Net operating income, a measure of insurer profitability, rose to $300 million, or $1.84 per diluted share in 2002, versus $210 million, or $1.29 per share, in 2001. The difference between net income and net operating income is the inclusion of realized investment losses.
Total 2002 revenues advanced 11 percent to $2.843 billion versus $2.561 billion in 2001. Revenues from pre-tax investment income, the primary source of profits, rose 5.6 percent to $445 million.
Financial Highlights
(In millions,
except share data) Fourth Quarter Ended Twelve Months Ended
December 31, December 31,
2002 2001 2002 2001
Income Statement Data
Net income $56 $36 $ 238 $ 193
Net capital losses (40) (21) (62) (17)
Net operating income $96 $57 $ 300 $ 210
Per Share Data (diluted)
Net income $ 0.35 $ 0.22 $ 1.46 $ 1.19
Net capital losses (0.24) (0.14) (0.38) (0.10)
Net operating income $ 0.59 $ 0.36 $ 1.84 $ 1.29
Cash dividend declared 0.2225 0.2100 0.8900 0.8400
Book value - - 34.65 37.07
Average shares
outstanding 162,500,454 161,289,796 163,193,184 162,398,777
Chairman and Chief Executive Officer John J. Schiff, Jr., CPCU, commented, "The
pace picked up across every part of our business in 2002. We are truly grateful
to the many independent agents and company associates who are working harder,
smarter and faster to help us continue to improve results. Working together
during 2002, we wrote 14 percent more property casualty business, more
profitably, all while evaluating more underwriting information and helping
policyholders navigate new pricing and coverage options. We kept expenses low
and generated cash to pay above-normal catastrophe losses and increase
investment income.
"The discipline and the momentum of 2002 built strength that should help Cincinnati outperform in 2003, even as we and all other companies operate in a climate of economic and political uncertainty. We expect the improved pricing and risk selection effected in 2002 will continue driving healthy cash flow to pay claims and to invest for current income and long-term appreciation."
Fourth-Quarter Results
For the fourth quarter of 2002, net income rose to $56 million, or 35 cents per share, versus $36 million, or 22 cents per share, last year. Excluding realized capital losses, net operating income for the fourth quarter reached $96 million, or 59 cents per share in 2002, versus $57 million, or 36 cents per share in 2001.
Total revenues advanced $69 million to $722 million, up 10.5 percent over last year's fourth quarter. Revenues from pre-tax investment income reached $114 million, up 5.3 percent from the prior fourth quarter.
Fourth-quarter catastrophe losses totaled $21 million, contributing 3.3 percentage points to the GAAP combined ratio of 95 percent and reducing after-tax earnings by 8 cents per share. For the comparable period last year, catastrophe losses were $9 million, contributing 1.6 percentage points to the GAAP combined ratio of 103.2 percent and reducing after-tax earnings by 4 cents per share.
Property Casualty Insurance Operations
Schiff commented, "Over recent quarters, we have noted that pricing has remained competitive for the best accounts in some lines and some territories. That has not changed and our goal continues to be moderate, profitable growth. For 2002, we achieved a gross underwriting profit of $7 million, with $48 million of underwriting profits for the second half of 2002 offsetting a first-half underwriting loss that included heavy catastrophes. This was our first full-year underwriting profit since 1999 and compared with a loss of $102 million last year. Clearly we are seeing results from our profitability initiatives: re-underwriting programs, renewal field reviews, risk reports, rate increases and changes in product terms and conditions.
"We're going to keep pressing in 2003. We'll look at every risk carefully and rely on our headquarters underwriters, field marketing representatives and local agents to effectively underwrite, rather than count on large price increases," Schiff said.
(Dollars in millions
- GAAP) Fourth Quarter Ended Twelve Months Ended
December 31, December 31,
2002 2001 2002 2001
Income Statement Data
Earned premiums $ 642 $ 552 $2,393 $2,073
Loss and LAE incurred
excluding catastrophe
losses 423 407 1,658 1,527
Catastrophe losses
incurred 21 9 87 64
Expenses incurred 166 153 641 584
Underwriting profit
(loss) $32 $(17) $7 $(102)
Ratio Data
Loss and LAE ratio
excluding catastrophe
losses 65.8% 73.8% 69.3% 73.7%
Catastrophe losses
incurred 3.3 1.6 3.6 3.1
Expense ratio 25.9 27.8 26.8 28.2
Combined ratio 95.0% 103.2% 99.7% 105.0%
Fourth-quarter property casualty results benefited from an actuarial adjustment
and a premium estimate adjustment, which together added $8 million after tax, or
5 cents per share, to net income. The actuarial adjustment, which was part of
the company's continuous and regular monitoring of losses and loss reserve
levels, contributed $9 million to pre-tax underwriting profits. The premium
estimate adjustment, which reflected further refinement of the company's
estimation process for matching written and earned premiums to policy effective
dates, added $3 million to pre-tax underwriting profits.
Statutory net premiums written by the property casualty insurance affiliates-The Cincinnati Insurance Company, The Cincinnati Indemnity Company and The Cincinnati Casualty Company-grew 19.4 percent for the year, or 14 percent excluding the premium estimate adjustment. Fourth-quarter net written premiums rose 31.1 percent, or 10 percent excluding the adjustment. Net written premiums for commercial lines of insurance rose 22.8 percent to $1.905 billion, or 15.8 percent to $1.796 billion excluding the adjustment. Personal lines rose 11 percent to $707.5 million, or 9.8 percent to $700 million excluding the adjustment.
For comparison purposes, Cincinnati's 2002 overall combined ratio of 98.4 percent on a statutory basis outperformed the 105.7 percent industry average estimated by A.M. Best. For commercial lines business, Cincinnati reported 95.3 percent versus 103.4 percent for the industry. While Cincinnati reported 106.5 percent for its personal lines business versus the industry's 105.6 percent, the Cincinnati personal lines ratio included 7.1 percentage points of catastrophes versus only 1.8 percentage points in the industry ratio.
Schiff commented, "New business written directly by agents in 2002 reached $317 million, as continued double-digit price increases served to offset a lower number of new policies. At the same time field representatives were underwriting and pricing new business, they also spent more time assisting agencies in reviewing renewal business. New commercial business rose 14.4 percent and new personal lines business rose 27.2 percent for the year. Growth of new commercial business slowed during the fourth quarter as we continued to selectively reduce our workers' compensation writings. While total workers' compensation writings grew 8.9 percent for the year due to renewal price increases, new workers' compensation business was down 17.4 percent for the year and 27.8 percent for the quarter.
"On the personal lines side, growth of new homeowner-auto package business is very strong as we implement rate increases and look to package homeowner accounts with more profitable auto business. New direct homeowner-auto package business rose 47.4 percent to $26 million," Schiff said.
Life Insurance Operations
(In millions
- GAAP) Fourth Quarter Ended Twelve Months Ended
December 31, December 31,
2002 2001 2002 2001
Net earned premiums $24 $23 $87 $81
Investment income 22 21 86 80
Total revenues 48 39 162 158
Total expenses 37 35 136 120
Net operating income $6 $6 $24 $30
Net capital gains (losses) 1 (3) (7) (4)
Net income $7 $3 $17 $26
The Cincinnati Life Insurance Company reported fourth-quarter 2002 net income of
$7 million, compared with $3 million in 2001. Net operating income was even for
the two periods, excluding a $1 million capital gain in the 2002 fourth quarter
versus a $3 million capital loss in the comparable 2001 quarter.
For the full year, net income of $17 million in 2002 included a $7 million capital loss versus net income of $26 million and a $4 million capital loss in 2001. Revenues rose 3 percent, with earned premiums up 8.3 percent and pre-tax investment income up 6.9 percent. After higher expenses associated with our strong growth and increased regulatory and legal expenses, net operating income for the year was $24 million, compared with $30 million in 2001.
Cincinnati Life President and Chief Operating Officer David H. Popplewell commented, "New submitted applications increased 16 percent in 2002 to more than 47,600 on strong sales of ordinary life products. Excluding the sale of a $33 million bank-owned life insurance policy, first-year net written ordinary life premiums in 2002 increased 21 percent to $24 million, primarily from the sale of LifeHorizons term and universal life products.
"In 2003, we will enhance our disability income policy and introduce two new, competitive LifeHorizons products-a guaranteed premium whole life and a universal life."
Investment Operations
(In millions) Fourth Quarter Ended Twelve Months Ended
December 31, December 31,
2002 2001 2002 2001
Investment income $ 114 $ 108 $ 445 $ 421
Capital (losses) gains:
Valuation of embedded
derivatives
(SFAS No. 133) $4 $7 $(4) $9
Other-than-temporary
impairments (60) (45) (98) (45)
Realized capital (losses)
gains (4) 5 8 11
Total capital losses $(60) $(33) $(94) $(25)
Investment income rose 5.3 percent for the fourth quarter and 5.6 percent for
the full year. Pre-tax capital losses of $60 million were realized for the
fourth quarter, bringing the full-year capital loss to $94 million. As indicated
in a preliminary estimate in our third-quarter 10-Q, capital losses for the
final quarter of 2002 included $60 million for write-downs of investments with
market value declines that met our criteria and that we deemed "other than
temporary," representing approximately 0.5 percent of invested assets at
December 31. Capital losses also included a $4 million gain related to Statement
of Financial Accounting Standard No. 133.
Vice President Kenneth S. Miller, CLU, ChFC, noted, "Low prevailing interest rates and weak market conditions led to a very difficult year for us and for all investors. However, because we favor equity holdings with annual dividend yields in the range of 1.5 to 3 percent, a steady flow of dividends added stability to our investment income. During the year, 28 of the 46 holdings in the common portfolio raised their dividends, adding about $12 million to annualized investment income for future years. Gross annualized dividend income from common stocks stood at $185 million at the end of 2002.
"Profitable operations generated excellent cash flow for investment, with the biggest challenge being to find high-quality investment options that fit our longstanding parameters-well-managed companies with proven histories and good prospects for sustained growth of sales, earnings and dividends. As we go forward, this philosophy continues to guide our search for opportunities with above-average potential to build long-term shareholder value," Miller said.
Balance Sheet Strength
At December 31, 2002, total assets reached $14.059 billion, up from $13.959 billion at year-end 2001. Shareholders' equity declined to $5.598 billion, reflecting lower unrealized gains in the investment portfolio. At December 31, 2002, accumulated other comprehensive income totaled $3.643 billion, compared with $4.113 billion at the end of 2001. While book value of $34.65 at year-end 2002 was down from $37.07 at year-end 2001, it improved from $34.14 at the end of the third quarter of 2002.
(In millions except
ratios) Fourth Quarter Ended Twelve Months Ended
December 31, December 31,
2002 2001 2002 2001
Balance Sheet Data
Total assets - - $14,059 $13,959
Shareholders' equity - - 5,598 5,998
Ratio Data
Annualized return on
equity 4.1% 2.4% 4.1% 3.2%
Annualized return on
equity including
net unrealized gains
(losses)* 8.5 7.2 (4.0) 2.5
* Comprehensive net income recognizes the company's equity focus and the
resulting appreciation/depreciation not reflected in traditional return
calculations that consider income statement-based earnings only.
During 2002, the company repurchased 1.1 million shares of Cincinnati Financial
common stock. Total cost was $42 million or $37.69 per share. Approximately 6.8
million shares remain authorized for future repurchases.
Since 1996, Cincinnati Financial has disclosed the estimated impact of stock options on net income and earnings per share in a Note to the Financial Statements. During 2002, net income would have been reduced by approximately 6 cents per share if option expense had been calculated using the Black-Scholes and modified prospective transition methodologies.
Outlook
Schiff concluded, "On February 1, the Cincinnati Financial board raised shareholder dividends 12.4 percent to an indicated annual total of $1.00 per share. By continuing the trend of 43 consecutive years of increasing dividends, they recognized that we have come a long way over the past two years. While further work is necessary for continued progress, the prospects are good to achieve it. The year 2002 has ended with property casualty insurance underwriting profits that exceeded our target; double-digit premium growth; and positive earnings contributions from our life and investment operations in a year when many were not so fortunate. We'll continue to pursue carefully crafted, incremental changes instead of quick fixes, gradual trajectories rather than peaks and valleys and longer-term commitments versus opportunistic decisions."
For additional information or to register for this afternoon's conference call, please visit our Web site at 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.
SOURCE Cincinnati Financial Corporation
CONTACT: Kenneth W. Stecher, Chief Financial Officer of Cincinnati
Financial Corporation, +1-513-603-5236
/Web Site: http://www.cinfin.com
(CINF)