CINCINNATI FINANCIAL CINCINNATI, Oct. 26, 2017 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:
-- Third-quarter 2017 net income of $102 million, or 61 cents per share,
compared with $180 million, or $1.08 per share, in the third quarter of
2016.
-- $46 million decrease in operating income* to $97 million, or 58 cents
per share, compared with $143 million, or 86 cents per share, in the
third quarter of last year.
-- $78 million decrease in third-quarter 2017 net income, reflecting a $51
million reduction in after-tax property casualty underwriting income and
a $32 million after-tax decrease in net realized investment gains.
-- $45.86 book value per share at September 30, 2017, up $2.91 or 6.8
percent since year-end to a new record high.
-- 10.3 percent value creation ratio for the first nine months of 2017,
compared with 14.0 percent for the same period of 2016.
Financial Highlights
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
------------------------------------------
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Revenue Data
Earned premiums $1,247 $1,191 5 $3,696 $3,518 5
Investment income, net of expenses 153 148 3 453 442 2
Total revenues 1,412 1,402 1 4,321 4,137 4
Income Statement Data
Net income $102 $180 (43) $403 $491 (18)
Realized investment gains and losses, net 5 37 (86) 101 105 (4)
--- ---
Operating income* $97 $143 (32) $302 $386 (22)
=== ==== ==== ====
Per Share Data (diluted)
Net income $0.61 $1.08 (44) $2.42 $2.95 (18)
Realized investment gains and losses, net 0.03 0.22 (86) 0.61 0.63 (3)
Operating income* $0.58 $0.86 (33) $1.81 $2.32 (22)
===== ===== ===== =====
Book value $45.86 $43.24 6
Cash dividend declared $0.50 $0.48 4 $1.50 $1.44 4
Diluted weighted average shares outstanding 165.9 166.8 (1) 166.1 166.5 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
-- 99.3 percent third-quarter 2017 property casualty combined ratio, up
from 92.4 percent for the third quarter of 2016.
-- 3 percent growth in third-quarter net written premiums, reflecting price
increases and premium growth initiatives.
-- $157 million third-quarter 2017 property casualty new business written
premiums, up 5 percent. Agencies appointed since the beginning of 2016
contributed $23 million or 15 percent of total new business written
premiums.
-- $8 million of life insurance subsidiary net income, down $2 million from
third-quarter 2016, and 5 percent growth in third-quarter 2017 term life
insurance earned premiums.
Investment and Balance Sheet Highlights
-- 3 percent or $5 million increase in third-quarter 2017 pretax investment
income, including 10 percent growth for stock portfolio dividends and 1
percent growth for bond interest income.
-- Three-month increase of 2 percent in fair value of total investments at
September 30, 2017, including a 4 percent increase for the stock
portfolio and an increase of less than 1 percent for the bond portfolio.
-- $2.480 billion parent company cash and marketable securities at
September 30, 2017, up 16 percent from year-end 2016.
Investments Lead Profits
Steven J. Johnston, president and chief executive officer, commented: "As previously announced, hurricanes Harvey and Irma brought considerable losses to our policyholders. Confident in our balance sheet and risk management decisions, we were able to focus on what was important: outstanding claims service. I applaud the efforts of our associates who worked quickly to comfort those who had experienced loss and get them moving toward recovery.
"Investment income continued to contribute to a positive operating profit, supported by a 10 percent growth in dividends from our stock portfolio and an increase of 1 percent in the interest from our bond portfolio. Steady cash flow from 13 quarters in a row of underwriting profit from our insurance operations, including this one, helps fuel our investment approach, allowing us to continually grow our entire portfolio.
"Catastrophe events in the third quarter contributed 9.1 points to our 99.3 percent combined ratio - a catastrophe effect nearly double our 10-year average for the third quarter. With three-quarters of the year behind us, our 99.1 percent combined ratio is within our long-term target of 95 to 100 percent.
"Segmentation is key to improving our core underwriting, and we continue to refine our capabilities in that arena. With more eyes on the risks through increasing loss control inspections and improving sophistication in our data models, our associates thoroughly understand the accounts we insure and can determine the appropriate price for each risk based on its unique characteristics.
"We continued to build on our record of 28 consecutive years of overall favorable reserve development with third quarter net favorable reserve development on prior accident years. While favorable development was 1.9 points less than last year's third quarter result, we maintained our consistently prudent approach to setting reserves, especially in the face of a recent-quarter elevation in commercial casualty large losses of $1 million or more per claim."
Confident in Growth Plans
"Diversification and a firm belief in our underwriting models and expertise are allowing us to grow with confidence. Property casualty net written premiums grew 6 percent in the first nine-months of the year, with Cincinnati Re(SM )contributing 1 percent.
"The independent agents who represent us continue to respond enthusiastically to our product and program offerings designed to meet the needs of a modern insurance buyer. Direct bill options for excess and surplus lines clients is meeting rave reviews; Pillar(TM) - our management liability program - is attracting additional business not correlated with the weather; and our high net worth program is continuing to grow, contributing $22 million in personal lines new business growth so far this year.
"With catastrophe loss estimates for the third quarter of 2017 indicating one of the worst quarters ever for the reinsurance industry, we experienced losses for each of the major hurricane events that were consistent with our modeled loss expectations for our assumed reinsurance portfolio. The Cincinnati Re team is well positioned to participate in what we believe will be a firming reinsurance market, considering the magnitude of losses faced by the insurance industry as a whole. Our team is highly qualified and respected in the industry. They have established relationships and proven analytics in place to understand, both quantitatively and qualitatively, the risks we accept and to price them appropriately."
Book Value at Record High
"At September 30, our book value again reached a record high, increasing 6.8 percent since December 31, 2016, to $45.86. Consolidated cash and total investments again topped $17 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 10.3 percent for the first nine months, on pace to meet our 10 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,
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Earned premiums $1,191 $1,133 5 $3,523 $3,343 5
Fee revenues 2 3 (33) 8 7 14
--- --- --- ---
Total revenues 1,193 1,136 5 3,531 3,350 5
Loss and loss expenses 815 690 18 2,397 2,110 14
Underwriting expenses 367 356 3 1,094 1,044 5
Underwriting profit $11 $90 (88) $40 $196 (80)
=== === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 68.4% 61.0% 7.4 68.0% 63.1% 4.9
Underwriting expenses 30.9 31.4 (0.5) 31.1 31.3 (0.2)
---- ---- ---- ---- ---- ----
Combined ratio 99.3% 92.4% 6.9 99.1% 94.4% 4.7
==== ==== === ==== ==== ===
% Change % Change
Agency renewal written premiums $1,064 $1,036 3 $3,211 $3,121 3
Agency new business written premiums 157 149 5 475 417 14
Cincinnati Re net written premiums 24 21 14 104 56 86
Other written premiums (37) (31) (19) (80) (78) (3)
Net written premiums $1,208 $1,175 3 $3,710 $3,516 6
====== ====== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 60.4% 59.8% 0.6 60.8% 59.9% 0.9
Current accident year catastrophe losses 9.6 4.7 4.9 9.9 7.8 2.1
Prior accident years before catastrophe losses (1.1) (3.7) 2.6 (2.1) (4.4) 2.3
Prior accident years catastrophe losses (0.5) 0.2 (0.7) (0.6) (0.2) (0.4)
Loss and loss expense ratio 68.4% 61.0% 7.4 68.0% 63.1% 4.9
==== ==== === ==== ==== ===
Current accident year combined ratio before 91.3% 91.2% 0.1 91.9% 91.2% 0.7
catastrophe losses
-- $33 million or 3 percent growth of third-quarter 2017 property casualty
net written premiums, and nine-month growth of 6 percent, with
Cincinnati Re contributing 1 percentage point to the nine-month period.
The increase also reflected other growth initiatives, price increases
and a higher level of insured exposures.
-- $8 million or 5 percent increase in third-quarter 2017 new business
premiums written by agencies and nine-month growth of 14 percent. The
third-quarter increase included a $17 million increase in standard
market property casualty production from agencies appointed since the
beginning of 2016.
-- 1,704 agency relationships in 2,237 reporting locations marketing
property casualty insurance products at September 30, 2017, compared
with 1,614 agency relationships in 2,090 reporting locations at year-end
2016. During the first nine months of 2017, new agency appointments
included 86 agencies that market most or all of our property casualty
insurance products and 92 that market only our personal lines products.
-- 6.9 percentage-point increase in the third-quarter 2017 combined ratio
and a 4.7 percentage-point increase for the nine-month period, including
a third-quarter increase of 4.2 points and a nine-month increase of 1.7
points for losses from natural catastrophes.
-- 3.6 and 1.2 percentage-point third-quarter and nine-month 2017
Cincinnati Re contribution to the ratio increase for losses from natural
catastrophes.
-- 1.6 percentage-point third-quarter 2017 benefit from favorable prior
accident year reserve development of $20 million, compared with 3.5
points or $40 million for third-quarter 2016.
-- 2.7 percentage-point nine-month 2017 benefit from favorable prior
accident year reserve development, compared with 4.6 points for the 2016
period.
-- 0.9 percentage-point increase, to 60.8 percent, for the nine-month 2017
ratio of current accident year losses and loss expenses before
catastrophes, including an increase of 0.7 points in the ratio for
current accident year losses of $1 million or more per claim.
-- 0.2 percentage point improvement in the nine-month 2017 underwriting
expense ratio, compared with the same period of 2016, as higher earned
premiums and ongoing expense management efforts offset 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,
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Earned premiums $792 $779 2 $2,369 $2,310 3
Fee revenues 1 1 0 3 3 0
--- --- --- ---
Total revenues 793 780 2 2,372 2,313 3
Loss and loss expenses 501 456 10 1,555 1,425 9
Underwriting expenses 253 252 0 756 740 2
--- --- --- ---
Underwriting profit $39 $72 (46) $61 $148 (59)
=== === === ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 63.3% 58.5% 4.8 65.7% 61.7% 4.0
Underwriting expenses 31.9 32.3 (0.4) 31.9 32.0 (0.1)
Combined ratio 95.2% 90.8% 4.4 97.6% 93.7% 3.9
==== ==== === ==== ==== ===
% Change % Change
-------- --------
Agency renewal written premiums $707 $698 1 $2,208 $2,174 2
Agency new business written premiums 99 101 (2) 301 281 7
Other written premiums (28) (22) (27) (53) (54) 2
Net written premiums $778 $777 0 $2,456 $2,401 2
==== ==== ====== ======
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 61.3% 59.1% 2.2 60.7% 58.7% 2.0
Current accident year catastrophe losses 4.3 3.5 0.8 7.2 8.1 (0.9)
Prior accident years before catastrophe losses (1.8) (4.5) 2.7 (1.6) (5.0) 3.4
Prior accident years catastrophe losses (0.5) 0.4 (0.9) (0.6) (0.1) (0.5)
Loss and loss expense ratio 63.3% 58.5% 4.8 65.7% 61.7% 4.0
==== ==== === ==== ==== ===
Current accident year combined ratio before 93.2% 91.4% 1.8 92.6% 90.7% 1.9
catastrophe losses
-- $1 million increase in third-quarter 2017 commercial lines net written
premiums, driven by higher renewal written premiums. Two percent
increase in nine-month net written premiums.
-- $9 million or 1 percent rise in third-quarter renewal written premiums,
with commercial lines average renewal pricing increases in the
low-single-digit percent range, similar to the second quarter of 2017,
and including commercial auto increases in the high-single-digit range.
-- $2 million or 2 percent decrease in third-quarter 2017 new business
written by agencies, reflecting a modest decrease for each major line of
business except commercial property. For the nine-month period, the
increase was 7 percent.
-- 4.4 and 3.9 percentage-point third-quarter and nine-month 2017 combined
ratio increases, somewhat offset by decreases of 0.1 and 1.4 points for
losses from natural catastrophes. The combined ratio increase for both
2017 periods was largely due to lower amounts of favorable reserve
development on prior accident years.
-- 2.3 percentage-point third-quarter 2017 benefit from favorable prior
accident year reserve development of $18 million, compared with 4.1
points or $31 million for third-quarter 2016.
-- 2.2 percentage-point nine-month 2017 benefit from favorable prior
accident year reserve development, compared with 5.1 points for the 2016
period.
Personal Lines Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Earned premiums $314 $293 7 $921 $864 7
Fee revenues 1 1 0 4 3 33
--- --- --- ---
Total revenues 315 294 7 925 867 7
Loss and loss expenses 233 217 7 706 614 15
Underwriting expenses 91 85 7 267 253 6
--- --- --- ---
Underwriting loss $(9) $(8) 13 $(48) $ - nm
=== === ==== === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Loss and loss expenses 74.0% 74.2% (0.2) 76.6% 71.1% 5.5
Underwriting expenses 29.1 29.2 (0.1) 29.0 29.3 (0.3)
Combined ratio 103.1% 103.4% (0.3) 105.6% 100.4% 5.2
===== ===== ==== ===== ===== ===
% Change % Change
Agency renewal written premiums $318 $303 5 $881 $841 5
Agency new business written premiums 43 32 34 122 91 34
Other written premiums (6) (6) 0 (18) (17) (6)
Net written premiums $355 $329 8 $985 $915 8
==== ==== ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 62.2% 63.7% (1.5) 63.6% 63.2% 0.4
Current accident year catastrophe losses 11.7 8.9 2.8 14.5 8.3 6.2
Prior accident years before catastrophe losses 0.7 2.1 (1.4) (1.0) (0.1) (0.9)
Prior accident years catastrophe losses (0.6) (0.5) (0.1) (0.5) (0.3) (0.2)
Loss and loss expense ratio 74.0% 74.2% (0.2) 76.6% 71.1% 5.5
==== ==== ==== ==== ==== ===
Current accident year combined ratio before 91.3% 92.9% (1.6) 92.6% 92.5% 0.1
catastrophe losses
-- $26 million or 8 percent increase in third-quarter 2017 personal lines
net written premiums, reflecting growth in new business and higher
renewal written premiums that benefited from rate increases averaging in
the mid-single-digit percent range, including personal auto increases
near the low end of the high-single-digit range. Eight percent increase
in nine-month net written premiums.
-- $11 million or 34 percent growth in third-quarter new business written
by agencies and 34 percent growth also for the first nine months of
2017. The growth was largely due to expanding our share of business from
agencies' high net worth clients, including an increase of approximately
$9 million during the third quarter of 2017.
-- 0.3 percentage-point third-quarter 2017 combined ratio decrease and
nine-month increase of 5.2 points, including increases of 2.7 and 6.0
points for losses from natural catastrophes.
-- 0.1 percentage-point third-quarter 2017 unfavorable prior accident year
reserve development of less than $1 million, compared with 1.6 points or
$4 million of unfavorable development for third-quarter 2016.
-- 1.5 percentage-point nine-month 2017 benefit from favorable prior
accident year reserve development, compared with 0.4 points for the 2016
period.
Excess and Surplus Lines Insurance Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Earned premiums $53 $48 10 $153 $136 13
Fee revenues - 1 nm 1 1 0
--- --- --- ---
Total revenues 53 49 8 154 137 12
Loss and loss expenses 24 15 60 58 55 5
Underwriting expenses 16 14 14 46 40 15
--- --- --- ---
Underwriting profit $13 $20 (35) $50 $42 19
=== === === ===
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Loss and loss expenses 45.8% 31.9% 13.9 38.1% 40.5% (2.4)
Underwriting expenses 29.0 29.4 (0.4) 29.9 29.4 0.5
---- ---- ---- ---- ---- ---
Combined ratio 74.8% 61.3% 13.5 68.0% 69.9% (1.9)
==== ==== ==== ==== ==== ====
% Change % Change
Agency renewal written premiums $39 $35 11 $122 $106 15
Agency new business written premiums 15 16 (6) 52 45 16
Other written premiums (3) (3) 0 (9) (7) (29)
Net written premiums $51 $48 6 $165 $144 15
=== === ==== ====
Ratios as a percent of earned premiums: Pt. Change Pt. Change
---------- ----------
Current accident year before catastrophe losses 49.1% 57.2% (8.1) 52.8% 58.9% (6.1)
Current accident year catastrophe losses 1.7 0.2 1.5 1.3 1.3 0.0
Prior accident years before catastrophe losses (4.7) (25.5) 20.8 (15.9) (19.6) 3.7
Prior accident years catastrophe losses (0.3) 0.0 (0.3) (0.1) (0.1) 0.0
Loss and loss expense ratio 45.8% 31.9% 13.9 38.1% 40.5% (2.4)
==== ==== ==== ==== ==== ====
Current accident year combined ratio before 78.1% 86.6% (8.5) 82.7% 88.3% (5.6)
catastrophe losses
-- $3 million or 6 percent increase in third-quarter 2017 excess and
surplus lines net written premiums, in part reflecting higher renewal
written premiums that benefited from rate increases averaging in the
low-single-digit percent range. Fifteen percent increase in nine-month
net written premiums.
-- $1 million decrease in third-quarter new business written by agencies
and 16 percent growth for the first nine months of 2017, reflecting an
increase in marketing efforts while continuing to carefully underwrite
each policy.
-- 13.5 percentage-point increase in the third-quarter 2017 combined ratio
and a 1.9 point decrease for the nine-month period, driven by less
favorable prior accident year reserve development for the third quarter
and more favorable current accident year loss experience before
catastrophe losses for the nine-month period.
-- 5.0 percentage-point third-quarter 2017 benefit from favorable prior
accident year reserve development of $3 million, compared with 25.5
points or $12 million for third-quarter 2016.
-- 16.0 percentage-point nine-month 2017 benefit from favorable prior
accident year reserve development, compared with 19.7 points for the
2016 period.
Life Insurance Subsidiary Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
--------------------
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Term life insurance $39 $37 5 $118 $112 5
Universal life insurance 7 13 (46) 28 34 (18)
Other life insurance, annuity, and disability income 10 8 25 27 29 (7)
products
Earned premiums 56 58 (3) 173 175 (1)
Investment income, net of expenses 39 40 (3) 117 117 0
Realized investment gains and losses, net 1 3 (67) 4 4 0
Fee revenues 1 2 (50) 4 4 0
--- --- --- ---
Total revenues 97 103 (6) 298 300 (1)
--- ---
Contract holders' benefits incurred 59 63 (6) 184 188 (2)
Underwriting expenses incurred 26 24 8 63 62 2
--- --- --- ---
Total benefits and expenses 85 87 (2) 247 250 (1)
--- --- --- ---
Net income before income tax 12 16 (25) 51 50 2
Income tax 4 6 (33) 18 18 0
Net income of the life insurance subsidiary $8 $10 (20) $33 $32 3
=== === === ===
-- $2 million or 3 percent decrease in third-quarter 2017 earned premiums,
including a 5 percent increase for term life insurance, our largest life
insurance product line. Third-quarter 2017 term life insurance premium
growth was offset by a decline in universal life insurance premiums due
to unlocking of actuarial assumptions that slowed amortization of
unearned front-end loads.
-- $1 million improvement in nine-month 2017 life insurance subsidiary net
income, largely due to more favorable mortality experience.
-- $52 million or 6 percent nine-month 2017 increase to $991 million in
GAAP shareholders' equity for the life insurance subsidiary, largely
reflecting net income of $33 million.
Investment and Balance Sheet Highlights
Investments Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
--------------------
2017 2016 % Change 2017 2016 % Change
---- ---- -------- ---- ---- --------
Investment income, net of expenses $153 $148 3 $453 $442 2
Investment interest credited to contract holders' (24) (23) (4) (70) (67) (4)
Realized investment gains and losses, net 7 56 nm 156 161 (3)
Investments profit $136 $181 (25) $539 $536 1
==== ==== ==== ====
Investment income:
Interest $112 $111 1 $334 $330 1
Dividends 43 39 10 124 117 6
Other 1 1 0 3 2 50
Less investment expenses 3 3 0 8 7 14
--- --- --- ---
Investment income, pretax 153 148 3 453 442 2
Less income taxes 35 35 0 106 105 1
--- --- --- ---
Total investment income, after-tax $118 $113 4 $347 $337 3
==== ==== ==== ====
Investment returns:
Average invested assets plus cash and cash $16,769 $15,564 $16,462 $15,192
equivalents
Average yield pretax 3.65% 3.80% 3.67% 3.88%
Average yield after-tax 2.81 2.90 2.81 2.96
Effective tax rate 23.4 23.9 23.5 23.8
Fixed-maturity returns:
Average amortized cost $10,121 $9,588 $9,967 $9,491
Average yield pretax 4.43% 4.63% 4.47% 4.64%
Average yield after-tax 3.25 3.37 3.27 3.37
Effective tax rate 26.6 27.3 26.8 27.3
-- $5 million or 3 percent rise in third-quarter 2017 pretax investment
income, including 10 percent growth in equity portfolio dividends and 1
percent growth in interest income.
-- $189 million or 6 percent third-quarter 2017 increase in pretax net
unrealized investment portfolio gains, including a $180 million increase
for the equity portfolio. The total increase included the offsetting
effect of $4 million of pretax net realized gains from investment
portfolio security sales or called bonds during the third quarter of
2017, including $1 million from the equity portfolio.
Balance Sheet Highlights
(Dollars in millions except share data) At September 30, At December 31,
--------------------------------------
2017 2016
---- ----
Total investments $16,664 $15,500
Total assets 21,592 20,386
Short-term debt 17 20
Long-term debt 787 787
Shareholders' equity 7,523 7,060
Book value per share 45.86 42.95
Debt-to-total-capital ratio 9.7% 10.3%
-- $17.338 billion in consolidated cash and total investments at September
30, 2017, up 7 percent from $16.277 billion at year-end 2016.
-- $10.540 billion bond portfolio at September 30, 2017, with an average
rating of A2/A. Fair value increased $38 million during the third
quarter of 2017, including $70 million in net purchases of
fixed-maturity securities.
-- $6.025 billion equity portfolio was 36.2 percent of total investments,
including $2.761 billion in pretax net unrealized gains at September 30,
2017. Third-quarter 2017 increase in fair value of $226 million or 4
percent.
-- $4.846 billion of statutory surplus for the property casualty insurance
group at September 30, 2017, up $160 million from $4.686 billion at
year-end 2016, after declaring $290 million in dividends to the parent
company. For the 12 months ended September 30, 2017, the ratio of net
written premiums to surplus was 1.0-to-1, matching year-end 2016.
-- $0.89 three-month 2017 increase in book value per share, including
additions of $0.59 from net income before realized gains, $0.77 from
investment portfolio realized gains and changes in unrealized gains and
$0.03 for other items that were partially offset by deductions of $0.50
from dividends declared to shareholders.
-- Value creation ratio of 10.3 percent for the first nine months of 2017,
including 4.3 percent from net income before net realized investment
gains, which includes underwriting and investment income, and 6.4
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 2016 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 29.
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
-- 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
-- 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
-- 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,
2017 2016
---- ----
Assets
Investments $16,664 $15,500
Cash and cash equivalents 674 777
Premiums receivable 1,640 1,533
Reinsurance recoverable 522 545
Deferred policy acquisition costs 676 637
Other assets 1,416 1,394
Total assets $21,592 $20,386
======= =======
Liabilities
Insurance reserves $8,066 $7,756
Unearned premiums 2,475 2,307
Deferred income tax 1,087 865
Long-term debt and capital lease obligations 826 826
Other liabilities 1,615 1,572
Total liabilities 14,069 13,326
------ ------
Shareholders' Equity
Common stock and paid-in capital 1,653 1,649
Retained earnings 5,193 5,037
Accumulated other comprehensive income 2,047 1,693
Treasury stock (1,370) (1,319)
------ ------
Total shareholders' equity 7,523 7,060
----- -----
Total liabilities and shareholders' equity $21,592 $20,386
======= =======
(Dollars in millions except per share data) Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
---- ---- ---- ----
Revenues
Earned premiums $1,247 $1,191 $3,696 $3,518
Investment income, net of expenses 153 148 453 442
Realized investment gains and losses, net 7 56 156 161
Other revenues 5 7 16 16
Total revenues 1,412 1,402 4,321 4,137
----- ----- ----- -----
Benefits and Expenses
Insurance losses and contract holders' benefits 874 753 2,581 2,298
Underwriting, acquisition and insurance expenses 393 380 1,157 1,106
Interest expense 13 13 39 39
Other operating expenses 3 3 11 10
--- --- --- ---
Total benefits and expenses 1,283 1,149 3,788 3,453
----- ----- ----- -----
Income Before Income Taxes 129 253 533 684
--- --- --- ---
Provision for Income Taxes 27 73 130 193
--- --- --- ---
Net Income $102 $180 $403 $491
==== ==== ==== ====
Per Common Share:
Net income-basic $0.62 $1.09 $2.45 $2.98
Net income-diluted 0.61 1.08 2.42 2.95
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,
----------------------
2017 2016 2017 2016
---- ---- ---- ----
Value creation ratio:
End of period book value $45.86 $43.24 $45.86 $43.24
Less beginning of period book value 44.97 42.37 42.95 39.20
----- ----- ----- -----
Change in book value 0.89 0.87 2.91 4.04
Dividend declared to shareholders 0.50 0.48 1.50 1.44
---- ----
Total value creation $1.39 $1.35 $4.41 $5.48
===== ===== ===== =====
Value creation ratio from change in book value* 2.0% 2.1% 6.8% 10.3%
Value creation ratio from dividends declared to 1.1 1.1 3.5 3.7
shareholders**
Value creation ratio 3.1% 3.2% 10.3% 14.0%
=== === ==== ====
* 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,
2017 2016 2017 2016
---- ---- ---- ----
Net income $102 $180 $403 $491
---- ---- ---- ----
Less:
Realized investment gains and losses, net 7 56 156 161
Income tax on realized investment gains (2) (19) (55) (56)
--- --- --- ---
Realized investment gains and losses, after-tax 5 37 101 105
--- --- ---
Operating income $97 $143 $302 $386
=== ==== ==== ====
Diluted per share data:
Net income $0.61 $1.08 $2.42 $2.95
----- ----- ----- -----
Less:
Realized investment gains and losses, net 0.04 0.34 0.94 0.97
Income tax on realized investment gains (0.01) (0.12) (0.33) (0.34)
----- ----- ----- -----
Realized investment gains and losses, after-tax 0.03 0.22 0.61 0.63
---- ---- ----
Operating income $0.58 $0.86 $1.81 $2.32
===== ===== ===== =====
Cincinnati Financial Corporation
Life Insurance Reconciliation
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
---- ---- ---- ----
Net income of the life insurance subsidiary $8 $10 $33 $32
Realized investment gains, net 1 3 4 4
Income tax on realized investment gains 1 1 2 1
--- --- --- ---
Operating income 8 8 31 29
Investment income, net of expenses (39) (40) (117) (117)
Investment income credited to contract holders' 24 23 70 67
Income tax on investment income and investment 3 5 16 17
income credited to contract holders'
Life insurance segment loss $(4) $(4) $ - $(4)
=== === === === ===
Cincinnati Financial Corporation
Property Casualty Insurance Reconciliation
(Dollars in millions) Three months ended September 30, 2017
Consolidated Commercial Personal E&S Cincinnati Re
Premiums:
Written premiums $1,208 $778 $355 $51 $24
Unearned premiums change (17) 14 (41) 2 8
--- --- --- ---
Earned premiums $1,191 $792 $314 $53 $32
====== ==== ==== === ===
Statutory ratios:
Combined ratio 99.1% 95.8% 100.9% 77.4% 208.0%
Contribution from catastrophe losses 9.1 3.8 11.1 1.4 137.2
-----
Combined ratio excluding catastrophe losses 90.0% 92.0% 89.8% 76.0% 70.8%
==== ==== ==== ==== ====
Commission expense ratio 18.8% 19.0% 16.9% 27.8% 19.8%
Other underwriting expense ratio 11.9 13.5 10.0 3.8 8.3
---
Total expense ratio 30.7% 32.5% 26.9% 31.6% 28.1%
==== ==== ==== ==== ====
GAAP ratios:
Combined ratio 99.3% 95.2% 103.1% 74.8% 207.4%
Contribution from catastrophe losses 9.1 3.8 11.1 1.4 137.2
Prior accident years before catastrophe losses (1.1) (1.8) 0.7 (4.7) 1.6
---
Current accident year combined ratio before 91.3% 93.2% 91.3% 78.1% 68.6%
catastrophe losses
(Dollars in millions) Nine months ended September 30, 2017
Consolidated Commercial Personal E&S Cincinnati Re
Premiums:
Written premiums $3,710 $2,456 $985 $165 $104
Unearned premiums change (187) (87) (64) (12) (24)
---- --- --- --- ---
Earned premiums $3,523 $2,369 $921 $153 $80
====== ====== ==== ==== ===
Statutory ratios:
Combined ratio 98.3% 96.7% 104.6% 69.0% 128.3%
Contribution from catastrophe losses 9.3 6.6 14.0 1.2 52.6
----
Combined ratio excluding catastrophe losses 89.0% 90.1% 90.6% 67.8% 75.7%
==== ==== ==== ==== ====
Commission expense ratio 18.3% 17.8% 17.5% 27.1% 24.5%
Other underwriting expense ratio 12.0 13.2 10.5 3.8 7.1
---
Total expense ratio 30.3% 31.0% 28.0% 30.9% 31.6%
==== ==== ==== ==== ====
GAAP ratios:
Combined ratio 99.1% 97.6% 105.6% 68.0% 129.4%
Contribution from catastrophe losses 9.3 6.6 14.0 1.2 52.6
Prior accident years before catastrophe losses (2.1) (1.6) (1.0) (15.9) (3.2)
---- ---- ---- ----- ----
Current accident year combined ratio before 91.9% 92.6% 92.6% 82.7% 80.0%
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
