Total net income for the third quarter was $72 million, or 44 cents per diluted share, versus $36 million, or 22 cents per share, in 2001. Net realized capital losses included in net income were $11 million, or 7 cents per share, compared with $2 million, or 1 cent per share, in last year's third quarter.
For the third quarter, revenues from pre-tax investment income, the primary source of profits, rose 7.1 percent to $113 million. Total revenues advanced 13.5 percent to $731 million.
Financial Highlights (In millions, except data per diluted share and ratios) Third Quarter Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 Income Statement Data Revenues $731 $644 $2,121 $1,907 Income before income taxes 90 34 215 182 Net operating income 83 38 204 152 Net capital (losses) gains (11) (2) (22) 5 Net income 72 36 182 157 Net operating income per share (diluted) 0.51 0.23 1.25 0.94 Net capital (losses) gains per share (diluted) (0.07) (0.01) (0.14) 0.03 Net income per share (diluted) 0.44 0.22 1.11 0.97 Cash dividend declared 0.2225 0.2100 0.6675 0.6300 Average shares outstanding (diluted) 163 162 163 163 Balance Sheet Data Total assets - - $13,684 $13,559 Shareholders' equity - - 5,517 5,926 Book value per share - - 34.14 36.69 Ratio Data Statutory combined ratio* 97.4% 108.9% 100.3% 104.0% Annualized return on equity 4.9 2.4 4.2 3.5 Annualized return on equity including net unrealized (losses) gains** (40.6) (2.7) (8.1) 1.0 * Property casualty 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 from nine-month 2001 results. ** 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.Chairman and Chief Executive Officer John J. Schiff, Jr., CPCU, commented, "We're clearly starting to see the benefits of pricing, underwriting, process and product initiatives. The hard work by our agents and associates is paying off, and I believe we now are looking at solid progress that will carry forward into future periods. With one more quarter to go, it appears that we will beat our 2002 property casualty profitability target of a 101.3 percent combined ratio, potentially coming closer to 100 percent. We expect the stream of profits from our growing insurance business to provide opportunities to maintain healthy investment income."
Nine-month Results
For the nine months ended September 30, 2002, net operating income was $204 million, or $1.25 per share, versus $152 million, or 94 cents per share, last year. Including realized capital gains and losses, net income for the nine months was $182 million, or $1.11 per share, versus $157 million, or 97 cents per share.
Cincinnati Financial does not reflect the expense of awarded options in its operating results; however, during the first nine months of this year, net income would have been reduced by approximately 2 cents per share if options expense had been calculated using the Black-Scholes methodology.
Total revenues advanced $214 million to $2.121 billion, up 11.2 percent over last year's first nine months. Revenues from pre-tax investment income reached $331 million, up 5.7 percent from $313 million in the prior-year nine- month period.
Nine-month catastrophe losses, net of reinsurance, totaled $66 million, contributing 3.8 points to the combined ratio of 100.3 percent and decreasing after-tax earnings by 26 cents per share. For the comparable period last year, catastrophe losses were $55 million, contributing 3.6 points to the combined ratio of 104.0 percent and decreasing after-tax earnings by 22 cents per share.
Property Casualty Insurance Operations: Growth (Statutory) (In millions) Third Quarter Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 Net written premiums* $637 $545 $1,884 $1,632 Net earned premiums 610 520 1,751 1,521 * Property casualty 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 from nine-month 2001 results.The Corporation's property casualty insurance affiliates -- The Cincinnati Insurance Company, The Cincinnati Indemnity Company and The Cincinnati Casualty Company -- reported third-quarter net written premiums of $637 million, up 16.9 percent or $92 million over the comparable 2001 period. Third-quarter net written premiums for commercial lines of insurance rose 19.3 percent to $441 million, while personal lines rose 11.9 percent to $196 million.
New business written directly by agents rose 27.8 percent to $87 million for the quarter, bringing the nine-month total to $241 million, up 21.2 percent. For the third quarter, commercial new business growth climbed to 29.5 percent and personal new business moderated to 21.7 percent.
Schiff noted, "This growth represents better pricing along with tightened underwriting. We continued to write new business on a case-by-case basis, particularly coverages for contractors and homeowners, and to offer one-year policies where competition or regulation makes multi-year policies impractical. Workers' compensation new business fell 8.4 percent as we continued to walk away from this business at current rates.
"While we anticipate no immediate effects, we did reach some milestones during the third quarter in Web-based technology projects that will make it easier for agents to place business with Cincinnati," Schiff said. "Agencies and field representatives in three states now are using our new commercial policy quoting system. Our Kansas agencies now have an initial version of our new integrated processing system for six personal lines of business. As state- by-state development and rollout take place over the coming years, this system will offer agents more control and more choices, such as agency or direct billing and printing at their offices or ours."
Property Casualty Insurance Operations: Profitability (Statutory) Third Quarter Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 Loss and LAE ratio excluding catastrophes 69.2% 79.7% 70.5% 73.6% Catastrophe loss ratio 0.8 2.6 3.8 3.6 Loss and LAE ratio 70.0% 82.3% 74.3% 77.2% Expense ratio* 27.3 25.6 25.7 26.0 Policyholder dividend ratio* 0.1 1.0 0.3 0.8 Combined ratio* 97.4% 108.9% 100.3% 104.0% * Property casualty 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 from nine-month 2001 results.Schiff commented, "The statutory combined ratio for the third quarter was 97.4 percent versus 108.9 percent in 2001. For the third quarter, the commercial lines loss and LAE ratio was 67.1 percent, or 65.8 percent excluding catastrophes, and the personal lines ratio was 77.5 percent, or 78.1 excluding catastrophes. Favorable development of claims from earlier storms offset approximately $3 million of the $8 million of damage, net of reinsurance, caused by the single weather catastrophe affecting our policyholders this quarter, a tornado in Indiana.
"Our agents are doing a good job presenting policyholders with choices that let them balance price and protection," he continued. "With agent guidance, many are selecting larger deductibles and options to buy just the right amount of formerly automatically included coverages. Agents are successfully implementing these coverage changes that will allow us to return to our historic levels of profitability. This is especially important for the homeowner line, where agents are offering higher deductibles, verifying insurance to value with building coverage increases averaging about 15 percent and customizing water damage and replacement coverages. Similar service will be needed as our new general liability filings, approved and in effect in a few states in September, move into additional states over the coming quarters.
"Loss severity continues, with the third-quarter ratio of total large losses above $250,000 to earned premium at 16.3 percent versus an average of 16.7 percent over the previous six quarters. We experienced 17 claims in excess of $1 million during this year's third quarter compared with an average of 14 over the previous six quarters. The statutory expense ratio rose to 27.4 percent versus an average of 26.2 over the previous six quarters, due to a combination of higher commissions and taxes, as well as timing differences on items affecting quarterly expenses. On a nine-month basis, the 2002 expense ratio improved slightly."
Life Insurance Operations Third Quarter Nine Months (In millions) Ended Ended September 30, September 30, 2002 2001 2002 2001 Net earned premiums $22 $18 $63 $58 Investment income 22 20 63 60 Total revenues 38 39 114 119 Total expenses 35 28 99 85 Net operating income $5 $8 $18 $23 Net capital losses (3) 0 (8) 0 Net income $2 $8 $10 $23The Cincinnati Life Insurance Company's third-quarter net operating income was $5 million, compared with $8 million last year. After net realized investment losses of $3 million, Cincinnati Life contributed $2 million to the company's third-quarter net profits in 2002 versus $8 million in 2001. Cincinnati Life President David H. Popplewell, FALU, LLIF, noted, "Higher expenses primarily arose from our very strong growth as well as increased regulatory and legal expenses.
"Net written premiums for the third quarter reached $78 million, up from $25 million in 2001. Excluding the sale of a $33 million bank-owned life insurance policy, growth of total net written premiums was 79 percent, and growth of net written life premiums was 6.4 percent. Total net written premiums included $21 million of annuities, compared with $2 million in last year's third quarter, as agents continued to market attractive annuity features including guaranteed interest and fixed income."
Popplewell continued, "New submitted applications increased 23 percent to more than 12,000 on strong sales of ordinary life products. Over the coming months, Cincinnati Life will enhance its disability income policy and introduce two new, competitive LifeHorizons guaranteed products-whole life with a single-pay paid-up life rider and long-term guaranteed universal life."
Investment Operations
Growth of investment income rose to 7.1 percent for the third quarter and 5.7 percent for the nine-month period of 2002. Pre-tax net capital losses of $16 million were realized during the third quarter. This total includes $8 million of asset impairment from write-downs of 10 nonperforming bond and preferred stock issues and $10 million from the effect of Statement of Financial Accounting Standard No. 133. This standard accounts for market value fluctuation of convertible preferred securities as a capital gain or loss instead of as an unrealized gain or loss.
Chief Investment Officer James G. Miller noted, "Operations are producing excellent cash flow for investment. So far this year, $319 million has been available to the Investment Department for new investments. During the fourth quarter, growth of investment income should continue at the nine-month pace if we can find high-quality investment options that fit our longstanding parameters."
Miller continued, "Twenty-three of the 51 common stocks in our portfolio have raised their dividends since January 1, adding about $11 million to gross investment income on an annualized basis. Our bank stocks continue their stellar records, with Fifth Third Bancorp's 2002 annualized dividend increase contributing almost $9 million. Annualized dividends from holdings in the common stock portfolio contribute about $186 million to pre-tax investment income, and this steady stream helps stabilize our investment results when the bond market is under pressure."
Balance Sheet Strength
At September 30, 2002, total assets were $13.684 billion versus $13.959 billion at year-end 2001. Shareholders' equity was $5.518 billion, or a book value of $34.14 per share, compared with $5.998 billion, or a book value of $37.07, at December 31, 2001. Shareholders' equity included $3.581 billion of unrealized gains in the investment portfolio, versus $4.113 billion at year-end 2001.
During the third quarter, the company repurchased 669,100 shares of Cincinnati Financial common stock. Miller commented, "With the market value of our common stock falling below book value in October, we took the opportunity to purchase 177,500 additional shares, bringing the year-to-date repurchases to 1.1 million shares, at a total cost of $43 million or $37.69 per share. Approximately 6.8 million shares remain authorized for future repurchases."
Outlook
Schiff concluded, "Cincinnati Financial and the blue chip stocks in our portfolio have recouped significant market value since September 30. Our internal estimates of book value as of yesterday are $1 to $2 above the reported September 30 level. In the current up-and-down equity marketplace, we keep our focus by tending to our insurance business and investing in companies that manage well over the long term.
"Third-quarter milestones included our 12th consecutive appearance on Ward Group's list of 50 top-performing insurers that effectively balance policyholder safety and shareholder return. With the October 15 cash dividend paid to shareholders, we have completed a string of 42 consecutive years of dividend increases. We think a strong dividend record is the best assurance shareholders can have that a company's earnings are solid, its accounting is fair and its prospects are bright. As more adequate insurance pricing prevails across our industry and we enjoy relatively mild weather, our underwriting and investment strategies and discipline should be rewarded with more good quarters and more dividends."
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 provides asset management services to institutions, corporations and individuals. For additional information or to register for this afternoon's conference call, 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 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 URL: http://www.cinfin.com