- First-quarter net income totals $57 million
- Operating income* rises to 60 cents per share on strong underwriting profits
- Property casualty combined ratio improves to 95.1 percent GAAP and 92.8 percent statutory
- Pre-tax investment income grows 6.3 percent
CINCINNATI, Apr 23, 2003 /PRNewswire-FirstCall via COMTEX/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported first-quarter 2003 net income of $57 million, or 35 cents per diluted share, compared with $75 million, or 46 cents per share, in the first quarter of 2002. Net income per share included net realized investment losses of 25 cents in 2003 versus 3 cents in the comparable 2002 period.
First-quarter operating income rose 20.6 percent to $97 million, or 60 cents per diluted share. Operating income, used by investors to measure insurer performance, excludes net realized investment gains and losses from net income.
Revenues from pre-tax investment income, the primary source of profits, rose 6.3 percent to $116 million, the highest quarterly result on record. Total 2003 first-quarter revenues advanced $20 million to $707 million.
Financial Highlights
(Dollars in millions, except share data) First Quarter Ended
March 31,
2003 2002
Income Statement Data
Net income $57 $75
Net realized investment losses (40) (5)
Operating income* $97 $80
Per Share Data (diluted)
Net income $0.35 $0.46
Net realized investment losses (0.25) (0.03)
Operating income* $0.60 $0.49
Cash dividend declared 0.2500 0.2225
Book value 32.10 39.58
Average shares outstanding 161,978,876 163,358,855
Since 1996, Cincinnati Financial has disclosed the estimated impact of stock options on net income and earnings per share in a Note to the Consolidated Financial Statements. During the first quarter of 2003, net income would have been reduced by less than 2 cents per share if option expense had been calculated using the Black-Scholes and prospective methodologies.
* Measures used in this release that are not based on Generally Accepted Accounting Principles (non-GAAP) are defined and reconciled to the most directly comparable GAAP measures and operating measures in the attached Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures. Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' Accounting Practices and Procedures Manual and therefore is not reconciled to GAAP.
Chairman and Chief Executive Officer John J. Schiff, Jr., CPCU, commented, "For the third consecutive quarter, operating income has increased to an all-time high, benefiting from steadily increasing investment income and profitable insurance underwriting. Our independent agency force is fully on board, providing local knowledge that helps us soundly underwrite each risk. This joint effort produced a solid operational performance, helping to offset the effects of continuing weakness in the general economy and the equity marketplace. We are pleased with these positive operating trends and the momentum they create for future quarters. And we're confident that as the economy begins to strengthen, market values will more fully reflect the quality of the well-managed companies in our equity portfolio."
Property Casualty Insurance Operations
(Dollars in millions - GAAP) First Quarter Ended
March 31,
2003 2002
Income Statement Data
Earned premiums $631 $561
Loss and loss expenses excluding
catastrophe losses 417 385
Catastrophe losses 3 14
Expenses 181 155
Underwriting profit $30 $7
Ratio Data
Loss and loss expenses ratio
excluding catastrophe losses 66.1% 68.6%
Catastrophe losses 0.4 2.6
Expense ratio 28.6 27.6
Combined ratio 95.1% 98.8%
Net premiums written by the property casualty insurance affiliates -- The Cincinnati Insurance Company, The Cincinnati Indemnity Company and The Cincinnati Casualty Company -- grew 10.6 percent over last year's first quarter, reaching $687 million. Total new business written directly by agents was $68 million compared with $71 million in last year's first quarter. This reflected continuing attention to careful underwriting and accurate pricing, as well as deliberate decisions to write less workers' compensation business.
Profitable property casualty underwriting contributed $30 million to pre-tax earnings, all from the commercial lines segment, which achieved higher profits over the comparable 2002 quarter and for the third sequential quarter. On a statutory basis, the first-quarter combined ratio for all lines improved to 92.8 percent in 2003 versus a 96.3 percent ratio in 2002. On a GAAP basis, the first-quarter ratio was 95.1 percent in 2003 and 98.8 percent in 2002, with catastrophe losses contributing 0.4 percentage points this year versus 2.6 points last year.
Schiff noted, "Our first quarter was remarkable in a couple of respects-the absence of severe storms and the lowest quarterly commercial lines ratio for several years. The good weather that our policyholders enjoyed led to catastrophe losses well below the normal of approximately 3.0 percentage points. Just as important, we are thankful to see continuing benefits from two years of intense effort to sharpen skills and apply conservative standards in underwriting, pricing and reserving. These benefits carry forward, continuing to improve our book of business as additional multi-year policies are renewed.
"Second-quarter catastrophe losses are typically higher, and 2003 will be no exception. Wind and hailstorms last weekend affected our policyholders in the areas of Columbus, Ohio and Owensville and Louisville, Kentucky. Claim reports are just beginning to come in. While it's very early to estimate total damage, we think this storm could result in approximately $9 million of losses, which would represent approximately 1.5 percentage points on the combined ratio."
Commercial Lines
(Dollars in millions - GAAP) First Quarter Ended
March 31,
2003 2002
Income Statement Data
Earned premiums $452 $400
Loss and loss expenses excluding
catastrophe losses 286 272
Catastrophe losses 5 5
Expenses 130 110
Underwriting profit $31 $13
Ratio Data
Loss and loss expenses ratio
excluding catastrophe losses 63.5% 68.0%
Catastrophe losses 1.0 1.2
Expense ratio 28.7 27.4
Combined ratio 93.2% 96.6%
Net written premiums for commercial lines of insurance rose 10.9 percent to $526 million, accounting for 76.6 percent of the total. The first-quarter commercial lines statutory combined ratio was 90.3 percent. The GAAP ratio improved 3.4 percentage points to 93.2 percent, including 1.0 percentage points of catastrophe losses.
Schiff said, "New workers' compensation premiums declined more than 30 percent. Total direct premiums in this line rose 6.8 percent on firmer pricing, even though we chose not to renew a few of our largest policies in order to avoid insuring a concentration of employees at single locations.
"We continue to pay close attention to adequate prices and appropriate policy terms and conditions for large commercial auto fleets, contractors and commercial umbrella liability policies. We are reviewing the quality of each risk case by case and pricing multi-peril packages without discounts where appropriate. While our agents report that price increases are moderating in the commercial marketplace to high single digits, they are highly successful in getting double-digit increases on renewals of our multi-year policies. These policies give us processing and marketing advantages, offering policyholders three-year rate stability for selected coverages."
Personal Lines
(Dollars in millions - GAAP) First Quarter Ended
March 31,
2003 2002
Income Statement Data
Earned premiums $179 $161
Loss and loss expenses excluding
catastrophe losses 131 113
Catastrophe losses (2) 9
Expenses 51 45
Underwriting loss $(1) $(6)
Ratio Data
Loss and loss expenses ratio
excluding catastrophe losses 72.8% 70.1%
Catastrophe losses (1.3) 6.0
Expense ratio 28.4 28.0
Combined ratio 99.9% 104.1%
Net written premiums for the personal lines segment increased 9.6 percent to $161 million. The personal lines combined ratio was 99.6 percent on a statutory basis and 99.9 percent on a GAAP basis, benefiting from 1.3 points of favorable development of prior-period catastrophes. The first-quarter 2002 GAAP ratio of 104.1 percent included 6 percentage points of catastrophes.
Schiff commented, "Improved pricing also was the principal driver of personal lines premium growth. We are beginning to receive state regulatory approvals for auto increases in the mid single digits and continue to homeowner increases in the double digits. New homeowner business is slowing as our rates rise to a level that supports the long-term process of returning this line to profitability. Agents are doing a good job of packaging auto with homeowner policies and selling our newer product for high-valued homes."
Life Insurance Operations
(In millions) First Quarter Ended
March 31,
2003 2002
Earned premiums $21 $20
Investment income 23 21
Other income 0 1
Total revenues $44 $42
Policyholder benefits 21 20
Expenses 11 11
Total benefits and expenses $32 $31
Income before income tax and
realized investment losses $12 $11
The Cincinnati Life Insurance Company reported first-quarter income before income taxes and realized investment losses up 10.8 percent to $12 million compared with $11 million in 2002. Realized investment losses attributable to the life operations in the first quarter were $13 million in 2003 versus $2 million in 2002.
Cincinnati Life President and Chief Operating Officer David H. Popplewell, FALU, LLIF, commented, "Net earned premiums rose 7.4 percent to $21 million, with continued growth of applications for new policies. First-quarter life and disability income insurance applications increased by 16.6 percent to 12,263 in 2003 from 10,519 in 2002. Within the next few months, Cincinnati Life will further expand the LifeHorizons portfolio with an enhanced disability income product and a new universal life product with long-term guarantees."
Investment Operations
(In millions) First Quarter Ended
March 31,
2003 2002
Investment income, net of expenses $116 $109
Realized investment gains and losses:
Valuation of embedded derivatives
(SFAS No. 133) $(10) $2
Other-than-temporary impairment charges (53) (6)
Realized investment gains and losses on
security sales 1 (4)
Total net realized investment losses $(62) $(8)
Consolidated pre-tax investment income rose 6.3 percent for the first quarter, benefiting from dividend increases announced last year by companies in the equity portfolio. As of March 31, 2003, 10 of the 44 equity holdings in the portfolio have announced 2003 dividend increases that total $1 million on an annualized basis. Annualized dividend income from our equity portfolio reached $189 million.
Vice President Kenneth S. Miller, CLU, ChFC, commented, "Our dividend-paying equities help stabilize investment income when bond interest rates fall. As of March 31, annualized bond income had declined to $233 million versus $234 million at this time last year, even after adding $334 million in net bond purchases over the past year. As we continue to invest cash from operations and proceeds of recent securities sales into bonds at lower prevailing interest rates, our estimate of full-year 2003 investment income growth remains at 3.5 percent to 4.5 percent.
"We reported $62 million investment losses, before taxes, in the first quarter. While gains from securities sales offset losses from sales, this quarter's reported investment losses arose from accounting rules that bring into the income statement certain unrealized losses due to changes in market values of securities that remain in the portfolio. Of that total, $10 million arose from fluctuation of market values of options embedded in convertible securities. The remaining $53 million arose from 'other-than-temporary' declines in the market values of securities. These declines, primarily from airline, utility and healthcare securities, represented less than 0.5 percent of the company's $10.617 billion portfolio, which held $4.910 billion of pre-tax unrealized gains at the end of the first quarter. We continue to review asset value declines on an individual-issue basis. Until the economy and investment markets rebound, further other-than-temporary impairment charges may occur."
Balance Sheet and Rankings
(Dollars in millions) First Quarter Ended
March 31,
2003 2002
Balance Sheet Data
Total assets $13,553 $14,742
Investments 10,685 12,295
Shareholders' equity 5,159 6,411
Ratio Data
Return on equity, annualized 4.2% 4.8%
Return on equity, annualized,
based on comprehensive income (27.4) 29.1
At March 31, 2003, total assets were $13.553 billion, down from $14.059 billion at year-end. Shareholders' equity at the end of the first quarter in 2003 was $5.159 billion versus $5.598 billion at year-end 2002. At March 31, 2003, accumulated other comprehensive income totaled $3.219 billion, compared with $3.643 billion at year-end 2002. Book value of $32.10 at the end of the current first quarter was down from $34.65 at year-end 2002.
Miller added, "Our lower book value since year-end was caused primarily by the stock price change for our largest equity holding, Fifth Third Bancorp. This holding represented 5.1 percent of our total portfolio at cost and 34.4 percent at market value at March 31, 2003. It continues to have excellent fundamentals that meet our investment criteria of steadily increasing sales, earnings and dividends. We are confident that their management is taking appropriate actions to address regulatory issues."
During the first quarter, the company repurchased 938,700 shares of Cincinnati Financial common stock. The total cost was $33 million, or $35.35 per share. Approximately 5.8 million shares remain authorized for repurchase. Schiff commented, "Repurchases are another way to reward shareholders, along with the 12.4 percent increase in the quarterly dividend in February. By investing in our own shares, we intend to convey our high expectations and confidence that current actions will lead to future rewards.
"The spring round of public company rankings is out and Cincinnati Financial advanced in several of these studies. We are recognized as:
-- 305th in the Forbes 500, by 'Super Rank,' holding top 500 rankings in
all four categories of sales, profits, assets and market value for the
first time (Forbes, April 14, 2003)
-- 19th largest among U.S. stock property casualty insurers and 513th
among the Fortune 1000, based on revenues (Fortune, April 14, 2003)
179th among S&P 500 companies for consistent performance over
one- and three-year periods (The BusinessWeek 50, Spring 2003)
"We are pleased that these studies recognize the value and consistency we aim to deliver. For the remainder of 2003, we will focus on continuing improvements in the same incremental style that has promoted stability for all of our stakeholders," Schiff concluded.
For additional information or to register for this afternoon's conference call, please visit www.cinfin.com .
Cincinnati Financial Corporation offers property and casualty insurance, our main business, through The Cincinnati Insurance Company, The Cincinnati Indemnity Company and The Cincinnati Casualty Company. The Cincinnati Life Insurance Company markets life, disability income and long-term care insurance and annuities. CFC Investment Company supports the insurance subsidiaries and their independent agent representatives through commercial leasing and financing activities. CinFin Capital Management Company provides asset management services to institutions, corporations and individuals.
This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements contained herein involve potential risks and uncertainties. The company's future results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to: unusually high levels of catastrophe losses due to changes in weather patterns or other causes; increased frequency and/or severity of claims; environmental events or changes; insurance regulatory actions, legislation or court decisions that increase expenses or place the company at a disadvantage in the marketplace; adverse outcomes from litigation or administrative proceedings; recession or other economic conditions resulting in lower demand for insurance products; sustained decline in overall stock market values negatively affecting the company's equity portfolio, in particular a sustained decline in market value of Fifth Third Bancorp shares; events that lead to a significant decline in the market value of a particular security and impairment of the asset; delays in the development, implementation and benefits of technology enhancements; and decreased ability to generate growth in investment income.
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 impacting 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)
(Dollars in millions except share data) March 31, December 31,
2003 2002
ASSETS
Investments
Fixed maturities, at fair value
(amortized cost: 2003-$3,315;
2002-$3,220) $3,455 $3,305
Equity securities, at fair
value (cost: 2003-$2,371;
2002-$2,375) 7,162 7,884
Other invested assets 68 68
Cash 128 112
Investment income receivable 91 98
Finance receivable 34 33
Premiums receivable 996 956
Reinsurance receivable 535 527
Prepaid reinsurance premiums 39 47
Deferred policy acquisition costs 357 343
Property and equipment, net,
for company use (accumulated depreciation:
2003-$162; 2002-$155) 125 128
Other assets 124 131
Separate accounts 439 427
Total assets $13,553 $14,059
LIABILITIES
Insurance reserves
Losses and loss expense $3,223 $3,176
Life policy reserves 895 854
Unearned premiums 1,366 1,319
Other liabilities 369 345
Deferred income tax 1,499 1,737
Notes payable 183 183
6.9% senior debenture due 2028 420 420
Separate accounts 439 427
Total liabilities 8,394 8,461
SHAREHOLDERS' EQUITY
Common stock, par value-$2 per share;
authorized 200 million shares;
issued: 2003 - 176 million shares,
2002 - 176 million shares 352 352
Paid-in capital 302 300
Retained earnings 1,789 1,772
Accumulated other comprehensive
income-unrealized gains on
investments and derivatives 3,219 3,643
Treasury stock at cost
(2003 - 15 million shares,
2002-14 million shares) (503) (469)
Total shareholders' equity 5,159 5,598
Total liabilities and
shareholders' equity $13,553 $14,059
Cincinnati Financial Corporation
Consolidated Statements of Income
(unaudited)
(In millions except per share data) Three months ended March 31,
2003 2002
REVENUES
Earned premiums
Property casualty $629 $559
Life 21 20
Investment income, net of expenses 116 109
Realized investments gains and losses (62) (8)
Other income 3 7
Total revenues 707 687
BENEFITS AND EXPENSES
Insurance losses and policyholder
benefits 440 419
Commissions 132 112
Other operating expenses 53 49
Taxes, licenses and fees 18 15
Increase in deferred policy
acquisition costs (14) (13)
Interest expense 8 9
Other expenses 5 3
Total benefits and expenses 642 594
INCOME BEFORE INCOME TAXES 65 93
PROVISION (BENEFIT) FOR INCOME TAXES
Current 17 19
Deferred (9) (1)
Total provision (benefit) for
income taxes 8 18
NET INCOME $57 $75
PER COMMON SHARE
Net income-basic $0.35 $0.46
Net income-diluted $0.35 $0.46
Cincinnati Financial Corporation
Definitions of Non-GAAP Information and
Reconciliation to Comparable GAAP Measures
Management believes that investor understanding of Cincinnati Financial Corporation's performance is enhanced by disclosure of certain non-GAAP financial measures. Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' Accounting Practices and Procedures Manual and therefore is not reconciled to GAAP.
One-time charge: Management analyzes results excluding the impact of one-time charges. In 2000, the company recorded a one-time charge to impair previously capitalized costs related to the development of next-generation software to process property casualty policies.
Operating income: The difference between net income and operating income is the inclusion of net realized investment gains and losses. Management utilizes operating income to evaluate underlying performance and because it is a measure commonly evaluated by investors for insurance companies. This measure also is described as net income before realized investment gains and losses.
Catastrophe losses: Due to the nature of catastrophic events, the frequency and cost of catastrophe occurrence is unpredictable. To aid in assessing the underlying performance of the business, management evaluates the company's overall performance and property casualty underwriting profitability after excluding the impact of catastrophe losses.
Five-Year Net Income Reconciliation
(In millions except per share data) Years ended December 31,
2002 2001 2000 1999 1998
Net income $238 $193 $118 $255 $242
One-time charge 0 0 (25) 0 0
Net income (pro forma) $238 $193 $144 $255 $242
Net realized investment
gains and losses (62) (17) (2) 0 43
Operating income (pro forma) $300 $210 $146 $255 $199
Catastrophe losses (57) (42) (33) (24) (61)
Operating income excluding
catastrophe losses
(pro forma) $357 $252 $179 $279 $260
Diluted per share data
Net income $1.46 $1.19 $0.73 $1.52 $1.41
One-time charge .00 .00 (.16) .00 .00
Net income (pro forma) $1.46 $1.19 $0.89 $1.52 $1.41
Net realized investment
gains and losses (.38) (.10) (.01) .00 .26
Operating income
(pro forma) $1.84 $1.29 $0.90 $1.52 $1.15
Catastrophe losses (.35) (.26) (.20) (.14) (.35)
Operating income
excluding catastrophe
losses (pro forma) $2.19 $1.55 $1.10 $1.66 $1.50
Some numbers may not foot due to rounding
First-Quarter Net Income Reconciliation
(In millions except per share data) Three months ended March 31,
2003 2002
Net income $57 $75
Net realized investment losses (40) (5)
Operating income $97 $80
Catastrophe losses (2) (9)
Operating income excluding
catastrophe losses $99 $89
Diluted per share data
Net income $0.35 $0.46
Net realized investment losses (.25) (.03)
Operating income $0.60 $0.49
Catastrophe losses (.01) (.06)
Operating income excluding
catastrophe losses $0.61 $0.55
Some numbers may not foot due to rounding
Property Casualty Combined Ratio Reconciliation
Three months ended Three months ended
March 31, 2003 March 31, 2002
Property Personal Commercial Property Personal Commercial
casualty lines lines casualty lines lines
total insurance insurance total insurance insurance
GAAP
Combined ratio 95.1% 99.9% 93.2% 98.8% 104.1% 96.6%
Catastrophe
losses (0.4) 1.3 (1.0) (2.6) (6.0) (1.2)
Combined ratio
excluding
catastrophe
losses 94.7% 101.2% 92.2% 96.3% 98.1% 95.4%
Statutory
Combined ratio 92.8% 99.5% 90.3% 96.3% 105.5% 93.2%
Catastrophe
losses (0.4) 1.3 (1.0) (2.6) (6.0) (1.2)
Combined ratio
excluding
catastrophe
losses 92.5% 100.8% 89.3% 93.7% 99.5% 92.0%
Some numbers may not foot due to rounding
Property Casualty Loss and Loss Expenses Reconciliation
Three months ended March 31,
2003 2002
Commercial multi-peril
Loss and loss expenses ratio 71.1% 60.0%
Catastrophe loss ratio 2.6 3.3
Loss and loss expenses
excluding catastrophe ratio 68.5% 56.7%
Workers compensation
Loss and loss expenses ratio 80.5% 82.2%
Catastrophe loss ratio 0.0 0.0
Loss and loss expenses
excluding catastrophe ratio 80.5% 82.2%
Commercial auto
Loss and loss expenses ratio 56.8% 64.9%
Catastrophe loss ratio 2.6 0.0
Loss and loss expenses
excluding catastrophe ratio 54.2% 64.9%
Other liability
Loss and loss expenses ratio 71.6% 91.0%
Catastrophe loss ratio 0.0 0.0
Loss and loss expenses
excluding catastrophe ratio 71.6% 91.0%
Personal auto
Loss and loss expenses ratio 72.4% 68.1%
Catastrophe loss ratio 0.1 0.1
Loss and loss expenses
excluding catastrophe ratio 72.3% 68.0%
Homeowner
Loss and loss expenses ratio 63.1% 79.7%
Catastrophe loss ratio (4.4) 17.6
Loss and loss expenses
excluding catastrophe ratio 67.6% 62.1%
Some numbers may not foot due to rounding
Written premium: Under statutory accounting rules as defined by the National Association of Insurance Commissioners' Accounting Practices and Procedures Manual, written premiums 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 premiums to assess business efforts. Earned premium, which is calculated and used in both statutory and GAAP accounting, is recognized ratably over the policy term. The difference between written and earned premium is unearned premium.
Premium Reconciliation
(in millions) Three months ended Three months ended
March 31, 2003 March 31, 2002
Property Personal Commercial Property Personal Commercial
casualty lines lines casualty lines lines
total insurance insurance total insurance insurance
Written premium $687 $161 $526 $621 $147 $474
Unearned premium (56) 18 (74) (60) 14 (74)
Earned premium $631 $179 $452 $561 $161 $400
Some numbers may not foot due to rounding
Underwriting profit: Underwriting profit for property casualty insurance represents premiums earned minus loss and loss expenses and other insurance- related expenses.
SOURCE Cincinnati Financial Corporation
Kenneth W. Stecher, Chief Financial Officer of Cincinnati Financial, +1-513-603-5236
http://www.cinfin.com