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$49 million, or 30 cents per share, of net loss for the second quarter of 2011 compared with $27 million, or 17 cents net income per share, in the 2010 second quarter.
•
Operating loss* of $93 million, or 57 cents per share, compared with operating income of $42 million, or 26 cents.
•
$76 million decrease in second-quarter 2011 net income driven by a $137 million after-tax decrease in the contribution from property casualty underwriting operations. The after-tax effect of second-quarter 2011 property casualty losses from natural catastrophes totaled $189 million, up $124 million compared with the same period of 2010. The contribution to income from investments, including net realized investment gains, rose $60 million for the quarter.
•
$31.01 book value per share at June 30, 2011, down approximately 1 percent from March 31, 2011, and up less than 1 percent from December 31, 2010.
•
2.9 percent value creation ratio for the first six months of 2011, compared with 2.3 percent for the first half of 2010.
Financial Highlights
(Dollars in millions except share data)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Revenue Highlights
Earned premiums
$
773
$
768
1
$
1,555
$
1,515
3
Investment income, pre-tax
132
130
2
263
260
1
Total revenues
975
878
11
1,904
1,765
8
Income Statement Data
Net income (loss)
$
(49)
$
27
nm
$
13
$
95
(86)
Net realized investment gains and losses
44
(15)
nm
51
(10)
nm
Operating income (loss)*
$
(93)
$
42
nm
$
(38)
$
105
nm
Per Share Data (diluted)
Net income (loss)
$
(0.30)
$
0.17
nm
$
0.08
$
0.58
(86)
Net realized investment gains and losses
0.27
(0.09)
nm
0.31
(0.06)
nm
Operating income (loss)*
$
(0.57)
$
0.26
nm
$
(0.23)
$
0.64
nm
Book value
$
31.01
$
29.13
6
Cash dividend declared
$
0.40
$
0.395
1
$
0.80
$
0.79
1
Weighted average shares outstanding
163,068,516
163,284,013
0
163,684,903
163,293,335
0
Insurance Operations Second-Quarter Highlights
•
136.6 percent second-quarter 2011 property casualty combined ratio, rising from 107.6 percent from one year ago.
•
3 percent growth in property casualty net written premiums, up in all three of our property casualty segments.
•
$117 million second-quarter 2011 property casualty new business written premiums, up 10 percent from 2010. Agencies produced our highest quarter ever for new business, up in all three of our property casualty segments.
•
8 cents per share contribution from life insurance to second-quarter operating income, up 2 cents from 2010.
Investment and Balance Sheet Highlights
•
2 percent second-quarter 2011 growth in pre-tax investment income as higher dividends offset lower interest income that continued to reflect depressed yields in the bond market.
•
2 percent six-month rise in fair value of invested assets at June 30, 2011, including second-quarter 2010 bond portfolio growth of 2 percent.
•
$1.086 billion parent company cash and marketable securities at June 30, 2011, up 4 percent from year-end.
Forward-looking statements and related assumptions are subject to the risks outlined in the
company’s safe harbor statement.
nm
Not meaningful
Fundamentally Prepared
Steven J. Johnston, FCAS, MAAA, CFA, president and chief executive officer, commented: “The Cincinnati Insurance Companies were prepared – operationally and financially – for the pounding our own policyholders and the property casualty insurance industry took from this spring’s powerful storms. While the previously announced, record-breaking catastrophe losses depleted our operating earnings for the second quarter and first half of 2011, our capital and book value per share rose above 2010 year-end levels. Confident in our very strong balance sheet and risk management decisions, we were able to focus on what was important: outstanding claims service and our ongoing initiatives to grow our business and improve its profitability.
“We quickly identified the worst-hit communities, dispatching more than 250 of our own experienced claims representatives to those locations during the second quarter. Technology was in place to give them field access to estimating tools, other resources and records; and they had the authority to provide prompt assistance. Our storm response teams were well equipped to put policyholders on the road to recovery, overcoming the operational difficulties presented by the sheer devastation of community infrastructure and the sheer volume of reported catastrophe claims – more than 21,000 to-date from second-quarter events.
“And we were prepared financially. For more than 60 years, our capital and risk management choices have consistently and conservatively balanced the need to build a strong foundation for long-term success with the need for current earnings. We met these catastrophes equipped with a strong reinsurance program featuring relatively lower loss retention; ample cash flow and liquidity; solid loss reserves and property casualty surplus; and the financial flexibility that comes from maintaining over $1 billion of cash and marketable securities at our parent company.
“Our reinsurance program covered more than $220 million of our estimate for gross catastrophe losses, reducing the net pretax loss to $290 million. During the second quarter we replenished reinsurance coverage for the remainder of 2011 for any single catastrophe event that causes losses above $70 million and up to $200 million, and coverage remains in place for losses up to $500 million. In effect, reinsurance protects our $12 billion investment portfolio, allowing us to pay claims while holding securities to maturity as planned. Unrealized gains accumulated in our portfolio rose to $1.5 billion pretax, up $75 million during the second quarter after harvesting $67 million of net investment gains. Pretax investment income grew 2 percent for the quarter. That growth has been a bright spot for us even in the current low-interest rate environment, due in large part to dividend-paying stocks in our portfolio. Another consistent contributor is our life insurance operation, which increased its operating profit by 20 percent for the second quarter.”
Improving Trends
“Our second-quarter and first-half property casualty underwriting results are more complex than usual due to the catastrophes, reinsurance coverage and $38 million of premiums we passed to reinsurers to reinstate part of our reinsurance program. Looking beyond the complexity of those three items, we offer two observations. First, our catastrophe claims response plan and reinsurance program made us very effective at fulfilling our obligation to policyholders at their time of need, and we’ll continue to take a similar approach. Second, the negative effects of those three items mask improving trends for underlying premium growth and profitability. Despite those effects, second-quarter written premium growth was satisfactory at 3 percent, including record new business written premiums from our agents. Our reported six-month combined ratio rose 14.9 percentage points, including 14.5 points from higher catastrophe losses and 2.4 points from the effect of the $38 million reinsurance reinstatement premium.
“We believe our company’s strategic initiatives, rather than marketplace changes, are positioning us for improved growth and profitability. Growth in our established agencies and states is boosted by growth in more recently appointed agencies and states entered in recent years to widen our geographic footprint. Growth also reflects sales of excess and surplus lines products, all new offerings since 2007; and our new target markets products, which are niche insurance programs developed for select business classes found in nearly every agent’s community.
“Improved pricing is an important way to increase underwriting profitability. Again, we are not looking to the marketplace to bring better prices to us. Our agents are working with us to market the value of the Cincinnati policy and service. While we still see average renewal price declines on commercial business overall, the declines are narrowing. We are obtaining price increases for workers’ compensation in total and for many other individual commercial lines policies, in addition to average renewal price increases for personal lines in total and excess and surplus lines in total. Predictive analytics tools are in use to guide pricing for several of our product lines, helping us compete for higher quality accounts and selectively target increases for other accounts, and we are developing similar tools to enhance pricing precision for additional lines of business.”
Consistency
“Our initiatives to grow profitably are bringing many changes. Still, we are careful to distinguish between tactical changes that lead to performance improvements and more fundamental, unchanging principles and practices. These fundamentals define our business model, giving us competitive advantages and increasing strength and stability over the long term. This month Ward Group announced that The Cincinnati Insurance Companies stand among the top performing insurers on its annual Ward's 50 list. Insurers and groups named to the list have excelled at balancing safety and consistency and have achieved superior performance over the past five years. Cincinnati is one of only four companies named to the property casualty Ward's 50 for 21 consecutive years.
“In May, Fitch Ratings affirmed our ratings with a stable outlook, considering our capital, liquidity and distribution advantages as well as our natural catastrophe risk in its decision. We have never had catastrophe losses like those of second-quarter 2011, and we hope to never again have that experience, but catastrophes are a part of our insurance business, and we will be prepared.”
Current accident year combined ratio before catastrophe losses
109.8
%
103.3
%
6.5
107.9
%
104.2
%
3.7
•
$19 million or 3 percent increase in second-quarter 2011 property casualty net written premiums and six-month growth of 3 percent. Solid growth for renewal and new business premiums was partially offset by $38 million of ceded premiums to reinstate property catastrophe reinsurance coverage.
•
$11 million increase to $117 million second-quarter new business written by agencies, largely from recent-year growth initiatives, including $10 million of the increase from agencies appointed since the beginning of 2010.
•
1,281 agency relationships in 1,593 reporting locations marketing our standard market property casualty insurance products at June 30, 2011, compared with 1,245 agency relationships in 1,544 reporting locations at year-end 2010. Seventy-one new agencies were appointed during the first six months of 2011.
•
29.0 and 14.9 percentage-point rise in the second-quarter and first-half combined ratios primarily due to 26.2 and 14.5 point increases in natural catastrophe losses plus lower earned premiums from $38 million reinstatement premiums that added another 4.8 and 2.4 percentage points to the second-quarter and first-half 2011 combined ratios.
•
12.9 percentage points second-quarter 2011 benefit from favorable prior accident year reserve development of $95 million, compared with 10.0 percent or $73 million for second-quarter 2010. Six-month ratio of 10.3 percent equaled the full-year 2010 ratio.
•
0.9 percentage-point rise in the second-quarter 2011 underwriting expense ratio, including 1.6 points from the effect of reinsurance reinstatement ceded premiums causing earned premiums to grow more slowly than expenses.
The following table shows incurred catastrophe losses for 2011 and 2010.
(In millions, net of reinsurance)
Three months ended June 30,
Six months ended June 30,
Comm.
Pers.
E&S
Comm.
Pers.
E&S
Dates
Cause of loss
Region
lines
lines
lines
Total
lines
lines
lines
Total
2011
First quarter catastrophes
$
—
$
(1)
$
—
$
(1)
$
18
$
12
$
—
$
30
Apr. 3-5
Flood, hail,
tornado, wind
South, Midwest
16
22
—
38
16
22
—
38
Apr. 8-11
Flood, hail,
tornado, wind
South, Midwest
11
9
—
20
11
9
—
20
Apr. 14-16
Flood, hail,
tornado, wind
South, Midwest
10
4
—
14
10
4
—
14
Apr. 19-20
Hail, wind
South, Midwest
13
13
—
26
13
13
—
26
Apr. 22-28
Flood, hail, tornado, wind
South, Midwest
47
31
—
78
47
31
—
78
May 20-27
Flood, hail, tornado, wind
South, Midwest
45
37
—
82
45
37
—
82
May 29-Jun. 1
Flood, hail, tornado, wind
East, Midwest
4
2
—
6
4
2
—
6
Jun. 16-22
Flood, hail, tornado, wind
South, Midwest
7
10
—
17
7
10
—
17
All other 2011 catastrophes
4
5
1
10
9
11
1
21
Development on 2010 and prior catastrophes
—
—
—
—
4
(5)
—
(1)
Calendar year incurred total
$
157
$
132
$
1
$
290
$
184
$
146
$
1
$
331
2010
First quarter catastrophes
$
(2)
$
—
$
—
$
(2)
$
8
$
4
$
—
$
12
Apr. 4-6
Flood, hail, tornado, wind
South, Midwest
5
6
—
11
5
6
—
11
Apr. 30-May 3
Flood, hail, tornado, wind
South
28
6
—
34
28
6
—
34
May 7-8
Hail, tornado, wind
East, Midwest
2
10
—
12
2
10
—
12
May 12-16
Flood, hail, tornado, wind
South, Midwest
3
2
—
5
3
2
—
5
Jun. 4-6
Flood, hail, tornado, wind
Midwest
3
3
—
6
3
3
—
6
Jun. 17-20
Flood, hail, tornado, wind
Midwest, West
5
4
—
9
5
4
—
9
Jun. 21-24
Flood, hail, tornado, wind
Midwest
4
5
—
9
4
5
—
9
Jun. 25-28
Flood, hail, tornado, wind
Midwest
1
4
—
5
1
4
—
5
All other 2010 catastrophes
11
4
—
15
17
6
—
23
Development on 2009 and prior catastrophes
(4)
(1)
—
(5)
(10)
(2)
—
(12)
Calendar year incurred total
$
56
$
43
$
—
$
99
$
66
$
48
$
—
$
114
Insurance Operations Highlights
Commercial Lines Insurance Operations
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Earned premiums
$
533
$
538
(1)
$
1,073
$
1,061
1
Fees revenues
-
-
nm
1
1
0
Total revenues
533
538
(1)
1,074
1,062
1
Loss and loss expenses
483
379
27
857
731
17
Underwriting expenses
178
169
5
366
350
5
Underwriting loss
$
(128)
$
(10)
nm
$
(149)
$
(19)
nm
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Loss and loss expenses
90.8%
70.4%
20.4
79.9%
68.9%
11.0
Underwriting expenses
33.4
31.3
2.1
34.1
33.0
1.1
Combined ratio
124.2%
101.7%
22.5
114.0%
101.9%
12.1
Change %
Change %
Agency renewal written premiums
$
500
$
492
2
$
1,042
$
1,025
2
Agency new business written premiums
81
73
11
152
139
9
Other written premiums
(44)
(33)
(33)
(69)
(44)
(57)
Net written premiums
$
537
$
532
1
$
1,125
$
1,120
0
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Current accident year before catastrophe losses
75.9%
71.7%
4.2
75.2%
71.4%
3.8
Current accident year catastrophe losses
29.5
11.2
18.3
16.8
7.2
9.6
Prior accident years before catastrophe losses
(14.8)
(11.7)
(3.1)
(12.5)
(8.7)
(3.8)
Prior accident years catastrophe losses
0.2
(0.8)
1.0
0.4
(1.0)
1.4
Total loss and loss expenses
90.8%
70.4%
20.4
79.9%
68.9%
11.0
Current accident year combined ratio before catastrophe losses
109.3%
103.0%
6.3
109.3%
104.4%
4.9
•
$5 million or 1 percent increase in second-quarter 2011 commercial lines net written premiums as growth in renewal and new business written premiums more than offset $23 million of ceded premiums from reinstatement of property catastrophe reinsurance. Second-quarter and six-month renewal and new business premium growth trended similarly.
•
$8 million and $17 million increases in second quarter and six-month renewal written premiums largely reflected the effects of improving economic conditions on insured exposure levels, partially offset by approximately 1 percent on average pricing decline for the second-quarter 2011, improved slightly from a low-single-digit range for first quarter.
•
$8 million increase to $81 million in new business written premiums, rising in both newer and established states.
•
22.5 and 12.1 percentage-point rise in the second-quarter and first-half combined ratios primarily due to 19.3 and 11.0 point increases in natural catastrophe losses plus lower earned premiums from reinstatement premiums.
•
75.2 percent ratio for six-month 2011 accident year losses and loss expenses before catastrophes increased 0.7 percentage points over full-year 2010, with the reinsurance reinstatement ceded premium effect contributing 1.5 points.
Personal Lines Insurance Operations
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Earned premiums
$
180
$
179
1
$
370
$
353
5
Fees revenues
1
1
0
1
1
0
Total revenues
181
180
1
371
354
5
Loss and loss expenses
269
163
65
410
275
49
Underwriting expenses
54
57
(5)
106
124
(15)
Underwriting loss
$
(142)
$
(40)
(255)
$
(145)
$
(45)
(222)
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Loss and loss expenses
149.4%
91.1%
58.3
110.7%
77.9%
32.8
Underwriting expenses
29.8
32.3
(2.5)
28.5
35.2
(6.7)
Combined ratio
179.2%
123.4%
55.8
139.2%
113.1%
26.1
Change %
Change %
Agency renewal written premiums
$
205
$
187
10
$
361
$
330
9
Agency new business written premiums
26
24
8
48
42
14
Other written premiums
(21)
(7)
(200)
(26)
(13)
(100)
Net written premiums
$
210
$
204
3
$
383
$
359
7
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Current accident year before catastrophe losses
81.2%
70.3%
10.9
74.4%
67.0%
7.4
Current accident year catastrophe losses
73.5
24.5
49.0
40.8
14.1
26.7
Prior accident years before catastrophe losses
(5.2)
(3.0)
(2.2)
(3.1)
(2.7)
(0.4)
Prior accident years catastrophe losses
(0.1)
(0.7)
0.6
(1.4)
(0.5)
(0.9)
Total loss and loss expenses
149.4%
91.1%
58.3
110.7%
77.9%
32.8
Current accident year combined ratio before catastrophe losses
111.0%
102.6%
8.4
102.9%
102.2%
0.7
•
$6 million or 3 percent growth in second-quarter 2011 personal lines net written premiums and six-month growth of 7 percent, as healthy increases in renewal and new business written premiums for both periods more than offset $15 million of ceded premiums to reinstate property catastrophe reinsurance.
•
55.8 and 26.1 percentage-point rise in the second-quarter and first-half combined ratios primarily due to 49.6 and 25.8 point increases in weather-related catastrophe losses plus lower earned premiums from reinstatement premiums.
•
74.4 percent ratio for six-month 2011 accident year losses and loss expenses before catastrophes was a 4.0 percentage-point increase over full-year 2010, including reinstatement premium effects contributing 3.0 points, higher new large losses contributing 0.5 points, plus higher weather-related losses not part of an industry-designated catastrophe event.
•
6.7 percentage-point decline in the six-month underwriting expense ratio was primarily due to higher first-quarter 2010 expenses from provisions for commitments and contingent liabilities.
Excess and Surplus Lines Insurance Operations
(Dollars in millions)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Earned premiums
$
17
$
11
55
$
32
$
22
45
Loss and loss expenses
7
11
(36)
22
22
0
Underwriting expenses
5
4
25
10
8
25
Underwriting profit (loss)
$
5
$
(4)
nm
$
—
$
(8)
nm
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Loss and loss expenses
41.5%
108.4%
(66.9)
70.3%
100.0%
(29.7)
Underwriting expenses
33.2
29.1
4.1
31.8
32.4
(0.6)
Combined ratio
74.7%
137.5%
(62.8)
102.1%
132.4%
(30.3)
Change %
Change %
Agency renewal written premiums
$
12
$
6
100
$
22
$
12
83
Agency new business written premiums
10
9
11
19
17
12
Other written premiums
(1)
(2)
50
(2)
(3)
33
Net written premiums
$
21
$
13
62
$
39
$
26
50
Ratios as a percent of earned premiums:
Pt. Change
Pt. Change
Current accident year before catastrophe losses
79.0%
93.3%
(14.3)
88.3%
90.7%
(2.4)
Current accident year catastrophe losses
4.9
5.6
(0.7)
3.4
2.8
0.6
Prior accident years before catastrophe losses
(41.9)
9.5
(51.4)
(21.6)
6.6
(28.2)
Prior accident years catastrophe losses
(0.5)
0.0
(0.5)
0.2
(0.1)
0.3
Total loss and loss expenses
41.5%
108.4%
(66.9)
70.3%
100.0%
(29.7)
Current accident year combined ratio before catastrophe losses
112.2%
122.4%
(10.2)
120.1%
123.1%
(3.0)
•
$8 million or 62 percent growth in second-quarter 2011 excess and surplus lines net written premiums and six-month growth of 50 percent, largely driven by the opportunity to renew many accounts for the first time.
•
11 percent and 12 percent increase in new business written premiums for the second quarter and first half of 2011, similar to the full-year 2010 rate of 9 percent.
•
62.8 and 30.3 percentage-point combined ratio improvements for second quarter and first-half of 2011, primarily due to net favorable reserve development on prior accident years.
Life Insurance Operations
(In millions)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Term life insurance
$
27
$
24
13
$
52
$
47
11
Universal life insurance
9
10
(10)
14
19
(26)
Other life insurance, annuity, and disability income products
7
6
17
14
13
8
Earned premiums
43
40
8
80
79
1
Investment income, net of expenses
34
33
3
67
65
3
Other income
—
1
nm
1
1
0
Total revenues, excluding realized investment gains and losses
77
74
4
148
145
2
Contract holders benefits
44
43
2
89
85
5
Underwriting expenses
14
16
(13)
30
32
(6)
Total benefits and expenses
58
59
(2)
119
117
2
Net income before income tax and realized investment gains and losses
19
15
27
29
28
4
Income tax
7
5
40
10
10
0
Net income before realized investment gains and losses
$
12
$
10
20
$
19
$
18
6
•
$3 million or 8 percent increase in second-quarter 2011 earned premiums, driven by term life insurance, our largest life insurance product line. Three- and six-month growth rates for term life insurance were similar. Face amount of life policies in force rose to $76.029 billion at June 30, 2011, from $74.124 billion at year-end 2010.
•
$28 million and $89 million in second-quarter and first half 2011 for fixed annuity deposits received, slowing from $116 million and $201 million in first-half and full-year 2010. Cincinnati Life does not offer variable or indexed products.
•
$2 million higher three-month profit was primarily due to increased earned premiums from strong renewal activity.
•
$35 million or 5 percent first-half 2011 growth in shareholders’ equity for The Cincinnati Life Insurance Company.
Investment and Balance Sheet Highlights
Investment Operations
(In millions)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Total investment income, net of expenses, pre-tax
$
132
$
130
2
$
263
$
260
1
Investment interest credited to contract holders
(20)
(20)
0
(40)
(39)
(3)
Realized investment gains and losses summary:
Realized investment gains and losses, net
67
16
319
105
19
453
Change in fair value of securities with embedded
derivatives
—
(5)
nm
4
1
300
Other-than-temporary impairment charges
—
(34)
nm
(30)
(35)
14
Total realized investment gains and losses
67
(23)
nm
79
(15)
nm
Investment operations profit
$
179
$
87
106
$
302
$
206
47
(In millions)
Three months ended June 30,
Six months ended June 30,
2011
2010
Change %
2011
2010
Change %
Investment income:
Interest
$
106
$
107
(1)
$
212
$
214
(1)
Dividends
27
24
13
53
48
10
Other
1
1
0
2
2
0
Investment expenses
(2)
(2)
0
(4)
(4)
0
Total investment income, net of expenses, pre-tax
132
130
2
263
260
1
Income taxes
(33)
(32)
(3)
(65)
(64)
(2)
Total investment income, net of expenses, after-tax
$
99
$
98
1
$
198
$
196
1
Effective tax rate
24.6%
24.5%
24.5%
24.5%
Average yield pre-tax
4.6%
4.8%
4.6%
4.8%
Average yield after-tax
3.4%
3.6%
3.5%
3.6%
•
2 percent growth in second-quarter 2011 pretax investment income. 1 percent first-half growth of both pretax and after-tax investment income. Growth of dividend income more than offset lower interest income for both periods.
•
$75 million or 5 percent second-quarter 2011 increase in pre-tax unrealized investment portfolio gains, including negative $21 million for the equity portfolio that reflected $61 million of realized gains from common stock sales.
(Dollars in millions except share data)
At June 30,
At December 31,
2011
2010
Balance sheet data
Invested assets
$
11,757
$
11,508
Total assets
15,702
15,095
Short-term debt
49
49
Long-term debt
790
790
Shareholders’ equity
5,057
5,032
Book value per share
31.01
30.91
Debt-to-total-capital ratio
14.2%
14.3%
Three months ended June 30,
Six months ended June 30,
2011
2010
2011
2010
Performance measure
Value creation ratio
0.1%
(1.1)%
2.9%
2.3%
•
$12.070 billion in consolidated cash and invested assets at June 30, 2011, up 1 percent from $11.893 billion at year-end.
•
$8.717 billion bond portfolio at June 30, 2011, with an average rating of A2/A and with a 4 percent rise in fair value during the first six months of 2011.
•
$2.971 billion equity portfolio was 25.3 percent of invested assets, including $856 million in pre-tax net unrealized gains at June 30, 2011.
•
$3.743 billion of statutory surplus for the property casualty insurance group at June 30, 2011, down $34 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 June 30, 2011, of 0.8-to-1, unchanged from the 12 months ended December 31, 2010.
•
Value creation ratio of 0.1 percent for the second quarter of 2011 is the total of 1.3 percent from shareholder dividends minus 1.2 percent from the change in book value per share.
For additional information or to hear a replay of our July 28 conference call webcast, please visit www.cinfin.com/investors.
Cincinnati Financial Corporation
Condensed Consolidated Balance Sheets and Statements of Operations (unaudited)
(Dollars in millions)
June 30,
December 31,
2011
2010
ASSETS
Investments
$
11,757
$
11,508
Cash and cash equivalents
313
385
Premiums receivable
1,106
1,015
Reinsurance receivable
753
572
Other assets
1,773
1,615
Total assets
$
15,702
$
15,095
LIABILITIES
Insurance reserves
$
6,683
$
6,234
Unearned premiums
1,630
1,553
Deferred income tax
324
260
Long-term debt
790
790
Other liabilities
1,218
1,226
Total liabilities
10,645
10,063
SHAREHOLDERS' EQUITY
Common stock and paid-in capital
1,487
1,484
Retained earnings
3,862
3,980
Accumulated other comprehensive income
903
769
Treasury stock
(1,195)
(1,201)
Total shareholders’ equity
5,057
5,032
Total liabilities and shareholders’ equity
$
15,702
$
15,095
(In millions except per share data)
Three months ended June 30,
Six months ended June 30,
2011
2010
2011
2010
REVENUES
Earned premiums
$
773
$
768
$
1,555
$
1,515
Investment income, net of expenses
132
130
263
260
Realized investment gains and losses
67
(23)
79
(15)
Fee revenues
1
1
2
2
Other revenues
2
2
5
3
Total revenues
975
878
1,904
1,765
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits
801
595
1,376
1,111
Underwriting, acquisition and insurance expenses
251
246
512
514
Other operating expenses
6
3
10
7
Interest expense
14
13
27
27
Total benefits and expenses
1,072
857
1,925
1,659
INCOME (LOSS) BEFORE INCOME TAXES
(97)
21
(21)
106
PROVISION (BENEFIT) FOR INCOME TAXES
(48)
(6)
(34)
11
NET INCOME (LOSS)
$
(49)
$
27
$
13
$
95
PER COMMON SHARE
Net income (loss)—basic
$
(0.30)
$
0.17
$
0.08
$
0.59
Net income (loss)—diluted
$
(0.30)
$
0.17
$
0.08
$
0.58
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.
Contribution to value creation ratio from change in book value*
(1.2)%
(2.4)%
0.3%
(0.4)%
Contribution to value creation ratio from dividends declared to shareholders**
1.3
1.3
2.6
2.7
Value creation ratio
0.1%
(1.1)%
2.9%
2.3%
* 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 ended
Six months ended
(In millions except per share data)
June 30,
June 30,
2011
2011
Net income (loss)
$
(49)
$
13
Net realized investment gains and losses
44
51
Operating loss
(93)
(38)
Less catastrophe losses
(189)
(216)
Operating income before catastrophe losses
$
96
$
178
Diluted per share data:
Net income (loss)
$
(0.30)
$
0.08
Net realized investment gains and losses
0.27
0.31
Operating loss
(0.57)
(0.23)
Less catastrophe losses
(1.16)
(1.32)
Operating income before catastrophe losses
$
0.59
$
1.09
Property Casualty Reconciliation
Three months ended June 30, 2011
Consolidated
Commercial
Personal
E&S
Premiums:
Written premiums
$
768
$
537
$
210
$
21
Unearned premiums change
(38)
(4)
(30)
(4)
Earned premiums
$
730
$
533
$
180
$
17
Statutory ratio:
Statutory combined ratio
135.4
%
123.0
%
178.4
%
73.1
%
Contribution from catastrophe losses
39.8
29.7
73.4
4.4
Statutory combined ratio excluding catastrophe losses
95.6
%
93.3
%
105.0
%
68.7
%
Commission expense ratio
18.2
%
17.7
%
18.7
%
24.5
%
Other expense ratio
13.1
14.5
10.3
7.1
Statutory expense ratio
31.3
%
32.2
%
29.0
%
31.6
%
GAAP ratio:
GAAP combined ratio
136.6
%
124.2
%
179.2
%
74.7
%
Contribution from catastrophe losses
39.8
29.7
73.4
4.4
Prior accident years before catastrophe losses
(13.0)
(14.8)
(5.2)
(41.9)
GAAP combined ratio excluding catastrophe losses and
109.8
%
109.3
%
111.0
%
112.2
%
prior years reserve development
Six months ended June 30, 2011
Consolidated
Commercial
Personal
E&S
Premiums:
Written premiums
$
1,547
$
1,125
$
383
$
39
Unearned premiums change
(72)
(52)
(13)
(7)
Earned premiums
$
1,475
$
1,073
$
370
$
32
Statutory ratio:
Statutory combined ratio
119.2
%
112.5
%
140.2
%
100.1
%
Contribution from catastrophe losses
22.5
17.2
39.4
3.6
Statutory combined ratio excluding catastrophe losses
96.7
%
95.3
%
100.8
%
96.5
%
Commission expense ratio
18.3
%
18.1
%
18.3
%
23.5
%
Other expense ratio
13.5
14.5
11.2
6.3
Statutory expense ratio
31.8
%
32.6
%
29.5
%
29.8
%
GAAP ratio:
GAAP combined ratio
120.1
%
114.0
%
139.2
%
102.1
%
Contribution from catastrophe losses
22.5
17.2
39.4
3.6
Prior accident years before catastrophe losses
(10.3)
(12.5)
(3.1)
(21.6)
GAAP combined ratio excluding catastrophe losses and
107.9
%
109.3
%
102.9
%
120.1
%
prior years reserve development
Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on whole dollar amounts.
This report contains forward-looking statements that involve potential risks and uncertainties. For factors that
could cause results to differ materially from those discussed, please see the most recent edition of our safe
harbor statement under the Private Securities Litigation Reform Act of 1995. To view or print the edition in
effect as of this report's initial publication date, please view this document as a printable PDF.
