appetite and pricing changes. Together, we are successfully attracting more larger-sized personal lines accounts."
Managing for Long-Term Value
"Rising interest rates pressured the bond markets in the second quarter. The lower market values at June 30 are reflected in our total portfolio's net unrealized gain position, still exceptionally strong at $2.4 billion. The change in net unrealized gains contributed to a 1 percent decline in book value to $39.60 at June 30 compared with year-end 2014.
"Our long-term strategies include several advantages that support book value growth over time. First, our generally laddered bond portfolio allows us to capture higher yield as we reinvest proceeds from interest payments and bond redemptions. Second, our high-quality, dividend paying equity portfolio gives us steady dividend income and long-term capital appreciation potential. 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 impact will continue to benefit future periods. Our insurance business is in excellent shape to provide cash for investment, earnings that support our shareholder dividend and increase book value over time."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Results
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $1,059 $1,006 5 $2,100 $1,985 6
Fee revenues 2 2 0 4 3 33
--- --- --- ---
Total revenues 1,061 1,008 5 2,104 1,988 6
Loss and loss expenses 654 707 (7) 1,343 1,383 (3)
Underwriting expenses 324 308 5 651 613 6
Underwriting profit (loss) $83 $(7) nm $110 $(8) nm
=== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 61.8% 70.2% (8.4) 63.9% 69.7% (5.8)
Underwriting expenses 30.6 30.7 (0.1) 31.0 30.9 0.1
---- ---- ---- ---- ---- ---
Combined ratio 92.4% 100.9% (8.5) 94.9% 100.6% (5.7)
==== ===== ==== ==== ===== ====
% Change % Change
Agency renewal written premiums $1,018 $974 5 $2,001 $1,930 4
Agency new business written premiums 138 133 4 254 256 (1)
Other written premiums (14) (25) 44 (47) (67) 30
Net written premiums $1,142 $1,082 6 $2,208 $2,119 4
====== ====== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 60.9% 64.8% (3.9) 62.0% 63.6% (1.6)
Current accident year catastrophe losses 7.5 11.9 (4.4) 6.3 10.9 (4.6)
Prior accident years before catastrophe losses (6.6) (6.0) (0.6) (3.9) (4.1) 0.2
Prior accident years catastrophe losses 0.0 (0.5) 0.5 (0.5) (0.7) 0.2
Loss and loss expense ratio 61.8% 70.2% (8.4) 63.9% 69.7% (5.8)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe 91.5% 95.5% (4.0) 93.0% 94.5% (1.5)
losses
-- $60 million or 6 percent growth of second-quarter 2015 property casualty
net written premiums and six-month growth of 4 percent. The increases
were largely due to price increases and a higher level of insured
exposures.
-- $5 million or 4 percent increase in second-quarter 2015 new business
premiums written by agencies, primarily due to contributions from new
agency appointments. Six-month new business premiums decreased $2
million, although standard market property casualty production from
agencies appointed since the beginning of 2014 increased $12 million and
excess and surplus lines increased $2 million.
-- 1,493 agency relationships in 1,913 reporting locations marketing
property casualty insurance products at June 30, 2015, compared with
1,466 agency relationships in 1,884 reporting locations at year-end
2014. During the first six months of 2015, 53 new agency appointments
were made.
-- 8.5 and 5.7 percentage-point second-quarter and first-half 2015 combined
ratio improvement, including decreases of 3.9 and 4.4 points for losses
from natural catastrophes.
-- 1.4 and 2.2 percentage-point second-quarter and first-half 2015 decrease
in the ratio for noncatastrophe weather-related losses.
-- 6.6 percentage-point second-quarter 2015 benefit from favorable prior
accident year reserve development of $70 million, compared with 6.5
points or $66 million for second-quarter 2014.
-- 3.9 percentage-point six-month 2015 benefit from favorable prior
accident year reserve development before catastrophe losses, similar to
the six-month 2014 benefit of 4.1 points.
-- 1.6 percentage-point improvement, to 62.0 percent, for the six-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, largely due to lower noncatastrophe weather-related losses
and a 0.7 point decrease in the ratio for current accident year losses
of $1 million or more per claim.
-- Negligible change from last year in the second-quarter and first-half
2015 underwriting expense ratio, reflecting higher earned premiums and
ongoing expense management efforts.
Commercial Lines Insurance Results
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $745 $714 4 $1,478 $1,406 5
Fee revenues 1 1 0 2 2 0
--- --- --- ---
Total revenues 746 715 4 1,480 1,408 5
Loss and loss expenses 417 461 (10) 891 930 (4)
Underwriting expenses 232 226 3 466 448 4
--- --- --- ---
Underwriting profit $97 $28 246 $123 $30 310
=== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 56.0% 64.5% (8.5) 60.3% 66.2% (5.9)
Underwriting expenses 31.2 31.8 (0.6) 31.6 31.9 (0.3)
Combined ratio 87.2% 96.3% (9.1) 91.9% 98.1% (6.2)
==== ==== ==== ==== ==== ====
% Change % Change
-------- --------
Agency renewal written premiums $699 $669 4 $1,429 $1,382 3
Agency new business written premiums 93 95 (2) 172 185 (7)
Other written premiums (5) (16) 69 (31) (48) 35
Net written premiums $787 $748 5 $1,570 $1,519 3
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 58.7% 63.4% (4.7) 59.9% 61.5% (1.6)
Current accident year catastrophe losses 5.8 9.1 (3.3) 5.6 9.0 (3.4)
Prior accident years before catastrophe losses (8.6) (7.5) (1.1) (4.6) (3.8) (0.8)
Prior accident years catastrophe losses 0.1 (0.5) 0.6 (0.6) (0.5) (0.1)
Loss and loss expense ratio 56.0% 64.5% (8.5) 60.3% 66.2% (5.9)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe 89.9% 95.2% (5.3) 91.5% 93.4% (1.9)
losses
-- $39 million or 5 percent increase in second-quarter 2015 commercial
lines net written premiums, as higher renewal written premiums offset
lower new business written premiums. Three percent increase in six-month
net written premiums.
-- $30 million or 4 percent rise in second-quarter renewal written premiums
with commercial lines renewal pricing increases averaging in the
low-single-digit percent range.
-- $2 million or 2 percent decrease in second-quarter 2015 new business
written by agencies, reflecting underwriting and pricing discipline in a
competitive market environment. For the six-month period, the decrease
was 7 percent.
-- 9.1 and 6.2 percentage-point second-quarter and first-half 2015 combined
ratio improvement, including decreases of 2.7 and 3.5 points for losses
from natural catastrophes.
-- 1.2 and 1.8 percentage-point second-quarter and first-half 2015 decrease
in the ratio for noncatastrophe weather-related losses.
-- 8.5 percentage-point second-quarter 2015 benefit from favorable prior
accident year reserve development of $63 million, compared with 8.0
points or $57 million for second-quarter 2014.
-- 4.6 percentage-point six-month 2015 benefit from favorable prior
accident year reserve development before catastrophe losses exceeded the
six-month 2014 benefit of 3.8 points.
-- 1.6 percentage-point improvement, to 59.9 percent, for the six-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, driven by lower noncatastrophe weather-related losses and
a 1.6 point decrease in the ratio for current accident year losses of $1
million or more per claim.
Personal Lines Insurance Results
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $272 $258 5 $540 $512 5
Fee revenues - 1 (100) 1 1 0
--- --- --- ---
Total revenues 272 259 5 541 513 5
Loss and loss expenses 216 227 (5) 407 415 (2)
Underwriting expenses 81 72 13 162 145 12
--- --- --- ---
Underwriting loss $(25) $(40) 38 $(28) $(47) 40
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 79.6% 87.7% (8.1) 75.3% 81.0% (5.7)
Underwriting expenses 29.6 28.1 1.5 30.0 28.4 1.6
Combined ratio 109.2% 115.8% (6.6) 105.3% 109.4% (4.1)
===== ===== ==== ===== ===== ====
% Change % Change
Agency renewal written premiums $285 $276 3 $508 $494 3
Agency new business written premiums 30 24 25 54 45 20
Other written premiums (6) (6) 0 (12) (14) 14
Net written premiums $309 $294 5 $550 $525 5
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 65.9% 67.1% (1.2) 66.3% 67.5% (1.2)
Current accident year catastrophe losses 12.8 21.0 (8.2) 9.2 17.2 (8.0)
Prior accident years before catastrophe losses 1.1 0.2 0.9 0.2 (2.2) 2.4
Prior accident years catastrophe losses (0.2) (0.6) 0.4 (0.4) (1.5) 1.1
Loss and loss expense ratio 79.6% 87.7% (8.1) 75.3% 81.0% (5.7)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe 95.5% 95.2% 0.3 96.3% 95.9% 0.4
losses
-- $15 million or 5 percent increase in second-quarter 2015 personal lines
net written premiums, including growth in new business and higher
renewal written premiums that benefited from rate increases. Five
percent increase in six-month net written premiums.
-- $6 million or 25 percent growth in second-quarter new business written
by agencies, raising the six-month growth rate to 20 percent. The strong
growth in part reflected more larger-sized policy submissions due to
broadened underwriting appetite and pricing changes, plus increased
visibility of underwriters and marketing efforts directed towards our
agencies.
-- 6.6 and 4.1 percentage-point second-quarter and first-half 2015 combined
ratio improvement, including decreases of 7.8 and 6.9 points for losses
from natural catastrophes.
-- 2.1 and 3.5 percentage-point second-quarter and first-half 2015 decrease
in the ratio for noncatastrophe weather-related losses.
-- 0.9 percentage-point second-quarter 2015 unfavorable prior accident year
reserve development of $2 million, reflecting a $7 million personal auto
reserve addition, compared with 0.4 points of benefit from favorable
development of $1 million for second-quarter 2014.
-- 0.2 percentage-point six-month 2015 benefit from favorable prior
accident year reserve development was less than the six-month 2014
benefit of 3.7 points, primarily due to unfavorable development for our
personal auto line of business.
-- 1.2 percentage-point improvement, to 66.3 percent, for the six-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, reflecting lower noncatastrophe weather-related losses
that were partially offset by a 2.6 point increase in the ratio for
current accident year losses of $1 million or more per claim.
-- 1.5 and 1.6 percentage-point second-quarter and first-half 2015
increases in the underwriting expense ratio, primarily due to changes in
estimates related to allocations of deferred acquisition costs by
segment.
Excess and Surplus Lines Insurance Results
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $42 $34 24 $82 $67 22
Fee revenues 1 - nm 1 - nm
--- --- --- ---
Total revenues 43 34 26 83 67 24
Loss and loss expenses 21 19 11 45 38 18
Underwriting expenses 11 10 10 23 20 15
--- --- --- ---
Underwriting profit $11 $5 120 $15 $9 67
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 49.6% 57.0% (7.4) 54.4% 56.8% (2.4)
Underwriting expenses 26.4 28.0 (1.6) 27.7 29.1 (1.4)
---- ---- ---- ---- ---- ----
Combined ratio 76.0% 85.0% (9.0) 82.1% 85.9% (3.8)
==== ==== ==== ==== ==== ====
% Change % Change
Agency renewal written premiums $34 $29 17 $64 $54 19
Agency new business written premiums 15 14 7 28 26 8
Other written premiums (3) (3) 0 (4) (5) 20
Net written premiums $46 $40 15 $88 $75 17
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 69.3% 75.4% (6.1) 70.7% 77.9% (7.2)
Current accident year catastrophe losses 0.6 2.3 (1.7) 0.9 2.6 (1.7)
Prior accident years before catastrophe losses (20.2) (21.3) 1.1 (17.0) (24.1) 7.1
Prior accident years catastrophe losses (0.1) 0.6 (0.7) (0.2) 0.4 (0.6)
Loss and loss expense ratio 49.6% 57.0% (7.4) 54.4% 56.8% (2.4)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe 95.7% 103.4% (7.7) 98.4% 107.0% (8.6)
losses
-- $6 million or 15 percent increase in second-quarter 2015 excess and
surplus lines net written premiums, including growth in new business and
higher renewal written premiums that benefited from rate increases
averaging near the low end of the mid-single-digit range. Seventeen
percent increase in six-month net written premiums.
-- $1 million or 7 percent increase in second-quarter new business written
by agencies, rising in part due to enhanced service to agencies provided
by recent-quarter additions to our excess and surplus lines field staff.
-- 9.0 and 3.8 percentage-point second-quarter and first-half 2015 combined
ratio improvement driven by lower ratios for current accident year loss
experience.
-- 20.3 percentage-point second-quarter 2015 benefit from favorable prior
accident year reserve development of $9 million, compared with 20.7
points or $8 million for second-quarter 2014.
-- 17.0 percentage-point six-month 2015 benefit from favorable prior
accident year reserve development before catastrophe losses was less
than the six-month 2014 benefit of 24.1 points.
-- 7.2 percentage-point improvement, to 70.7 percent, for the six-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, including a 1.9 point decrease in the ratio for current
accident year losses of $1 million or more per claim.
Life Insurance Results
(Dollars in millions) Three months ended June 30, Six months ended June 30,
--------------------
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Term life insurance $35 $33 6 $69 $65 6
Universal life insurance 9 12 (25) 19 20 (5)
Other life insurance, annuity, and disability income 8 8 0 17 16 6
products
Earned premiums 52 53 (2) 105 101 4
Investment income, net of expenses 37 37 0 74 72 3
Other income 1 1 0 2 3 (33)
--- --- --- ---
Total revenues, excluding realized investment gains and losses 90 91 (1) 181 176 3
--- ---
Contract holders' benefits incurred 58 56 4 118 112 5
Underwriting expenses incurred 16 19 (16) 34 34 0
--- --- --- ---
Total benefits and expenses 74 75 (1) 152 146 4
--- --- --- ---
Net income before income tax and realized investment 16 16 0 29 30 (3)
gains, net
Income tax 5 6 (17) 10 11 (9)
Net income before realized investment gains, net $11 $10 10 $19 $19 0
=== === === ===
-- $1 million or 2 percent decrease in second-quarter 2015 earned premiums,
including a 6 percent increase for term life insurance, our largest life
insurance product line. Three- and six-month growth rates for term life
were similar.
-- $3 million decrease to $17 million in six-month 2015 fixed-annuity
deposits received. Cincinnati Life does not offer variable or indexed
annuities.
-- $19 million in six-month 2015 profit, matching the same period in 2014.
Mortality experience was favorable for the first six months of 2015.
-- $9 million or 1 percent six-month 2015 decrease to $896 million in GAAP
shareholders' equity for The Cincinnati Life Insurance Company, largely
reflecting a decrease in fair value of the fixed-maturity portfolio due
to an increase in interest rates.
Investment and Balance Sheet Highlights
Investments Results
(Dollars in millions) Three months ended June 30, Six months ended June 30,
--------------------
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Investment income, net of expenses $140 $136 3 $279 $271 3
Investment interest credited to contract holders' (22) (20) (10) (43) (41) (5)
Realized investment gains, net 60 14 329 107 36 197
Investments profit $178 $130 37 $343 $266 29
==== ==== ==== ====
Investment income:
Interest $106 $103 3 $211 $207 2
Dividends 35 34 3 71 66 8
Other 1 1 0 1 2 (50)
Less investment expenses 2 2 0 4 4 0
--- --- --- ---
Investment income, before income taxes 140 136 3 279 271 3
Less income taxes 33 33 0 66 65 2
--- --- --- ---
Total investment income $107 $103 4 $213 $206 3
==== ==== ==== ====
Investment returns:
Effective tax rate 23.9% 23.8% 23.7% 23.9%
Average invested assets plus $14,534 $13,743 $14,488 $13,686
cash and cash equivalents
Average yield pretax 3.85% 3.96% 3.85% 3.96%
Average yield after-tax 2.94 3.00 2.94 3.10
Fixed-maturity returns:
Effective tax rate 27.2% 27.1% 27.1% 27.1%
Average amortized cost $9,143 $8,664 $9,085 $8,679
Average yield pretax 4.64% 4.76% 4.65% 4.77%
Average yield after-tax 3.38 3.47 3.39 3.48
-- $4 million or 3 percent rise in second-quarter 2015 pretax investment
income, including 3 percent growth in equity portfolio dividends and 3
percent growth in interest income.
-- $319 million or 12 percent second-quarter 2015 decrease in pretax net
unrealized investment portfolio gains, including a $135 million decrease
for the equity portfolio. The total decrease included the offsetting
effect of $63 million of pretax net realized gains from investment
portfolio security sales or called bonds during the second quarter of
2015, including $56 million from the equity portfolio.
Balance Sheet Highlights
(Dollars in millions
except share data) At June 30, At December 31,
--------------------
2015 2014
---- ----
Balance sheet data:
Total investments $14,551 $14,386
Total assets 18,888 18,753
Short-term debt 49 49
Long-term debt 791 791
Shareholders' equity 6,497 6,573
Book value per share 39.60 40.14
Debt-to-total-
capital ratio 11.4% 11.3%
-------------- ---- ----
-- $15.038 billion in consolidated cash and total investments at June 30,
2015, up less than 1 percent from $14.977 billion at year-end 2014.
-- $9.675 billion bond portfolio at June 30, 2015, with an average rating
of A2/A. Fair value increased $79 million or 1 percent during the second
quarter of 2015, reflecting $243 million in net purchases of
fixed-maturity securities.
-- $4.734 billion equity portfolio was 32.5 percent of total investments,
including $1.906 billion in pretax net unrealized gains at June 30,
2015. Second-quarter 2015 decrease in fair value of $55 million or 1
percent.
-- $4.419 billion of statutory surplus for the property casualty insurance
group at June 30, 2015, down $53 million from $4.472 billion at year-end
2014, after declaring $200 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, 2015, was 1.0-to-1, up from 0.9-to-1 at
year-end 2014.
-- Value creation ratio of 0.9 percent for the first six months of 2015,
reflecting 3.5 percent from net income before net realized investment
gains, which includes underwriting and investment income, and negative
2.5 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.
About Cincinnati Financial
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 2014 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 33.
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 or development of claims
that are unforeseen at the time of policy issuance
-- Inadequate estimates or assumptions used for critical accounting
estimates
-- Declines in overall stock market values negatively affecting the
company's equity portfolio and book value
-- Domestic and global 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
-- Recession or other economic conditions resulting in lower demand for
insurance products or increased payment delinquencies
-- Difficulties with technology or data security breaches, including
cyberattacks, that could negatively affect our ability to conduct
business and our relationships with agents, policyholders and others
-- Disruption of the insurance market caused by technology innovations such
as driverless cars that could decrease consumer demand for insurance
products
-- Delays or performance inadequacies from ongoing development and
implementation of underwriting and pricing methods, including telematics
and other usage-based insurance methods, or technology projects and
enhancements expected to increase our pricing accuracy, underwriting
profit and competitiveness
-- Increased competition that could result in a significant reduction in
the company's premium volume
-- 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
-- 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
-- Inability of our subsidiaries to pay dividends consistent with current
or past levels
-- 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
-- Inability or unwillingness to nimbly develop and introduce coverage
product updates and innovations that our competitors offer and
consumers expect to find 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, global, 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,
2015 2014
---- ----
Assets
Investments $14,551 $14,386
Cash and cash equivalents 487 591
Premiums receivable 1,509 1,405
Reinsurance recoverable 535 545
Deferred policy acquisition costs 600 578
Other assets 1,206 1,248
Total assets $18,888 $18,753
======= =======
Liabilities
Insurance reserves $7,234 $6,982
Unearned premiums 2,191 2,082
Deferred income tax 717 840
Long-term debt and capital lease obligations 823 827
Other liabilities 1,426 1,449
Total liabilities 12,391 12,180
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,613 1,611
Retained earnings 4,658 4,505
Accumulated other comprehensive income 1,514 1,744
Treasury stock (1,288) (1,287)
------ ------
Total shareholders' equity 6,497 6,573
----- -----
Total liabilities and shareholders' equity $18,888 $18,753
======= =======
(Dollars in millions except per share data) Three months ended June 30, Six months ended June 30,
2015 2014 2015 2014
---- ---- ---- ----
Revenues
Earned premiums $1,111 $1,059 $2,205 $2,086
Investment income, net of expenses 140 136 279 271
Realized investment gains, net 60 14 107 36
Other revenues 5 5 10 10
Total revenues 1,316 1,214 2,601 2,403
----- ----- ----- -----
Benefits and Expenses
Insurance losses and contract holders' benefits 712 763 1,461 1,495
Underwriting, acquisition and insurance expenses 340 328 685 648
Interest expense 13 13 26 27
Other operating expenses 3 3 7 7
--- --- --- ---
Total benefits and expenses 1,068 1,107 2,179 2,177
----- ----- ----- -----
Income Before Income Taxes 248 107 422 226
--- --- --- ---
Provision for Income Taxes 72 23 118 51
--- --- --- ---
Net Income $176 $84 $304 $175
==== === ==== ====
Per Common Share:
Net income-basic $1.07 $0.51 $1.85 $1.07
Net income-diluted 1.06 0.51 1.84 1.06
------------------ ---- ---- ---- ----
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for reconciliations; additional 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,
----------------------
2015 2014 2015 2014
---- ---- ---- ----
Value creation ratio:
End of period book value $39.60 $38.77 $39.60 $38.77
Less beginning of period book value 40.22 37.73 40.14 37.21
----- ----- ----- -----
Change in book value (0.62) 1.04 (0.54) 1.56
Dividend declared to shareholders 0.46 0.44 0.92 0.88
---- ----
Total value creation $(0.16) $1.48 $0.38 $2.44
====== ===== ===== =====
Value creation ratio from change in book value* (1.5)% 2.7% (1.4)% 4.2%
Value creation ratio from dividends declared to 1.1 1.2 2.3 2.4
shareholders**
Value creation ratio (0.4)% 3.9% 0.9% 6.6%
===== === === ===
* Change in book value divided by the beginning of period book value
** Dividend declared to shareholders divided by beginning of period book value
Net Income Reconciliation
(Dollars in millions except per share data) Three months ended June 30, Six months ended June 30,
2015 2014 2015 2014
---- ---- ---- ----
Net income $176 $84 $304 $175
Realized investment gains, net 38 9 69 23
--- --- --- ---
Operating income 138 75 235 152
Less catastrophe losses (51) (74) (79) (131)
Operating income before catastrophe losses 189 149 $314 $283
=== === ==== ====
Diluted per share data:
Net income $1.06 $0.51 $1.84 $1.06
Realized investment gains, net 0.23 0.05 0.42 0.14
---- ---- ---- ----
Operating income 0.83 0.46 1.42 0.92
Less catastrophe losses (0.31) (0.45) (0.48) (0.79)
Operating income before catastrophe losses 1.14 0.91 $1.90 $1.71
==== ==== ===== =====
Cincinnati Financial Corporation
Property Casualty Insurance Reconciliation
(Dollars in millions) Three months ended June 30, 2015
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $1,142 $787 $309 $46
Unearned premiums change (83) (42) (37) (4)
--- --- --- ---
Earned premiums $1,059 $745 $272 $42
====== ==== ==== ===
Statutory ratios:
Combined ratio 90.7% 85.9% 105.8% 78.7%
Contribution from catastrophe losses 7.5 5.9 12.6 0.5
Combined ratio excluding catastrophe losses 83.2% 80.0% 93.2% 78.2%
==== ==== ==== ====
Commission expense ratio 17.9% 17.8% 17.0% 26.7%
Other underwriting expense ratio 11.0 12.1 9.2 2.4
Total expense ratio 28.9% 29.9% 26.2% 29.1%
==== ==== ==== ====
GAAP ratios:
Combined ratio 92.4% 87.2% 109.2% 76.0%
Contribution from catastrophe losses 7.5 5.9 12.6 0.5
Prior accident years before catastrophe losses (6.6) (8.6) 1.1 (20.2)
Current accident year combined ratio before catastrophe losses 91.5% 89.9% 95.5% 95.7%
==== ==== ==== ====
(Dollars in millions) Six months ended June 30, 2015
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $2,208 $1,570 $550 $88
Unearned premiums change (108) (92) (10) (6)
---- --- --- ---
Earned premiums $2,100 $1,478 $540 $82
====== ====== ==== ===
Statutory ratios:
Combined ratio 93.3% 90.2% 103.3% 83.9%
Contribution from catastrophe losses 5.8 5.0 8.8 0.7
Combined ratio excluding catastrophe losses 87.5% 85.2% 94.5% 83.2%
==== ==== ==== ====
Commission expense ratio 17.9% 17.3% 18.0% 26.7%
Other underwriting expense ratio 11.5 12.6 10.0 2.8
Total expense ratio 29.4% 29.9% 28.0% 29.5%
==== ==== ==== ====
GAAP ratios:
Combined ratio 94.9% 91.9% 105.3% 82.1%
Contribution from catastrophe losses 5.8 5.0 8.8 0.7
Prior accident years before catastrophe losses (3.9) (4.6) 0.2 (17.0)
---- ---- --- -----
Current accident year combined ratio before catastrophe losses 93.0% 91.5% 96.3% 98.4%
==== ==== ==== ====
Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on dollar amounts in thousands.
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SOURCE Cincinnati Financial Corporation
