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-- Second-quarter 2009 net loss of $19 million compared with net income of
$63 million in the second quarter of 2008.
-- Book value per share of $25.49, an increase of 6.7 percent during the
quarter.
-- Operating loss* of $5 million, or 3 cents per share, compared with
operating income of $69 million, or 42 cents per share.
-- Net income and operating income declined 25 cents per share compared to
second-quarter 2008 from the effects of higher catastrophe losses and a
lesser amount of favorable development on loss and loss expense reserves
for prior accident years. The contribution from investment income
declined 9 cents per share.
-- Value creation ratio of 8.4 percent for the second quarter and 2.0
percent for the first half of 2009 compared with negative 23.5 percent
for the full year 2008.
Financial Highlights
------------------------------------------------------------------------
(Dollars in millions except share data)
Three months ended June 30,
2009 2008 change %
------------------------------------------------------------------------
Revenue Highlights
Earned premiums $770 $794 (3.1)
Investment income 119 130 (8.4)
Total revenues 874 917 (4.7)
Income Statement Data
Net income (loss) $(19) $63 nm
Net realized investment gains
and losses (14) (6) (119.0)
----------- -----------
Operating income (loss)* $(5) $69 nm
=========== ===========
Per Share Data (diluted)
Net income (loss) $(0.12) $0.38 nm
Net realized investment gains
and losses (0.09) (0.04) (125.0)
----------- -----------
Operating income (loss)* $(0.03) $0.42 nm
=========== ===========
Book value
Cash dividend declared 0.39 0.39 0.0
Diluted weighted average
shares outstanding 162,556,327 165,044,463 (1.5)
------------------------------------------------------------------------
(Dollars in millions except share data)
Six months ended June 30,
2009 2008 change %
------------------------------------------------------------------------
Revenue Highlights
Earned premiums $1,535 $1,575 (2.5)
Investment income 243 282 (13.9)
Total revenues 1,764 1,621 8.8
Income Statement Data
Net income (loss) $17 $21 (20.0)
Net realized investment gains
and losses (15) (157) 90.0
----------- -----------
Operating income (loss)* $32 $178 (81.8)
=========== ===========
Per Share Data (diluted)
Net income (loss) $0.10 $0.13 (23.1)
Net realized investment gains
and losses (0.10) (0.95) 89.5
----------- -----------
Operating income (loss)* $0.20 $1.08 (81.5)
=========== ===========
Book value $25.49 $28.99 (12.1)
Cash dividend declared 0.78 0.78 0.0
Diluted weighted average
shares outstanding 162,738,081 164,601,462 (1.1)
------------------------------------------------------------------------
Insurance Operations Highlights
-- 116.6 percent second-quarter 2009 property casualty combined ratio, a
pre-tax underwriting loss of $122 million.
-- Property casualty net written premiums decreased $67 million or 8.5
percent, driven by economic trends lowering insured exposures along with
continued weak pricing in the insurance marketplace.
-- $7 million increase in property casualty new business written by
agencies in the second quarter of 2009, driven by $6 million from
surplus lines operations that began in 2008.
-- 7 cents per share contribution from life insurance operations to
second-quarter operating income, up from 6 cents.
Balance Sheet and Investment Highlights
-- $25.49 book value compared with $23.88 at March 31, 2009, and $25.75 at
December 31, 2008, with the second-quarter improvement reflecting higher
market-driven valuations in the investment portfolio.
-- Excellent financial flexibility and growth capacity with property
casualty statutory surplus of $3.241 billion at June 30, 2009, compared
with $3.360 billion at December 31, 2008. Parent company cash and
marketable securities of $1.046 billion provide shareholder dividend
capacity.
-- Investment income declined for the quarter and year-to-date periods,
reflecting recent quarter portfolio changes from a capital preservation
diversification strategy. Lower dividend income from equity securities
was partially offset by higher interest income from bonds.
* The Definitions of Non-GAAP Information and Reconciliation to
Comparable GAAP Measures on Page 10 defines and reconciles measures
presented in this release that are not based on Generally Accepted
Accounting Principles or Statutory Accounting Principles.
** Forward-looking statements and related assumptions are subject to
the risks outlined in the company's safe harbor statement (see
Page 8).
Focus Continues on Long-Term Value Creation
Kenneth W. Stecher, president and chief executive officer, commented, "The 2009 second quarter brought an unwelcome repeat of recent trends for our property casualty insurance operations. Our underwriting loss primarily was driven by very high catastrophe losses, less favorable development on claims for prior accident years and a prolonged period of soft pricing and economic weakness that has reduced premium revenues for our company and our industry. Interest and dividend income from investments and steady profits from life insurance operations offset some of the property casualty underwriting loss.
"At June 30, 2009, unrealized gains in our stock and bond portfolio significantly exceeded the March 31 level. This increase offset the effects of the second-quarter underwriting loss on book value per share, which rose by $1.61 during the quarter. As a result, the value creation ratio we use to measure our success trended positively, reaching 8.4 percent for the second quarter and 2.0 percent for the six months. Looking past 2009 to the 2010-2014 period, we continue to target a five-year value creation ratio of 12 percent to 15 percent, comprised of the total of our rate of growth in book value per share plus the rate of dividend contribution per share.
"We continue to focus on actions to build our company's long-term competitive advantages, financial strength and stability through all market cycles. Some of those actions, such as the diversification of our investment portfolio that has been achieved over the past year, set income back for the short term but improved our position going forward. We rebalanced our portfolio with a smaller equity component in order to preserve capital and increase stability. After adjusting prior periods to reflect current accounting standards for impaired securities, we expect to again see favorable trend comparisons for investment income by the end of this year's second half. At that point, we anticipate interest from bonds will increase to a level that offsets lower dividends from our stock holdings.
"We believe that the quality of an insurer's balance sheets hinges on its reserving practices," Stecher noted. "Consistent reserving practices are essential during soft markets. As losses develop over the years after they occur, our reserves have proven more than adequate and allowed us to release favorable development from prior-year loss reserves into current earnings. In the current quarter and first half, the benefit from this savings was less than in the year-ago period because we slightly increased our inflation assumption for workers' compensation reserves going back 20 or more years. Our reserves for open workers' compensation claims total nearly $1 billion, so even small changes in inflation assumptions translate into significant quarterly income effects.
"The unique strength of our relationship with our agents remains a key competitive advantage, and we remain confident that it will lead to profitable growth as insurance markets improve. Our strong capital position provides plenty of capacity for that growth along with financial flexibility."
Improving Profitability
Stecher said, "We expect to see improvement in our underperforming workers' compensation and homeowner lines of business as we apply predictive modeling techniques to improve pricing accuracy. We are on target to begin using our workers' compensation predictive modeling tool throughout our operating territory during the second half of 2009 to assist our underwriting staff with improved risk selection and pricing capabilities. We recently refined our homeowner predictive modeling and continue to improve pricing sophistication for individual risks. Rate increases are also being implemented for states representing approximately 80 percent of our personal lines business.
"Frequent catastrophe events continue to weigh on our results, particularly for the homeowner line. In addition to the three significant events during the second quarter for which we reported a preliminary catastrophe loss estimate on July 13, we identified smaller impacts from several events classified as catastrophes by Property Claims Services, an industry group that declares catastrophes when a single incident or a series of closely related incidents causes severe insured property losses totaling more than $25 million. Our second quarter 2009 total incurred losses from catastrophes were $118 million compared with $113 million for the same quarter in 2008.
"These amounts in both periods were well above our historical norm for catastrophe losses. We are addressing catastrophe risk through several initiatives, including ongoing efforts to control our hurricane exposure. Additionally, we have made progress with geographic diversification, expanding our personal lines operations over the past 18 months into seven states less prone to catastrophe events. Through the first six months of 2009, agencies in these states already have contributed more than $5 million of new business, approximately 15 percent of total new personal lines business. While it will take time to see meaningful earnings effects from geographic diversification, it is an important part of our enterprise risk management program."
Driving Growth
Stecher continued, "Although new property casualty business written for the second quarter of 2009 exceeded the 2008 level by 6.9 percent, due primarily to our surplus lines operation, total net written premiums declined 8.5 percent. These trends reflect pricing pressure as well as reduced premiums based on insured exposures that are highly sensitive to economic cycles, such as business sales or payrolls. Premiums on commercial accounts we choose to renew continue to reflect pricing declines at a low-single-digit rate, on average. We choose not to renew accounts that would require price decreases out of proportion to the quality of the individual risk.
"Rather than compete for business that appears to be underpriced, we are focusing on expanding our agency plant, geographical territory and lines of business. During the second quarter, we appointed our first Colorado agency, and we expect to announce our first agency relationship in Wyoming soon. We also recently added a third marketing territory in Texas, a state where we began actively marketing in 2008, and generated $3 million in direct written premiums for the first half of 2009. Typically, new agencies give us opportunities to underwrite accounts they formerly placed with another carrier, bringing us the advantage of risk characteristics and loss histories that are well-known to our agent.
"Agents also have responded enthusiastically to the surplus lines offerings of The Cincinnati Specialty Underwriters Insurance Company, now in its second year of operation. Of the $29 million increase in new, consolidated property casualty business written in the first six months, $12 million was surplus lines premium. Our ability to handle surplus lines risk through this company also increases our opportunities to write standard business for the same accounts through The Cincinnati Insurance Company.
"Our life insurance operation similarly provides opportunities to crosssell life insurance products to clients of the independent agencies that sell Cincinnati's property casualty insurance policies. We continue to enhance this portfolio of products and later this year plan to offer a new secondary guarantee universal life product, a new return of premium term life series and also a worksite return of premium 20-year term life product.
"We are on the verge of introducing our new commercial lines policy administration system, which we expect to drive future premium growth. A group of our associates are using it now to produce commercial package and commercial auto policies for Ohio and Indiana agencies they serve. In October, agents will receive the system and will gain direct bill capability. Further, our improved personal lines administration system is on track for early 2010 delivery to agents.
"In summary, our second quarter results were a disappointment but not a surprise, and we see few signs of a better environment for the remainder of 2009. Looking to the future, we strengthened our competitive and financial position during the second quarter by continuing to improve our portfolio and risk management, build our agency relationships, expand our independent agency force and advance our technology."
Stecher concluded, "Our property casualty insurance group was named in July to the Ward's 50 list of insurers that excel at balancing financial strength with superior performance over a five-year period. Our group is one of only five insurers named to the Ward's 50 every year since inception of the list 19 years ago. With support from our loyal shareholders, agents, policyholders and associates, we will continue making progress and building value that endures over time."
Consolidated Property Casualty Insurance Operations
--------------------------------------------------------------------------
(Dollars in millions; percent change given for dollar amounts
and point change given for ratios)
Three months ended Six months ended
June 30, June 30,
2009 2008 change % 2009 2008 change %
--------------------------------------------------------------------------
Earned premiums $733 $761 (3.7) $1,465 $1,512 (3.1)
Loss and loss
expenses before
catastrophe losses 502 445 12.8 992 903 9.9
Loss and loss
expenses from
catastrophe losses 118 113 4.1 171 156 9.3
----- ----- ----- -----
Total loss and
loss expenses 620 558 11.2 1,163 1,059 9.9
Underwriting
expenses 235 230 2.6 479 469 2.0
----- ----- ----- -----
Underwriting loss $(122) (27) (356.3) $(177) (16) nm
===== ===== ===== =====
Other premium metrics:
Agency renewal
written premiums $666 $738 (9.8) $1,361 $1,472 (7.5)
Agency new business
written premiums 107 100 6.9 204 175 16.4
Net written premiums 723 790 (8.5) 1,501 1,566 (4.2)
Ratios as a percent of
earned premiums: Points Points
------ ------
Loss and loss expenses 84.5% 73.3% 11.2 79.4% 70.0% 9.4
Underwriting expenses 32.1 30.2 1.9 32.7 31.1 1.6
----- ----- ----- ----- ----- -----
Combined ratio 116.6% 103.5% 13.1 112.1% 101.1% 11.0
===== ===== ===== ===== ===== =====
Other metrics within
combined ratio:
Contribution from
catastrophe losses 16.1 14.9 1.2 11.6 10.3 1.3
Contribution from
prior period
reserve development (3.9) (11.4) 7.5 (1.5) (6.5) 5.0
--------------------------------------------------------------------------
-- $67 million or 8.5 percent decrease in second-quarter property casualty
net written premiums as the effects of exposure decreases, soft pricing
and disciplined renewal underwriting more than offset growth in new
business.
-- $7 million increase in 2009 new business written by agencies reflected
the contribution from growth initiatives, including a $6 million
increase from surplus lines.
-- 1,168 agency relationships with 1,444 reporting locations marketing
standard market property casualty insurance products at June 30, 2009,
up from 1,133 agency relationships with 1,387 reporting locations at
year-end 2008.
-- Second-quarter 2009 GAAP combined ratio increased primarily due to less
favorable development on prior accident year loss and loss expense
reserves. The underwriting profit impacts of this prior accident year
reserve development for the second quarter of 2009 and 2008,
respectively, were $29 million unfavorable and $9 million favorable for
the workers' compensation line of business and $58 million
favorable and $77 million favorable for all other lines of business.
-------------------------------------------------------------------------
(In millions, net of reinsurance) Three months ended June 30,
Commercial Personal
Dates Cause of loss Region lines lines Total
-------------------------------------------------------------------------
2009
Jan. 26-28 Flood, freezing, South, Midwest $(1) $ - $(1)
ice, snow
Feb. 10-13 Flood, hail, wind South, Midwest, 4 5 9
East
Feb. 18-19 Wind, hail South 1 3 4
Apr. 9-11 Flood, hail, wind South, Midwest 13 15 28
May 7-9 Flood, hail, wind South, Midwest 12 17 29
Jun. 2-6 Flood, hail, wind South, Midwest 6 4 10
Jun. 10-18 Flood, hail, wind South, Midwest 21 9 30
All other 2009
catastrophes 5 6 11
Development on 2008 and prior catastrophes (4) 2 (2)
----- ----- -----
Calendar year incurred total $57 $61 $118
===== ===== =====
2008
Jan. 4-9 Wind, hail, flood, South, Midwest $- $- $-
freezing
Jan. 29-30 Wind, hail Midwest - - -
Feb. 5-6 Wind, hail, flood Midwest (2) (1) (3)
Mar. 14 Tornadoes, wind, South - - -
hail, flood
Mar. 15-16 Wind, hail South (2) 1 (1)
Apr. 9-11 Wind, hail, flood South 19 2 21
May 10-12 Wind, hail, flood South, Mid-Atlantic 4 3 7
May 22-26 Wind, hail Midwest 7 2 9
May 29-
Jun. 1 Wind, hail, flood Midwest 6 6 12
Jun. 2-4 Wind, hail, flood Midwest 6 7 13
Jun. 5-8 Wind, hail, flood Midwest 13 11 24
Jun. 11-12 Wind, hail, flood Midwest 11 12 23
All other 2008 catastrophes 4 4 8
Development on 2007 and prior catastrophes - - -
----- ----- -----
Calendar year incurred total $66 $47 $113
===== ===== =====
(In millions, net of reinsurance) Six months ended June 30,
Commercial Personal
Dates Cause of loss Region lines lines Total
-------------------------------------------------------------------------
2009
Jan. 26-28 Flood, freezing, South, Midwest $5 $15 $20
ice, snow
Feb. 10-13 Flood, hail, wind South, Midwest, 15 23 38
East
Feb. 18-19 Wind, hail South 1 8 9
Apr. 9-11 Flood, hail, wind South, Midwest 13 15 28
May 7-9 Flood, hail, wind South, Midwest 12 17 29
Jun. 2-6 Flood, hail, wind South, Midwest 6 4 10
Jun. 10-18 Flood, hail, wind South, Midwest 21 9 30
All other 2008 catastrophes 5 6 11
Development on 2008 and prior catastrophes (7) 3 (4)
----- ----- -----
Calendar year incurred total $71 $100 $171
===== ===== =====
2008
Jan. 4-9 Wind, hail, flood, South, Midwest $3 $3 $6
freezing
Jan. 29-30 Wind, hail Midwest 6 4 10
Feb. 5-6 Wind, hail, flood Midwest 6 8 14
Mar. 14 Tornadoes, wind, South 5 1 6
hail, flood
Mar. 15-16 Wind, hail South 2 5 7
Apr. 9-11 Wind, hail, flood South 19 2 21
May 10-12 Wind, hail, flood South, Mid-Atlantic 4 3 7
May 22-26 Wind, hail Midwest 7 2 9
May 29-
Jun. 1 Wind, hail, flood Midwest 6 6 12
Jun. 2-4 Wind, hail, flood Midwest 6 7 13
Jun. 5-8 Wind, hail, flood Midwest 13 11 24
Jun. 11-12 Wind, hail, flood Midwest 11 12 23
All other 2008 catastrophes 4 4 8
Development on 2007 and prior catastrophes (3) (1) (4)
----- ----- -----
Calendar year incurred total $89 $67 $156
===== ===== =====
-------------------------------------------------------------------------
Insurance Segments Highlights
Commercial Lines Insurance Operations
--------------------------------------------------------------------------
(Dollars in millions; percent change given for dollar amounts
and point change given for ratios)
Three months ended Six months ended
June 30, June 30,
2009 2008 change % 2009 2008 change %
--------------------------------------------------------------------------
Earned premiums $556 $586 (5.2) $1,112 $1,161 (4.2)
Loss and loss expenses
before catastrophe losses 385 342 12.3 759 685 10.8
Loss and loss expenses
from catastrophe losses 57 66 (14.0) 71 89 (19.9)
----- ----- ----- -----
Total loss and loss
expenses 442 408 8.1 830 774 7.3
Underwriting expenses 175 177 (1.1) 355 357 (0.6)
----- ----- ----- -----
Underwriting (loss)
profit $(61) $1 nm $(73) $30 nm
===== ===== ===== =====
Other premium metrics:
Agency renewal written
premiums $488 $552 (11.7) $1,045 $1,140 (8.3)
Agency new business
written premiums 79 87 (8.7) 155 153 1.5
Net written premiums 524 597 (12.2) 1,149 1,222 (5.9)
Ratios as a percent of
earned premiums: Points Points
------ ------
Loss and loss
expenses 79.5% 69.7% 9.8 74.6% 66.7% 7.9
Underwriting expenses 31.4 30.2 1.2 32.0 30.7 1.3
----- ----- ----- ----- ----- -----
Combined ratio 110.9% 99.9% 11.0 106.6% 97.4% 9.2
===== ===== ===== ===== ===== =====
Other metrics within
combined ratio:
Contribution from
catastrophe losses 10.2 11.3 (1.1) 6.4 7.6 (1.2)
Contribution from prior
period reserve
development (3.9) (12.5) 8.6 (1.2) (7.6) 6.4
-------------------------------------------------------------------------
-- $73 million or 12.2 percent decrease in second-quarter commercial lines
net written premiums. Lower renewal premiums reflected pricing declines
and lower insured exposure levels such as business sales or payroll
volume, reflecting the weak economy. Lower new business premiums
reflected decisions to decline business considered underpriced.
-- $13 million of commercial lines new business written was from agencies
appointed since January 2008.
-- 11.0 percentage-point increase in second-quarter 2009 combined ratio
included 6.8 percentage points from development of workers'
compensation loss and loss expense reserves for prior accident years. It
unfavorably affected by 5.3 percentage points the second-quarter ratio
of 2009 and favorably impacted by 1.5 percentage points the second
quarter of 2008.
Personal Lines Insurance Operations
--------------------------------------------------------------------------
(Dollars in millions; percent change given for dollar amounts
and point change given for ratios)
Three months ended Six months ended
June 30, June 30,
2009 2008 change % 2009 2008 change %
--------------------------------------------------------------------------
Earned premiums $172 $174 (1.5) $343 $351 (2.2)
Loss and loss expenses
before catastrophe losses 112 102 10.2 225 217 3.9
Loss and loss expenses
from catastrophe losses 61 47 29.3 100 67 47.3
----- ----- ----- -----
Total loss and loss
expenses 173 149 16.2 325 284 14.2
Underwriting expenses 56 52 6.6 110 112 (0.5)
----- ----- ----- -----
Underwriting loss $(57) $(27) (113.0) $(92) $(45) (107.3)
===== ===== ===== =====
Other premium metrics:
Agency renewal direct
written premiums $176 $186 (5.3) $313 $332 (5.6)
Agency new business
direct written premiums 19 10 84.7 34 19 76.8
Net written premiums 190 191 (0.6) 334 341 (1.9)
Ratios as a percent of
earned premiums: Points Points
------ ------
Loss and loss
expenses 100.9% 85.4% 15.5 94.6% 81.0% 13.6
Underwriting
expenses 32.3 29.9 2.4 32.3 31.7 0.6
----- ----- ----- ----- ----- -----
Combined ratio 133.2% 115.3% 17.9 126.9% 112.7% 14.2
===== ===== ===== ===== ===== =====
Other metrics within
combined ratio:
Contribution from
catastrophe losses 35.4 27.0 8.4 29.0 19.3 9.7
Contribution from
prior period reserve
development (4.3) (7.2) 2.9 (2.5) (3.2) 0.7
--------------------------------------------------------------------------
-- $1 million or 0.6 percent decline in second-quarter personal lines net
written premiums. Higher new personal lines business was offset by the
effects of changes in pricing on renewal business volume.
-- $9 million increase in second-quarter 2009 personal lines new business
written including $3 million from seven states where we began in 2008 to
market personal lines or significantly expanded our personal lines
product offerings and automation capabilities.
-- 17.9 percentage-point increase in the combined ratio due largely to an
8.4 percentage-point increase in catastrophe losses and a 3.1
percentage-point increase in personal lines large losses above $250,000
per loss.
Life Insurance Operations
--------------------------------------------------------------------------
(In millions) Three months ended Six months ended
June 30, June 30,
2009 2008 change % 2009 2008 change %
--------------------------------------------------------------------------
Written premiums $73 $47 56.1 $123 $90 35.8
===== ===== ===== =====
Earned premiums $37 $33 9.9 $70 $63 11.1
Investment income, net
of expenses 29 29 (0.1) 59 58 1.3
Other income - 1 (131.0) - 1 (83.5)
----- ----- ----- -----
Total revenues,
excluding realized
investment gains and
losses 66 63 3.9 129 122 5.4
----- ----- ----- -----
Contract holders benefits 39 38 1.8 78 74 5.3
Underwriting expenses 13 10 29.8 24 21 16.0
----- ----- ----- -----
Total benefits and
expenses 52 48 7.5 102 95 7.7
----- ----- ----- -----
Net income before income
tax and realized
investment gains and
losses 14 15 (7.3) 27 27 (2.6)
Income tax 3 5 (41.2) 8 9 (20.8)
----- ----- ----- -----
Net income before realized
investment gains
and losses $11 $10 10.3 $19 $18 6.7
===== ===== ===== =====
--------------------------------------------------------------------------
-- $33 million increase in total six-month 2009 life insurance segment net
written premiums primarily due to increased fixed annuity sales. Written
premiums include life insurance, annuity and accident and health
premiums.
-- 7.6 percent increase to $78 million in six-month 2009 written premiums
for life insurance products in total.
-- 12.0 percent rise to $43 million in six-month term life insurance
written premiums, reflecting marketing advantages of competitive,
uptodate products, providing close personal attention and offering
policies backed by financial strength and stability.
-- Growth in earned premiums more than offset less favorable mortality
experience as life insurance operations continue to provide a steady
contribution to overall earnings.
-- 2.9 percent rise in face amount of life policies in force to $67.812
billion at June 30, 2009, from $65.888 billion at yearend 2008.
Investment and Balance Sheet Highlights
Investment Operations
--------------------------------------------------------------------------
(In millions) Three months ended Six months ended
June 30, June 30,
2009 2008 change % 2009 2008 change %
--------------------------------------------------------------------------
Investment income:
Interest $96 $79 21.0 $192 $155 23.7
Dividends 24 50 (52.4) 50 123 (59.2)
Other 1 3 (47.8) 5 7 (36.6)
Investment expenses (2) (2) (4.3) (4) (3) (7.8)
----- ----- ----- -----
Total investment
income, net of
expenses 119 130 (8.4) 243 282 (13.9)
----- ----- ----- -----
Investment interest
credited to contract
holders (17) (16) 6.8 (33) (31) 6.3
----- ----- ----- -----
Realized investment
gains and losses summary:
Realized investment
gains and losses 23 57 (59.3) 75 40 85.1
Change in fair value
of securities with
embedded derivatives 11 (3) nm 7 (6) nm
Other-than-temporary
impairment charges (52) (65) 18.9 (102) (278) 63.4
----- ----- ----- -----
Total realized
investment gains
and losses (18) (11) (62.0) (20) (244) 91.9
----- ----- ----- -----
Investment operations
income $84 $103 (18.3) $190 $7 nm
===== ===== ===== =====
--------------------------------------------------------------------------
-- 8.4 percent decline in second-quarter 2009 net investment income,
primarily due to dividend reductions by equity security holdings.
-- $18 million realized investment loss in second-quarter 2009 compared
with an $11 million loss in second-quarter 2008.
-- Second-quarter 2009 pretax realized investment loss included $52 million
non-cash charge for other-than-temporary impairments that recognize
significant market value declines, primarily for the equity portfolio.
------------------------------------------------------------------------
(Dollars in millions except share data) At June 30, At December 31,
2009 2008
------------------------------------------------------------------------
Balance sheet data
Invested assets $9,708 $8,890
Total assets 13,522 13,369
Short-term debt 49 49
Long-term debt 790 791
Shareholders' equity 4,144 4,182
Book value per share 25.49 25.75
Debt-to-capital ratio 16.8% 16.7%
------------------------------------------------------------------------
Six months ended June 30,
2009 2008
------------------------------------------------------------------------
Performance measures
Value creation ratio 2.0% (16.6)%
------------------------------------------------------------------------
-- $9.962 billion in cash and invested assets at June 30, 2009, compared
with $9.899 billion at December 31, 2008. Cash and equivalents of $254
million at June 30, 2009, compared with $1.009 billion at December 31,
2008.
-- $7.127 billion bond portfolio at June 30, 2009, with an average rating
of A2/A, reflecting a diverse mix of taxable and taxexempt securities.
-- $2.492 billion equity portfolio was 25.7 percent of invested assets and
included $533 million in pretax unrealized gains at June 30, 2009.
-- $3.241 billion of statutory surplus for the property casualty insurance
group at June 30, 2009, compared with $3.360 billion at December 31,
2008. Ratio of net written premiums to property casualty statutory
surplus for the 12 months ended June 30, 2009, of 0.93-to-1, up from
0.89-to-1 for the 12 months ended December 31, 2008.
-- Value creation ratio for the first half of 2009 includes 3.0 percent
from shareholder dividends and negative 1.0 percent growth in book value
per share.
For additional information or to register for this morning's 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 2008 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 25. Although we often review or update our forward-looking statements when events warrant, we caution our readers that we undertake no obligation to do so.
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 our personal lines
segment if pricing and loss trends would lead management to conclude
this 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, 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
-- Ability 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:
-- Multi-notch 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
-- Increase our expenses
-- 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
-- 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, 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 recent measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation
Condensed Balance Sheets and Statements of Income (unaudited)
-------------------------------------------------------------------------
(Dollars in millions) June 30, Dec. 31,
2009 2008
-------------------------------------------------------------------------
Assets
Investments $9,708 $8,890
Cash and cash equivalents 254 1,009
Premiums receivable 1,075 1,059
Reinsurance receivable 730 759
Deferred income tax 73 126
Other assets 1,682 1,526
------- -------
Total assets $13,522 $13,369
======= =======
Liabilities
Insurance reserves $5,847 $5,637
Unearned premiums 1,565 1,544
6.125% senior notes due 2034 371 371
6.9% senior debentures due 2028 28 28
6.92% senior debentures due 2028 391 392
Other liabilities 1,176 1,215
------- -------
Total liabilities 9,378 9,187
------- -------
Shareholders' Equity
Common stock and paid-in capital 1,468 1,462
Retained earnings 3,575 3,579
Accumulated other comprehensive income 304 347
Treasury stock (1,203) (1,206)
------- -------
Total shareholders' equity 4,144 4,182
------- -------
Total liabilities and shareholders' equity $13,522 $13,369
======= =======
-------------------------------------------------------------------------
(Dollars in millions except per share data)
Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenues
Earned premiums $770 $794 $1,535 $1,575
Investment income, net of expenses 119 130 243 282
Realized investment gains and
losses (18) (11) (20) (244)
Other income 3 4 6 8
----- ----- ----- -----
Total revenues 874 917 1,764 1,621
----- ----- ----- -----
Benefits and Expenses
Insurance losses and policyholder
benefits 658 595 1,239 1,131
Underwriting, acquisition and
insurance expenses 248 239 503 491
Other operating expenses 4 6 10 10
Interest expense 14 13 28 25
----- ----- ----- -----
Total benefits and expenses 924 853 1,780 1,657
----- ----- ----- -----
Income (Loss) before Income Taxes (50) 64 (16) (36)
Provision (Benefit) for Income Taxes (31) 1 (33) (57)
----- ----- ----- -----
Net Income (Loss) $(19) $63 $17 $21
===== ===== ===== =====
Per Common Share:
Net income (loss)-basic $(0.12) $0.38 $0.10 $0.13
Net income(loss)-diluted $(0.12) $0.38 $0.10 $0.13
-------------------------------------------------------------------------
Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2009 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 nonGAAP measures may improve its understanding of trends in the underlying business and 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.
-- Written premium adjustment - statutory basis only: In 2002, the
company refined its estimation process for matching property
casualty written premiums to policy effective dates, which added
$117 million to 2002 written premiums. To better assess ongoing
business trends, management may exclude this adjustment when
analyzing trends in written premiums and statutory ratios that
make use of written premiums.
-------------------------------------------------------------------------
Cincinnati Financial Corporation
Net Income Reconciliation
-------------------------------------------------------------------------
(In millions except per share data)
Three months ended Six months ended
June 30, 2009 June 30, 2009
-------------------------------------------------------------------------
Net income (loss) $(19) $17
Net realized investment gains and losses (14) (15)
------ ------
Operating income (loss) (5) 32
Less catastrophe losses (77) (111)
------ ------
Operating income before catastrophe losses $72 $143
====== ======
Diluted per share data:
Net income (loss) $(0.12) $0.10
Net realized investment gains and
losses (0.09) (0.10)
------ ------
Operating income (loss) (0.03) 0.20
Less catastrophe losses (0.47) (0.68)
------ ------
Operating income before catastrophe
losses $0.44 $0.88
====== ======
-------------------------------------------------------------------------
Property Casualty Reconciliation
(Dollars in millions) Three months ended June 30, 2009
Consolidated* Commercial Personal
-------------------------------------------------------------------------
Premiums:
Adjusted written premiums - statutory $735 $536 $190
Written premium adjustment (12) (12) 0
------ ------ ------
Reported written premiums - statutory 723 524 190
Unearned premiums change 10 32 (18)
------ ------ ------
Earned premiums $733 $556 $172
====== ====== ======
Statutory combined ratio:
Statutory combined ratio 116.6% 112.0% 130.5%
Contribution from catastrophe losses 16.1 10.2 35.4
------ ------ ------
Statutory combined ratio excluding
catastrophe losses 100.5% 101.8% 95.1%
====== ====== ======
Commission expense ratio 18.2% 18.1% 18.0%
Other expense ratio 13.8 14.4 11.7
------ ------ ------
Statutory expense ratio 32.0% 32.5% 29.7%
====== ====== ======
GAAP combined ratio:
GAAP combined ratio 116.6% 110.9% 133.2%
Contribution from catastrophe losses 16.1 10.2 35.4
Prior accident years before
catastrophe losses (3.7) (3.2) (5.4)
------ ------ ------
GAAP combined ratio excluding
catastrophe losses and prior
years reserve development 104.2% 103.9% For full details on Cincinnati Financial Cp (CINF) click here. Cincinnati Financial Cp (CINF) has Short Term PowerRatings of 5. Details on Cincinnati Financial Cp (CINF) Short Term PowerRatings is available at This Link.
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