Cincinnati Financial Reports First-Quarter 2011 Results |
PRNewswire
Apr 27, 2011
CINCINNATI, April 27, 2011 /PRNewswire/ -- Cincinnati Financial Corporation today reported:
-- First-quarter 2011 net income of $62 million, or 38 cents per share,
compared with $68 million, or 42 cents per share, in 2010.
-- Operating income* of $55 million, or 33 cents per share, compared with
$63 million, or 39 cents per share.
-- $6 million decrease in first-quarter 2011 net income was driven by a $7
million after-tax decrease in the contribution from property casualty
underwriting operations. The after-tax effect of property casualty
catastrophe losses, mostly weather-related, was $17 million higher in
the first quarter of 2011 compared with the same period of 2010.
-- $31.40 book value per share at March 31, 2011, up 2 percent from
December 31, 2010.
-- 2.9 percent value creation ratio for the first quarter of 2011, compared
with 3.4 percent for the 2010 first quarter.
Financial Highlights
(Dollars in millions except share data) Three months ended March 31, 2011 2010 Change % ---- ---- -------- Revenue Highlights Earned premiums $782 $746 5 Investment income, pre-tax 131 130 1 Total revenues 929 887 5 Income Statement Data Net income $62 $68 (9) Net realized investment gains and losses 7 5 40 Operating income* $55 $63 (13) === === Per Share Data (diluted) Net income $0.38 $0.42 (10) Net realized investment gains and losses 0.05 0.03 67 Operating income* $0.33 $0.39 (15) ===== ===== Book value $31.40 $29.86 5 Cash dividend declared $0.40 $0.395 1 Diluted weighted average shares outstanding 163,669,998 163,310,451 0 ------------------------ ----------- ----------- ---
Insurance Operations First-Quarter Highlights
-- 103.9 percent first-quarter 2011 property casualty combined ratio, up
from 102.6 percent for the first quarter of 2010.
-- 3 percent growth in property casualty net written premiums, which
included personal lines segment growth of 12 percent.
-- $102 million first-quarter 2011 property casualty new business written
by agencies, up $10 million from first-quarter 2010. $8 million of the
increase was standard market business contributed by agencies appointed
since the beginning of 2010.
-- 4 cents per share contribution from life insurance to first-quarter
operating income, down 1 cent from first-quarter 2010.
Investment and Balance Sheet Highlights
-- 1 percent first-quarter 2011 growth in pre-tax investment income as
higher dividends offset lower interest income that reflected continued
depressed yields in the bond market.
-- 2 percent sequential-quarter increase in fair value of invested assets
plus cash at March 31, 2011, including equity portfolio growth of 2
percent and bond portfolio growth of 2 percent.
-- $1.126 billion parent company cash and marketable securities at March
31, 2011, up 8 percent from year-end.
The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 11 defines and reconciles measures presented in this release that are not based on Generally Accepted * Accounting Principles. Forward-looking statements and related assumptions are subject to the ** risks outlined in the company's safe harbor statement (see Page 8).
Strong Investment Performance
Kenneth W. Stecher, president and chief executive officer, commented, "Cincinnati Financial increased our book value, invested assets, unrealized gains, and the surplus of our insurance companies during the first quarter of 2011. A higher mix of equities compared with most of our peers in the insurance industry gives our portfolio more opportunity to hold its market value when interest rates rise and reduce bond values. Unrealized gains for our investment portfolio increased over 10 percent with the equity security portion increasing over 15 percent.
"Another advantage of our equity portfolio is the dividend income it generates. Our pre-tax dividend income rose 8 percent for the first quarter, offsetting lower interest income from bonds and allowing us to increase total investment income by 1 percent."
Mixed Property Casualty Underwriting Performance
Stecher noted, "Growth of our property casualty insurance business was satisfactory in the first quarter, with a 3 percent increase in net written premiums. Underwriting was unprofitable, leading to lower earnings. Losses from natural catastrophes were at the second highest level for a first quarter in at least a dozen years. These claims are opportunities to prove the value of our policies and claims service - and to grow our business over time. While catastrophes cause volatility of earnings in the property casualty insurance industry, investors, agents and policyholders can rely on Cincinnati Financial to maintain consistency in estimating loss reserves. During the first quarter, we increased property casualty net loss and loss expense reserves over 1 percent, nearly $50 million, from year-end 2010.
"Of the seven first-quarter 2011 storms across our operating territory, the largest was a $13 million event in late February that affected our policyholders in several Midwest states. In total, catastrophes accounted for 5.5 percentage points of our 103.9 percent first-quarter combined ratio, including approximately 1 percentage point for catastrophe losses we assumed under a reinsurance agreement for the earthquake in Japan.
"Earned premiums and new business written premiums rose in each of our property casualty segments as growth initiatives continued. While we are seeing signs of marketplace improvement, our commercial lines pricing continues to decline in the low single digits, and we continue to walk away from underpriced business. A modest increase in commercial lines renewal written premiums reflected improving exposure levels as many businesses we insure continued to recover. Rates continued to firm for personal lines, where our net written premiums and new business written premiums rose at double-digit rates; and pricing is starting to firm for excess and surplus lines, where net written premiums rose over 30 percent and new business rose more than 10 percent. Earned premiums for our largest life insurance product, term life insurance, also grew almost 10 percent.
"Along with better market conditions, we believe improved pricing precision is our most effective strategy to improve profitability. We are using predictive data to develop and refine pricing and underwriting tools that seek to determine an appropriate price for each risk, higher or lower depending on measurable risk characteristics. These tools have been implemented for our major personal lines and workers' compensation policies, and we now are piloting modeled pricing for the coverages in our commercial insurance packages including property, general liability and business auto."
Responsiveness to Our Independent Agency Customers
"Our agents continue to give us opportunities to quote and write their best accounts, selling the value of a Cincinnati policy even when other quotes may be less. In turn, we are responding to their needs. They need efficiency and speed to serve their clients, so we continue to improve our processing systems and streamline our workflows. They need a strong Cincinnati field staff, so we continue to add loss control associates and to split marketing territories, increasing service for policyholders and support for agents in areas with high growth potential. They need outstanding claims service, so we continue to add staff expertise through field specialists and headquarters services. They need training resources to get new producers started and to assure the continuity and succession of their business and ours, so we continue to expand our agent curriculums.
Stecher concluded, "This past Monday, our board announced several leadership changes that provide for succession and assure continuity for our organization. As chairman, I'll miss the daily experiences driving our key initiatives and working directly with the people whose contributions are making us a stronger competitor. Over the past three years, we have put in place a strong foundation and a vision of our future. Our next president and CEO, Steve Johnston, is uniquely qualified to take the lead in the next phase, where we will increase growth and profitability by further advancing our new technology and analytics capabilities. At the same time, Steve and his team will rededicate themselves to enhancing our proven advantages of solid agency relationships, superior claims service and exceptional financial strength."
Consolidated Property Casualty Insurance Operations
(Dollars in millions) Three months ended March 31, 2011 2010 Change % ---- ---- -------- Earned premiums $745 $708 5 Fee revenues 1 1 0 --- --- Total revenues 746 709 5 Loss and loss expenses 530 475 12 Underwriting expenses 245 252 (3) --- Underwriting loss $(29) $(18) (61) ==== ==== Ratios as a percent of earned Pt. premiums: Change ------- Loss and loss expenses 71.1% 67.0% 4.1 Underwriting expenses 32.8 35.6 (2.8) Combined ratio 103.9% 102.6% 1.3 ===== ===== === Change % -------- Agency renewal written premiums $708 $682 4 Agency new business written premiums 102 92 11 Other written premiums (31) (18) (72) Net written premiums $779 $756 3 ==== ==== Loss and loss expense ratios as a percent of earned Pt. premiums: Change ------- Current accident year before catastrophe losses 73.3% 69.5% 3.8 Current accident year catastrophe losses 5.7 3.1 2.6 Prior accident years before catastrophe losses (7.7) (4.6) (3.1) Prior accident years catastrophe losses (0.2) (1.0) 0.8 Total loss and loss expenses 71.1% 67.0% 4.1 ==== ==== === Current accident year combined ratio before catastrophe losses 106.1% 105.1% 1.0 ===== ===== ===
-- $23 million or 3 percent increase in first-quarter 2011 property
casualty net written premiums. Growth largely reflected targeted growth
initiatives including $18 million from personal lines and $5 million
from excess and surplus lines.
-- $10 million increase to $102 million new business written by agencies in
the first quarter of 2011 reflected the contribution from growth
initiatives in recent years. $8 million of the increase was from
standard market property casualty new business produced by agencies
appointed since the beginning of 2010.
-- 1,263 agency relationships in 1,569 reporting locations marketing our
standard market property casualty insurance products at March 31, 2011,
compared with 1,245 agency relationships in 1,544 reporting locations at
year-end 2010. Forty new agencies were appointed during the first three
months of 2011.
-- 1.3 percentage-point higher first-quarter combined ratio, driven
primarily by a $26 million pretax increase in losses from natural
catastrophe events, mostly weather-related.
-- Underwriting results benefited from favorable prior accident year
reserve development of $58 million for the first quarter, compared with
$39 million for the same period of 2010.
-- The lower first-quarter 2011 underwriting expense ratio reflected
expense management efforts and higher earned premiums, compared with the
first-quarter 2010 ratio, which also included an increase to provisions
for commitments and contingent liabilities.
The following table shows incurred catastrophe losses for the first quarters of 2011 and 2010.
(In millions, net of reinsurance) Three months ended March 31, Excess Total Cause of Commercial Personal and Dates loss Region lines lines surplus ----- lines ----- 2011 Flood, freezing, Jan. 31 - ice, snow, South, Feb 3 wind Midwest $5 $5 $ - $10 Flood, hail, tornado, Feb. 27 -28 wind Midwest 5 8 - 13 Mar. 11 Earthquake Japan 8 - - 8 All other 2011 catastrophes 5 6 - 11 Development on 2010 and prior catastrophes 4 (5) - (1) --- --- --- --- Calendar year incurred total $27 $14 $ - $41 === === === === 2010 Freezing, South, Jan. 7 wind Midwest $4 $2 $ - $6 Ice, snow, East, Feb. 4 wind Midwest 4 1 - 5 Ice, snow, East, Feb. 9 wind Midwest 6 2 - 8 All other 2010 catastrophes 2 1 - 3 Development on 2009 and prior catastrophes (6) (1) - (7) --- --- --- --- Calendar year incurred total $10 $5 $ - $15 === === === ===
Insurance Operations Highlights Commercial Lines Insurance Operations
(Dollars in millions) Three months ended March 31, 2011 2010 Change % ---- ---- -------- Earned premiums $540 $523 3 Fee revenues 1 1 0 --- --- Total revenues 541 524 3 Loss and loss expenses 374 353 6 Underwriting expenses 188 181 4 --- Underwriting loss $(21) $(10) (110) ==== ==== Ratios as a percent of earned Pt. premiums: Change ------- Loss and loss expenses 69.2% 67.4% 1.8 Underwriting expenses 34.8 34.7 0.1 Combined ratio 104.0% 102.1% 1.9 ===== ===== === Change % -------- Agency renewal written premiums $542 $533 2 Agency new business written premiums 71 66 8 Other written premiums (25) (11) (127) Net written premiums $588 $588 0 ==== ==== Loss and loss expense ratios as a percent of earned Pt. premiums: Change ------- Current accident year before catastrophe losses 74.5% 71.1% 3.4 Current accident year catastrophe losses 4.3 3.0 1.3 Prior accident years before catastrophe losses (10.2) (5.5) (4.7) Prior accident years catastrophe losses 0.6 (1.2) 1.8 Total loss and loss expenses 69.2% 67.4% 1.8 ==== ==== === Current accident year combined ratio before catastrophe losses 109.3% 105.8% 3.5 ===== ===== ===
-- No change in first-quarter commercial lines net written premiums as
recorded increases in renewal and new business written premiums were
offset by an adjustment for estimated premiums of policies in effect but
not yet processed.
-- $9 million or 2 percent increase in renewal written premiums largely
reflected the effects of improving economic conditions on insured
exposure levels, partially offset by a low-single-digit average pricing
decline for the first quarter of 2011 that was similar to the full-year
2010 average pricing decline.
-- $5 million increase to $71 million in first-quarter 2011 new business
premiums, in line with the first-quarter average of $71 million for 2008
and 2009.
-- 104.0 percent first-quarter 2011 combined ratio was 1.9 percentage
points higher, driven by a 3.1 point increase in catastrophe losses that
included 1.5 points from assumed reinsurance losses related to the Japan
earthquake event.
-- 74.5 percent ratio for current accident year losses and loss expenses
before catastrophes matched 74.5 percent for full-year 2010.
Personal Lines Insurance Operations
(Dollars in millions) Three months ended March 31, 2011 2010 Change % ---- ---- -------- Earned premiums $190 $174 9 Fee revenues - - nm --- --- Total revenues 190 174 9 Loss and loss expenses 141 112 26 Underwriting expenses 52 67 (22) --- Underwriting loss $(3) $(5) 40 === === Ratios as a percent of earned Pt. premiums: Change ------- Loss and loss expenses 74.1% 64.4% 9.7 Underwriting expenses 27.3 38.1 (10.8) Combined ratio 101.4% 102.5% (1.1) ===== ===== ==== Change % -------- Agency renewal written premiums $156 $143 9 Agency new business written premiums 22 18 22 Other written premiums (5) (6) 17 Net written premiums $173 $155 12 ==== ==== Loss and loss expense ratios as a percent of earned Pt. premiums: Change ------- Current accident year before catastrophe losses 67.9% 63.7% 4.2 Current accident year catastrophe losses 10.0 3.3 6.7 Prior accident years before catastrophe losses (1.2) (2.3) 1.1 Prior accident years catastrophe losses (2.6) (0.3) (2.3) ---- ---- ---- Total loss and loss expenses 74.1% 64.4% 9.7 ==== ==== === Current accident year combined ratio before catastrophe losses 95.2% 101.8% (6.6) ==== ===== ====
-- $18 million or 12 percent growth in first-quarter 2011 personal lines
net written premiums, largely driven by higher renewal and new business
written premiums that reflected improved pricing.
-- 1.1 percentage-point improvement in first-quarter 2011 combined ratio
primarily due to a 10.8 point reduction in the underwriting expense
ratio that offset a 4.7 point increase in large losses and a 4.4 point
rise in weather-related catastrophe losses.
-- 67.9 percent ratio for current accident year losses and loss expenses
before catastrophes was a 2.5 percentage-point improvement over
full-year 2010, largely reflecting improved pricing.
-- 10.8 percentage-point improvement in the underwriting expense ratio was
primarily due to first-quarter 2010 provisions for commitments and
contingent liabilities in addition to lower agency profit-sharing
expenses.
Excess and Surplus Lines Insurance Operations
(Dollars in millions) Three months ended March 31, 2011 2010 Change % ---- ---- -------- Earned premiums $15 $11 36 Loss and loss expenses 15 10 50 Underwriting expenses 5 4 25 --- Underwriting loss $(5) $(3) (67) === === Ratios as a percent of Pt. earned premiums: Change ------- Loss and loss expenses 102.7% 91.4% 11.3 Underwriting expenses 30.3 35.7 (5.4) Combined ratio 133.0% 127.1% 5.9 ===== ===== === Change % -------- Agency renewal written premiums $10 $6 67 Agency new business written premiums 9 8 13 Other written premiums (1) (1) 0 Net written premiums $18 $13 38 === === Loss and loss expense ratios as a percent of Pt. earned premiums: Change ------- Current accident year before catastrophe losses 98.8% 88.0% 10.8 Current accident year catastrophe losses 1.7 0.0 1.7 Prior accident years before catastrophe losses 1.1 3.6 (2.5) Prior accident years catastrophe losses 1.1 (0.2) 1.3 --- ---- --- Total loss and loss expenses 102.7% 91.4% 11.3 ===== ==== ==== Current accident year combined ratio before catastrophe losses 129.1% 123.7% 5.4 ===== ===== ===
-- $5 million or 38 percent growth in first-quarter 2011 excess and surplus
lines net written premiums, largely driven by the initial opportunity to
renew many accounts for the first time, in addition to $1 million growth
in new business written.
-- 5.9 percentage-point rise in first-quarter combined ratio primarily due
to new large losses greater than $250,000 and reserves for estimated
losses incurred but not reported (IBNR).
Life Insurance Operations
Three months ended (In millions) March 31, 2011 2010 Change % ---- ---- -------- Term life insurance $25 $23 9 Universal life insurance 5 9 (44) Other life insurance, annuity, and disability income products 7 7 0 --- --- Earned premiums 37 39 (5) Investment income, net of expenses 33 32 3 Other income 1 - nm --- Total revenues, excluding realized investment gains and losses 71 71 0 --- --- Contract holders benefits 45 42 7 Underwriting expenses 16 16 0 --- Total benefits and expenses 61 58 5 --- --- Net income before income tax and realized investment gains and losses 10 13 (23) Income tax 3 5 (40) --- --- Net income before realized investment gains and losses $7 $8 (13) === ===
-- $2 million or 5 percent decrease in first-quarter 2011 earned premiums,
as lower universal life premiums offset 9 percent growth for term life
insurance, our largest life insurance product line. Face amount of life
policies in force rose 1 percent to $75.026 billion at March 31, 2011,
from $74.124 billion at year-end 2010.
-- $60 million in first-quarter 2011 fixed annuity deposits received
compared with $65 million in first quarter 2010 and $201 million in
full-year 2010. Cincinnati Life does not offer variable or indexed
products.
-- $1 million decline in first-quarter 2011 profit was primarily due to
less favorable mortality experience.
-- $8 million or 1 percent first-quarter 2011 growth to $756 million in
GAAP shareholders' equity for The Cincinnati Life Insurance Company.
Investment and Balance Sheet Highlights Investment Operations
Three months ended March (In millions) 31, 2011 2010 Change % ---- ---- -------- Total investment income, net of expenses, pre-tax $131 $130 1 --- --- Investment interest credited to contract holders (20) (19) (5) --- --- Realized investment gains and losses summary: Realized investment gains and losses 38 3 nm Change in fair value of securities with embedded derivatives 4 6 (33) Other-than-temporary impairment charges (30) (1) nm Total realized investment gains and losses 12 8 50 --- --- Investment operations profit $123 $119 3 ==== ====
Three months ended March (In millions) 31, 2011 2010 Change % ---- ---- -------- Investment income: Interest $106 $107 (1) Dividends 26 24 8 Other 1 1 0 Investment expenses (2) (2) 0 Total investment income, net of expenses, pre-tax 131 130 1 Income taxes (32) (32) 0 Total investment income, net of expenses, after-tax $99 $98 1 === === Effective tax rate 24.5% 24.5% Average yield pre-tax 4.6% 4.8% Average yield after-tax 3.4% 3.6% ----------------------- --- ---
-- 1 percent growth in first-quarter 2011 in both pretax and after-tax
investment income. 8 percent growth in pretax dividend income more than
offset a 1 percent decline in pretax interest income.
-- $129 million or 10 percent first-quarter 2011 increase in pre-tax
unrealized investment portfolio gains, including $122 million for the
equity portfolio. $35 million of realized gains from sales were
harvested from the equity portfolio.
(Dollars in millions except share data) At March 31, At December 31, 2011 2010 ---- ---- Balance sheet data Invested assets $11,704 $11,508 Total assets 15,369 15,095 Short-term debt 49 49 Long-term debt 790 790 Shareholders' equity 5,118 5,032 Book value per share 31.40 30.91 Debt-to-total-capital ratio 14.1% 14.3% Three months ended March 31, 2011 2010 ---- ---- Performance measure Value creation ratio 2.9% 3.4 % -------------------- --- ----
-- $12.083 billion in consolidated cash and invested assets at March 31,
2011, up 2 percent from $11.893 billion at year-end.
-- $8.536 billion bond portfolio at March 31, 2011, with an average rating
of A2/A and with a 2 percent rise in fair value during the first quarter
of 2011.
-- $3.100 billion equity portfolio was 26.5 percent of invested assets,
including $877 million in pre-tax net unrealized gains at March 31,
2011. 2 percent first-quarter 2011 growth in fair value.
-- $3.833 billion of statutory surplus for the property casualty insurance
group at March 31, 2011, up $56 million from $3.777 billion at year-end
2010, after declaring $60 million in dividends to the parent company.
Ratio of net written premiums to property casualty statutory surplus for
the 12 months ended March 31, 2011, of 0.8-to-1, unchanged from the 12
months ended December 31, 2010.
-- Value creation ratio of 2.9 percent for the first quarter of 2011 is the
sum of 1.3 percent from shareholder dividends plus 1.6 percent from
growth in book value per share.
For additional information or to register for our conference call webcast, please visit www.cinfin.com/investors.
Cincinnati Financial Corporation offers business, home and auto insurance, our main business, through The Cincinnati Insurance Company and its two standard market property casualty companies. The same local independent insurance agencies that market those policies may offer products of our other subsidiaries, including life and disability income insurance, annuities and surplus lines property and casualty insurance. For additional information about the company, please visit www.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 2010 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 24.
Factors that could cause or contribute to such differences include, but are not limited to:
-- Unusually high levels of catastrophe losses due to risk concentrations,
changes in weather patterns, environmental events, terrorism incidents
or other causes
-- Increased frequency and/or severity of claims
-- Inadequate estimates or assumptions used for critical accounting
estimates
-- Recession or other economic conditions resulting in lower demand for
insurance products or increased payment delinquencies
-- Delays in adoption and implementation of underwriting and pricing
methods that could increase our pricing accuracy, underwriting profit
and competitiveness
-- 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
-- Declines in overall stock market values negatively affecting the
company's equity portfolio and book value
-- Events, such as the credit crisis, 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
-- Prolonged low interest rate environment or other factors that limit the
company's ability to generate growth in investment income or interest
rate fluctuations that result in declining values of fixed-maturity
investments, including declines in accounts in which we hold bank-owned
life insurance contract assets
-- Increased competition that could result in a significant reduction in
the company's premium volume
-- 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 non-payment or delay in payment by reinsurers
-- 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
-- Delays or inadequacies in the development, implementation,
performance and benefits of technology projects and enhancements
-- 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:
-- Restrict our ability to exit or reduce writings of unprofitable
coverages or lines of business
-- Place the insurance industry under greater regulatory scrutiny or
result in new statutes, rules and regulations
-- 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
-- Difficulties with technology or data security breaches that could
negatively affect our ability to conduct business and our relationships
with agents, policyholders and others
Further, the company's insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation Consolidated Balance Sheets (unaudited)
(In millions except per share December data) March 31, 31, 2011 2010 ---- ---- ASSETS Investments Fixed maturities, at fair value (amortized cost: 2011-$8,033; 2010-$7,888) $8,536 $8,383 Equity securities, at fair value (cost: 2011-$2,223; 2010-$2,286) 3,100 3,041 Other invested assets 68 84 Total investments 11,704 11,508 Cash and cash equivalents 379 385 Investment income receivable 117 119 Finance receivable 76 73 Premiums receivable 1,062 1,015 Reinsurance receivable 573 572 Prepaid reinsurance premiums 16 18 Deferred policy acquisition costs 503 488 Land, building and equipment, net, for company use (accumulated depreciation: 243 229 2011-$368; 2010-$352) Other assets 66 67 Separate accounts 630 621 --- --- Total assets $15,369 $15,095 ======= ======= LIABILITIES Insurance reserves Loss and loss expense reserves $4,239 $4,200 Life policy reserves 2,106 2,034 Unearned premiums 1,586 1,553 Other liabilities 555 556 Deferred income tax 296 260 Note payable 49 49 Long-term debt 790 790 Separate accounts 630 621 --- --- Total liabilities 10,251 10,063 ------ ------ SHAREHOLDERS' EQUITY Common stock, par value-$2 per share; (authorized: 2011 and 2010-500 million shares; 393 393 issued: 2011 and 2010-196 million shares) Paid-in capital 1,090 1,091 Retained earnings 3,977 3,980 Accumulated other comprehensive income 855 769 Treasury stock at cost (2011-33 million shares and 2010-34 million shares) (1,197) (1,201) ------ ------ Total shareholders' equity 5,118 5,032 ----- ----- Total liabilities and shareholders' equity $15,369 $15,095 ======= =======
Cincinnati Financial Corporation Consolidated Statements of Income (unaudited) --------------------------------------------- Three months (Dollars in millions except per ended March share data) 31, 2011 2010 ---- ---- Revenues Earned premiums $782 $746 Investment income, net of expenses 131 130 Realized investment gains and losses 12 8 Fee revenues 1 1 Other revenues 3 2 --- --- Total revenues 929 887 --- --- Benefits and Expenses Insurance losses and policyholder benefits 575 516 Underwriting, acquisition and insurance expenses 261 268 Other operating expenses 4 4 Interest expense 13 14 Total benefits and expenses 853 802 --- --- Income Before Income Taxes 76 85 Provision for Income Taxes 14 17 --- --- Net Income $62 $68 Per Common Share: Net income -basic $0.38 $0.42 Net income -diluted $0.38 $0.42 ------------------- ----- -----
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2011 reconciliations; prior-period reconciliations available at www.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.
-- 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
Three months ended (Dollars are per share) March 31, ----------------------- 2011 2010 ---- ---- Value creation ratio End of period book value $31.40 $29.86 Less beginning of period book value 30.91 29.25 ----- ----- Change in book value 0.49 0.61 Dividend declared to shareholders 0.40 0.395 ----- Total contribution to value creation ratio $0.89 $1.005 ===== ====== Contribution to value creation ratio from change in book value* 1.6% 2.1% Contribution to value creation ratio from dividends declared to shareholders** 1.3 1.3 Value creation ratio 2.9% 3.4% === ===
* Change in book value divided by the beginning of period book value ** Dividend declared to shareholders divided by beginning of period book value
Cincinnati Financial Corporation Net Income Reconciliation
Three months (In millions except per share data) ended March 31, 2011 ---------- Net income $62 Net realized investment gains and losses 7 --- Operating income 55 Less catastrophe losses (27) Operating income before catastrophe losses $82 === Diluted per share data: Net income $0.38 Net realized investment gains and losses 0.05 ---- Operating income 0.33 Less catastrophe losses (0.16) Operating income before catastrophe losses $0.49 =====
Property Casualty Reconciliation
Three months ended March 31, 2011 Consolidated Commercial ------------ ---------- Premiums: Written premiums $779 $588 Unearned premiums change (34) (48) --- --- Earned premiums $745 $540 ==== ==== Statutory ratio: Statutory combined ratio 103.3% 102.1% Contribution from catastrophe losses 5.5 4.9 Statutory combined ratio excluding catastrophe losses 97.8% 97.2% ==== ==== Commission expense ratio 18.4% 18.5% Other expense ratio 13.8 14.4 ---- ---- Statutory expense ratio 32.2% 32.9% ==== ==== GAAP ratio: GAAP combined ratio 103.9% 104.0% Contribution from catastrophe losses 5.5 4.9 Prior accident years before catastrophe losses (7.7) (10.2) ---- ----- GAAP combined ratio excluding catastrophe losses and prior years reserve development 106.1% 109.3% ===== =====
Three months ended March 31, 2011 Personal E&S -------- --- Premiums: Written premiums $173 $18 Unearned premiums change 17 (3) --- --- Earned premiums $190 $15 ==== === Statutory ratio: Statutory combined ratio 104.4% 130.4% Contribution from catastrophe losses 7.4 2.8 Statutory combined ratio excluding catastrophe losses 97.0% 127.6% ==== ===== Commission expense ratio 17.9% 22.2% Other expense ratio 12.4 5.4 ---- --- Statutory expense ratio 30.3% 27.6% ==== ==== GAAP ratio: GAAP combined ratio 101.4% 133.0% Contribution from catastrophe losses 7.4 2.8 Prior accident years before catastrophe losses (1.2) 1.1 ---- --- GAAP combined ratio excluding catastrophe losses and prior years reserve development 95.2% 129.1% ==== =====
Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on whole dollar amounts.
Cincinnati Financial Corporation
CONTACT: Investor Contact: Dennis E. McDaniel, +1-513-870-2768,CINF-IR@cinfin.com; Media Contact: Joan O. Shevchik, +1-513-603-5323Media_Inquiries@cinfin.com
