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Cincinnati Financial Reports Fourth-Quarter and Full-Year 2014 Results

CINCINNATI, Feb. 4, 2015 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:

  • Fourth-quarter 2014 net income of $167 million, or $1.02 per share, compared with $122 million, or 74 cents per share, in the fourth quarter of 2013.
  • Full-year 2014 net income of $525 million, or $3.18 per share, up 2 percent from $517 million, or $3.12, in 2013. Operating income of $440 million, or $2.66 per share, down 5 percent from $463 million, or $2.80 per share.
  • $45 million or 37 percent increase in fourth-quarter 2014 net income reflected the after-tax net effect of two primary items: a $26 million improvement in the contribution from property casualty underwriting, reflecting a $26 million dollar favorable effect from lower natural catastrophe losses, and a $16 million increase from net realized investment gains.
  • $40.14 book value per share at December 31, 2014, up 8 percent from December 31, 2013.
  • 12.6 percent value creation ratio for full-year 2014, compared with 16.1 percent for 2013.

 

Financial Highlights
















(In millions except per share data)

Three months ended December 31,


Twelve months ended December 31,


2014


2013


% Change


2014


2013


% Change

Revenue Data












   Earned premiums

$

1,086


$

1,025


6


$

4,243


$

3,902


9

   Investment income, pretax

140


137


2


549


529


4

   Total revenues

1,262


1,172


8


4,945


4,531


9

Income Statement Data












   Net income

$

167


$

122


37


$

525


$

517


2

   Realized investment gains, net

19


3


533


85


54


57

   Operating income*

$

148


$

119


24


$

440


$

463


(5)

Per Share Data (diluted)












   Net income

$

1.02


$

0.74


38


$

3.18


$

3.12


2

   Realized investment gains, net

0.13


0.02


550


0.52


0.32


63

   Operating income*

$

0.89


$

0.72


24


$

2.66


$

2.80


(5)













   Book value







$

40.14


$

37.21


8

   Cash dividend declared

$

0.44


$

0.42


5


$

1.76


$

1.655


6

   Weighted average shares outstanding

165.3


165.7


0


165.1


165.4


0



*  

The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures defines and reconciles measures presented in this release that are not based on U. S. Generally Accepted Accounting Principles. of Non-GAAP Information and Reconciliation to Comparable GAAP Measures defines and reconciles measures presented in this release that are not based on U. S. Generally Accepted Accounting Principles.

**

Forward-looking statements and related assumptions are subject to the risks outlined in the company's safe harbor statement.



Insurance Operations Fourth-Quarter Highlights

  • 90.4 percent fourth-quarter 2014 property casualty combined ratio, improved from 93.9 percent for fourth-quarter 2013. Full-year 2014 property casualty combined ratio at 95.6%, with net written premiums up 6 percent.
  • 9 percent increase in fourth-quarter net written premiums, reflecting higher pricing and growth initiatives.
  • $122 million fourth-quarter 2014 property casualty new business written premiums. Agencies appointed since the beginning of 2013 contributed $10 million or 8 percent to total fourth-quarter new business written premiums.
  • 6 cents per share contribution from life insurance operating income to fourth-quarter results, matching a year ago.

Investment and Balance Sheet Highlights

  • 2 percent or $3 million rise in fourth-quarter 2014 pretax investment income, including a 6 percent increase in stock portfolio dividends.
  • 7 percent full-year rise in fair value of invested assets plus cash at December 31, 2014, including an 11 percent increase for the stock portfolio and a 4 percent increase for the bond portfolio.
  • $1.784 billion parent company cash and marketable securities at year-end 2014, up 16 percent from a year ago.

Book Value Reaches Record High
Steven J. Johnston, president and chief executive officer, commented: "Strong fourth-quarter net and operating income brought our 2014 full-year results essentially in line with full-year 2013. Positive contributions from both our insurance and investment operations increased our book value 8 percent to $40.14 per share at December 31, 2014. We finished the year with a value creation ratio of 12.6 percent, solidly within our long-term objective of a 10 percent to 13 percent annual average.

"After a stormy first-half, our property casualty insurance combined ratio improved 10 points during the second half. Our fourth-quarter combined ratio at 90.4 percent improved 3.5 points over last year's fourth quarter, contributing to a satisfactory 95.6 percent ratio and $186 million of pretax underwriting gains for the year.

"Compared with 93.8 percent in 2013, the 2014 full-year ratio included a half-point increase from higher catastrophe losses and a full-point increase from higher weather-related losses that were not part of industry-designated catastrophe events. Our fourth-quarter and full-year combined ratios also included higher reserve estimates of losses and loss expenses incurred but not yet reported for our commercial casualty line of business. While our commercial casualty line achieved an underwriting profit in 2014, we felt it was prudent to record higher reserves for estimated losses in this line. Development for all lines in total remained favorable for the full year, as we continue to follow the same reserving practices that have resulted in an outstanding 26-year record of net favorable property casualty reserve development."

Initiatives Drive Profitable Growth
"The pace of growth in our property casualty net written premiums ticked up to 9 percent in the fourth quarter. We believe our full-year growth of 6 percent is again ahead of the industry, reflecting our successful efforts to balance growth and profitability strategies. Our core combined ratio, which considers results before catastrophe losses and prior accident year reserve development, continued to improve this year to 92.3 percent. We are optimistic about our opportunities to continue finding the right balance between growth and profitability to create long-term value for shareholders.

"To accurately underwrite and price the business our independent agents produce, we continue efforts to maximize pricing sophistication while also inspecting more properties for both personal and commercial accounts. We'll continue to segment our business through those pricing and risk selection actions, seeking to maintain our high retention rates on those policies we believe are most adequately priced. We're confident that our initiatives in those areas are helping us determine the right price for each account.

"In addition, we are focused on solutions that help our agents attract and retain high-quality business. We are subdividing field territories to assure in-person service and deploying technology that increases ease of doing business. At the same time, we are improving and adding products to attract high net worth personal lines and targeted business clients, as well as surety and excess and surplus lines policyholders."

Balance Sheet Shows Strength
"Our property casualty statutory surplus rose to $4.5 billion at December 31, indicating ample capacity to support our growth plans. A strong balance sheet gives us the flexibility to invest in our business while still paying shareholder dividends as a consistent, long-term strategy. The board of directors' recent decision to increase the cash dividend demonstrates their confidence in the future success of our initiatives."


Insurance Operations Highlights

Consolidated Property Casualty Insurance Operations

(In millions)

Three months ended December 31,


Twelve months ended December 31,



2014



2013



% Change


2014



2013



% Change

Earned premiums


$

1,035



$

960



8


$

4,045



$

3,713



9

Fee revenues


1



1



0


6



4



50

   Total revenues


1,036



961



8


4,051



3,717



9


















Loss and loss expenses


622



601



3


2,627



2,301



14

Underwriting expenses


314



300



5


1,238



1,183



5

   Underwriting profit


$

100



$

60



67


$

186



$

233



(20)


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Loss and loss expenses


60.1

%


62.6

%


(2.5)


65.0

%


61.9

%


3.1

     Underwriting expenses


30.3



31.3



(1.0)


30.6



31.9



(1.3)

           Combined ratio


90.4

%


93.9

%


(3.5)


95.6

%


93.8

%


1.8


























% Change








% Change

Agency renewal written premiums


$

906



$

854



6


$

3,794



$

3,493



9

Agency new business written premiums


122



128



(5)


503



543



(7)

Other written premiums


(41)



(74)



45


(154)



(143)



(8)

   Net written premiums


$

987



$

908



9


$

4,143



$

3,893



6


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Current accident year before catastrophe losses


58.3

%


59.9

%


(1.6)


61.7

%


60.6

%


1.1

     Current accident year catastrophe losses


(0.2)



3.5



(3.7)


5.7



5.4



0.3

     Prior accident years before catastrophe losses


2.7



(0.5)



3.2


(1.8)



(3.3)



1.5

     Prior accident years catastrophe losses


(0.7)



(0.3)



(0.4)


(0.6)



(0.8)



0.2

           Loss and loss expense ratio


60.1

%


62.6

%


(2.5)


65.0

%


61.9

%


3.1


















Current accident year combined ratio before

















  catastrophe losses


88.6

%


91.2

%


(2.6)


92.3

%


92.5

%


(0.2)


















 

  • 9 percent and 6 percent growth in fourth-quarter and full-year 2014 property casualty net written premiums. Full‑year renewal written premiums increase of 9 percent reflects higher pricing, rising insured exposures and multi-year compounding effects of premium growth initiatives.
  • 5 percent and 7 percent lower fourth-quarter and full-year 2014 new business premiums written by agencies, compared with a year ago – when full-year 2013 was at a record high. Key factors affecting the 2014 decrease included disciplined pricing and the impact of underwriting profitability initiatives, partially offset by contributions from new agency appointments and other growth initiatives. Full-year 2014 new business premiums, down $40 million in total, included a $20 million increase from standard market property casualty production from agencies appointed since the beginning of 2013 and an increase of $9 million for excess and surplus lines.
  • 1,466 agency relationships in 1,884 reporting locations marketing standard market property casualty insurance products at December 31, 2014, compared with 1,450 agency relationships in 1,823 reporting locations at year‑end 2013. During 2014, 99 new agency appointments were made as planned.
  • 3.5 percentage-point fourth-quarter 2014 combined ratio improvement, compared with a year ago, driven by a 4.1 point decrease for lower losses from natural catastrophes.
  • 1.8 percentage-point rise in full-year 2014 combined ratio, compared with 2013, including 0.5 points from higher natural catastrophe losses, 1.0 point from higher noncatastrophe weather-related losses and 1.5 points from higher estimates of incurred but not reported (IBNR) losses and loss expenses for our commercial casualty line of business.
  • 2.0 percentage-point fourth-quarter unfavorable effect and 2.4 points full-year 2014 favorable effect from prior accident year reserve development of $22 million and $98 million, compared with 0.8 points and 4.1 points favorable effects from $8 million and $148 million of development for the same periods of 2013. The less favorable fourth-quarter and full-year reserve development was primarily due to higher estimates of IBNR losses and loss expenses for our commercial casualty line of business.
  • 1.1 percentage-point increase, to 61.7 percent, for the full-year 2014 ratio of current accident year losses and loss expenses before catastrophes, largely due to a 1.0 percentage-point rise in the ratio for noncatastrophe weather-related losses.
  • 1.0 and 1.3 percentage-point improvement in the fourth-quarter and full-year underwriting expense ratios, largely due to higher earned premiums and ongoing expense management efforts.

 

Commercial Lines Insurance Operations

(In millions)

Three months ended December 31,


Twelve months ended December 31,



2014



2013



% Change


2014



2013



% Change

Earned premiums


$

730



$

680



7


$

2,856



$

2,636



8

Fee revenues


1



1



0


4



3



33

   Total revenues


731



681



7


2,860



2,639



8


















Loss and loss expenses


454



411



10


1,812



1,596



14

Underwriting expenses


228



219



4


902



857



5

   Underwriting profit


$

49



$

51



(4)


$

146



$

186



(22)


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Loss and loss expenses


62.3

%


60.4

%


1.9


63.5

%


60.5

%


3.0

     Underwriting expenses


31.3



32.3



(1.0)


31.6



32.5



(0.9)

           Combined ratio


93.6

%


92.7

%


0.9


95.1

%


93.0

%


2.1


























% Change








% Change

Agency renewal written premiums


$

645



$

606



6


$

2,678



$

2,471



8

Agency new business written premiums


86



92



(7)


360



391



(8)

Other written premiums


(32)



(63)



49


(116)



(102)



(14)

   Net written premiums


$

699



$

635



10


$

2,922



$

2,760



6


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Current accident year before catastrophe losses


58.9

%


58.8

%


0.1


60.7

%


59.8

%


0.9

     Current accident year catastrophe losses


(0.1)



2.3



(2.4)


4.8



4.3



0.5

     Prior accident years before catastrophe losses


4.4



(0.1)



4.5


(1.5)



(3.0)



1.5

     Prior accident years catastrophe losses


(0.9)



(0.6)



(0.3)


(0.5)



(0.6)



0.1

           Loss and loss expense ratio


62.3

%


60.4

%


1.9


63.5

%


60.5

%


3.0


















Current accident year combined ratio before

















  catastrophe losses


90.2

%


91.1

%


(0.9)


92.3

%


92.3

%


0.0


















 

  • 10 percent and 6 percent growth in fourth-quarter and full-year 2014 commercial lines net written premiums, primarily due to higher renewal written premiums that included the effects of higher pricing and rising insured exposures.
  • $39 million and $207 million increase in fourth-quarter and full-year renewal written premiums, with fourth-quarter and full-year 2014 commercial lines pricing changes that increased on average in a low-single-digit range.
  • $31 million or 8 percent lower full-year 2014 new business written by agencies, down from a record-high amount a year ago and reflecting an $18 million decrease for our workers' compensation line of business.
  • 0.9 percentage-point rise in fourth-quarter 2014 combined ratio, driven by 8.5 points from estimates of IBNR losses and loss expenses.
  • 2.1 percentage-point rise in the full-year 2014 combined ratio, including 0.6 points from higher natural catastrophe losses, 1.0 point from noncatastrophe weather-related losses and 4.2 points from higher incurred losses and loss expenses for our largest commercial line of business, commercial casualty. That line, while profitable for the year 2014, experienced ratio increases of 1.6 points for paid losses and loss expenses for accident years three or more years ago in aggregate and 6.2 points for estimates of IBNR losses and loss expenses for all accident years in aggregate.
  • 3.5 percentage-point fourth-quarter unfavorable effect and 2.0 points full-year 2014 favorable effect from prior accident year reserve development of $26 million and $58 million, compared with 0.7 points and 3.6 points favorable effects from $5 million and $96 million of development for the same periods of 2013. The less favorable fourth-quarter and full-year reserve development was primarily due to estimates of IBNR losses and loss expenses for our commercial casualty line of business.
  • 0.9 percentage-point increase, to 60.7 percent, for the full-year 2014 ratio of current accident year losses and loss expenses before catastrophes, largely due to a 1.0 point rise in the ratio for noncatastrophe weather-related losses and a 0.3 point increase in the ratio for current accident year losses of $1 million or more per claim.

 

Personal Lines Insurance Operations

(In millions)

Three months ended December 31,


Twelve months ended December 31,



2014



2013



% Change


2014



2013



% Change

Earned premiums


$

266



$

249



7


$

1,041



$

961



8

Fee revenues


0



0



0


2



1



100

   Total revenues


266



249



7


1,043



962



8


















Loss and loss expenses


148



177



(16)


740



639



16

Underwriting expenses


75



72



4


293



290



1

   Underwriting profit


$

43



$

0



nm


$

10



$

33



(70)


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Loss and loss expenses


55.8

%


71.4

%


(15.6)


71.1

%


66.6

%


4.5

     Underwriting expenses


27.9



28.9



(1.0)


28.1



30.2



(2.1)

           Combined ratio


83.7

%


100.3

%


(16.6)


99.2

%


96.8

%


2.4


























% Change








% Change

Agency renewal written premiums


$

233



$

224



4


$

1,005



$

928



8

Agency new business written premiums


24



24



0


92



110



(16)

Other written premiums


(8)



(9)



11


(29)



(33)



12

   Net written premiums


$

249



$

239



4


$

1,068



$

1,005



6


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Current accident year before catastrophe losses


56.1

%


62.6

%


(6.5)


63.4

%


61.9

%


1.5

     Current accident year catastrophe losses


(0.9)



7.4



(8.3)


8.8



8.8



0.0

     Prior accident years before catastrophe losses


1.1



1.1



0.0


(0.1)



(3.0)



2.9

     Prior accident years catastrophe losses


(0.5)



0.3



(0.8)


(1.0)



(1.1)



0.1

           Loss and loss expense ratio


55.8

%


71.4

%


(15.6)


71.1

%


66.6

%


4.5


















Current accident year combined ratio before

















  catastrophe losses


84.0

%


91.5

%


(7.5)


91.5

%


92.1

%


(0.6)


















 

  • 4 percent and 6 percent growth in fourth-quarter and full-year 2014 personal lines net written premiums, driven by increases in renewal written premiums.
  • 4 percent increase in full-year 2014 earned premiums in aggregate from our four highest volume states where we offer personal lines policies and that represent approximately half of our personal lines premiums, while rising 13 percent for all other states in aggregate as we progress toward geographic diversification.
  • 16 percent lower full-year 2014 new business written premium, declining as expected due to underwriting actions such as higher premium rates and expanded use of higher deductibles, age of roof limitations and more precise pricing.
  • 16.6 percentage-point improvement in fourth-quarter 2014 combined ratio, including 9.1 points from lower natural catastrophe losses.
  • 2.4 percentage-point rise in the full-year 2014 combined ratio, including 1.4 points from higher noncatastrophe weather-related losses and a 3.0 point rise from less favorable prior accident year reserve development.
  • 0.6 percentage-point fourth-quarter unfavorable effect and 1.1 points full-year 2014 favorable effect from prior accident year reserve development of $1 million and $12 million, compared with effects of 1.4 points unfavorable and 4.1 points favorable from $3 million and $39 million of development for the same periods of 2013.
  • 1.5 percentage-point increase, to 63.4 percent, for the full-year 2014 ratio of current accident year losses and loss expenses before catastrophes, largely due to a 1.4 percentage-point rise in the ratio for noncatastrophe weather-related losses.

 

Excess and Surplus Lines Insurance Operations

(In millions)

Three months ended December 31,


Twelve months ended December 31,



2014



2013



% Change


2014



2013



% Change

Earned premiums


$

39



$

31



26


$

148



$

116



28


















Loss and loss expenses


20



13



54


75



66



14

Underwriting expenses


11



9



22


43



36



19

   Underwriting profit


$

8



$

9



(11)


$

30



$

14



114


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Loss and loss expenses


49.0

%


41.0

%


8.0


50.5

%


56.7

%


(6.2)

     Underwriting expenses


28.8



29.4



(0.6)


28.9



31.1



(2.2)

           Combined ratio


77.8

%


70.4

%


7.4


79.4

%


87.8

%


(8.4)


























% Change








% Change

Agency renewal written premiums


$

28



$

24



17


$

111



$

94



18

Agency new business written premiums


12



12



0


51



42



21

Other written premiums


(1)



(2)



50


(9)



(8)



(13)

   Net written premiums


$

39



$

34



15


$

153



$

128



20


















Ratios as a percent of earned premiums:








Pt. Change








Pt. Change

     Current accident year before catastrophe losses


62.1

%


62.6

%


(0.5)


68.1

%


67.1

%


1.0

     Current accident year catastrophe losses


2.9



(1.9)



4.8


1.8



0.7



1.1

     Prior accident years before catastrophe losses


(16.1)



(19.9)



3.8


(19.6)



(11.2)



(8.4)

     Prior accident years catastrophe losses


0.1



0.2



(0.1)


0.2



0.1



0.1

           Loss and loss expense ratio


49.0

%


41.0

%


8.0


50.5

%


56.7

%


(6.2)


















Current accident year combined ratio before

















  catastrophe losses


90.9

%


92.0

%


(1.1)


97.0

%


98.2

%


(1.2)


















 

  • 15 percent and 20 percent growth in fourth-quarter and full-year 2014 excess and surplus lines net written premiums, largely due to the opportunity to renew many accounts for the first time. Also contributing to growth were average fourth-quarter and full-year 2014 renewal price increases in a mid-single-digit range.
  • 21 percent increase in full-year 2014 new business written premiums, rising in part due to enhanced service to agencies provided by a larger staff of excess and surplus lines field marketing representatives.
  • 8.4 percentage-point combined ratio improvement for full-year 2014, primarily due to a larger benefit from favorable prior accident year reserve development.

 

Life Insurance Operations

(In millions)

Three months ended December 31,


Twelve months ended December 31,



2014



2013



% Change


2014



2013



% Change

Term life insurance


$

32



$

30



7


$

131



$

122



7

Universal life insurance


10



27



(63)


35



35



0

Other life insurance, annuity, and disability income

  products


9



8



13


32



32



0

    Earned premiums


51



65



(22)


198



189



5

Investment income, net of expenses


36



36



0


144



140



3

Other income


2



1



100


6



4



50

Total revenues, excluding realized investment gains
    
and losses


89



102



(13)


348



333



5

Contract holders' benefits incurred


53



63



(16)


229



204



12

Operating expenses incurred


21



24



(13)


63



60



5

    Total benefits and expenses


74



87



(15)


292



264



11

Net income before income tax and realized

  investment gains and losses


15



15



0


56



69



(19)

Income tax


5



6



(17)


20



25



(20)

Net income before realized investment gains and

  losses


$

10



$

9



11


$

36



$

44



(18)


















 

  • $9 million or 5 percent increase in full-year 2014 earned premiums, including a 7 percent increase for term life insurance, our largest life insurance product line.
  • $1 million decline to $37 million in full-year 2014 fixed annuity deposits received, slowing as planned. Cincinnati Life does not offer variable or indexed products.
  • $8 million decrease in full-year 2014 profit, primarily due to less favorable mortality experience.
  • $72 million or 9 percent full-year 2014 increase to $904 million in GAAP shareholders' equity for The Cincinnati Life Insurance Company, largely reflecting net income and an increase in the fair value of the fixed-maturity portfolio due to a decrease in interest rates.

 

Investment and Balance Sheet Highlights

Investment Operations

(In millions)


Three months ended December 31,


Twelve months ended December 31,



2014



2013



% Change


2014



2013



% Change

Investment income, net of expenses


$

140



$

137



2


$

549



$

529



4

Investment interest credited to contract holders


(21)



(20)



(5)


(83)



(80)



(4)

Realized investment gains, net


32



6



433


133



83



60

Investment operations profit, pretax


$

151



$

123



23


$

599



$

532



13


















Investment income:

















   Interest


$

105



$

104



1


$

417



$

413



1

   Dividends


37



35



6


138



122



13

   Other




1



(100)


2



3



(33)

   Less investment expenses


2



3



0


8



9



(11)

      Total investment income, net of expenses, pretax


140



137



2


549



529



4

      Less income taxes


33



33



0


130



128



2

Investment income, net of expenses, after-tax


$

107



$

104



3


$

419



$

401



4


















   Investment returns:

















      Effective tax rate


23.6

%


23.9

%




23.7

%


24.1

%



    Average invested assets plus cash and cash
      equivalents


$

14,229



$

13,289





$

13,951



$

12,832




      Average yield pretax


3.94

%


4.12

%




3.94

%


4.12

%



      Average yield after-tax


3.01



3.13





3.00



3.13




   Fixed-maturity returns:

















   Effective tax rate


27.0

%


27.2

%




27.0

%


27.1

%



   Average amortized cost


$

8,898



$

8,570





$

8,755



$

8,430




   Average yield pretax


4.72

%


4.85

%




4.76

%


4.90

%



   Average yield after-tax


3.45



3.53





3.48



3.57





















 

  • $3 million or 2 percent rise in fourth-quarter 2014 investment income, including 6 percent growth in equity portfolio dividends and 1 percent growth in interest income.
  • $152 million or 6 percent fourth-quarter 2014 net increase in pretax net unrealized investment portfolio gains, including a $161 million increase for the equity portfolio. The total increase included the offsetting effect of $53 million of pretax net realized gains from investment portfolio security sales or called bonds during the fourth quarter of 2014, including $43 million from the equity portfolio.

 

Balance Sheet Highlights

(In millions except per share data)


At December 31,


At December 31,



2014


2013

Balance sheet data:







   Invested assets


$

14,386



$

13,564


   Total assets


18,753



17,662


   Short-term debt


49



104


   Long-term debt


791



790


   Shareholders' equity


6,573



6,070


   Book value per share


40.14



37.21


   Debt-to-total-capital ratio                                           


11.3

%


12.8

%










 

  • $14.977 billion in consolidated cash and invested assets at December 31, 2014, up 7 percent from $13.997 billion at year-end 2013.
  • $9.460 billion bond portfolio at December 31, 2014, with an average rating of A2/A. Fair value decreased $62 million or 1 percent during the fourth quarter of 2014.
  • $4.858 billion equity portfolio was 33.8 percent of invested assets, including $2.130 billion in pretax net unrealized gains at December 31, 2014. $192 million or 4 percent fourth-quarter 2014 growth in fair value.
  • $4.472 billion of statutory surplus for the property casualty insurance group at December 31, 2014, up $146 million from $4.326 billion at year-end 2013, after declaring $400 million in dividends to the parent company. The ratio of net written premiums to property casualty statutory surplus for the 12 months ended December 31, 2014, was 0.9-to-1, unchanged from year-end 2013.
  • Value creation ratio of 12.6 percent for full-year 2014 included 7.2 percent from net income before net realized investment gains and 5.5 percent from investment portfolio realized gains and changes in unrealized gains.

For additional information or to register for our conference call webcast, please visit cinfin.com/investors.

Cincinnati Financial Corporation offers business, home and auto insurance, our main business, through The Cincinnati Insurance Company and its two standard market property casualty companies. The same local independent insurance agencies that market those policies may offer products of our other subsidiaries, including life and disability income insurance, fixed annuities and surplus lines property and casualty insurance. For additional information about the company, please visit cinfin.com.












Mailing Address:






Street Address:



P.O. Box 145496






6200 South Gilmore Road



Cincinnati, Ohio 45250-5496






Fairfield, Ohio 45014-5141










Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2013 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 31.

Factors that could cause or contribute to such differences include, but are not limited to:

  • Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
  • Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance
  • Inadequate estimates or assumptions used for critical accounting estimates
  • Declines in overall stock market values negatively affecting the company's equity portfolio and book value
  • Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:
    • Significant or prolonged decline in the value of a particular security or group of securities and impairment of the asset(s)
    • Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities
    • Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities
  • Prolonged low interest rate environment or other factors that limit the company's ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
  • Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies
  • Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business and our relationships with agents, policyholders and others
  • Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products
  • Delays or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness
  • Increased competition that could result in a significant reduction in the company's premium volume
  • Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages
  • Inability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers
  • Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
  • Inability of our subsidiaries to pay dividends consistent with current or past levels
  • Events or conditions that could weaken or harm the company's relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company's opportunities for growth, such as:
    • Downgrades of the company's financial strength ratings
    • Concerns that doing business with the company is too difficult
    • Perceptions that the company's level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace
    • Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace
  • Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:
    • Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates
    • Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations
    • Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
    • Add assessments for guaranty funds, other insurance related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
    • Increase our provision for federal income taxes due to changes in tax law
    • Increase our other expenses
    • Limit our ability to set fair, adequate and reasonable rates
    • Place us at a disadvantage in the marketplace
    • Restrict our ability to execute our business model, including the way we compensate agents
  • Adverse outcomes from litigation or administrative proceedings
  • Events or actions, including unauthorized intentional circumvention of controls, that reduce the company's future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002
  • Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others
  • Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location

Further, the company's insurance businesses are subject to the effects of changing social, global, 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 measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

* * *

 

Cincinnati Financial Corporation
Condensed Consolidated Balance Sheets (unaudited)

(In millions except per share data)


December 31,


December 31,



2014


2013

Assets





  Investments





    Fixed maturities, at fair value (amortized cost: 2014—$8,871; 2013—$8,638)


$

9,460


$

9,121

    Equity securities, at fair value (cost: 2014—$2,728; 2013—$2,523)


4,858


4,375

    Other invested assets


68


68

      Total investments


14,386


13,564

  Cash and cash equivalents


591


433

  Investment income receivable


123


121

  Finance receivable


75


85

  Premiums receivable


1,405


1,346

  Reinsurance recoverable


545


547

  Prepaid reinsurance premiums


29


26

  Deferred policy acquisition costs


578


565

  Land, building and equipment, net, for company use (accumulated depreciation:

     2014—$446; 2013—$420)


194


210

  Other assets


75


73

  Separate accounts


752


692

    Total assets


$

18,753


$

17,662

Liabilities





  Insurance reserves





    Loss and loss expense reserves


$

4,485


$

4,311

    Life policy and investment contract reserves


2,497


2,390

  Unearned premiums


2,082


1,976

  Other liabilities


648


611

  Deferred income tax


840


673

  Note payable


49


104

  Long-term debt and capital lease obligations


827


835

  Separate accounts


752


692

    Total liabilities


12,180


11,592






Shareholders' Equity





  Common stock, par value—$2 per share; (authorized: 2014 and 2013—500 million shares;

    issued and outstanding: 2014 and 2013—198.3 million shares)


397


397

Paid-in capital


1,214


1,191

Retained earnings


4,505


4,268

Accumulated other comprehensive income


1,744


1,504

Treasury stock at cost (2014—34.6 million share and 2013—35.2 million shares)


(1,287)


(1,290)

   Total shareholders' equity


6,573


6,070

   Total liabilities and shareholders' equity


$

18,753


$

17,662

 

 

Cincinnati Financial Corporation
Condensed Consolidated Statements of Income (unaudited)

(In millions except per share data)

Three months ended December 31,


Twelve months ended December 31,


2014


2013


2014


2013

Revenues








   Earned premiums

$

1,086


$

1,025


$

4,243


$

3,902

   Investment income, net of expenses

140


137


549


529

   Realized investment gains, net

32


6


133


83

   Fee revenues

3


2


12


8

   Other revenues

1


2


8


9

      Total revenues

1,262


1,172


4,945


4,531









Benefits and Expenses








   Insurance losses and policyholder benefits

675


664


2,856


2,505

   Underwriting, acquisition and insurance expenses

334


324


1,301


1,243

   Interest expense

13


14


53


54

   Other operating expenses

4


3


14


15

      Total benefits and expenses

1,026


1,005


4,224


3,817









Income Before Income Taxes

236


167


721


714









Provision for Income Taxes








   Current

53


41


159


178

   Deferred

16


4


37


19

      Total provision for income taxes

69


45


196


197









Net Income

$

167


$

122


$

525


$

517









Per Common Share








   Net income—basic

$

1.03


$

0.75


$

3.21


$

3.16

   Net income—diluted

1.02


0.74


3.18


3.12

 

Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for reconciliations; prior-period reconciliations available at 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.
  • Value creation ratio: This is a measure of shareholder value creation that management believes captures the contribution of the company's insurance operations, the success of its investment strategy and the importance placed on paying cash dividends to shareholders. The value creation ratio measure is made up of two primary components: (1) rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. Management believes this non-GAAP measure is a useful supplement to GAAP information, providing a meaningful measure of long-term progress in creating shareholder value. It is intended to be all-inclusive regarding changes in book value per share, and uses originally reported book value per share in cases where book value per share has been adjusted, such as adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.
  • 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.

 

Cincinnati Financial Corporation
Balance Sheet Reconciliation


(Dollars are per outstanding share)

Three months ended December 31,


Twelve months ended December 31,


2014


2013


2014


2013

Value creation ratio:












   End of period book value