- Fourth-quarter net operating income at 36 cents per share versus loss of 14 cents in 2000
- Full-year net operating income at $1.29 per share
- 9.9 percent revenue gain on strong growth of insurance premiums
- Assets reach a record $13.959 billion
Total 2001 revenues advanced 9.9 percent to $2.561 billion versus $2.331 billion in 2000. Revenue from pre-tax investment income rose to a new high of $421 million.
Financial Highlights
(In millions,
except per share data) Fourth Quarter Ended Full Year Ended
December 31, December 31,
2001 2000 2001 2000
Pro Forma*
Income Statement Data
Revenues $654 $581 $2,561 $2,331
Income (loss) before
income taxes 39 (83) 221 148*
Net operating income (loss) 57 (21) 210 146*
Net capital losses (21) (20) (17) (2)
Net income (loss) 36 (41) 193 144*
Net income (loss) 36 (41) 193 118
Net operating income
per common share (diluted) .36 (.14) 1.29 .90*
Net income (loss)
per common share (diluted) .22 (.26) 1.19 .89*
Net income (loss)
per common share (diluted) .22 (.26) 1.19 .73
Cash dividends declared .21 .19 .84 .76
Average shares outstanding
(diluted) 161 164 162 164
Balance Sheet Data
Total assets -- -- $13,959 $13,287
Shareholders' equity -- -- 5,998 5,995
Book value per share -- -- 37.07 37.26
Ratio Data
Statutory combined ratio** 102.6% 129.1% 103.6% 109.9%*
Return on equity 2.4 (2.9) 3.2 2.5*
Return on equity including net
unrealized gains and losses 7.2 36.4 2.5 13.5*
* In 2000, the Company incurred a one-time charge (GAAP) for
asset impairment of $39 million, before tax; $25 million, or 16 cents
per share, net of tax. Pro forma results exclude the charge for
comparison purposes only. Including the 2000 charge, income before
income taxes was $109 million; net operating income was $120 million,
or 74 cents per share (diluted); the statutory combined ratio was
111.6 percent; and return on equity was 2.1 percent and 13.0 percent
including net unrealized gains and losses.
** 2001 statutory data reflects the Company's adoption of Codification
effective January 1, 2001. For comparison purposes, a $402 million
written premium adjustment required by Codification was excluded, and
2000 statutory data was reclassified; as originally reported before
reclassification, the 2000 combined ratios, excluding the one-time
charge, were 128.2 percent for the fourth quarter and 110.7 percent for
the full year.
Fourth-quarter and full-year 2000 results included a $110 million pre-tax
addition (44 cents per share after taxes) to reserves for uninsured motorist
losses incurred but not reported (IBNR), net of reinsurance, for losses to be
reported or paid in 2001 and beyond. The reserve addition was an estimate of
past uninsured and underinsured motorist losses resulting from two Ohio Supreme
Court decisions affecting all auto insurers in the state. It contributed 22.8
points for the fourth quarter and 6 points for the full year to the 2000
combined ratios.
Chairman and Chief Executive Officer John J. Schiff, Jr., CPCU, commented, "While there is still a distance to go, Cincinnati Financial has come a long way over the past year. Operating earnings rose on strong premium growth and steadily rising investment income. We continued to pursue higher profitability with proven strategies and measured up pretty well against standard yardsticks like A.M. Best industry averages and the S&P 500 Index-even as we fell a little short of our own targets.
"This was a year when hopes were dashed across our industry, as the almost unimaginable events of September 11 added to catastrophe losses already on the high side due to natural events. There will be long-term effects, though it's too early to guess how disruptive these will be. What we do know is that our September 11 losses were relatively minor at $9 million. Larger immediate problems for us were Midwest hailstorms and continuing claims severity across the industry, driven by escalating legal costs, medical costs and jury verdicts along with, as some observers think, inflated perceived values caused by sensational "celebrity" pay announcements."
Fourth-Quarter Results
Net operating income for the fourth quarter rose to $57 million, or 36 cents per share. Net income of $36 million, or 22 cents per share, included net realized capital losses of $21 million, or 14 cents per share. In the fourth quarter of 2000, the net operating loss was $21 million, or 14 cents per share, and the net loss was $41 million, or 26 cents per share. Net capital losses included in the 2000 net loss were $20 million, or 12 cents per share.
For the fourth quarter, total revenues rose 12.5 percent to $654 million on strong growth of insurance premiums and investment income. Pre-tax investment income reached $108 million, up 4.2 percent over the comparable 2000 period.
Net pre-tax catastrophe losses for the fourth quarter of 2001 were $9 million, or 4 cents per share after taxes, versus $3 million, or 1 cent per share, in the fourth quarter of 2000. A single wind and hail event in October caused $8 million of damage to approximately 1,000 policyholders across eight states in the South and Midwest.
Property Casualty Insurance Operations: Growth (Statutory)
(Dollars in millions) Fourth Quarter Ended Full Year Ended
December 31, December 31,
2001 2000 2001 2000
Net written premiums* $ 556 $ 487 $ 2,188 $ 1,936
Net earned premiums 546 482 2,067 1,829
* 2001 statutory data reflects the Company's adoption of Codification
effective January 1, 2001. For comparison purposes, a $402 million
written premium adjustment required by Codification was excluded, and
2000 statutory data was reclassified.
Net premiums written by the property casualty insurance group -- The Cincinnati
Insurance Company, The Cincinnati Casualty Company and The Cincinnati Indemnity
Company -- grew 13.1 percent for the year, including 14.2 percent growth for the
fourth quarter. Schiff commented, "Our overall growth rate continues well above
the 8.5 percent industry growth rate estimated by A. M. Best. Our commercial net
written premiums rose 16.6 percent to $1.551 billion in 2001, while net written
premiums for personal lines of insurance rose 5.3 percent to $637 million.
Schiff continued, "New business written directly by our agents in 2001 reached $272 million, just short of last year's all-time high of $275 million and a strong result given the priority we placed this year on underwriting activities. The main source of growth was firmer pricing on new and renewal commercial business. While our philosophy does not support large, across-the-board price increases, we have been introducing new tools and tapping the local knowledge of our field force to improve the way we measure each risk's exposures. This allows us to write coverage amounts at more accurate values, providing the protection needed and collecting an adequate premium. Writing insurance to value increases premiums without increasing exposures.
"Our ability to recognize and respond to local market conditions is also a growth factor. While many carriers take a broad-brush approach that discourages good business as well as bad, we are able to be selective. We've enlisted the support of our agents to strengthen frontline underwriting and provided them with a team of marketing, claims, loss control and engineering representatives to help inspect and review risks. This is an ongoing effort, and where it works best, we are able to identify accounts that were previously underpriced and accept good business that others have missed because of their wholesale approach," Schiff added.
"Finally, new growth initiatives are promising. During 2001, two additional field representatives were assigned to established marketing territories, effecting a split and setting the stage for new levels of service and business development in each of the four resulting territories. In 2002, we plan to split and staff another 6-10 territories," Schiff said.
Property Casualty Insurance Operations: Profitability (Statutory)
(In percentages) Fourth Quarter Ended Full Year Ended
December 31, December 31,
2001 2000 2001 2000
Pro Forma**
Loss and LAE ratio
excluding catastrophes 74.6 101.9* 73.8 79.7*
Catastrophe loss ratio 1.6 .7 3.1 2.7
Loss and LAE ratio 76.2 102.6* 76.9 82.4*
Expense ratio + 25.8 25.5 26.0 26.6**
Policyholder dividend
ratio + .6 1.0 .7 .9
Combined ratio + 102.6 129.1* 103.6 109.9* **
+ 2001 statutory data reflects the Company's adoption of Codification
effective January 1, 2001. For comparison purposes, a $402 million
one-time written premium adjustment required by Codification was
excluded, and 2000 statutory data was reclassified; as originally
reported before reclassification, the 2000 combined ratios, excluding
the one-time charge, were 128.2 percent for the fourth quarter and
110.7 percent for the full year.
* The 2000 loss and LAE and combined ratios included 22.8 points for the
quarter and 6.0 points for the full year due to the IBNR addition for
uninsured motorist claims.
** In 2000, the Company incurred a one-time charge for asset impairment.
Pro forma results exclude the charge for comparison purposes only.
Including the 2000 charge, the expense ratio was 28.2 percent and the
statutory combined ratio was 111.6 percent.
"The combined ratio for the fourth quarter was 102.6 percent, improved from
129.1 percent for last year's fourth quarter," Schiff commented. "Even excluding
22.8 points for last year's IBNR addition, the 2001 ratio shows progress.
"For the year, the 103.6 percent ratio remains-as expected-a couple of points above our target of 101.3 percent, which was our average ratio for the second half of the 1990s. However, our 2001 ratio is lower by a good margin than the estimated industry average, even excluding the industry's September 11 catastrophe losses. A. M. Best estimates a 117 percent industry ratio including approximately six points for September 11 losses. We continue to maintain exceptional expense control, offsetting generous commissions for the agents who provide superior service to our policyholders with one of the lowest non-commission expense ratios in the industry.
"Commercial lines had a loss and LAE ratio of 74.4 percent, including 1.9 points for catastrophes, for the full year 2001. Personal lines had a loss ratio of 82.9 percent, with 5.8 points for catastrophes. Among our major lines of insurance, workers' compensation, commercial auto and homeowners continue as our least profitable. We're attacking these lines with rate increases, underwriting guidelines, product refinements and new building cost estimating tools.
"Changes like these take time to move through regulatory and implementation processes. As they continue rolling out over the coming months, what may have a more immediate effect is the spirit with which our agents, local field people and underwriters are going the extra mile for and with each other. Loss control associates are now performing risk inspections at the request of commercial underwriters. Claims representatives are taking care to report to agencies and marketing representatives any changes in risks that they observe while meeting with claimants and visiting properties to respond to claims. Field marketing representatives are gathering engineering, life, loss control and claims staff to pool knowledge and to support agents as they review renewal accounts. The Cincinnati business model places decision-making representatives in the field near the risks we underwrite-and we are leveraging this advantage for all it's worth," Schiff said.
Life Insurance Operations
(Dollars in millions) Fourth Quarter Ended Full Year Ended
December 31, December 31,
2001 2000 2001 2000
Net earned premiums $23 $22 $81 $79
Investment income 21 19 80 79
Total revenues 39 40 158 158
Total expenses 35 30 120 112
Net operating income $ 6 $ 8 $30 $32
Net capital losses (3) (1) (4) (1)
Net income $ 3 $ 7 $26 $31
The Cincinnati Life Insurance Company's net written premiums in 2001 were $102
million. On a comparable basis excluding large, single-premium bank-owned life
premiums, 2000 net written premiums were $99 million. Annuity net written
premiums increased to $10 million from $7 million. Annuities were written to
structure settlements of $27 million of property casualty claims, up from the
2000 total of $21 million. Total expenses in 2001 increased due to one-time
charges for automation, incentives and policy audits on certain lines of
business. As of December 31, 2001, assets reached $1.761 billion, up 8.6
percent. Policyholder surplus rose 5.2 percent to $552 million.
Cincinnati Life President David H. Popplewell, FALU, LLIF, commented, "Using the Cincinnati Life term insurance products, our property casualty agents can expand their life insurance marketing and sales opportunities, diversifying and increasing their revenue stream. Term insurance in force rose 23 percent in 2001, contributing to excellent cash flow for our investment operations. To further the cross-selling opportunities with property casualty agencies, we will introduce a new and enhanced term product series in the first quarter of 2002."
Investment Operations
Pre-tax investment income, the Company's main source of profits, reached $421 million for 2001, up 1.5 percent, or up 2.8 percent on a comparable basis excluding 2000 income from a bank-owned life insurance policy. The fourth-quarter 2001 growth rate was 4.2 percent.
Chief Investment Officer James G. Miller noted, "Of the 44 common stocks in our portfolio, 26 raised their dividends during 2001, adding $18 million to gross annualized investment earnings. Total return on the equity portfolio for 2001 was flat at seven-tenths of a percent, outperforming the S&P 500's negative return of 11.9 percent. A large portion of our portfolio is financial equities, which have advantages in a declining interest rate environment.
"This year's net capital losses were $21 million for the fourth quarter and $17 million for the full year. 2001 was a tough year for the corporate bond market, with the highest default ratios since 1990-91. Like most bondholders, we are taking an aggressive approach, selling or writing off issues that we feel will not be able to recoup lost value. At year-end, the market value of our non-investment grade corporate bonds was $700 million, or 6 percent of the Company's total portfolio. Going forward in 2002, we will reduce non-investment grade bond holdings. We will continue to buy convertibles, our preferred trading vehicle. This strategy should make the portfolio more stable, our results more predictable and our returns more visible."
Balance Sheet Strength
At December 31, 2001, total assets reached an all-time high of $13.959 billion, up from $13.287 billion at year-end 2000. Shareholders' equity rose to $5.998 billion, or a book value of $37.07, versus $5.995 billion, or a book value of $37.26, at year-end 2000. Shareholders' equity included $4.113 billion of unrealized gains versus $4.156 billion at year-end 2000.
During the fourth quarter, the Company repurchased 230 thousand shares of Cincinnati Financial's common stock, bringing the total 2001 repurchases to 1.2 million shares. For the full year, $46 million was invested, at an average price of $37.67 per share. So far in 2002, 197 thousand additional shares have been repurchased, with 7.7 million shares remaining of the Board's 17 million-share authorization.
Outlook
Schiff commented, "We've spent 2001 getting our house in order, and 2002 will put those efforts to the test. We believe we will pass with flying colors. Our talented associates and loyal agents are primed to do what has to be done and do it better than ever. We welcome the work that's ahead of us. We'll stand by our steady, hands-on, flexible approach to commercial lines, convinced that it's the most effective way to build mutually beneficial long-term relationships with our local independent agents and their small- to mid-sized business policyholders. We have the capacity to grow and the will to do so profitably. For this Company, the outlook is good."
Cincinnati Financial Corporation offers property 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 provides asset management services to institutions, corporations and individuals. For additional information, please visit our Web site at www.cinfin.com.
This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements contained herein involve risks and uncertainties. Many factors could cause future results to differ materially from those discussed. Examples of such factors include: variation in catastrophe losses due to changes in weather patterns or other causes; environmental events or changes; changes in insurance regulations, legislation or court decisions that place the Company at a disadvantage in the marketplace; recession, economic conditions or stock market changes affecting pricing or demand for insurance products or the Company's ability to generate investment income; and the ability of the Company, suppliers and agency representatives to adapt to technology changes. Growth and profitability have been and may be potentially materially affected by these and other factors.
SOURCE Cincinnati Financial Corporation
CONTACT: Kenneth W. Stecher, Chief Financial Officer of Cincinnati
Financial Corporation, +1-513-603-5236
URL: http://www.cinfin.com