CINCINNATI FINANCIAL CINCINNATI, Oct. 27, 2015 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Third-quarter 2015 net income of $174 million, or $1.05 per share,
compared with $183 million, or $1.11 per share, in the third quarter of
2014.
-- $32 million or 23 percent rise in operating income* to $172 million, or
$1.04 per share, up from $140 million, or 85 cents per share, in the
third quarter of last year.
-- $9 million decrease in third-quarter 2015 net income, reflecting the
after-tax net effect of two primary items: $41 million reduction in net
realized investment gains that offset $25 million of improvement in the
contribution from property casualty underwriting, including an
unfavorable effect from natural catastrophe losses that were $9 million
more for third-quarter 2015 compared with the same quarter a year ago.
-- $38.77 book value per share at September 30, 2015, down $1.37 or 3
percent since December 31, 2014.
-- Zero percent value creation ratio for the first nine months of 2015,
compared with 8.4 percent for the same period of 2014.
Financial Highlights
---
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
------------------------------------------
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Revenue Data
Earned premiums $1,127 $1,071 5 $3,332 $3,157 6
Investment income, net of expenses 143 138 4 422 409 3
Total revenues 1,278 1,280 0 3,879 3,683 5
Income Statement Data
Net income $174 $183 (5) $478 $358 34
Realized investment gains, net 2 43 (95) 71 66 8
--- ---
Operating income* $172 $140 23 $407 $292 39
==== ==== ==== ====
Per Share Data (diluted)
Net income $1.05 $1.11 (5) $2.89 $2.17 33
Realized investment gains, net 0.01 0.26 (96) 0.43 0.40 8
Operating income* $1.04 $0.85 22 $2.46 $1.77 39
===== ===== ===== =====
Book value $38.77 $39.01 (1)
Cash dividend declared $0.46 $0.44 5 $1.38 $1.32 5
Diluted weighted average shares outstanding 165.5 165.0 0 165.5 165.0 0
------------------------------------------- ----- ----- --- ----- ----- ---
* 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
-- 87.8 percent third-quarter 2015 property casualty combined ratio,
improved from 91.0 percent for third-quarter 2014.
-- 6 percent growth in third-quarter net written premiums, reflecting price
increases and insured exposure growth.
-- $138 million third-quarter 2015 property casualty new business written
premiums, up $13 million or 10 percent. Agencies appointed since the
beginning of 2014 contributed $11 million or 8 percent of total new
business written premiums.
-- 7 cents per share contribution from life insurance operating income, up
3 cents from third-quarter 2014.
Investment and Balance Sheet Highlights
-- 4 percent or $5 million increase in third-quarter 2015 pretax investment
income, including 6 percent growth for stock portfolio dividends and 3
percent growth for bond interest income.
-- Three-month increase of less than 1 percent in fair value of total
investments at September 30, 2015, including a 1 percent increase for
the bond portfolio and a 4 percent decrease for the equity portfolio.
-- $1.801 billion parent company cash and marketable securities at
September 30, 2015, up approximately 1 percent from year-end 2014.
Property Casualty Underwriting Driving Results
Steven J. Johnston, president and chief executive officer, commented: "Operating income rose to $172 million, our best-ever third-quarter result, bolstered by underwriting profits as well as pretax investment income that increased 4 percent over last year's third quarter.
"Property casualty insurance underwriting led our strong performance as positive trends seen in the second quarter continued. Underwriting profits before taxes rose to $133 million in the third quarter and $243 million for the nine months. Our combined ratio of 87.8 percent was our best quarterly result in 11 quarters, and the nine-month ratio of 92.5 percent was our best in seven years.
"Catastrophe losses contributed just 2.5 percentage points to the third-quarter combined ratio. Favorable development on our reserves for prior accident years before catastrophes provided a benefit of 4.3 percentage points, in line with historical long-term averages. Excluding catastrophe losses and prior accident year reserve development gives us our core underwriting results. At 89.6 percent, that ratio improved 2.2 points over last year's third quarter."
Maintaining Momentum
"Balancing profitability and growth takes determination and expertise. We continue to invest in the people and the tools we need to further enhance our ability to price each policy based on its individual characteristics. Our field marketing associates are armed with analytics that complement their experience, earned through an average of 20 years in the industry, giving them an ever increasing confidence when competing for our agencies' best business.
"Net written premiums for the first nine months of 2015 grew 5 percent compared with the first nine months of 2014, reflecting modest overall pricing increases. We're supporting the advantages of our local independent agencies through additional loss control sophistication, expansion of our Customer Care Center for small commercial policies and enhancements to our services for niche markets.
"Last month, we officially launched in New York our Executive Capstone(TM) suite of products for high net worth policyholders. During the third quarter, we appointed 14 new agencies to represent us in New York City and the surrounding area. Whether our agents are using Capstone or our Executive Classic(TM) policy, growth in the number of large personal lines accounts is a strong contributor to our nine-month personal lines new business premium growth rate of 24 percent."
Focusing on a Long-Term Investment Strategy
"Equity markets sold off in the third quarter, pressuring market values at September 30. Those lower values are reflected in our total portfolio's net unrealized gain position of $2.0 billion before taxes. The change in net unrealized gains contributed to a 3 percent decline in book value to $38.77 per share at September 30 compared with year-end 2014.
"We maintain a long-term perspective with our investment philosophy and aren't swayed by periodic market volatility. Our insurance business continues to provide cash that we invest in high-quality bonds and dividend-paying stocks. We are poised to further benefit from these purchases when the markets rebound."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $1,076 $1,025 5 $3,176 $3,010 6
Fee revenues 2 2 0 6 5 20
--- --- --- ---
Total revenues 1,078 1,027 5 3,182 3,015 6
Loss and loss expenses 613 622 (1) 1,956 2,005 (2)
Underwriting expenses 332 311 7 983 924 6
Underwriting profit $133 $94 41 $243 $86 183
==== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 56.9% 60.7% (3.8) 61.5% 66.6% (5.1)
Underwriting expenses 30.9 30.3 0.6 31.0 30.7 0.3
---- ---- --- ---- ---- ---
Combined ratio 87.8% 91.0% (3.2) 92.5% 97.3% (4.8)
==== ==== ==== ==== ==== ====
% Change % Change
Agency renewal written premiums $999 $958 4 $3,000 $2,888 4
Agency new business written premiums 138 125 10 392 381 3
Other written premiums (39) (46) 15 (86) (113) 24
Net written premiums $1,098 $1,037 6 $3,306 $3,156 5
====== ====== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 58.7% 61.5% (2.8) 60.8% 62.8% (2.0)
Current accident year catastrophe losses 2.6 1.6 1.0 5.1 7.7 (2.6)
Prior accident years before catastrophe losses (4.3) (2.0) (2.3) (4.0) (3.3) (0.7)
Prior accident years catastrophe losses (0.1) (0.4) 0.3 (0.4) (0.6) 0.2
Loss and loss expense ratio 56.9% 60.7% (3.8) 61.5% 66.6% (5.1)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe 89.6% 91.8% (2.2) 91.8% 93.5% (1.7)
losses
-- $61 million or 6 percent growth of third-quarter 2015 property casualty
net written premiums and nine-month growth of 5 percent. The increases
were largely due to price increases and a higher level of insured
exposures.
-- $13 million or 10 percent increase in third-quarter 2015 new business
premiums written by agencies, largely due to contributions from new
agency appointments. Nine-month new business premiums increased $11
million, including a $21 million increase from standard market property
casualty production from agencies appointed since the beginning of 2014
and a $1 million increase for excess and surplus lines.
-- 1,515 agency relationships in 1,933 reporting locations marketing
property casualty insurance products at September 30, 2015, compared
with 1,466 agency relationships in 1,884 reporting locations at year-end
2014. During the first nine months of 2015, 85 new agency appointments
were made.
-- 3.2 and 4.8 percentage-point third-quarter and nine-month 2015 combined
ratio improvement, including a third-quarter increase of 1.3 points and
a nine-month decrease of 2.4 points for losses from natural
catastrophes.
-- 4.4 percentage-point third-quarter 2015 benefit from favorable prior
accident year reserve development of $48 million, compared with 2.4
points or $25 million for third-quarter 2014.
-- 4.4 percentage-point nine-month 2015 benefit from favorable prior
accident year reserve development, slightly higher than the nine-month
2014 benefit of 3.9 points.
-- 2.0 percentage-point improvement, to 60.8 percent, for the nine-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, reflecting overall higher pricing, 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.
-- 0.6 and 0.3 percentage-point rise in the third-quarter and nine-month
2015 underwriting expense ratio, as strategic investments for profitable
growth offset higher earned premiums and expense management efforts.
Commercial Lines Insurance Results
---
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $757 $720 5 $2,235 $2,126 5
Fee revenues 1 1 0 3 3 0
--- --- --- ---
Total revenues 758 721 5 2,238 2,129 5
Loss and loss expenses 398 428 (7) 1,289 1,358 (5)
Underwriting expenses 239 226 6 705 674 5
--- --- --- ---
Underwriting profit $121 $67 81 $244 $97 152
==== === ==== ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 52.4% 59.4% (7.0) 57.6% 63.9% (6.3)
Underwriting expenses 31.6 31.3 0.3 31.6 31.7 (0.1)
Combined ratio 84.0% 90.7% (6.7) 89.2% 95.6% (6.4)
==== ==== ==== ==== ==== ====
% Change % Change
-------- --------
Agency renewal written premiums $678 $651 4 $2,107 $2,033 4
Agency new business written premiums 96 89 8 268 274 (2)
Other written premiums (31) (36) 14 (62) (84) 26
Net written premiums $743 $704 6 $2,313 $2,223 4
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 56.6% 61.3% (4.7) 58.8% 61.4% (2.6)
Current accident year catastrophe losses 1.5 1.4 0.1 4.2 6.5 (2.3)
Prior accident years before catastrophe losses (5.6) (2.9) (2.7) (5.0) (3.5) (1.5)
Prior accident years catastrophe losses (0.1) (0.4) 0.3 (0.4) (0.5) 0.1
Loss and loss expense ratio 52.4% 59.4% (7.0) 57.6% 63.9% (6.3)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before catastrophe 88.2% 92.6% (4.4) 90.4% 93.1% (2.7)
losses
-- $39 million or 6 percent increase in third-quarter 2015 commercial lines
net written premiums, including higher renewal written premiums and
growth in new business written premiums. Four percent increase in
nine-month net written premiums.
-- $27 million or 4 percent rise in third-quarter renewal written premiums
with commercial lines renewal pricing increases averaging in the
low-single-digit percent range.
-- $7 million or 8 percent increase in third-quarter 2015 new business
written by agencies, with growth in each major commercial line of
business. For the nine-month period, the 2 percent decrease largely
reflected underwriting and pricing discipline in a competitive market
environment.
-- 6.7 and 6.4 percentage-point third-quarter and nine-month 2015 combined
ratio improvement, including a third-quarter increase of 0.4 points and
a nine-month decrease of 2.2 points for losses from natural
catastrophes.
-- 5.7 percentage-point third-quarter 2015 benefit from favorable prior
accident year reserve development of $43 million, compared with 3.3
points or $24 million for third-quarter 2014.
-- 5.4 percentage-point nine-month 2015 benefit from favorable prior
accident year reserve development exceeded the nine-month 2014 benefit
of 4.0 points.
-- 2.6 percentage-point improvement, to 58.8 percent, for the nine-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, largely due to lower noncatastrophe weather-related losses
and a 2.0 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 September 30, Nine months ended September 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $277 $263 5 $817 $775 5
Fee revenues 1 1 0 2 2 0
--- --- --- ---
Total revenues 278 264 5 819 777 5
Loss and loss expenses 198 177 12 605 592 2
Underwriting expenses 82 73 12 244 218 12
--- --- --- ---
Underwriting (loss) profit $(2) $14 nm $(30) $(33) 9
=== === ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 71.5% 67.4% 4.1 74.0% 76.3% (2.3)
Underwriting expenses 29.4 27.6 1.8 29.8 28.2 1.6
Combined ratio 100.9% 95.0% 5.9 103.8% 104.5% (0.7)
===== ==== === ===== ===== ====
% Change % Change
Agency renewal written premiums $288 $278 4 $796 $772 3
Agency new business written premiums 30 23 30 84 68 24
Other written premiums (6) (7) 14 (18) (21) 14
Net written premiums $312 $294 6 $862 $819 5
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 64.9% 62.7% 2.2 65.8% 65.8% 0.0
Current accident year catastrophe losses 5.7 2.6 3.1 8.0 12.2 (4.2)
Prior accident years before catastrophe losses 1.0 2.7 (1.7) 0.5 (0.5) 1.0
Prior accident years catastrophe losses (0.1) (0.6) 0.5 (0.3) (1.2) 0.9
Loss and loss expense ratio 71.5% 67.4% 4.1 74.0% 76.3% (2.3)
==== ==== === ==== ==== ====
Current accident year combined ratio before catastrophe 94.3% 90.3% 4.0 95.6% 94.0% 1.6
losses
-- $18 million or 6 percent increase in third-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 nine-month net written premiums.
-- $7 million or 30 percent growth in third-quarter new business written by
agencies, raising the nine-month growth rate to 24 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 toward our
agencies. Approximately $1 million of third-quarter growth was from
agencies' high net worth clients.
-- 5.9 percentage-point rise in the third-quarter 2015 combined ratio,
primarily due to a increase of 3.6 points for losses from natural
catastrophes.
-- 0.7 percentage-point nine-month 2015 combined ratio improvement,
including a decrease of 3.3 points for losses from natural catastrophes.
-- 0.9 percentage-point third-quarter 2015 unfavorable prior accident year
reserve development of $2 million, largely from personal umbrella
claims, compared with 2.1 points from $5 million for the third-quarter
2014.
-- 0.2 percentage-point nine-month 2015 unfavorable prior accident year
reserve development of $1 million, primarily due to unfavorable
development for our personal auto line of business.
-- 65.8 percent nine-month 2015 ratio of current accident year losses and
loss expenses before catastrophes matched the same period of 2014,
reflecting lower noncatastrophe weather-related losses offset by a 2.7
point increase in the ratio for current accident year losses of $1
million or more per claim.
-- 1.8 and 1.6 percentage-point third-quarter and nine-month 2015 increases
in the underwriting expense ratio, largely due to strategic investments,
such as staff additions to support expansion in high net worth markets,
and changes in estimates related to allocations of deferred acquisition
costs by segment.
Excess and Surplus Lines Insurance Results
---
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Earned premiums $42 $42 0 $124 $109 14
Fee revenues - - nm 1 - nm
--- --- --- ---
Total revenues 42 42 0 125 109 15
Loss and loss expenses 17 17 0 62 55 13
Underwriting expenses 11 12 (8) 34 32 6
--- --- --- ---
Underwriting profit $14 $13 8 $29 $22 32
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 41.9% 41.8% 0.1 50.1% 51.0% (0.9)
Underwriting expenses 28.0 28.4 (0.4) 27.8 28.9 (1.1)
---- ---- ---- ---- ---- ----
Combined ratio 69.9% 70.2% (0.3) 77.9% 79.9% (2.0)
==== ==== ==== ==== ==== ====
% Change % Change
Agency renewal written premiums $33 $29 14 $97 $83 17
Agency new business written premiums 12 13 (8) 40 39 3
Other written premiums (2) (3) 33 (6) (8) 25
Net written premiums $43 $39 10 $131 $114 15
=== === ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 56.9% 57.8% (0.9) 65.9% 70.2% (4.3)
Current accident year catastrophe losses 0.3 (0.7) 1.0 0.7 1.4 (0.7)
Prior accident years before catastrophe losses (15.4) (15.4) 0.0 (16.4) (20.8) 4.4
Prior accident years catastrophe losses 0.1 0.1 0.0 (0.1) 0.2 (0.3)
Loss and loss expense ratio 41.9% 41.8% 0.1 50.1% 51.0% (0.9)
==== ==== === ==== ==== ====
Current accident year combined ratio before catastrophe 84.9% 86.2% (1.3) 93.7% 99.1% (5.4)
losses
-- $4 million or 10 percent increase in third-quarter 2015 excess and
surplus lines net written premiums, reflecting higher renewal written
premiums that benefited from rate increases averaging near the low end
of the mid-single-digit range. Fifteen percent increase in nine-month
net written premiums.
-- $1 million or 8 percent decrease in third-quarter new business written
by agencies, primarily due to writing fewer new large-premium accounts.
-- 0.3 and 2.0 percentage-point third-quarter and nine-month 2015 combined
ratio improvement driven by lower ratios for current accident year loss
experience.
-- 15.3 percentage-point third-quarter 2015 benefit from favorable prior
accident year reserve development of $7 million, compared with 15.3
points from $6 million for third-quarter 2014.
-- 16.5 percentage-point nine-month 2015 benefit from favorable prior
accident year reserve development was less than the nine-month 2014
benefit of 20.6 points.
-- 4.3 percentage-point improvement, to 65.9 percent, for the nine-month
2015 ratio of current accident year losses and loss expenses before
catastrophes, including lower noncatastrophe weather-related losses and
a 0.6 point increase in the ratio for current accident year losses of $1
million or more per claim.
Life Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
--------------------
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Term life insurance $34 $34 0 $103 $99 4
Universal life insurance 9 5 80 28 25 12
Other life insurance, annuity, and disability income 8 7 14 25 23 9
products
Earned premiums 51 46 11 156 147 6
Investment income, net of expenses 38 36 6 112 108 4
Other income 2 1 100 4 4 0
--- --- --- ---
Total revenues, excluding realized investment gains and losses 91 83 10 272 259 5
--- ---
Contract holders' benefits incurred 57 64 (11) 175 176 (1)
Underwriting expenses incurred 16 8 100 50 42 19
--- --- --- ---
Total benefits and expenses 73 72 1 225 218 3
--- --- --- ---
Net income before income tax and realized investment 18 11 64 47 41 15
gains, net
Income tax 7 4 75 17 15 13
Net income before realized investment gains, net $11 $7 57 $30 $26 15
=== === === ===
-- $5 million or 11 percent increase in third-quarter 2015 earned premiums,
including no change for term life insurance, our largest life insurance
product line. For the first nine months of 2015, term life insurance
earned premiums increased 4 percent. The unlocking of interest rates and
other actuarial assumptions for our universal life insurance contracts
during the third quarter of both 2015 and 2014 slowed the amortization
of unearned front-end loads, reducing universal life premiums, with a
corresponding decrease to operating expenses as more expenses were
deferred to future periods. The unlocking impact to earned premiums and
operating expenses was much more significant during the third quarter of
2014. For both third quarter periods, the impact to net income was
minimal.
-- $4 million increase in nine-month 2015 profit, primarily due to
favorable mortality experience. Mortality experience was unfavorable for
the first nine months of 2014.
-- $7 million or 1 percent nine-month 2015 decrease to $897 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 rate spreads.
Investment and Balance Sheet Highlights
Investments Results
---
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
--------------------
2015 2014 % Change 2015 2014 % Change
---- ---- -------- ---- ---- --------
Investment income, net of expenses $143 $138 4 $422 $409 3
Investment interest credited to contract holders' (21) (21) 0 (64) (62) (3)
Realized investment gains, net 3 65 (95) 110 101 9
Investments profit $125 $182 (31) $468 $448 4
==== ==== ==== ====
Investment income:
Interest $108 $105 3 $319 $312 2
Dividends 37 35 6 108 101 7
Other 1 - nm 2 2 0
Less investment expenses 3 2 0 7 6 17
--- --- --- ---
Investment income, pretax 143 138 4 422 409 3
Less income taxes 34 32 6 100 97 3
--- --- --- ---
Total investment income, after-tax $109 $106 3 $322 $312 3
==== ==== ==== ====
Investment returns:
Effective tax rate 23.7% 23.3% 23.7% 23.7%
Average invested assets plus cash and cash equivalents $14,498 $13,964 $14,399 $13,792
Average yield pretax 3.95% 3.95% 3.91% 3.95%
Average yield after-tax 3.01 3.04 2.98 3.02
Fixed-maturity returns:
Effective tax rate 27.1% 26.6% 27.1% 27.0%
Average amortized cost $9,347 $8,822 $9,133 $8,781
Average yield pretax 4.62% 4.76% 4.66% 4.74%
Average yield after-tax 3.37 3.49 3.40 3.46
-- $5 million or 4 percent rise in third-quarter 2015 pretax investment
income, including 6 percent growth in equity portfolio dividends and 3
percent growth in interest income.
-- $365 million or 15 percent third-quarter 2015 decrease in pretax net
unrealized investment portfolio gains, including a $350 million decrease
for the equity portfolio. The total decrease included the offsetting
effect of $10 million of pretax net realized gains from investment
portfolio security sales or called bonds during the third quarter of
2015, including $6 million from the equity portfolio.
Balance Sheet Highlights
------------------------
(Dollars in
millions
except share
data) At September 30, At December 31,
-------------
2015 2014
---- ----
Balance sheet
data:
Total
investments $14,426 $14,386
Total assets 18,751 18,753
Short-term
debt 35 49
Long-term
debt 791 791
Shareholders'
equity 6,350 6,573
Book value per
share 38.77 40.14
Debt-to-
total-
capital ratio 11.5% 11.3%
-------------- ---- ----
-- $14.845 billion in consolidated cash and total investments at September
30, 2015, down 1 percent from $14.977 billion at year-end 2014.
-- $9.756 billion bond portfolio at September 30, 2015, with an average
rating of A2/A. Fair value increased $81 million or 1 percent during the
third quarter of 2015, including $100 million in net purchases of
fixed-maturity securities.
-- $4.526 billion equity portfolio was 31.4 percent of total investments,
including $1.556 billion in pretax net unrealized gains at September 30,
2015. Third-quarter 2015 decrease in fair value of $208 million or 4
percent.
-- $4.324 billion of statutory surplus for the property casualty insurance
group at September 30, 2015, down $148 million from $4.472 billion at
year-end 2014, after declaring $300 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, 2015, was
1.0-to-1, up from 0.9-to-1 at year-end 2014.
-- $1.37 nine-month 2015 decrease in book value per share, including an
addition of $2.48 from net income before realized gains that was offset
by deductions of $1.38 from dividends declared to shareholders, $2.45
from investment portfolio realized gains and changes in unrealized gains
and $0.02 from other items.
-- Value creation ratio of zero percent for the first nine months of 2015,
reflecting 6.1 percent from net income before net realized investment
gains, which includes underwriting and investment income, and negative
6.1 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) September 30, December 31,
2015 2014
---- ----
Assets
Investments $14,426 $14,386
Cash and cash equivalents 419 591
Premiums receivable 1,494 1,405
Reinsurance recoverable 552 545
Deferred policy acquisition costs 609 578
Other assets 1,251 1,248
Total assets $18,751 $18,753
======= =======
Liabilities
Insurance reserves $7,264 $6,982
Unearned premiums 2,215 2,082
Deferred income tax 596 840
Long-term debt and capital lease obligations 826 827
Other liabilities 1,500 1,449
Total liabilities 12,401 12,180
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,620 1,611
Retained earnings 4,756 4,505
Accumulated other comprehensive income 1,280 1,744
Treasury stock (1,306) (1,287)
------ ------
Total shareholders' equity 6,350 6,573
----- -----
Total liabilities and shareholders' equity $18,751 $18,753
======= =======
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
2015 2014 2015 2014
---- ---- ---- ----
Revenues
Earned premiums $1,127 $1,071 $3,332 $3,157
Investment income, net of expenses 143 138 422 409
Realized investment gains, net 3 65 110 101
Other revenues 5 6 15 16
Total revenues 1,278 1,280 3,879 3,683
----- ----- ----- -----
Benefits and Expenses
Insurance losses and contract holders' benefits 670 686 2,131 2,181
Underwriting, acquisition and insurance expenses 348 319 1,033 967
Interest expense 14 13 40 40
Other operating expenses 3 3 10 10
--- --- --- ---
Total benefits and expenses 1,035 1,021 3,214 3,198
----- ----- ----- -----
Income Before Income Taxes 243 259 665 485
--- --- --- ---
Provision for Income Taxes 69 76 187 127
--- --- --- ---
Net Income $174 $183 $478 $358
==== ==== ==== ====
Per Common Share:
Net income-basic $1.06 $1.12 $2.91 $2.19
Net income-diluted 1.05 1.11 2.89 2.17
------------------ ---- ---- ---- ----
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 September 30, Nine months ended September 30,
----------------------
2015 2014 2015 2014
---- ---- ---- ----
Value creation ratio:
End of period book value $38.77 $39.01 $38.77 $39.01
Less beginning of period book value 39.60 38.77 40.14 37.21
----- ----- ----- -----
Change in book value (0.83) 0.24 (1.37) 1.80
Dividend declared to shareholders 0.46 0.44 1.38 1.32
---- ----
Total value creation $(0.37) $0.68 $0.01 $3.12
====== ===== ===== =====
Value creation ratio from change in book value* (2.1)% 0.6% (3.4)% 4.8%
Value creation ratio from dividends declared to 1.2 1.2 3.4 3.6
shareholders**
Value creation ratio (0.9)% 1.8% 0.0% 8.4%
===== === === ===
* 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 September 30, Nine months ended September 30,
2015 2014 2015 2014
---- ---- ---- ----
Net income $174 $183 $478 $358
Realized investment gains, net 2 43 71 66
--- --- --- ---
Operating income 172 140 407 292
Less catastrophe losses (17) (8) (96) (139)
Operating income before catastrophe losses 189 148 $503 $431
=== === ==== ====
Diluted per share data:
Net income $1.05 $1.11 $2.89 $2.17
Realized investment gains, net 0.01 0.26 0.43 0.40
---- ---- ---- ----
Operating income 1.04 0.85 2.46 1.77
Less catastrophe losses (0.10) (0.05) (0.58) (0.84)
Operating income before catastrophe losses 1.14 0.90 $3.04 $2.61
==== ==== ===== =====
Cincinnati Financial Corporation
Property Casualty Insurance Reconciliation
(Dollars in millions) Three months ended September 30, 2015
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $1,098 $743 $312 $43
Unearned premiums change (22) 14 (35) (1)
--- --- --- ---
Earned premiums $1,076 $757 $277 $42
====== ==== ==== ===
Statutory ratios:
Combined ratio 87.5% 84.6% 98.5% 71.3%
Contribution from catastrophe losses 2.5 1.4 5.6 0.4
Combined ratio excluding catastrophe losses 85.0% 83.2% 92.9% 70.9%
==== ==== ==== ====
Commission expense ratio 18.8% 19.1% 16.8% 26.8%
Other underwriting expense ratio 11.8 13.1 10.2 2.6
Total expense ratio 30.6% 32.2% 27.0% 29.4%
==== ==== ==== ====
GAAP ratios:
Combined ratio 87.8% 84.0% 100.9% 69.9%
Contribution from catastrophe losses 2.5 1.4 5.6 0.4
Prior accident years before catastrophe losses (4.3) (5.6) 1.0 (15.4)
Current accident year combined ratio before catastrophe losses 89.6% 88.2% 94.3% 84.9%
==== ==== ==== ====
(Dollars in millions) Nine months ended September 30, 2015
Consolidated Commercial Personal E&S
------------ ---------- -------- ---
Premiums:
Written premiums $3,306 $2,313 $862 $131
Unearned premiums change (130) (78) (45) (7)
---- --- --- ---
Earned premiums $3,176 $2,235 $817 $124
====== ====== ==== ====
Statutory ratios:
Combined ratio 91.3% 88.2% 101.7% 79.6%
Contribution from catastrophe losses 4.7 3.8 7.7 0.6
Combined ratio excluding catastrophe losses 86.6% 84.4% 94.0% 79.0%
==== ==== ==== ====
Commission expense ratio 18.2% 17.9% 17.6% 26.7%
Other underwriting expense ratio 11.6 12.7 10.1 2.8
Total expense ratio 29.8% 30.6% 27.7% 29.5%
==== ==== ==== ====
GAAP ratios:
Combined ratio 92.5% 89.2% 103.8% 77.9%
Contribution from catastrophe losses 4.7 3.8 7.7 0.6
Prior accident years before catastrophe losses (4.0) (5.0) 0.5 (16.4)
---- ---- --- -----
Current accident year combined ratio before catastrophe losses 91.8% 90.4% 95.6% 93.7%
==== ==== ==== ====
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 Insurance Company
