CINCINNATI FINANCIAL CINCINNATI, Oct. 25, 2016 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Third-quarter 2016 net income of $180 million, or $1.08 per share,
compared with $174 million, or $1.05 per share, in the third quarter of
2015.
-- $29 million decrease in operating income* to $143 million, or 86 cents
per share, down from $172 million, or $1.04 per share, in the third
quarter of last year.
-- $6 million increase in third-quarter 2016 net income, reflecting the
after-tax net effect of two primary items: a $35 million increase in net
realized investment gains; partially offset by an increase of $19
million in catastrophe losses.
-- $43.24 book value per share at September 30, 2016, a record-high amount
and up $4.04 or 10 percent since December 31, 2015.
-- 14.0 percent value creation ratio for the first nine months of 2016,
compared with zero percent for the same period of 2015.
Financial Highlights
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
------------------------------------------
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Revenue Data
Earned premiums $1,191 $1,127 6 $3,518 $3,332 6
Investment income, net of expenses 148 143 3 442 422 5
Total revenues 1,402 1,278 10 4,137 3,879 7
Income Statement Data
Net income $180 $174 3 $491 $478 3
Realized investment gains, net 37 2 nm 105 71 48
--- ---
Operating income* $143 $172 (17) $386 $407 (5)
==== ==== ==== ====
Per Share Data (diluted)
Net income $1.08 $1.05 3 $2.95 $2.89 2
Realized investment gains, net 0.22 0.01 nm 0.63 0.43 47
Operating income* $0.86 $1.04 (17) $2.32 $2.46 (6)
===== ===== ===== =====
Book value $43.24 $38.77 12
Cash dividend declared $0.48 $0.46 4 $1.44 $1.38 4
Diluted weighted average shares outstanding 166.8 165.5 1 166.5 165.5 1
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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 Third-Quarter Highlights
-- 92.4 percent third-quarter 2016 property casualty combined ratio, up
from 87.8 percent for third-quarter 2015.
-- 7 percent growth in third-quarter net written premiums, reflecting price
increases and premium growth initiatives.
-- $149 million third-quarter 2016 property casualty new business written
premiums, up 8 percent. Agencies appointed since the beginning of 2015
contributed $10 million or 7 percent of total new business written
premiums.
-- 14 percent growth in third-quarter life insurance earned premiums, with
steady progress in life insurance operations and financial contribution.
Investment and Balance Sheet Highlights
-- 3 percent or $5 million increase in third-quarter 2016 pretax investment
income, including 5 percent growth for stock portfolio dividends and 3
percent growth for bond interest income.
-- Three-month increase of 1 percent in fair value of total investments at
September 30, 2016, including a 1 percent increase for both the stock
portfolio and the bond portfolio.
-- $2.128 billion parent company cash and marketable securities at
September 30, 2016, up 22 percent from year-end 2015.
Maintaining Investment Income Growth
Steven J. Johnston, president and chief executive officer, commented: "Net income for both the third quarter and the first nine months of 2016 increased 3 percent. Steady cash flow from our insurance operations allowed us to purchase additional securities. Those additional purchases contributed to a 5 percent third-quarter increase in dividend income from our high-quality stock investments and a 3 percent increase in interest income from our bond portfolio."
Producing Stable Property Casualty Results
"Higher catastrophe losses continued in the third quarter of this year. Weather-related natural catastrophes for accident year 2016 accounted for 4.7 points of our 92.4 percent quarterly combined ratio and 7.8 points of our 94.4 percent nine-month combined ratio.
"We continue to benefit from our consistent reserving philosophy. Favorable reserve development of 4.6 points for the first nine months is within 0.2 points of last year's nine-month favorable reserve development of 4.4 points.
"To evaluate our current progress on our major profitability initiatives, we look at our core underwriting results as measured by our nine-month combined ratio before catastrophe losses and before reserve development for prior accident years. At 91.2 percent, that ratio improved 0.6 points compared with the same period last year."
Growing As Expected
"Consolidated property casualty net written premiums increased 6 percent to $3.5 billion for the first nine months of 2016 compared with the first nine months of 2015. New agency appointments, continued refinements in pricing precision and policy segmentation, along with our expansion into high net worth personal lines business and assumed reinsurance are cumulatively keeping our growth in line with our expectations.
"In the first nine months of 2016, new business written premiums from our agencies' high net worth clients totaled approximately $21 million. As our relationships with recently appointed agencies that focus on high net worth accounts continue to mature, we're confident that we'll reach our 2016 goal of $25 million in new high net worth business.
"The reinsurance market has responded favorably to our financial strength and relationship-based model, and our experienced reinsurance team continues to write new business as planned. Cincinnati Re contributed 2 percentage points to our overall premium growth for the year."
Delivering Steady Value for Shareholders
"At September 30, our book value again reached a record high, increasing 10 percent since December 31, 2015, to $43.24. Consolidated cash and total investments again topped $16 billion. Our ample capital allows us to execute on our long-term strategies and, at the same time, continue to pay dividends to shareholders.
"Our value creation ratio, which considers the dividends we pay as well as growth in book value, was 14 percent for the first nine months - and is on a pace to meet our 10 percent to 13 percent average annual target for this measure."
Insurance Operations Highlights
Consolidated Property Casualty Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Earned premiums $1,133 $1,076 5 $3,343 $3,176 5
Fee revenues 3 2 50 7 6 17
--- --- --- ---
Total revenues 1,136 1,078 5 3,350 3,182 5
Loss and loss expenses 690 613 13 2,110 1,956 8
Underwriting expenses 356 332 7 1,044 983 6
Underwriting profit $90 $133 (32) $196 $243 (19)
=== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 61.0% 56.9% 4.1 63.1% 61.5% 1.6
Underwriting expenses 31.4 30.9 0.5 31.3 31.0 0.3
---- ---- --- ---- ---- ---
Combined ratio 92.4% 87.8% 4.6 94.4% 92.5% 1.9
==== ==== === ==== ==== ===
% Change % Change
Agency renewal written premiums $1,036 $999 4 $3,121 $3,000 4
Agency new business written premiums 149 138 8 417 392 6
Cincinnati Re net written premiums 21 - nm 56 - nm
Other written premiums (31) (39) 21 (78) (86) 9
Net written premiums $1,175 $1,098 7 $3,516 $3,306 6
====== ====== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 59.8% 58.7% 1.1 59.9% 60.8% (0.9)
Current accident year catastrophe losses 4.7 2.6 2.1 7.8 5.1 2.7
Prior accident years before catastrophe losses (3.7) (4.3) 0.6 (4.4) (4.0) (0.4)
Prior accident years catastrophe losses 0.2 (0.1) 0.3 (0.2) (0.4) 0.2
Loss and loss expense ratio 61.0% 56.9% 4.1 63.1% 61.5% 1.6
==== ==== === ==== ==== ===
Current accident year combined ratio before 91.2% 89.6% 1.6 91.2% 91.8% (0.6)
catastrophe losses
-- $77 million or 7 percent growth of third-quarter 2016 property casualty
net written premiums and nine-month growth of 6 percent, with Cincinnati
Re contributing 2 percentage points for each respective period. The
increase also reflected other growth initiatives, price increases and a
higher level of insured exposures.
-- $11 million or 8 percent increase in third-quarter 2016 new business
premiums written by agencies and nine-month growth of 6 percent,
primarily due to contributions from new agency appointments.
-- 1,592 agency relationships in 2,059 reporting locations marketing
property casualty insurance products at September 30, 2016, compared
with 1,526 agency relationships in 1,956 reporting locations at year-end
2015. During the first nine months of 2016, 60 new agency appointments
were made for agencies that offer most or all of our property casualty
insurance products.
-- 4.6 and 1.9 percentage-point third-quarter and nine-month 2016 combined
ratio increases, including increases of 2.4 and 2.9 points for losses
from natural catastrophes.
-- 3.5 percentage-point third-quarter 2016 benefit from favorable prior
accident year reserve development of $40 million, compared with 4.4
points or $48 million for third-quarter 2015.
-- 4.6 percentage-point nine-month 2016 benefit from favorable prior
accident year reserve development, compared with 4.4 points for the 2015
period.
-- 0.9 percentage-point improvement, to 59.9 percent, for the nine-month
2016 ratio of current accident year losses and loss expenses before
catastrophes, including an increase of 0.5 points in the ratio for
current accident year losses of $1 million or more per claim.
-- 0.3 percentage-point increase in the nine-month 2016 underwriting
expense ratio, as higher earned premiums and ongoing expense management
efforts were slightly offset by strategic investments that include
enhancement of underwriting expertise.
Commercial Lines Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Earned premiums $779 $757 3 $2,310 $2,235 3
Fee revenues 1 1 0 3 3 0
--- --- --- ---
Total revenues 780 758 3 2,313 2,238 3
Loss and loss expenses 456 398 15 1,425 1,289 11
Underwriting expenses 252 239 5 740 705 5
--- --- --- ---
Underwriting profit $72 $121 (40) $148 $244 (39)
=== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 58.5% 52.4% 6.1 61.7% 57.6% 4.1
Underwriting expenses 32.3 31.6 0.7 32.0 31.6 0.4
Combined ratio 90.8% 84.0% 6.8 93.7% 89.2% 4.5
==== ==== === ==== ==== ===
% Change % Change
-------- --------
Agency renewal written premiums $698 $678 3 $2,174 $2,107 3
Agency new business written premiums 101 96 5 281 268 5
Other written premiums (22) (31) 29 (54) (62) 13
Net written premiums $777 $743 5 $2,401 $2,313 4
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 59.1% 56.6% 2.5 58.7% 58.8% (0.1)
Current accident year catastrophe losses 3.5 1.5 2.0 8.1 4.2 3.9
Prior accident years before catastrophe losses (4.5) (5.6) 1.1 (5.0) (5.0) 0.0
Prior accident years catastrophe losses 0.4 (0.1) 0.5 (0.1) (0.4) 0.3
Loss and loss expense ratio 58.5% 52.4% 6.1 61.7% 57.6% 4.1
==== ==== === ==== ==== ===
Current accident year combined ratio before 91.4% 88.2% 3.2 90.7% 90.4% 0.3
catastrophe losses
-- $34 million or 5 percent increase in third-quarter 2016 commercial lines
net written premiums, driven by higher renewal written premiums. Four
percent increase in nine-month net written premiums.
-- $20 million or 3 percent rise in third-quarter renewal written premiums
with commercial lines renewal pricing increases averaging in the
low-single-digit percent range.
-- $5 million or 5 percent increase in third-quarter 2016 new business
written by agencies. The nine-month increase was also 5 percent, with
growth in each major commercial line of business.
-- 6.8 and 4.5 percentage-point increase in third-quarter and nine-month
2016 combined ratio, including increases of 2.5 and 4.2 points for
losses from natural catastrophes.
-- 4.1 percentage-point third-quarter 2016 benefit from favorable prior
accident year reserve development of $31 million, compared with 5.7
points or $43 million for third-quarter 2015.
-- 5.1 percentage-point nine-month 2016 benefit from favorable prior
accident year reserve development, compared with a nine-month 2015
benefit of 5.4 points.
-- 0.1 percentage-point improvement, to 58.7 percent, for the nine-month
2016 ratio of current accident year losses and loss expenses before
catastrophes, including an increase of 1.8 points 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,
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Earned premiums $293 $277 6 $864 $817 6
Fee revenues 1 1 0 3 2 50
--- --- --- ---
Total revenues 294 278 6 867 819 6
Loss and loss expenses 217 198 10 614 605 1
Underwriting expenses 85 82 4 253 244 4
--- --- --- ---
Underwriting loss $(8) $(2) 300 $ - $(30) nm
=== === === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 74.2% 71.5% 2.7 71.1% 74.0% (2.9)
Underwriting expenses 29.2 29.4 (0.2) 29.3 29.8 (0.5)
Combined ratio 103.4% 100.9% 2.5 100.4% 103.8% (3.4)
===== ===== === ===== ===== ====
% Change % Change
Agency renewal written premiums $303 $288 5 $841 $796 6
Agency new business written premiums 32 30 7 91 84 8
Other written premiums (6) (6) 0 (17) (18) 6
Net written premiums $329 $312 5 $915 $862 6
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 63.7% 64.9% (1.2) 63.2% 65.8% (2.6)
Current accident year catastrophe losses 8.9 5.7 3.2 8.3 8.0 0.3
Prior accident years before catastrophe losses 2.1 1.0 1.1 (0.1) 0.5 (0.6)
Prior accident years catastrophe losses (0.5) (0.1) (0.4) (0.3) (0.3) 0.0
Loss and loss expense ratio 74.2% 71.5% 2.7 71.1% 74.0% (2.9)
==== ==== === ==== ==== ====
Current accident year combined ratio before 92.9% 94.3% (1.4) 92.5% 95.6% (3.1)
catastrophe losses
-- $17 million or 5 percent increase in third-quarter 2016 personal lines
net written premiums, including growth in new business and higher
renewal written premiums that benefited from rate increases. Six percent
increase in nine-month net written premiums.
-- $2 million or 7 percent growth in third-quarter new business written by
agencies, with a nine-month growth rate of 8 percent. The growth was
driven by expanding our share of business from agencies' high net worth
clients, including an increase of approximately $9 million during the
first nine months of 2016.
-- 2.5 percentage-point increase in the third-quarter 2016 combined ratio
and a 3.4 percentage-point decrease for the nine-month period, including
increases of 2.8 and 0.3 points for losses from natural catastrophes.
-- 1.6 percentage-point third-quarter 2016 unfavorable prior accident year
reserve development of $4 million, compared with an unfavorable 0.9
points from $2 million for third-quarter 2015.
-- 0.4 percentage-point nine-month 2016 benefit from favorable prior
accident year reserve development, compared with a nine-month 2015
unfavorable effect of 0.2 points.
-- 2.6 percentage-point improvement, to 63.2 percent, for the nine-month
2016 ratio of current accident year losses and loss expenses before
catastrophes, reflecting a decrease of 2.7 points in the ratio for
current accident year losses of $1 million or more per claim.
Excess and Surplus Lines Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Earned premiums $48 $42 14 $136 $124 10
Fee revenues 1 - nm 1 1 0
--- --- --- ---
Total revenues 49 42 17 137 125 10
Loss and loss expenses 15 17 (12) 55 62 (11)
Underwriting expenses 14 11 27 40 34 18
--- --- --- ---
Underwriting profit $20 $14 43 $42 $29 45
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 31.9% 41.9% (10.0) 40.5% 50.1% (9.6)
Underwriting expenses 29.4 28.0 1.4 29.4 27.8 1.6
---- ---- --- ---- ---- ---
Combined ratio 61.3% 69.9% (8.6) 69.9% 77.9% (8.0)
==== ==== ==== ==== ==== ====
% Change % Change
Agency renewal written premiums $35 $33 6 $106 $97 9
Agency new business written premiums 16 12 33 45 40 13
Other written premiums (3) (2) (50) (7) (6) (17)
Net written premiums $48 $43 12 $144 $131 10
=== === ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 57.2% 56.9% 0.3 58.9% 65.9% (7.0)
Current accident year catastrophe losses 0.2 0.3 (0.1) 1.3 0.7 0.6
Prior accident years before catastrophe losses (25.5) (15.4) (10.1) (19.6) (16.4) (3.2)
Prior accident years catastrophe losses 0.0 0.1 (0.1) (0.1) (0.1) 0.0
Loss and loss expense ratio 31.9% 41.9% (10.0) 40.5% 50.1% (9.6)
==== ==== ===== ==== ==== ====
Current accident year combined ratio before 86.6% 84.9% 1.7 88.3% 93.7% (5.4)
catastrophe losses
-- $5 million or 12 percent increase in third-quarter 2016 excess and
surplus lines net written premiums, in part reflecting higher renewal
written premiums that benefited from rate increases averaging near the
high end of the low-single-digit range. Ten percent increase in
nine-month net written premiums.
-- $4 million or 33 percent increase in third-quarter new business written
by agencies, raising the nine-month growth rate to 13 percent and
reflecting an increase in marketing efforts while continuing to
carefully underwrite each policy.
-- 8.6 percentage-point third-quarter 2016 combined ratio improvement,
driven by more favorable prior accident year reserve development. For
the nine-month 2016 period, the combined ratio improved 8.0 percentage
points, primarily due to a lower ratio for current accident year loss
experience before catastrophe losses.
-- 25.5 percentage-point third-quarter 2016 benefit from favorable prior
accident year reserve development of $12 million, compared with 15.3
points or $7 million for third-quarter 2015.
-- 19.7 percentage-point nine-month 2016 benefit from favorable prior
accident year reserve development, compared with a nine-month 2015
benefit of 16.5 points.
-- 7.0 percentage-point improvement, to 58.9 percent, for the nine-month
2016 ratio of current accident year losses and loss expenses before
catastrophes, including a decrease of 0.2 points in the ratio for
current accident year losses of $1 million or more per claim.
Life Insurance Subsidiary Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
--------------------
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Term life insurance $37 $34 9 $112 $103 9
Universal life insurance 13 9 44 34 28 21
Other life insurance, annuity, and disability income 8 8 0 29 25 16
products
Earned premiums 58 51 14 175 156 12
Investment income, net of expenses 40 38 5 117 112 4
Realized investment gains, net 3 (1) nm 4 1 300
Fee revenues 2 2 0 4 4 0
--- --- --- ---
Total revenues 103 90 14 300 273 10
--- ---
Contract holders' benefits incurred 63 57 11 188 175 7
Underwriting expenses incurred 24 16 50 62 50 24
--- --- --- ---
Total benefits and expenses 87 73 19 250 225 11
--- --- --- ---
Net income before income tax 16 17 (6) 50 48 4
Income tax 6 6 0 18 17 6
Net income of the life insurance subsidiary $10 $11 (9) $32 $31 3
=== === === ===
-- $7 million or 14 percent increase in third-quarter 2016 earned premiums,
including a 9 percent increase for term life insurance, our largest life
insurance product line. The nine-month 2016 growth rate for term life
matched third-quarter.
-- $1 million improvement in nine-month 2016 life insurance subsidiary net
income, primarily due to revenue growth for both earned premiums and
investment income.
-- $106 million or 12 percent nine-month 2016 increase to $979 million in
GAAP shareholders' equity for the life insurance subsidiary, largely
reflecting an increase in fair value of the fixed-maturity portfolio due
to the effects of lower interest rates.
Investment and Balance Sheet Highlights
Investments Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
--------------------
2016 2015 % Change 2016 2015 % Change
---- ---- -------- ---- ---- --------
Investment income, net of expenses $148 $143 3 $442 $422 5
Investment interest credited to contract holders' (23) (21) (10) (67) (64) (5)
Realized investment gains, net 56 3 nm 161 110 46
Investments profit $181 $125 45 $536 $468 15
==== ==== ==== ====
Investment income:
Interest $111 $108 3 $330 $319 3
Dividends 39 37 5 117 108 8
Other 1 1 0 2 2 0
Less investment expenses 3 3 0 7 7 0
--- --- --- ---
Investment income, pretax 148 143 3 442 422 5
Less income taxes 35 34 3 105 100 5
--- --- --- ---
Total investment income, after-tax $113 $109 4 $337 $322 5
==== ==== ==== ====
Investment returns:
Effective tax rate 23.9% 23.7% 23.8% 23.7%
Average invested assets plus cash and cash $15,564 $14,498 $15,192 $14,399
equivalents
Average yield pretax 3.80% 3.95% 3.88% 3.91%
Average yield after-tax 2.90 3.01 2.96 2.98
Fixed-maturity returns:
Effective tax rate 27.3% 27.1% 27.3% 27.1%
Average amortized cost $9,588 $9,347 $9,491 $9,133
Average yield pretax 4.63% 4.62% 4.64% 4.66%
Average yield after-tax 3.37 3.37 3.37 3.40
-- $5 million or 3 percent rise in third-quarter 2016 pretax investment
income, including 5 percent growth in equity portfolio dividends and 3
percent growth in interest income.
-- $62 million or 2 percent third-quarter 2016 increase in pretax net
unrealized investment portfolio gains, including an $82 million increase
for the equity portfolio. The total increase included the offsetting
effect of $57 million of pretax net realized gains from investment
portfolio security sales or called bonds during the third quarter of
2016, including $47 million from the equity portfolio.
Balance Sheet Highlights
(Dollars in millions except share data) At September 30, At December 31,
--------------------------------------
2016 2015
---- ----
Total investments $15,642 $14,423
Total assets 20,455 18,888
Short-term debt 20 35
Long-term debt 786 786
Shareholders' equity 7,121 6,427
Book value per share 43.24 39.20
Debt-to-total-capital ratio 10.2% 11.3%
--------------------------- ---- ----
-- $16.342 billion in consolidated cash and total investments at September
30, 2016, up 9 percent from $14.967 billion at year-end 2015.
-- $10.257 billion bond portfolio at September 30, 2016, with an average
rating of A3/A. Fair value increased $119 million or 1 percent during
the third quarter of 2016, including $150 million in net purchases of
fixed-maturity securities.
-- $5.304 billion equity portfolio was 34 percent of total investments,
including $2.135 billion in pretax net unrealized gains at September 30,
2016. Third-quarter 2016 increase in fair value of $62 million or 1
percent.
-- $4.679 billion of statutory surplus for the property casualty insurance
group at September 30, 2016, up $266 million from $4.413 billion at
year-end 2015, after declaring $300 million in dividends to the parent
company. For the 12 months ended September 30, 2016, the ratio of net
written premiums to surplus was 1.0-to-1, matching year-end 2015.
-- $0.87 three-month 2016 increase in book value per share, including
additions of $0.87 from net income before realized gains and $0.47 from
investment portfolio realized gains and changes in unrealized gains that
were partially offset by deductions of $0.48 from dividends declared to
shareholders.
-- Value creation ratio of 14.0 percent for the first nine months of 2016,
reflecting 6.0 percent from net income before net realized investment
gains, which includes underwriting and investment income, and 8.1
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 2015 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 or development of claims
that are unforeseen at the time of policy issuance
-- Inadequate estimates, assumptions or reliance on third-party data 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 fair 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, inadequate data developed internally or from third parties, 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 ceded reinsurance on acceptable terms,
amount of reinsurance coverage 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,
2016 2015
---- ----
Assets
Investments $15,642 $14,423
Cash and cash equivalents 700 544
Premiums receivable 1,518 1,431
Reinsurance recoverable 552 542
Deferred policy acquisition costs 627 616
Other assets 1,416 1,332
Total assets $20,455 $18,888
======= =======
Liabilities
Insurance reserves $7,632 $7,301
Unearned premiums 2,388 2,201
Deferred income tax 879 638
Long-term debt and capital lease obligations 827 821
Other liabilities 1,608 1,500
Total liabilities 13,334 12,461
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,641 1,629
Retained earnings 5,016 4,762
Accumulated other comprehensive income 1,752 1,344
Treasury stock (1,288) (1,308)
------ ------
Total shareholders' equity 7,121 6,427
----- -----
Total liabilities and shareholders' equity $20,455 $18,888
======= =======
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
2016 2015 2016 2015
---- ---- ---- ----
Revenues
Earned premiums $1,191 $1,127 $3,518 $3,332
Investment income, net of expenses 148 143 442 422
Realized investment gains, net 56 3 161 110
Other revenues 7 5 16 15
Total revenues 1,402 1,278 4,137 3,879
----- ----- ----- -----
Benefits and Expenses
Insurance losses and contract holders' benefits 753 670 2,298 2,131
Underwriting, acquisition and insurance expenses 380 348 1,106 1,033
Interest expense 13 14 39 40
Other operating expenses 3 3 10 10
--- --- --- ---
Total benefits and expenses 1,149 1,035 3,453 3,214
----- ----- ----- -----
Income Before Income Taxes 253 243 684 665
--- --- --- ---
Provision for Income Taxes 73 69 193 187
--- --- --- ---
Net Income $180 $174 $491 $478
==== ==== ==== ====
Per Common Share:
Net income-basic $1.09 $1.06 $2.98 $2.91
Net income-diluted 1.08 1.05 2.95 2.89
------------------ ---- ---- ---- ----
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; supplement reporting segment disclosures with disclosures for a subsidiary company or for a combination of subsidiaries or reporting segments; 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.
-- Consolidated property casualty insurance results: To supplement
reporting segment disclosures related to our property casualty insurance
operations, we also evaluate results for those operations on a basis
that includes results for our property casualty insurance and brokerage
services subsidiaries. That is the total of our commercial lines,
personal lines and our excess and surplus lines segment plus our
reinsurance assumed operations.
-- Life insurance subsidiary results: To supplement life insurance
reporting segment disclosures related to our life insurance operation,
we also evaluate results for that operation on a basis that includes
life insurance subsidiary investment income, or investment income plus
net realized investment gains, that are also included in our investments
reporting segment. We recognize that assets under management, capital
appreciation and investment income are integral to evaluating the
success of the life insurance segment because of the long duration of
life products.
-- 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,
----------------------
2016 2015 2016 2015
---- ---- ---- ----
Value creation ratio:
End of period book value $43.24 $38.77 $43.24 $38.77
Less beginning of period book value 42.37 39.60 39.20 40.14
----- ----- ----- -----
Change in book value 0.87 (0.83) 4.04 (1.37)
Dividend declared to shareholders 0.48 0.46 1.44 1.38
---- ----
Total value creation $1.35 $(0.37) $5.48 $0.01
===== ====== ===== =====
Value creation ratio from change in book value* 2.1% (2.1)% 10.3% (3.4)%
Value creation ratio from dividends declared to 1.1 1.2 3.7 3.4
shareholders**
Value creation ratio 3.2% (0.9)% 14.0% 0.0%
=== ===== ==== ===
* 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,
2016 2015 2016 2015
---- ---- ---- ----
Net income $180 $174 $491 $478
---- ---- ---- ----
Less:
Realized investment gains, net 56 3 161 110
Income tax on realized investment gains (19) (1) (56) (39)
--- --- --- ---
Realized investment gains, after-tax 37 2 105 71
--- --- ---
Operating income $143 $172 $386 $407
==== ==== ==== ====
Diluted per share data:
Net income $1.08 $1.05 $2.95 $2.89
----- ----- ----- -----
Less:
Realized investment gains, net 0.34 0.02 0.97 0.66
Income tax on realized investment gains (0.12) (0.01) (0.34) (0.23)
----- ----- ----- -----
Realized investment gains, after-tax 0.22 0.01 0.63 0.43
---- ---- ----
Operating income $0.86 $1.04 $2.32 $2.46
===== ===== ===== =====
Cincinnati Financial Corporation
Life Insurance Reconciliation
(Dollars in millions) Three months ended September Nine months ended September
30, 30,
2016 2015 2016 2015
---- ---- ---- ----
Net income of the life insurance subsidiary $10 $11 $32 $31
Realized investment gains, net 3 (1) 4 1
Income tax on realized investment gains 1 - 1 -
--- --- --- ---
Operating income 8 12 29 30
Investment income, net of expenses (40) (38) (117) (112)
Investment income credited to contract 23 21 67 64
holders'
Income tax on investment income and investment 5 6 17 17
income credited to contract holders'
Life insurance segment (loss) profit $(4) $1 $(4) $(1)
=== === === ===
Cincinnati Financial Corporation
Property Casualty Insurance Reconciliation
(Dollars in millions) Three months ended September 30, 2016
Consolidated Commercial Personal E&S Cincinnati Re
------------ ---------- -------- --- -------------
Premiums:
Written premiums $1,175 $777 $329 $48 $21
Unearned premiums change (42) 2 (36) - (8)
--- --- --- ---
Earned premiums $1,133 $779 $293 $48 $13
====== ==== ==== === ===
Statutory ratios:
Combined ratio 91.9% 91.1% 101.3% 62.7% 49.4%
Contribution from catastrophe losses 4.9 3.9 8.4 0.2 0.0
Combined ratio excluding catastrophe losses 87.0% 87.2% 92.9% 62.5% 49.4%
==== ==== ==== ==== ====
Commission expense ratio 18.5% 18.6% 16.8% 27.3% 21.6%
Other underwriting expense ratio 12.4 14.0 10.3 3.5 8.2
---
Total expense ratio 30.9% 32.6% 27.1% 30.8% 29.8%
==== ==== ==== ==== ====
GAAP ratios:
Combined ratio 92.4% 90.8% 103.4% 61.3% 53.3%
Contribution from catastrophe losses 4.9 3.9 8.4 0.2 0.0
Prior accident years before catastrophe losses (3.7) (4.5) 2.1 (25.5) (3.0)
Current accident year combined ratio before 91.2% 91.4% 92.9% 86.6% 56.3%
catastrophe losses
(Dollars in millions) Nine months ended September 30, 2016
Consolidated Commercial Personal E&S Cincinnati Re
------------ ---------- -------- --- -------------
Premiums:
Written premiums $3,516 $2,401 $915 $144 $56
Unearned premiums change (173) (91) (51) (8) (23)
---- --- --- --- ---
Earned premiums $3,343 $2,310 $864 $136 $33
====== ====== ==== ==== ===
Statutory ratios:
Combined ratio 93.4% 92.7% 99.3% 70.9% 76.4%
Contribution from catastrophe losses 7.6 8.0 8.0 1.2 0.0
Combined ratio excluding catastrophe losses 85.8% 84.7% 91.3% 69.7% 76.4%
==== ==== ==== ==== ====
Commission expense ratio 18.2% 17.8% 17.5% 27.2% 19.6%
Other underwriting expense ratio 12.1 13.2 10.7 3.2 7.0
---
Total expense ratio 30.3% 31.0% 28.2% 30.4% 26.6%
==== ==== ==== ==== ====
GAAP ratios:
Combined ratio 94.4% 93.7% 100.4% 69.9% 81.4%
Contribution from catastrophe losses 7.6 8.0 8.0 1.2 0.0
Prior accident years before catastrophe losses (4.4) (5.0) (0.1) (19.6) (5.7)
---- ---- ---- ----- ----
Current accident year combined ratio before 91.2% 90.7% 92.5% 88.3% 87.1%
catastrophe losses
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
