þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Ohio | 31-0746871 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
6200 S. Gilmore Road, Fairfield, Ohio | 45014-5141 | |
(Address of principal executive offices) | (Zip code) |
Cincinnati Financial Corporation | ||
2 | Form 10-Q for the quarter ended September 30, 2006 |
September 30, | December 31, | |||||||
(Dollars in millions except per share data) | 2006 | 2005 | ||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Investments |
||||||||
Fixed maturities, at fair value (amortized cost: 2006$5,719; 2005$5,387) |
$ | 5,790 | $ | 5,476 | ||||
Equity securities, at fair value (cost: 2006$2,574; 2005$2,128) |
7,256 | 7,106 | ||||||
Short-term investments, at fair value (amortized cost: 2005$75) |
0 | 75 | ||||||
Other invested assets |
58 | 45 | ||||||
Cash and cash equivalents |
239 | 119 | ||||||
Securities lending collateral |
1,016 | 0 | ||||||
Investment income receivable |
115 | 117 | ||||||
Finance receivable |
106 | 105 | ||||||
Premiums receivable |
1,166 | 1,116 | ||||||
Reinsurance receivable |
701 | 681 | ||||||
Prepaid reinsurance premiums |
13 | 14 | ||||||
Deferred policy acquisition costs |
458 | 429 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: 2006$253; 2005$232) |
185 | 168 | ||||||
Other assets |
63 | 66 | ||||||
Separate accounts |
505 | 486 | ||||||
Total assets |
$ | 17,671 | $ | 16,003 | ||||
LIABILITIES |
||||||||
Insurance reserves |
||||||||
Loss and loss expense reserves |
$ | 3,878 | $ | 3,661 | ||||
Life policy reserves |
1,389 | 1,343 | ||||||
Unearned premiums |
1,623 | 1,559 | ||||||
Securities lending payable |
1,016 | 0 | ||||||
Other liabilities |
459 | 455 | ||||||
Deferred income tax |
1,497 | 1,622 | ||||||
Notes payable |
49 | 0 | ||||||
6.125% senior notes due 2034 |
371 | 371 | ||||||
6.9% senior debentures due 2028 |
28 | 28 | ||||||
6.92% senior debenture due 2028 |
392 | 392 | ||||||
Separate accounts |
505 | 486 | ||||||
Total liabilities |
11,207 | 9,917 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, par value-$2 per share; authorized: 2006-500 million shares, 2005-
500 million shares; issued: 2006-195 million shares, 2005-194 million shares |
391 | 389 | ||||||
Paid-in capital |
1,005 | 969 | ||||||
Retained earnings |
2,714 | 2,088 | ||||||
Accumulated other comprehensive income |
3,093 | 3,284 | ||||||
Treasury stock at cost (200622 million shares, 200520 million shares) |
(739 | ) | (644 | ) | ||||
Total shareholders equity |
6,464 | 6,086 | ||||||
Total liabilities and shareholders equity |
$ | 17,671 | $ | 16,003 | ||||
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 3 |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
(In millions except per share data) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
REVENUES |
||||||||||||||||
Earned premiums |
||||||||||||||||
Property casualty |
$ | 791 | $ | 765 | $ | 2,362 | $ | 2,283 | ||||||||
Life |
28 | 25 | 84 | 78 | ||||||||||||
Investment income, net of expenses |
144 | 134 | 425 | 390 | ||||||||||||
Realized investment gains and losses |
0 | 16 | 671 | 38 | ||||||||||||
Other income |
4 | 4 | 14 | 12 | ||||||||||||
Total revenues |
967 | 944 | 3,556 | 2,801 | ||||||||||||
BENEFITS AND EXPENSES |
||||||||||||||||
Insurance losses and policyholder benefits |
549 | 528 | 1,596 | 1,470 | ||||||||||||
Commissions |
156 | 160 | 478 | 476 | ||||||||||||
Other operating expenses |
83 | 74 | 243 | 213 | ||||||||||||
Taxes, licenses and fees |
19 | 17 | 58 | 52 | ||||||||||||
Increase in deferred policy acquisition costs |
(5 | ) | (5 | ) | (27 | ) | (23 | ) | ||||||||
Interest expense |
13 | 13 | 39 | 39 | ||||||||||||
Other expenses |
4 | 6 | 12 | 12 | ||||||||||||
Total benefits and expenses |
819 | 793 | 2,399 | 2,239 | ||||||||||||
INCOME BEFORE INCOME TAXES |
148 | 151 | 1,157 | 562 | ||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
||||||||||||||||
Current |
23 | 19 | 363 | 126 | ||||||||||||
Deferred |
10 | 15 | (6 | ) | 17 | |||||||||||
Total provision for income taxes |
33 | 34 | 357 | 143 | ||||||||||||
NET INCOME |
$ | 115 | $ | 117 | $ | 800 | $ | 419 | ||||||||
PER COMMON SHARE |
||||||||||||||||
Net incomebasic |
$ | 0.67 | $ | 0.67 | $ | 4.61 | $ | 2.39 | ||||||||
Net incomediluted |
$ | 0.66 | $ | 0.66 | $ | 4.56 | $ | 2.37 |
Cincinnati Financial Corporation | ||
4 | Form 10-Q for the quarter ended September 30, 2006 |
Nine months ended Sept. 30, | ||||||||
(In millions) | 2006 | 2005 | ||||||
(unaudited) | ||||||||
COMMON STOCK NUMBER OF SHARES |
||||||||
Beginning of year |
174 | 167 | ||||||
5% stock dividend |
0 | 9 | ||||||
Stock options exercised |
1 | 0 | ||||||
Purchase of treasury shares |
(2 | ) | (1 | ) | ||||
End of period |
173 | 175 | ||||||
COMMON STOCK |
||||||||
Beginning of year |
$ | 389 | $ | 370 | ||||
5% stock dividend |
0 | 19 | ||||||
Stock options exercised |
2 | 0 | ||||||
End of period |
391 | 389 | ||||||
PAID-IN CAPITAL |
||||||||
Beginning of year |
969 | 618 | ||||||
5% stock dividend |
0 | 341 | ||||||
Stock options exercised |
22 | 6 | ||||||
Share-based compensation |
14 | 0 | ||||||
End of period |
1,005 | 965 | ||||||
RETAINED EARNINGS |
||||||||
Beginning of year |
2,088 | 2,057 | ||||||
Net income |
800 | 419 | ||||||
5% stock dividend |
0 | (360 | ) | |||||
Dividends declared |
(174 | ) | (158 | ) | ||||
End of period |
2,714 | 1,958 | ||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME |
||||||||
Beginning of year |
3,284 | 3,787 | ||||||
Change in accumulated other comprehensive income, net |
(191 | ) | (458 | ) | ||||
End of period |
3,093 | 3,329 | ||||||
TREASURY STOCK |
||||||||
Beginning of year |
(644 | ) | (583 | ) | ||||
Purchase |
(95 | ) | (45 | ) | ||||
Reissued for stock options |
0 | 2 | ||||||
End of period |
(739 | ) | (626 | ) | ||||
Total shareholders equity |
$ | 6,464 | $ | 6,015 | ||||
COMPREHENSIVE INCOME |
||||||||
Net income |
$ | 800 | $ | 419 | ||||
Change in accumulated other comprehensive income, net |
(191 | ) | (458 | ) | ||||
Total comprehensive income |
$ | 609 | $ | (39 | ) | |||
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 5 |
Nine months ended Sept. 30, | ||||||||
(In millions) | 2006 | 2005 | ||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 800 | $ | 419 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation, amortization and other non-cash items |
26 | 22 | ||||||
Share-based compensation expense |
14 | 0 | ||||||
Realized (gains) on investments |
(671 | ) | (38 | ) | ||||
Interest credited to contract holders |
22 | 21 | ||||||
Changes in: |
||||||||
Investment income receivable |
2 | (7 | ) | |||||
Premiums and reinsurance receivable |
(69 | ) | (75 | ) | ||||
Deferred policy acquisition costs |
(27 | ) | (24 | ) | ||||
Other assets |
3 | (11 | ) | |||||
Loss and loss expense reserves |
217 | 157 | ||||||
Life policy reserves |
53 | 83 | ||||||
Unearned premiums |
64 | 67 | ||||||
Other liabilities |
(12 | ) | (20 | ) | ||||
Deferred income tax |
(6 | ) | 17 | |||||
Current income tax |
4 | (46 | ) | |||||
Net cash provided by operating activities |
420 | 565 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Sale of fixed maturities investments |
76 | 156 | ||||||
Call or maturity of fixed maturities investments |
225 | 400 | ||||||
Sale of equity securities investments |
850 | 70 | ||||||
Collection of finance receivables |
26 | 24 | ||||||
Purchase of fixed maturities investments |
(611 | ) | (1,085 | ) | ||||
Purchase of equity securities investments |
(644 | ) | (136 | ) | ||||
Change in short-term investments, net |
79 | 19 | ||||||
Investment in buildings and equipment, net |
(37 | ) | (34 | ) | ||||
Investment in finance receivables |
(30 | ) | (29 | ) | ||||
Change in other invested assets, net |
(10 | ) | (7 | ) | ||||
Change in securities lending collateral |
(1,016 | ) | 0 | |||||
Net cash used in investing activities |
(1,092 | ) | (622 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Payment of cash dividends to shareholders |
(170 | ) | (151 | ) | ||||
Purchase/issuance of treasury shares |
(95 | ) | (43 | ) | ||||
Increase in notes payable |
49 | 0 | ||||||
Proceeds from stock options exercised |
21 | 7 | ||||||
Contract holder funds deposited |
28 | 77 | ||||||
Contract holder funds withdrawn |
(57 | ) | (41 | ) | ||||
Change in securities lending payable |
1,016 | 0 | ||||||
Excess tax benefits on share-based compensation |
2 | 0 | ||||||
Other |
(2 | ) | 0 | |||||
Net cash provided by (used in) financing activities |
792 | (151 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
120 | (208 | ) | |||||
Cash and cash equivalents at beginning of period |
119 | 306 | ||||||
Cash and cash equivalents at end of period |
$ | 239 | $ | 98 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Interest paid |
$ | 26 | $ | 26 | ||||
Income taxes paid |
360 | 172 | ||||||
Non-cash activities |
||||||||
Conversion and exchanges of investment securities |
$ | 50 | $ | 34 | ||||
Equipment acquired with capital lease obligations |
7 | 0 |
Cincinnati Financial Corporation | ||
6 | Form 10-Q for the quarter ended September 30, 2006 |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Change in other comprehensive income: |
||||||||||||||||
Fixed maturities |
$ | 142 | $ | (93 | ) | $ | (18 | ) | $ | (146 | ) | |||||
Equity securities |
385 | (178 | ) | (296 | ) | (565 | ) | |||||||||
Adjustment to deferred acquisition costs and life policy reserves |
(4 | ) | 3 | 2 | 4 | |||||||||||
Other |
2 | (3 | ) | 3 | 2 | |||||||||||
Income taxes on above |
(184 | ) | 95 | 118 | 247 | |||||||||||
Total |
$ | 341 | $ | (176 | ) | $ | (191 | ) | $ | (458 | ) | |||||
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 7 |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Direct earned premiums |
$ | 826 | $ | 810 | $ | 2,459 | $ | 2,398 | ||||||||
Assumed earned premiums |
6 | 6 | 17 | 21 | ||||||||||||
Ceded earned premiums |
(41 | ) | (51 | ) | (114 | ) | (136 | ) | ||||||||
Net earned premiums |
$ | 791 | $ | 765 | $ | 2,362 | $ | 2,283 | ||||||||
Direct incurred loss and loss expenses |
$ | 533 | $ | 522 | $ | 1,567 | $ | 1,469 | ||||||||
Assumed incurred loss and loss expenses |
3 | 21 | 10 | 33 | ||||||||||||
Ceded incurred loss and loss expenses |
(20 | ) | (42 | ) | (72 | ) | (107 | ) | ||||||||
Net incurred loss and loss expenses |
$ | 516 | $ | 501 | $ | 1,505 | $ | 1,395 | ||||||||
| compensation cost for all stock options granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R) |
Cincinnati Financial Corporation | ||
8 | Form 10-Q for the quarter ended September 30, 2006 |
| compensation cost for all non-vested stock options granted prior to January 1, 2006, that vested during the first nine months of 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and |
| compensation cost for all non-vested stock options that have nonsubstantive vesting requirements, such as those to associates who are eligible for retirement. |
Weighted- | Aggregate | |||||||||||
average exercise | intrinsic | |||||||||||
(Dollars in millions, shares in thousands) | Shares | price | value | |||||||||
2006 |
||||||||||||
Outstanding at beginning of year |
10,589 | $ | 33.70 | |||||||||
Granted/reinstated |
1,372 | 45.26 | ||||||||||
Exercised |
(877 | ) | 23.88 | |||||||||
Forfeited/revoked |
(167 | ) | 35.72 | |||||||||
Outstanding at end of period |
10,917 | 35.91 | $ | 133 | ||||||||
Options exercisable at end of period |
8,220 | $ | 33.60 | $ | 119 | |||||||
Weighted-average fair value of options granted during the period |
10.09 |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||
(In millions except per share data) | 2005 | 2005 | ||||||||
Net income |
As reported | $ | 117 | $ | 419 | |||||
Stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects |
3 | 10 | ||||||||
Pro forma | $ | 114 | $ | 409 | ||||||
Net income per common sharebasic |
As reported | $ | 0.67 | $ | 2.39 | |||||
Pro forma | 0.65 | 2.34 | ||||||||
Net income per common sharediluted |
As reported | $ | 0.66 | $ | 2.37 | |||||
Pro forma | 0.64 | 2.31 |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 9 |
Options outstanding | Options exercisable | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
average | Weighted- | Weighted- | ||||||||||||||||||
(Shares in thousands) | remaining | average exercise | average exercise | |||||||||||||||||
Range of excercise prices | Shares | contractual life | price | Shares | price | |||||||||||||||
$17.07 to 19.34 |
5 | 0.27 | yrs | $ | 18.78 | 5 | $ | 18.78 | ||||||||||||
$20.37 to 24.14 |
188 | 0.53 | yrs | 20.58 | 188 | 20.58 | ||||||||||||||
$26.63 to 29.92 |
1,019 | 3.27 | yrs | 27.06 | 1,019 | 27.06 | ||||||||||||||
$30.60 to 35.00 |
4,687 | 4.44 | yrs | 32.66 | 4,687 | 32.66 | ||||||||||||||
$36.17 to 38.87 |
1,976 | 5.57 | yrs | 38.47 | 1,541 | 38.37 | ||||||||||||||
$41.14 to 45.62 |
3,042 | 8.15 | yrs | 43.19 | 780 | 41.53 | ||||||||||||||
Total |
10,917 | 5.50 | yrs | 35.91 | 8,220 | 33.60 | ||||||||||||||
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Service cost |
$ | 4 | $ | 3 | $ | 12 | $ | 10 | ||||||||
Interest cost |
4 | 3 | 10 | 9 | ||||||||||||
Expected return on plan assets |
(3 | ) | (3 | ) | (9 | ) | (9 | ) | ||||||||
Amortization |
1 | 0 | 2 | 0 | ||||||||||||
Net pension expense |
$ | 6 | $ | 3 | $ | 15 | $ | 10 | ||||||||
Cincinnati Financial Corporation | ||
10 | Form 10-Q for the quarter ended September 30, 2006 |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 11 |
| Commercial lines property casualty insurance |
| Personal lines property casualty insurance |
| Life insurance |
| Investment operations |
| All three insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include separate account investment management fees. |
| Our investment operations revenues are pretax net investment income plus realized investment gains and losses. |
| Other revenues are primarily finance/lease income. |
| Income before income taxes for the insurance segments is defined as underwriting income or loss. |
o | For commercial lines and personal lines insurance segments, we calculate underwriting income or loss by recording premiums earned minus loss and loss expenses and underwriting expenses incurred. | ||
o | For the life insurance segment, we calculate underwriting income or loss by recording premiums earned and separate account investment management fees, minus contract holder benefits and expenses incurred, plus investment interest credited to contract holders. |
| Income before income taxes for the investment operations segment is net investment income plus realized investment gains and losses for all fixed-maturity and equity security investments of the entire company, minus investment interest credited to contract holders of the life insurance segment. |
| Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters. |
Cincinnati Financial Corporation | ||
12 | Form 10-Q for the quarter ended September 30, 2006 |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Revenues: |
||||||||||||||||
Commercial lines insurance |
||||||||||||||||
Commercial casualty |
$ | 207 | $ | 193 | $ | 613 | $ | 566 | ||||||||
Commercial property |
123 | 113 | 367 | 347 | ||||||||||||
Commercial auto |
113 | 115 | 337 | 340 | ||||||||||||
Workers compensation |
93 | 82 | 271 | 244 | ||||||||||||
Specialty packages |
35 | 34 | 106 | 103 | ||||||||||||
Surety and executive risk |
24 | 21 | 69 | 59 | ||||||||||||
Machinery and equipment |
7 | 6 | 20 | 19 | ||||||||||||
Total commercial lines insurance |
602 | 564 | 1,783 | 1,678 | ||||||||||||
Personal lines insurance |
||||||||||||||||
Personal auto |
95 | 107 | 294 | 329 | ||||||||||||
Homeowner |
72 | 72 | 219 | 209 | ||||||||||||
Other personal lines |
22 | 22 | 66 | 67 | ||||||||||||
Total personal lines insurance |
189 | 201 | 579 | 605 | ||||||||||||
Life insurance |
28 | 26 | 86 | 81 | ||||||||||||
Investment operations |
144 | 150 | 1,096 | 428 | ||||||||||||
Other |
4 | 3 | 12 | 9 | ||||||||||||
Total |
$ | 967 | $ | 944 | $ | 3,556 | $ | 2,801 | ||||||||
Income (loss) before income taxes: |
||||||||||||||||
Insurance underwriting results: |
||||||||||||||||
Commercial lines insurance |
$ | 39 | $ | 27 | $ | 153 | $ | 182 | ||||||||
Personal lines insurance |
(8 | ) | (1 | ) | (16 | ) | 23 | |||||||||
Life insurance |
0 | 0 | 2 | 5 | ||||||||||||
Investment operations |
130 | 137 | 1,056 | 390 | ||||||||||||
Other |
(13 | ) | (12 | ) | (38 | ) | (38 | ) | ||||||||
Total |
$ | 148 | $ | 151 | $ | 1,157 | $ | 562 | ||||||||
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
Identifiable assets: |
||||||||
Property casualty insurance |
$ | 2,309 | $ | 2,167 | ||||
Life insurance |
856 | 845 | ||||||
Investment operations |
13,161 | 12,774 | ||||||
Other |
1,345 | 217 | ||||||
Total |
$ | 17,671 | $ | 16,003 | ||||
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 13 |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
| 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 |
| Inaccurate estimates or assumptions used for critical accounting estimates |
| Events or actions, including unauthorized intentional circumvention of controls, that reduce the companys future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 |
| Events or conditions that could weaken or harm the companys relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the companys opportunities for growth, such as: |
o | Downgrade of the companys financial strength ratings, | ||
o | Concerns that doing business with the company is too difficult | ||
o | Perceptions that the companys level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace or | ||
o | Regulations or laws that change industry or company practices for our agents. |
| Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements |
| Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for non-payment or delay in payment by reinsurers |
| Increased competition that could result in a significant reduction in the companys premium growth rate |
| Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly price risks, which could decrease our competitive advantages |
| Actions of insurance departments, state attorneys general or other regulatory agencies that: |
o | Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations | ||
o | Increase our expenses | ||
o | 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 | ||
o | Limit our ability to set fair, adequate and reasonable rates | ||
o | Place us at a disadvantage in the marketplace or | ||
o | Restrict our ability to execute our business model, including the way we compensate agents |
Cincinnati Financial Corporation | ||
14 | Form 10-Q for the quarter ended September 30, 2006 |
| Sustained decline in overall stock market values negatively affecting the companys equity portfolio and book value; in particular a sustained decline in the market value of Fifth Third Bancorp (NASDAQ:FITB) shares, a significant equity holding |
| Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products |
| Events that lead to a significant decline in the value of a particular security and impairment of the asset |
| Prolonged medium- and long-term low interest rate environment or other factors that limit the companys ability to generate growth in investment income |
| Adverse outcomes from litigation or administrative proceedings |
| Investment activities or market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940 |
| Events, such as an avian flu epidemic, natural catastrophe or construction delays, that could hamper our ability to assemble our workforce at our headquarters location |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions except share data) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Income statement data |
||||||||||||||||||||||||
Earned premiums |
$ | 819 | $ | 790 | 3.6 | $ | 2,446 | $ | 2,361 | 3.6 | ||||||||||||||
Investment income, net of expenses |
144 | 134 | 7.5 | 425 | 390 | 9.0 | ||||||||||||||||||
Net realized gains and losses (pretax) |
0 | 16 | nm | 671 | 38 | nm | ||||||||||||||||||
Total revenues |
967 | 944 | 2.4 | 3,556 | 2,801 | 27.0 | ||||||||||||||||||
Net income |
115 | 117 | (1.6 | ) | 800 | 419 | 90.7 | |||||||||||||||||
Per share data (diluted) |
||||||||||||||||||||||||
Net income |
0.66 | 0.66 | 0.0 | 4.56 | 2.37 | 92.4 | ||||||||||||||||||
Cash dividends declared |
0.335 | 0.305 | 9.8 | 1.005 | 0.90 | 11.7 | ||||||||||||||||||
Weighted average shares outstanding |
175,260,063 | 176,806,267 | (0.9 | ) | 175,542,616 | 177,212,677 | (0.9 | ) |
| 2006 Realized investment gains were immaterial in the three months ended September 30, 2006. Realized investment gains in the nine months ended September 30, 2006, raised net income by $426 million, or $2.43 per share, after applicable income taxes. The sale of our ALLTEL holding contributed $412 million, or $2.34 per share, of the gain in the nine-month period. |
| 2005 Realized investment gains in the three months ended September 30, 2005, raised net income by $10 million, or 5 cents per share, after applicable income taxes. Realized investment gains in the nine months |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 15 |
At September 30, | At December 31, | |||||||
(Dollars in millions except share data) | 2006 | 2005 | ||||||
Balance sheet data |
||||||||
Invested assets |
$ | 13,104 | $ | 12,702 | ||||
Total assets |
17,671 | 16,003 | ||||||
Short-term debt |
49 | 0 | ||||||
Long-term debt |
791 | 791 | ||||||
Shareholders equity |
6,464 | 6,086 | ||||||
Book value per share |
37.32 | 34.88 | ||||||
Debt-to-capital ratio |
11.5 | % | 11.5 | % |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Performance measures |
||||||||||||||||
Comprehensive income (loss) |
$ | 455 | $ | (59 | ) | $ | 609 | $ | (39 | ) | ||||||
Return on equity, annualized |
7.4 | % | 7.7 | % | 17.0 | % | 9.1 | % | ||||||||
Return on equity, annualized,
based on comprehensive income |
29.1 | (3.9 | ) | 12.9 | (0.8 | ) |
Cincinnati Financial Corporation | ||
16 | Form 10-Q for the quarter ended September 30, 2006 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions except share data) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Property casualty highlights |
||||||||||||||||||||||||
Written premiums |
$ | 780 | $ | 761 | 2.4 | $ | 2,423 | $ | 2,349 | 3.2 | ||||||||||||||
Earned premiums |
791 | 765 | 3.4 | 2,362 | 2,283 | 3.5 | ||||||||||||||||||
Underwriting profit |
31 | 26 | 19.0 | 137 | 205 | (33.4 | ) | |||||||||||||||||
GAAP combined ratio |
96.1 | 96.6 | 94.2 | 91.0 | ||||||||||||||||||||
Statutory combined ratio |
96.4 | 96.6 | 93.2 | 90.1 |
| Maintaining our strong relationships with our established agencies, writing a significant portion of each agencys business and attracting new agencies In 2006, we expect to continue to rank No. 1 or No. 2 by premium volume in at least 74 percent or more of the agency locations that have marketed our products for more than five years. We are targeting 55 to 60 new agency appointments. In the first nine months of 2006, we made 49 agency appointments. These new appointments and other changes in agency structures brought total reporting agency locations to 1,286, a net increase of 34 since year-end 2005. | |
In 2006, we expect to make further progress in our efforts to improve service to and communication with our agencies. Among other actions, we subdivided two field marketing territories in the first nine months of the year and staffed a third territory in October, giving our field marketing representatives more time to spend in each agency. We also continued to enhance our expanding portfolio of software. We discussed our technology plans for 2006 in our 2005 Annual Report on Form 10-K, Item 1, Technology Solutions, Page 4. In the nine months ended September 30, 2006, we made progress toward the technology objectives we established for the year: | ||
Three commercial lines and one personal lines system form the core of our quoting and policy processing systems. Agencies access our quoting and policy processing systems via CinciLink®, our secure agency-only Web site. |
o | WinCPP® is an online commercial lines rating and quoting system for businessowner, commercial package, commercial auto and workers compensation policies. We are on track to achieve our 2006 objective of rolling out quoting for specialty programs for metalworkers and garage owners. We now expect to add data sharing capabilities with agency systems in early 2007. | ||
o | e-CLAS is a commercial lines policy processing system. Businessowner Policy (BOP) and Dentists Package Policy (DBOP) processing now is available through e-CLAS in Arkansas, Indiana, Michigan, Ohio and Pennsylvania. We are moving forward with development of commercial auto and commercial package policy processing capabilities. | ||
o | CinciBond is an automated system to process license and permit surety bonds. CinciBond now is deployed in Indiana, Illinois, North Carolina, Ohio and Tennessee, with Georgia, Minnesota, Missouri, Utah and Vermont scheduled for later in 2006. | ||
o | Diamond is our personal lines policy processing system. In the first nine months of 2006, $424 million of our $570 million of personal lines written premium was issued through Diamond. In 2006, agents in Georgia, Kentucky, Minnesota, Missouri, Tennessee and Wisconsin have begun using Diamond. As a result, Diamond is in use in states that represent approximately 90 percent of our personal lines premium volume. Our plans for 2007 include the introduction of Diamond in Pennsylvania and Virginia and other low personal lines volume states. |
o | CMS is a claims file management system. We continue to refine the system to add capabilities to make our associates more effective. During the first nine months of 2006, we issued tablet computers to our field claims representatives. These units allow our claims representatives to view and enter information into |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 17 |
CMS from any location, including an insureds home or agents office, and to print claims checks using wireless printers. Agent access to selected CMS information is planned for 2007. | |||
o | i-View is a commercial lines policy imaging and workflow system now in use by all of our commercial lines underwriting teams. During the remainder of the year, we expect to begin providing field and other headquarters associates with access to these electronic files. |
We also continue to work to give independent agents enhanced access to Cincinnatis systems and client data quickly and easily through their agency systems. In 2006 and 2007, we plan to advance our use of industry integration products, TransactNOW® and Transformation Station®. | ||
| Achieving above-industry-average growth in property casualty statutory net written premiums and maintaining industry-leading profitability by leveraging our regional franchise and proven agency-centered business strategy We now expect consolidated property casualty written premium growth of at least 2 percent in 2006 compared with the 2.6 percent increase in 2005. We anticipate continued above-average growth in commercial lines written premiums. We may not achieve our objective of above-industry-average growth in total in 2006 because of the rate-driven declines we anticipate in personal lines written premiums. | |
We now anticipate a combined ratio for 2006 in the range of 94 percent to 95 percent (93 percent to 94 percent on a statutory basis), primarily due to the level of catastrophe losses through the first nine months of 2006 and preliminary estimates of catastrophe losses in October 2006. Previously, our combined ratio estimate for 2006 was 92 percent to 94 percent on a GAAP basis compared with 89.2 percent on a GAAP basis in 2005. Considerations include: |
o | Catastrophe losses of at least 5.0 percentage points on combined ratio We originally allowed for full year catastrophe losses, net of reinsurance, of approximately $125 million to $145 million, contributing in the range of 4.0 to 4.5 percentage points to the full-year 2006 combined ratio. We had raised our estimate from the historical range of 3.0 to 3.5 percentage points to account for the potential of severe weather, such as weve seen in the past two years and for the higher retention on our 2006 catastrophe reinsurance treaty. | ||
Catastrophe losses in the third quarter of 2006 totaled $27 million, reflecting $19 million from events during the period and $8 million of net unfavorable development from prior period catastrophes, compared with $66 million in the third quarter of 2005. The development of prior period catastrophe losses primarily relates to the April 13-15 wind and hailstorm in the Midwest. Policyholders in the Indianapolis market continue to report hail damage that has caused our estimate of total losses from this event to rise by approximately $10 million from the second-quarter 2006 level. | |||
Catastrophe losses for the first nine months of 2006 totaled $130 million, contributing 5.5 percentage points to the nine-month combined ratio, compared with $83 million, contributing 3.6 percentage points, in the first nine months of 2005. | |||
In addition to catastrophe losses reported for the first nine months of 2006, a Midwest storm in early October caused heavy hail damage in central Ohio, resulting in at least $35 million of losses for our policyholders, which will be included in fourth-quarter results. That estimate does not take into account any catastrophe activity that may occur in the remainder of the fourth quarter of 2006 or potential development from events in prior periods. | |||
o | Rising loss severity, including an increase in the number of losses greater than $1 million, resulted in higher loss and loss expense ratios excluding catastrophe losses for the first nine months of 2006. Our initial analysis has turned up no new trend in the sources of these losses no geographic concentration, no policy age concentration, no cause of loss concentration and different influences on each of the three most affected business lines commercial auto, workers compensation and homeowners. | ||
We believe commercial auto results reflected the increasing competition in the commercial lines marketplace. Workers compensation reflected a review we made of established case reserves. Homeowner results appeared to reflect industrywide trends of higher material costs and insured property values as well as rising deductibles. Underwriting results remained healthy for our other business areas, including our two largest commercial business lines commercial property and commercial casualty and our largest personal business line personal auto. | |||
o | Lower level of savings from loss reserve development We continue to believe that savings from favorable loss reserve development from prior accident years is likely to reduce the 2006 combined ratio in line with historical levels of 2 to 3 percentage points. Higher-than-normal savings, particularly for liability coverages, reduced the 2005 combined ratio by 5.2 percentage points and the 2004 combined ratio by 6.7 percentage points. Net savings for the nine months ended September 30, 2006, was 1.5 percent points. In the first nine months of 2005, savings lowered the loss and loss expense ratio by 3.5 percentage points. |
Cincinnati Financial Corporation | ||
18 | Form 10-Q for the quarter ended September 30, 2006 |
o | The degree of price softening in the commercial lines marketplace will affect the 2006 loss and loss expense ratio for that business segment. That ratio may move up slightly as pricing becomes more competitive. | ||
o | We believe we have taken actions to improve competitiveness for personal lines by adjusting pricing. These changes could lead to a full year loss and loss expense ratio above the improved level we had achieved in 2005. The ratio may increase further, if premiums continue to decline. | ||
o | For both commercial lines and personal lines, lower growth rates could lead to further unfavorable year-over-year comparisons in the ratios of deferred acquisition costs and other underwriting expenses to earned premiums. Continued investment in technology also may contribute to an increase in other underwriting expenses. |
| Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation For full-year 2006, we now are estimating that pretax investment income growth could be in the range of 8.0 percent to 8.5 percent. This outlook is based on strong cash flows from insurance operations, a higher-than-historical allocation of new cash flow to fixed-maturity securities over the last two years and an increase in the general level of interest rates. | |
We do not establish annual capital appreciation targets. Over the long term, our target is to have the equity portfolio outperform the Standard & Poors 500 Index, a common benchmark of market performance. In the first nine months of 2006, our equity portfolios total return of 7.9 percent was below the 8.5 percent return for the Index. Over the five years ended September 30, 2006, our compound annual equity portfolio return was 0.9 percent compared with a compound annual total return of 7.0 percent for the Index. Our equity portfolio performance reflected the decline in the market value of our holdings of Fifth Third common stock, which generated a negative annualized return of 6.7 percent for the five-year period ended September 30, 2006. | ||
| Increasing the total return to shareholders through a combination of higher earnings per share, growth in book value and increasing dividends We do not announce annual targets for earnings per share or book value. Earnings results in 2006 are being tempered by the adoption of SFAS No. 123(R), which requires expensing the cost of associate stock options on our income statement. We continue to anticipate that stock option expense will reduce full-year earnings per share by approximately 8 cents. | |
Over the long term, we look for our earnings per share growth to outpace that of a peer group of national and regional property casualty insurance companies. Long-term book value growth should approximate that of our equity portfolio. The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. In February 2006, the board increased the indicated annual dividend rate for the 46th consecutive year, a record we believe is matched by only 11 other U.S. publicly traded corporations. | ||
Over the long-term, we also seek to increase earnings per share, book value and dividends at a rate that would allow long-term total return to our shareholders to exceed that of the Standard & Poors Composite 1500 Property Casualty Insurance Index. As provided in our 2006 Proxy Statement, over the five years ended December 31, 2005, our total return to shareholders of 40.9 percent matched the return on that Index. | ||
| Maintaining financial strength by keeping the ratio of debt to capital below 15 percent and purchasing reinsurance to provide investment flexibility - Based on our present capital requirements, we do not anticipate a material increase in debt levels during the remainder of 2006. Our consolidated debt-to-capital ratio was 11.5 percent at September 30, 2006 and December 31, 2005. | |
Our property casualty reinsurance program for 2006 maintains the balance between the cost of the program and the level of risk we retain. We now anticipate that under the new program, our 2006 reinsurance premiums should be $11 million to $12 million lower than 2005, without taking into account the reinstatement premium we incurred in 2005. For more details on our reinsurance programs, please see our 2005 Annual Report on Form 10-K, Item 7, 2006 Reinsurance Programs, Page 68. | ||
Our property casualty and life operations are awarded insurer financial strength ratings. These ratings assess an insurers ability to meet its financial obligations to policyholders and do not necessarily address matters that may be important to shareholders. | ||
On September 15, 2006, Fitch Ratings affirmed the AA- issuer default rating and A+ senior debt ratings of Cincinnati Financial Corporation. Further, it affirmed the AA insurer financial strength ratings of our three property casualty companies and The Cincinnati Life Insurance Company. The AA rating is at the fourth highest level of Fitchs 21 rating levels. Fitch said the ratings are based on the strong financial condition of our operating subsidiaries, excellent financial flexibility and successful total return investment strategy. The ratings |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 19 |
Parent Company | Property Casualty | ||||||||||||
Senior Debt | Insurance | Life Insurance | |||||||||||
Rating | Subsidiaries | Subsidiary | Outlook | ||||||||||
Financial Strength Ratings: | |||||||||||||
A. M. Best Co.
|
aa- | A++ | Superior | A+ | Superior | Stable | |||||||
Fitch Ratings
|
A+ | AA | Very Strong | AA | Very Strong | Stable | |||||||
Moodys Investors Services
|
A2 | Aa3 | Excellent | - | - | Stable | |||||||
Standard & Poors Ratings Services
|
A | AA- | Very Strong | AA- | Very Strong | Stable |
Cincinnati Financial Corporation | ||
20 | Form 10-Q for the quarter ended September 30, 2006 |
| Commercial lines property casualty insurance |
| Personal lines property casualty insurance |
| Life insurance |
| Investments operations |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 21 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Written premiums |
$ | 780 | $ | 761 | 2.4 | $ | 2,423 | $ | 2,349 | 3.2 | ||||||||||||||
Earned premiums |
$ | 791 | $ | 765 | 3.4 | $ | 2,362 | $ | 2,283 | 3.5 | ||||||||||||||
Loss and loss expenses excluding catastrophes |
489 | 435 | 12.2 | 1,375 | 1,312 | 4.8 | ||||||||||||||||||
Catastrophe loss and loss expenses |
27 | 66 | (58.2 | ) | 130 | 83 | 57.2 | |||||||||||||||||
Commission expenses |
147 | 151 | (2.6 | ) | 452 | 451 | 0.4 | |||||||||||||||||
Underwriting expenses |
94 | 84 | 11.4 | 256 | 225 | 13.7 | ||||||||||||||||||
Policyholder dividends |
3 | 3 | 39.4 | 12 | 7 | 56.5 | ||||||||||||||||||
Underwriting profit |
$ | 31 | $ | 26 | 19.0 | $ | 137 | $ | 205 | (33.4 | ) | |||||||||||||
Ratios as a percent of earned premiums: |
||||||||||||||||||||||||
Loss and loss expenses excluding catastrophes |
61.7 | % | 56.9 | % | 58.3 | % | 57.5 | % | ||||||||||||||||
Catastrophe loss and loss expenses |
3.5 | 8.6 | 5.5 | 3.6 | ||||||||||||||||||||
Loss and loss expenses |
65.2 | 65.5 | 63.8 | 61.1 | ||||||||||||||||||||
Commission expenses |
18.7 | 19.8 | 19.1 | 19.7 | ||||||||||||||||||||
Underwriting expenses |
11.8 | 11.0 | 10.8 | 9.9 | ||||||||||||||||||||
Policyholder dividends |
0.4 | 0.3 | 0.5 | 0.3 | ||||||||||||||||||||
Combined ratio |
96.1 | % | 96.6 | % | 94.2 | % | 91.0 | % | ||||||||||||||||
| Premium growth Commercial lines net written premiums reached a record level for the nine months ended September 30, 2006. That growth more than offset the expected decline in personal lines written premiums. The net effect of reinsurance reinstatement premiums and assumed pool adjustments in the third quarter of 2005 |
increased the net written premium growth rate by 0.5 and 0.1 percentage points, respectively, for the three and nine months ended September 30, 2006. | ||
Total new business written directly by agencies was $98 million and $79 million in the third quarters of 2006 and 2005, respectively, and $268 million and $231 million in the nine months ended September 30, 2006 and 2005. A record level of new commercial lines business in the first nine months of 2006 more than offset a decline in new personal lines business. In the third quarter, new business grew for both commercial lines and personal lines. | ||
| Change in loss and loss expense ratio excluding catastrophes For the three months ended September 30, 2006, the consolidated property casualty combined ratio improved from the year-ago period due to a lower level of commercial lines catastrophe losses, which offset a rise in loss severity in selected commercial and personal business lines and a lower level of savings from favorable development on prior period reserves. For the nine months ended September 30, 2006, the ratio increased due to increasingly competitive pricing, rising loss severity, increased catastrophe losses, a lower level of savings from favorable development on prior period reserves and higher underwriting expenses. The loss and loss expense ratio for the nine months ended September 30, 2005, also included 1.1 percentage points from a single large loss that was insufficiently covered by our facultative reinsurance. | |
For the three months ended September 30, 2006, net savings from favorable development on prior period reserves lowered the loss and loss expense ratio by 4.9 percentage points compared with 6.5 percentage points in last years third quarter. Net development for the nine months ended September 30, 2006, lowered the loss and loss expense ratio by 1.5 percentage points. In the first nine months of 2005, net development lowered the loss and loss expense ratio by 3.5 percentage points. The year-over-year differences largely related to development on commercial casualty losses, which can fluctuate due to the nature and size of liability policies and limits, such as those on commercial umbrella policies. |
Cincinnati Financial Corporation | ||
22 | Form 10-Q for the quarter ended September 30, 2006 |
| Higher catastrophe losses Catastrophe losses for the three and nine months ended September 30, 2006, were $27 million and $130 million, contributing 3.5 and 5.5 percentage points to the combined ratio. In the three and nine months ended September 30, 2005, catastrophe losses were $66 million and $83 million, contributing 8.6 and 3.6 percentage points to the combined ratio. |
Reported | Loss Estimate | |||||||||||
Claims | (pretax, net | |||||||||||
(as of | of reinsurance, | |||||||||||
Nine-month 2006 Events | Dates | States Primarily Affected | October 27) | as of September 30) | ||||||||
Midwest tornadoes and |
Mar. 11-13 | Arkansas, Illinois, Indiana, Kansas, | ||||||||||
severe weather |
Missouri, Oklahoma | 1,629 | $38 million | |||||||||
Midwest wind and hail |
Apr. 2-3 | Arkansas, Illinois, Indiana, Kentucky, | 1,227 | $18 million | ||||||||
Missouri, Tennessee | ||||||||||||
Midwest wind and hail |
Apr. 6-8 | Alabama, Georgia, Indiana, Kansas, | 976 | $10 million | ||||||||
Kentucky, Nebraska, Ohio, Tennessee | ||||||||||||
Midwest wind and hail |
Apr. 13-15 | Illinois, Indiana, Iowa, Wisconsin | 3,360 | $38 million | ||||||||
Midwest wind, hail and flood |
Jun. 18-22 | Indiana, Ohio, Wisconsin | 535 | $5 million | ||||||||
Midwest wind, hail and flood |
Jul. 19-21 | Illinois, Kentucky, Missouri, | 472 | $6 million | ||||||||
Tennessee and Wisconsin | ||||||||||||
Midwest wind, hail and flood |
Aug. 23-25 | Illinois, Indiana, Minnesota, Wisconsin | 337 | $8 million |
| Change in commission, underwriting and policyholder dividend expense ratio For the three months ended September 30, 2006, the total commission and underwriting expense ratio declined 0.2 percentage points, as lower commission accruals offset higher underwriting expenses. For the nine months ended September 30, 2006, the ratio rose by 0.5 percentage points as higher underwriting expenses more than offset lower commission accruals. The adoption of stock option expensing contributed 0.4 and 0.5 percentage points to the ratio in the three and nine months ended September 30, 2006. |
| Premiums Commercial lines written and earned premiums rose in the three and nine months ended September 30, 2006, due to our strong agency relationships, which promoted healthy new business growth and policyholder retention. The effect of reinsurance reinstatement premiums in the third quarter of 2005 increased the commercial lines net written premium growth rate by 1.0 and 0.3 percentage points, respectively, for the three and nine months ended September 30, 2006. | |
The competitive pricing environment continues, but we continue to select quality risks and to underwrite and price them case by case. On an ongoing basis, we monitor loss patterns and structure our products and our pricing accordingly. We also continued to see a shift in our customer base to slightly larger accounts as our policy count remained relatively stable. | ||
We believe that our written premium growth rate continues to exceed the average for the overall commercial lines industry. A.M. Best estimates that overall commercial lines industry net written premium growth was 1.9 percent for the first six months of 2006. New commercial lines business written directly by agencies in the three months ended September 30, 2006, grew by 25.1 percent to a record $89 million from $71 million in the comparable 2005 period. New commercial lines business in the nine months ended September 30, 2006, rose 18.5 percent to $244 million from $206 million in the comparable 2005 period. | ||
| Combined ratio Our commercial lines combined ratios exceeded our targeted levels in the three and nine months ended September 30, 2006, largely because of rising loss severity including an increase in the number of losses greater than $1 million. Commercial auto results reflected the increasing competition in the commercial lines marketplace and workers compensation results reflected a review we conducted of established case reserves. | |
Our commercial lines combined ratio for the three months ended September 30, 2006, was lower than the year earlier period, largely due to the significantly lower level of catastrophe losses this year, which offset the higher loss and loss expense ratio excluding catastrophe losses. Our commercial lines combined ratio for the nine months ended September 30, 2006, was higher than the year earlier period due to the higher level of catastrophe losses this year and the increase in the loss and loss expense ratio excluding catastrophe losses. | ||
As discussed below, other factors affecting the comparisons included a lower level of savings from favorable development on prior period reserves, changes in commission and underwriting expenses as well as the adoption of stock option expensing and a single large loss in last years first quarter. |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 23 |
The commercial lines statutory combined ratio was 94.1 percent and 89.0 percent for the three and nine months ended September 30, 2006, compared with 95.6 percent and 88.1 percent for the comparable prior periods. Under statutory accounting principles, stock options expense is not included in the calculation of statutory income. |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Written premiums |
$ | 582 | $ | 546 | 6.5 | $ | 1,853 | $ | 1,741 | 6.4 | ||||||||||||||
Earned premiums |
$ | 602 | $ | 564 | 6.7 | $ | 1,783 | $ | 1,678 | 6.3 | ||||||||||||||
Loss and loss expenses excluding catastrophes |
363 | 307 | 18.1 | 1,020 | 942 | 8.4 | ||||||||||||||||||
Catastrophe loss and loss expenses |
14 | 53 | (73.4 | ) | 77 | 62 | 24.4 | |||||||||||||||||
Commission expenses |
109 | 110 | (0.5 | ) | 331 | 325 | 2.1 | |||||||||||||||||
Underwriting expenses |
74 | 64 | 14.2 | 190 | 160 | 18.5 | ||||||||||||||||||
Policyholder dividends |
3 | 3 | 39.4 | 12 | 7 | 56.5 | ||||||||||||||||||
Underwriting profit |
$ | 39 | $ | 27 | 44.9 | $ | 153 | $ | 182 | (16.0 | ) | |||||||||||||
Ratios as a percent of earned premiums: |
||||||||||||||||||||||||
Loss and loss expenses excluding catastrophes |
60.2 | % | 54.4 | % | 57.3 | % | 56.1 | % | ||||||||||||||||
Catastrophe loss and loss expenses |
2.3 | 9.5 | 4.3 | 3.7 | ||||||||||||||||||||
Loss and loss expenses |
62.5 | 63.9 | 61.6 | 59.8 | ||||||||||||||||||||
Commission expenses |
18.2 | 19.5 | 18.6 | 19.4 | ||||||||||||||||||||
Underwriting expenses |
12.2 | 11.4 | 10.6 | 9.5 | ||||||||||||||||||||
Policyholder dividends |
0.5 | 0.4 | 0.6 | 0.5 | ||||||||||||||||||||
Combined ratio |
93.4 | % | 95.2 | % | 91.4 | % | 89.2 | % | ||||||||||||||||
Cincinnati Financial Corporation | ||
24 | Form 10-Q for the quarter ended September 30, 2006 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Losses $1 million or more |
$ | 51 | 24 | 111.6 | $ | 121 | 93 | 30.4 | ||||||||||||||||
Losses $250 thousand to $1 million |
36 | 27 | 38.0 | 104 | 77 | 34.4 | ||||||||||||||||||
Development and case reserve increases of $250
thousand or more |
46 | 35 | 28.9 | 135 | 103 | 31.7 | ||||||||||||||||||
Other losses excluding catastrophes |
163 | 156 | 4.5 | 464 | 478 | (3.0 | ) | |||||||||||||||||
Total losses incurred excluding catastrophe losses |
296 | 242 | 22.4 | 824 | 751 | 9.7 | ||||||||||||||||||
Catastrophe losses |
14 | 53 | (73.4 | ) | 77 | 62 | 24.4 | |||||||||||||||||
Total losses incurred |
$ | 310 | 295 | 5.1 | $ | 901 | 813 | 10.8 | ||||||||||||||||
Ratios as a percent of earned premiums: |
||||||||||||||||||||||||
Losses $1 million or more |
8.5 | % | 4.3 | % | 6.8 | % | 5.5 | % | ||||||||||||||||
Losses $250 thousand to $1 million |
6.1 | 4.7 | 5.8 | 4.6 | ||||||||||||||||||||
Development and case reserve increases of $250
thousand or more |
7.5 | 6.3 | 7.6 | 6.1 | ||||||||||||||||||||
Other losses excluding catastrophes |
27.1 | 27.6 | 26.0 | 28.5 | ||||||||||||||||||||
Loss ratio excluding catastrophe losses |
49.2 | 42.9 | 46.2 | 44.7 | ||||||||||||||||||||
Catastrophe losses |
2.3 | 9.5 | 4.3 | 3.7 | ||||||||||||||||||||
Total loss ratio |
51.5 | % | 52.4 | % | 50.5 | % | 48.4 | % | ||||||||||||||||
| Commercial casualty Commercial casualty insurance provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including coverage for injuries sustained from products sold as well as coverage for professional services, such as dental care. Specialized casualty policies may include coverage for employment practices liability (EPLI), which protects businesses against claims by employees that their legal rights as employees of the company have been violated, and other acts or failures to act under specified circumstances as well as excess insurance and umbrella liability, including personal umbrella written as an endorsement to commercial umbrella coverages. The commercial casualty business line includes liability coverage written on both a discounted and nondiscounted basis as part of commercial package policies. Our ceded participation in USAIG, a joint underwriting association, from 2003 and prior now is included in the commercial casualty business line. |
| Commercial property Commercial property insurance provides coverage for loss or damage to buildings, inventory and equipment caused by fire, wind, hail, water, theft and vandalism as well as business interruption resulting from a covered loss. Commercial property also includes crime insurance, which provides coverage for losses due to embezzlement or misappropriation of funds by an employee, and inland marine insurance, which provides coverage for a variety of mobile equipment, such as builders risk, |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 25 |
contractors equipment, cargo and electronic data processing equipment. Various property coverages can be written as stand-alone policies or can be added to a package policy. The commercial property business line includes property coverage written on both a nondiscounted and discounted basis as part of commercial package policies. |
| Commercial auto Commercial auto coverages protect businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insureds own vehicle from collision and various other perils, and damages caused by uninsured motorists. |
| Workers compensation Workers compensation coverage protects employers against specified benefits payable under state or federal law for workplace injuries to employees. We write workers compensation coverage in all of our active states except North Dakota, Ohio and West Virginia, where coverage is provided solely by the state instead of by private insurers. |
| Specialty packages Specialty packages include coverages for property, liability and business interruption tailored to meet the needs of specific industry classes, such as artisan contractors, dentists, garage operators, financial institutions, metalworkers, printers, religious institutions, or smaller, main street businesses. Businessowner policies, which combine property, liability and business interruption coverages for small businesses, are included in specialty packages. |
| Surety and executive risk This business line includes: |
| Contract and commercial surety bonds, which guarantee a payment or reimbursement for financial losses resulting from dishonesty, failure to perform and other acts. | ||
| Fidelity bonds, which cover losses that policyholders incur as a result of fraudulent acts by specified individuals or dishonest acts by employees. | ||
| Directors and officers liability insurance, which covers liability for alleged errors in judgment, breaches of duty and wrongful acts related to activities of for-profit or nonprofit organizations. Our directors and officers liability policy can optionally include EPLI coverage. |
| Machinery and equipment Specialized machinery and equipment coverage can provide protection for loss or damage to boilers and machinery, including production and computer equipment, from mechanical breakdown, steam explosion, or artificially generated electrical current. |
Cincinnati Financial Corporation | ||
26 | Form 10-Q for the quarter ended September 30, 2006 |
| The table below provides data for the three- and nine-month periods for the commercial business lines: |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Commercial casualty: |
||||||||||||||||||||||||
Written premiums |
$ | 196 | $ | 183 | 9.3 | $ | 634 | $ | 593 | 7.6 | ||||||||||||||
Earned premiums |
207 | 193 | 9.3 | 613 | 566 | 8.5 | ||||||||||||||||||
Loss and loss expenses incurred |
103 | 92 | 9.7 | 311 | 290 | 6.6 | ||||||||||||||||||
Loss and loss expense ratio |
49.4 | % | 49.3 | % | 50.8 | % | 51.8 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
49.4 | 49.3 | 50.8 | 51.8 | ||||||||||||||||||||
Commercial property: |
||||||||||||||||||||||||
Written premiums |
$ | 126 | $ | 113 | 11.2 | $ | 381 | $ | 361 | 5.5 | ||||||||||||||
Earned premiums |
123 | 113 | 8.8 | 367 | 347 | 5.8 | ||||||||||||||||||
Loss and loss expenses incurred |
68 | 107 | (36.7 | ) | 224 | 236 | (5.2 | ) | ||||||||||||||||
Loss and loss expense ratio |
54.9 | % | 94.3 | % | 61.0 | % | 68.2 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
45.0 | 50.2 | 44.9 | 52.1 | ||||||||||||||||||||
Commercial auto: |
||||||||||||||||||||||||
Written premiums |
$ | 105 | $ | 108 | (2.4 | ) | $ | 345 | $ | 341 | 1.2 | |||||||||||||
Earned premiums |
113 | 115 | (1.5 | ) | 337 | 340 | (0.8 | ) | ||||||||||||||||
Loss and loss expenses incurred |
82 | 69 | 18.4 | 211 | 203 | 4.2 | ||||||||||||||||||
Loss and loss expense ratio |
72.8 | % | 60.6 | % | 62.5 | % | 59.6 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
73.3 | 60.4 | 61.5 | 59.4 | ||||||||||||||||||||
Workers compensation: |
||||||||||||||||||||||||
Written premiums |
$ | 85 | $ | 75 | 13.0 | $ | 288 | $ | 258 | 11.6 | ||||||||||||||
Earned premiums |
93 | 82 | 13.1 | 271 | 244 | 11.4 | ||||||||||||||||||
Loss and loss expenses incurred |
84 | 61 | 38.0 | 228 | 185 | 23.5 | ||||||||||||||||||
Loss and loss expense ratio |
90.3 | % | 74.0 | % | 84.1 | % | 75.9 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
90.3 | 74.0 | 84.1 | 75.9 | ||||||||||||||||||||
Specialty packages: |
||||||||||||||||||||||||
Written premiums |
$ | 35 | $ | 35 | 0.2 | $ | 109 | $ | 105 | 3.0 | ||||||||||||||
Earned premiums |
35 | 34 | 1.2 | 106 | 103 | 3.0 | ||||||||||||||||||
Loss and loss expenses incurred |
26 | 24 | 7.5 | 78 | 73 | 5.8 | ||||||||||||||||||
Loss and loss expense ratio |
74.2 | % | 69.9 | % | 73.5 | % | 71.5 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
67.1 | 60.0 | 60.2 | 66.2 | ||||||||||||||||||||
Surety and executive risk: |
||||||||||||||||||||||||
Written premiums |
$ | 28 | $ | 25 | 10.9 | $ | 74 | $ | 63 | 16.7 | ||||||||||||||
Earned premiums |
24 | 21 | 17.4 | 69 | 59 | 16.9 | ||||||||||||||||||
Loss and loss expenses incurred |
11 | 6 | 76.4 | 38 | 13 | 195.4 | ||||||||||||||||||
Loss and loss expense ratio |
47.3 | % | 31.5 | % | 55.6 | % | 22.0 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
47.3 | 31.5 | 55.6 | 22.0 | ||||||||||||||||||||
Machinery and equipment: |
||||||||||||||||||||||||
Written premiums |
$ | 7 | $ | 7 | (9.5 | ) | $ | 22 | $ | 20 | 5.0 | |||||||||||||
Earned premiums |
7 | 6 | 4.2 | 20 | 19 | 4.5 | ||||||||||||||||||
Loss and loss expenses incurred |
3 | 1 | 119.3 | 7 | 4 | 88.7 | ||||||||||||||||||
Loss and loss expense ratio |
45.2 | % | 21.5 | % | 34.8 | % | 19.3 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
43.1 | 21.3 | 34.0 | 19.3 |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 27 |
Cincinnati Financial Corporation | ||
28 | Form 10-Q for the quarter ended September 30, 2006 |
| Premiums As discussed in our 2005 Annual Report on Form 10-K, a variety of market- and company-specific factors have caused personal lines written premiums to decline on a year-over-year basis for the past five quarters, and earned premiums now are reflecting the written premium trend. The net effect of reinsurance reinstatement premiums and assumed pool adjustments in the third quarter of 2005 reduced the decline in net written premiums by 0.8 and 0.3 percentage points, respectively, for the three and nine months ended September 30, 2006. | |
The same market- and company-specific factors had an impact on new personal lines business through the first half of 2006. Below we discuss rate changes made effective July 1, 2006, that have better positioned our personal lines products in certain markets. As a result of those changes, new personal lines business written directly by agencies was $9 million for the three months ended September 30, 2006, up 14.4 percent from $8 million in the comparable prior period. For the nine months ended September 30, 2006, new personal lines business was $24 million compared with $25 million in the year ago period. | ||
| Combined ratio Our personal lines combined ratio in the three and nine months ended September 30, 2006, rose over the year ago periods, primarily because of higher catastrophe losses. As discussed below, other factors affecting the comparisons included rising loss severity and higher losses greater than $1 million in the homeowner business line and changes in commission and underwriting expenses as well as the adoption of stock option expensing. | |
Our personal lines statutory combined ratio was 104.0 percent and 102.3 percent in the three and nine months ended September 30, 2006, compared with 99.9 percent and 95.7 percent in the comparable prior periods. Under statutory accounting principles, stock options expense is not included in the calculation of statutory income. |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 29 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Written premiums |
$ | 198 | $ | 215 | (8.0) | $ | 570 | $ | 608 | (6.1 | ) | |||||||||||||
Earned premiums |
$ | 189 | $ | 201 | (5.9) | $ | 579 | $ | 605 | (4.4 | ) | |||||||||||||
Loss and loss expenses excluding catastrophes |
126 | 128 | (1.9 | ) | 355 | 370 | (4.2 | ) | ||||||||||||||||
Catastrophe loss and loss expenses |
13 | 13 | 6.4 | 53 | 21 | 153.9 | ||||||||||||||||||
Commission expenses |
38 | 41 | (8.0 | ) | 121 | 126 | (4.1 | ) | ||||||||||||||||
Underwriting expenses |
20 | 20 | 2.3 | 66 | 65 | 1.9 | ||||||||||||||||||
Underwriting profit (loss) |
$ | (8 | ) | $ | (1 | ) | (670.2 | ) | $ | (16 | ) | $ | 23 | (169.2 | ) | |||||||||
Ratios as a percent of earned premiums: |
||||||||||||||||||||||||
Loss and loss expenses excluding |
||||||||||||||||||||||||
catastrophes |
66.6 | % | 63.9 | % | 61.3 | % | 61.1 | % | ||||||||||||||||
Catastrophe loss and loss expenses |
7.1 | 6.3 | 9.2 | 3.5 | ||||||||||||||||||||
Loss and loss expenses |
73.7 | 70.2 | 70.5 | % | 64.6 | |||||||||||||||||||
Commission expenses |
20.1 | 20.5 | 20.8 | 20.8 | ||||||||||||||||||||
Underwriting expenses |
10.6 | 9.8 | 11.5 | 10.7 | ||||||||||||||||||||
Combined ratio |
104.4 | % | 100.5 | % | 102.8 | % | 96.1 | % | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Losses $1 million or more |
$ | 9 | $ | 3 | 202.7 | $ | 19 | $ | 5 | 242.0 | ||||||||||||||
Losses $250 thousand to $1 million |
12 | 9 | 39.9 | 31 | 27 | 16.9 | ||||||||||||||||||
Development and case reserve increases of $250
thousand or more |
4 | 3 | 19.2 | 16 | 12 | 34.2 | ||||||||||||||||||
Other losses excluding catastrophes |
85 | 97 | (13.4 | ) | 242 | 280 | (13.6 | ) | ||||||||||||||||
Total losses incurred excluding catastrophe losses |
110 | 112 | (2.3 | ) | 308 | 324 | (5.1 | ) | ||||||||||||||||
Catastrophe losses |
13 | 13 | 6.4 | 53 | 21 | 153.9 | ||||||||||||||||||
Total losses incurred |
$ | 123 | $ | 125 | (1.4 | ) | $ | 361 | $ | 345 | 4.6 | |||||||||||||
Ratios as a percent of earned premiums: |
||||||||||||||||||||||||
Losses $1 million or more |
5.0 | % | 1.6 | % | 3.2 | % | 0.9 | % | ||||||||||||||||
Losses $250 thousand to $1 million |
6.4 | 4.3 | 5.4 | 4.4 | ||||||||||||||||||||
Development and case reserve increases of $250
thousand or more |
2.1 | 1.7 | 2.8 | 2.0 | ||||||||||||||||||||
Other losses excluding catastrophes |
44.5 | 48.3 | 41.8 | 46.2 | ||||||||||||||||||||
Loss ratio excluding catastrophe losses |
58.0 | 55.9 | 53.2 | 53.5 | ||||||||||||||||||||
Catastrophe losses |
7.1 | 6.3 | 9.2 | 3.5 | ||||||||||||||||||||
Total loss ratio |
65.1 | % | 62.2 | % | 62.4 | % | 57.0 | % | ||||||||||||||||
Cincinnati Financial Corporation | ||
30 | Form 10-Q for the quarter ended September 30, 2006 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Personal auto: |
||||||||||||||||||||||||
Written premiums |
$ | 96 | $ | 112 | (14.5 | ) | $ | 279 | $ | 321 | (12.8 | ) | ||||||||||||
Earned premiums |
95 | 107 | (11.7 | ) | 294 | 329 | (10.7 | ) | ||||||||||||||||
Loss and loss expenses incurred |
57 | 70 | (17.8 | ) | 183 | 203 | (10.1 | ) | ||||||||||||||||
Loss and loss expense ratio |
60.6 | % | 65.0 | % | 62.2 | % | 61.7 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
59.2 | 64.6 | 60.2 | 61.2 | ||||||||||||||||||||
Homeowner: |
||||||||||||||||||||||||
Written premiums |
$ | 79 | $ | 80 | (1.6 | ) | $ | 224 | $ | 219 | 1.4 | |||||||||||||
Earned premiums |
72 | 72 | 0.9 | 219 | 209 | 3.4 | ||||||||||||||||||
Loss and loss expenses incurred |
68 | 56 | 21.4 | 183 | 154 | 18.8 | ||||||||||||||||||
Loss and loss expense ratio |
93.9 | % | 78.0 | % | 83.7 | % | 72.9 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
78.9 | 62.8 | 63.9 | 64.9 | ||||||||||||||||||||
Other personal: |
||||||||||||||||||||||||
Written premiums |
$ | 23 | $ | 23 | (2.1 | ) | $ | 67 | $ | 68 | (2.3 | ) | ||||||||||||
Earned premiums |
22 | 22 | (2.3 | ) | 66 | 67 | (0.8 | ) | ||||||||||||||||
Loss and loss expenses incurred |
14 | 15 | 6.5 | 42 | 34 | 34.4 | ||||||||||||||||||
Loss and loss expense ratio |
63.3 | % | 58.0 | % | 63.9 | % | 47.1 | % | ||||||||||||||||
Loss and loss expense ratio
excluding catastrophes |
58.1 | 53.0 | 57.3 | 43.8 |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 31 |
| Continued decline in written premiums We are working on a number of initiatives to make our rates competitive. Effective July 1, 2006, we introduced a limited program of policy credits that incorporated insurance scores into the pricing of our homeowner policies in most of the states in which our Diamond system is in use. These changes lowered premiums for some current policyholders. We believe these changes can contribute to higher levels of new business and improved policyholder retention by making our rates more competitive for our agents better customers. |
| Higher-than-historical level of catastrophe losses Our performance target projects catastrophe losses as a percent of homeowner earned premium would be approximately 17 percent. From 2003 to 2005, catastrophe losses averaged approximately 21 percent of homeowner earned premiums due to higher-than-historical storm activity. |
| Higher-than-anticipated commission and underwriting expenses We generally do not allocate noncommission expenses to individual business lines. To measure homeowner profitability, our target assumes that total commission and underwriting expenses would contribute approximately 31 percentage points to a homeowner combined ratio, including option expense. If written premium growth slows further, this ratio may be greater than 31 percent because some of our costs are relatively fixed, such as our planned investments in technology. |
Cincinnati Financial Corporation | ||
32 | Form 10-Q for the quarter ended September 30, 2006 |
| Competitive rates We are implementing rate changes to make our personal auto and homeowner rates competitive. While these pricing refinements will lower premiums for some policyholders, we believe they present an opportunity to work with our agents to market the advantages of our personal lines products to their preferred clients, which could help us resume growing in this business segment. |
| Diamond introduction The Diamond system now is in use by agencies writing approximately 90 percent of personal lines premium volume. We believe the system makes it easier for agents to place homeowner, personal auto and other personal lines business with us, while providing direct-bill capabilities and greatly increasing policy-issuance and policy-renewal efficiencies. Diamond provides other advantages, including the ability to make rate changes more quickly. |
| Products enhancements We continue to work to introduce enhancements, including replacement cost coverage for new automobiles and identity theft expense mitigation, which will help agents market our products to their personal lines customers. |
| New agencies We are working to increase the number of agencies that offer our personal lines products, which also could contribute to personal lines growth. Our personal lines team is working closely with our field associates to introduce the benefits of our personal lines products to newly appointed agencies and to selected agencies that currently offer only our commercial lines products. |
| Revenues Earned premiums reflected continued growth of gross in-force policy face amounts to $55.691 billion at September 30, 2006, up from $51.493 billion at year-end 2005. Our life insurance subsidiary reported total statutory net written premiums of $40 million and $121 million in the three and nine months ended September 30, 2006, compared with $56 million and $163 million in the comparable 2005 periods. The change primarily was due to: |
| Statutory written premiums for term and other life insurance products rose 14.8 percent to $32 million for the three months ended September 30, 2006, and rose 13.2 percent to $94 million for the nine months ended September 30, 2006. | ||
| Statutory written annuity premiums declined to $7 million and $24 million in the three and nine months ended September 30, 2006, from $27 million and $77 million in the comparable 2005 periods. Since late 2005, we have de-emphasized annuities because of an unfavorable interest rate environment. |
Total statutory written premiums for life insurance operations for all periods include life insurance, annuity and accident and health premiums. | ||
| Profitability The life insurance segment reports a small GAAP profit because investment income is included in investment segment results, except investment income credited to contract holders (interest assumed in life insurance policy reserve calculations). The segment operating profit declined in the three and nine months ended September 30, 2006, due to: |
| Higher mortality expenses compared with the year-earlier periods, however, mortality experience remained within pricing guidelines. | ||
| Adoption of stock option expensing, which added approximately $300,000 and $1 million, respectively, to other operating expenses. |
At the same time, we recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. For that reason, we also evaluate GAAP data including all investment activities on life insurance-related assets. | ||
GAAP net income on that basis was $9 million in the three months ended September 30, 2006, compared with $8 million in the three months ended September 30, 2005. GAAP net income rose to $54 million in the nine months ended September 30, 2006, compared with $31 million in the nine months ended |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 33 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(In millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | ||||||||||||||||||
Written premiums |
$ | 40 | $ | 56 | (28.7 | ) | $ | 121 | $ | 163 | (25.6 | ) | ||||||||||||
Earned premiums |
$ | 28 | $ | 25 | 9.4 | $ | 84 | $ | 78 | 6.9 | ||||||||||||||
Separate account investment
management fees |
0 | 1 | (20.6 | ) | 2 | 3 | 0.5 | |||||||||||||||||
Total revenues |
28 | 26 | 8.4 | 86 | 81 | 6.7 | ||||||||||||||||||
Contract holders benefits incurred |
33 | 27 | 21.2 | 92 | 77 | 19.2 | ||||||||||||||||||
Investment interest credited to
contract holders |
(14 | ) | (13 | ) | 3.4 | (40 | ) | (38 | ) | 6.0 | ||||||||||||||
Expenses incurred |
9 | 12 | (19.8 | ) | 32 | 37 | (9.9 | ) | ||||||||||||||||
Total expenses |
28 | 26 | 12.0 | 84 | 76 | 11.6 | ||||||||||||||||||
Life insurance segment profit |
$ | 0 | $ | 0 | nm | $ | 2 | $ | 5 | (66.3 | ) | |||||||||||||
| Investment income Consolidated pretax investment income rose 7.5 percent and 9.0 percent in the three and nine months ended September 30, 2006. The growth in investment income reflected new investments, higher interest income from the growing fixed-maturity portfolio and increased dividend income from the common stock portfolio. In addition, proceeds from the sale of the ALLTEL holding that were used to make the applicable tax payments in June 2006 were invested in short-term instruments that generated approximately $5 million in interest income in the nine months ended September 30, 2006. | |
While increasing, dividend income has slightly declined as a percent of total investment income primarily due to the allocation of a larger portion of cash flow for fixed-maturity investments over the past two years. Fifth Third, our largest equity holding, contributed 43.4 percent and 44.2 percent of total dividend income in the three and nine months ended September 30, 2006. We discuss our Fifth Third investment in Item 3, Quantitative and Qualitative Disclosures About Market Risk, Page 40. | ||
We have begun participating in a securities lending program under which certain fixed maturity securities from our investment portfolio are loaned to other institutions for short periods of time. We require collateral equal to 102 percent of the market value of the loaned securities. The lending agent invests the collateral in accordance with our guidelines. In the three and nine months ended September 30, 2006, the program generated net investment income, net of applicable fees, of $252,000 and $528,000. |
Cincinnati Financial Corporation | ||
34 | Form 10-Q for the quarter ended September 30, 2006 |
Based on terms of the agreement, we have the right to sell or re-pledge the collateral in the event of a default by the borrower. At September 30, 2006, the amount of collateral held was $1.016 billion. |
| Net realized gains and losses Pretax realized gains were immaterial for the three months ended September 30, 2006 and we reported a pretax realized gain of $671 million for the nine months ended September 30, 2006. Fair value changes due to the application of SFAS No. 133 offset realized losses from investment sales for the three-month period. Included in realized investment gains and losses for the three months ended September 30, 2006, was a $542,000 recorded loss due to the decline in the fair value of an interest-rate swap initiated during the period. |
The previously announced sale of our holdings of ALLTEL common stock accounted for $647 million of the realized gain in the nine-month period. The effect of other-than-temporary impairment charges was insignificant in both periods. We reported a net realized gain in the three and nine months ended September 30, 2005, primarily due to realized gains from investment sales. |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||
(In millions) | 2006 | 2005 | Change % | 2006 | 2005 | Change % | |||||||||||||||||||
Investment income: |
|||||||||||||||||||||||||
Interest |
$ | 74 | $ | 70 | 6.1 | $ | 225 | $ | 208 | 8.2 | |||||||||||||||
Dividends |
67 | 64 | 5.2 | 194 | 180 | 7.5 | |||||||||||||||||||
Other |
4 | 2 | 130.0 | 11 | 6 | 78.8 | |||||||||||||||||||
Investment expenses |
(1 | ) | (2 | ) | 9.9 | (5 | ) | (4 | ) | (14.4 | ) | ||||||||||||||
Total net investment income |
144 | 134 | 7.5 | 425 | 390 | 9.0 | |||||||||||||||||||
Investment interest credited to contract
holders |
(14 | ) | (13 | ) | (3.4 | ) | (40 | ) | (38 | ) | (6.0 | ) | |||||||||||||
Net realized investment gains and losses: |
|||||||||||||||||||||||||
Realized investment gains and losses |
(2 | ) | 12 | (117.3 | ) | 667 | 41 | 1,519.9 | |||||||||||||||||
Change in valuation of embedded
derivatives |
2 | 5 | (56.0 | ) | 5 | (2 | ) | 353.6 | |||||||||||||||||
Other-than-temporary impairment charges |
0 | (1 | ) | nm | (1 | ) | (1 | ) | 41.7 | ||||||||||||||||
Net realized investment gains (losses) |
0 | 16 | nm | 671 | 38 | 1,683.6 | |||||||||||||||||||
Investment operations income |
$ | 130 | $ | 137 | (4.8 | ) | $ | 1,056 | $ | 390 | 171.1 | ||||||||||||||
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 35 |
Nine months ended Sept. 30, | ||||||||
(In millions) | 2006 | 2005 | ||||||
Premiums collected |
$ | 2,459 | $ | 2,383 | ||||
Loss and loss expenses paid |
(1,378 | ) | (1,279 | ) | ||||
Commissions and other underwriting expenses paid |
(789 | ) | (776 | ) | ||||
Insurance subsidiary cash flow from
underwriting |
292 | 328 | ||||||
Investment income received |
355 | 318 | ||||||
Insurance subsidiary operating cash flow |
$ | 647 | $ | 646 | ||||
| Fixed maturities Including calls, maturities and sales, fixed-maturity dispositions were approximately $301 million compared with last years unusually high level of $556 million. |
Cincinnati Financial Corporation | ||
36 | Form 10-Q for the quarter ended September 30, 2006 |
| Equity securities Total equity security sales were $850 million. We sold the remaining 12,700,164 shares of our ALLTEL common stock holding, generating proceeds of $764 million, in the first quarter of 2006. (We sold 475,000 shares of our ALLTEL holding in the fourth quarter of 2005.) |
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 37 |
| Dividends to shareholders In February 2006, the board of directors authorized a 9.8 percent increase in the regular quarterly cash dividend to an indicated annual rate of $1.34 per share. During the first nine months of 2006, $170 million was used for dividends to shareholders. | |
| Common stock repurchase program During the first nine months of 2006, we used $95 million to repurchase 2.143 million shares of our common stock at an average price of $44.28. The details of the 2006 repurchase activity are described in Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, Page 45. | |
In 2005, the board authorized a 10 million share repurchase program to replace a program authorized in 1999. At September 30, 2006, 7.323 million shares remained authorized for repurchase under the 2005 program. We do not adjust number of shares repurchased and average price per repurchased share for stock dividends. |
Loss reserves | Loss | Total | ||||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
(In millions) | reserves | reserves | reserves | reserves | of total | |||||||||||||||
At September 30, 2006 |
||||||||||||||||||||
Commercial casualty |
$ | 909 | $ | 473 | $ | 441 | 1,823 | 53.7 | % | |||||||||||
Commercial property |
137 | 31 | 38 | 206 | 6.1 | |||||||||||||||
Commercial auto |
273 | 59 | 67 | 399 | 11.7 | |||||||||||||||
Workers compensation |
395 | 287 | 87 | 769 | 22.7 | |||||||||||||||
Specialty packages |
77 | 2 | 11 | 90 | 2.7 | |||||||||||||||
Surety and executive risk |
63 | 0 | 36 | 99 | 2.9 | |||||||||||||||
Machinery and equipment |
3 | 3 | 0 | 6 | 0.2 | |||||||||||||||
Total |
$ | 1,857 | $ | 855 | $ | 680 | $ | 3,392 | 100.0 | % | ||||||||||
At December 31, 2005 |
||||||||||||||||||||
Commercial casualty |
$ | 859 | $ | 451 | $ | 423 | $ | 1,733 | 54.6 | % | ||||||||||
Commercial property |
135 | 40 | 36 | 211 | 6.6 | |||||||||||||||
Commercial auto |
268 | 55 | 65 | 388 | 12.2 | |||||||||||||||
Workers compensation |
283 | 333 | 79 | 695 | 21.9 | |||||||||||||||
Specialty packages |
63 | 0 | 12 | 75 | 2.4 | |||||||||||||||
Surety and executive risk |
36 | 0 | 32 | 68 | 2.1 | |||||||||||||||
Machinery and equipment |
3 | 3 | 0 | 6 | 0.2 | |||||||||||||||
Total |
$ | 1,647 | $ | 882 | $ | 647 | $ | 3,176 | 100.0 | % | ||||||||||
Cincinnati Financial Corporation | ||
38 | Form 10-Q for the quarter ended September 30, 2006 |
Loss reserves | Loss | Total | ||||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
(In millions) | reserves | reserves | reserves | reserves | of total | |||||||||||||||
At September 30, 2006 |
||||||||||||||||||||
Personal auto |
$ | 163 | $ | 7 | $ | 35 | $ | 205 | 45.4 | % | ||||||||||
Homeowners |
75 | 17 | 18 | 110 | 24.2 | |||||||||||||||
Other personal |
55 | 70 | 12 | 137 | 30.4 | |||||||||||||||
Total |
$ | 293 | $ | 94 | $ | 65 | $ | 452 | 100.0 | % | ||||||||||
At December 31, 2005 |
||||||||||||||||||||
Personal auto |
$ | 175 | $ | 4 | $ | 34 | $ | 213 | 47.1 | % | ||||||||||
Homeowners |
70 | 21 | 18 | 109 | 24.0 | |||||||||||||||
Other personal |
52 | 67 | 12 | 131 | 28.9 | |||||||||||||||
Total |
$ | 297 | $ | 92 | $ | 64 | $ | 453 | 100.0 | % | ||||||||||
Cincinnati Financial Corporation | ||
Form 10-Q for the quarter ended September 30, 2006 | 39 |
At Sept. 30, 2006 | At December 31, 2005 | |||||||||||||||
(In millions) | Book value | Fair value | Book value | Fair value | ||||||||||||
Taxable fixed maturities |
$ | 3,410 | $ | 3,441 | $ | 3,304 | $ | 3,359 | ||||||||
Tax-exempt fixed
maturities |
2,309 | 2,349 | 2,083 | 2,117 | ||||||||||||
Common equities |
2,358 | 7,032 | 1,961 | 6,936 | ||||||||||||
Preferred equities |
216 | 224 | 167 | 170 | ||||||||||||
Short-term investments |
0 | 0 | 75 | 75 | ||||||||||||
Total |
$ | 8,293 | $ | 13,046 | $ | 7,590 | $ | 12,657 | ||||||||
Fair value | Modified duration | Duration to worst | ||||||||||||||||||
of fixed | 100 basis | 100 basis | 100 basis | 100 basis | ||||||||||||||||
maturity | point spread | point spread | point spread | point spread | ||||||||||||||||
(In millions) | portfolio | decrease | increase | decrease | increase | |||||||||||||||
At September 30, 2006 |
$ | 5,790 | $ | 6,190 | $ | 5,389 | $ | 6,138 | $ | 5,441 | ||||||||||
At December 31, 2005 |
5,476 | 5,868 | 5,084 | 5,779 | 5,173 |
Cincinnati Financial Corporation | ||
40
|
Form 10-Q for the quarter ended September 30, 2006 |
As of and for the quarter ended September 30, 2006 | ||||||||||||||||
Earned | ||||||||||||||||
Actual | Fair | Percent of | dividend | |||||||||||||
(Dollars in millions) | cost | value | fair value | income | ||||||||||||
Fifth Third Bagncorp |
$ | 283 | $ | 2,771 | 39.5 | % | $ | 86 | ||||||||
ExxonMobil Corporation |
134 | 601 | 8.6 | 9 | ||||||||||||
The Procter & Gamble Company |
192 | 452 | 6.4 | 6 | ||||||||||||
National City Corporation |
172 | 359 | 5.1 | 11 | ||||||||||||
PNC Financial Services Group, Inc. |
62 | 341 | 4.8 | 7 | ||||||||||||
Johnson & Johnson |
194 | 234 | 3.3 | 4 | ||||||||||||
AllianceBernstein Holding L.P. |
60 | 228 | 3.2 | 9 | ||||||||||||
Wyeth |
62 | 225 | 3.2 | 3 | ||||||||||||
U.S. Bancorp |
140 | 222 | 3.2 | 7 | ||||||||||||
Wells Fargo & Company |
96 | 196 | 2.8 | 4 | ||||||||||||
Piedmont Natural Gas Company, Inc. |
64 | 143 | 2.0 | 4 | ||||||||||||
FirstMerit Corporation |
54 | 124 | 1.8 | 4 | ||||||||||||
Sky Financial Group, Inc. |
91 | 116 | 1.6 | 3 | ||||||||||||
All other common stock holdings |
754 | 1,020 | 14.5 | 22 | ||||||||||||
Total |
$ | 2,358 | $ | 7,032 | 100.0 | % | $ | 179 | ||||||||
Cincinnati Financial Corporation |
||
Form 10-Q for the quarter ended September 30, 2006
|
41 |
Nine months ended September 30, | ||||||||
(In millions except market price data) | 2006 | 2005 | ||||||
Fifth Third Bancorp common stock holding: |
||||||||
Dividends earned |
$ | 86 | $ | 79 | ||||
Percent of total net investment income |
20.2 | % | 20.2 | % |
At September 30, | At December 31, | |||||||
2006 | 2005 | |||||||
Shares held |
73 | 73 | ||||||
Closing market price of Fifth Third |
$ | 38.08 | $ | 37.72 | ||||
Book value of holding |
283 | 283 | ||||||
Fair value of holding |
2,771 | 2,745 | ||||||
After-tax unrealized gain |
1,617 | 1,600 | ||||||
Market value as a percent of total equity investments |
38.2 | % | 38.6 | % | ||||
Market value as a percent of invested assets |
21.2 | 21.6 | ||||||
Market value as a percent of total shareholders equity |
42.9 | 45.1 | ||||||
After-tax unrealized gain as a percent of total
shareholders equity |
25.0 | 26.3 |
| 623 of these holdings were trading between 90 percent and 100 percent of book value. The value of these securities fluctuates primarily because of changes in interest rates. The fair value of these 623 securities was $2.660 billion at September 30, 2006, and they accounted for $58 million in unrealized losses. | |
| 10 of these holdings were trading between 70 percent and 90 percent of book value at September 30, 2006. The fair value of these holdings was $91 million, and they accounted for the remaining $13 million in unrealized losses. These holdings are being monitored for credit- and industry-related risk factors, but we believe the changes in value primarily are due to normal fluctuations and economic factors. | |
Of these securities, one is a common stock and one is a convertible preferred stock with market values between 87 percent and 90 percent of book value at September 30, 2006. The fair value of these two securities was $62 million and they accounted for $8 million of unrealized losses, primarily related to the common stock holding. The remaining eight are fixed-maturity securities with a total fair value of |
Cincinnati Financial Corporation | ||
42
|
Form 10-Q for the quarter ended September 30, 2006 |
$29 million. All of these holdings were trading between 82 percent and 90 percent of book value at September 30, 2006, and no single industry accounted for more than two of the holdings. | ||
| No holdings were trading below 70 percent of book value at September 30, 2006. |
Gross | Gross | |||||||||||||||||||
Number | unrealized | investment | ||||||||||||||||||
(Dollars in millions) | of issues | Book value | Fair value | gain/loss | income | |||||||||||||||
At September 30, 2006 |
||||||||||||||||||||
Portfolio summary: |
||||||||||||||||||||
Trading below 70% of book value |
0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
Trading at 70% to less than 100% of
book value |
633 | 2,822 | 2,751 | (71 | ) | 100 | ||||||||||||||
Trading at 100% and above of book value |
1,304 | 5,471 | 10,295 | 4,824 | 308 | |||||||||||||||
Securities sold in current year |
0 | 0 | 0 | 0 | 12 | |||||||||||||||
Total |
1,937 | $ | 8,293 | $ | 13,046 | $ | 4,753 | $ | 420 | |||||||||||
At December 31, 2005 |
||||||||||||||||||||
Portfolio summary: |
||||||||||||||||||||
Trading below 70% of book value |
2 | $ | 12 | $ | 8 | $ | (4 | ) | $ | 1 | ||||||||||
Trading at 70% to less than 100% of
book value |
730 | 2,894 | 2,820 | (74 | ) | 118 | ||||||||||||||
Trading at 100% and above of book value |
1,082 | 4,684 | 9,829 | 5,145 | 387 | |||||||||||||||
Securities sold in current year |
0 | 0 | 0 | 0 | 18 | |||||||||||||||
Total |
1,814 | $ | 7,590 | $ | 12,657 | $ | 5,067 | $ | 524 | |||||||||||
6 Months or less | > 6 - 12 Months | > 12 - 24 Months | > 24 - 36 Months | |||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Number | unrealized | Number | unrealized | Number | unrealized | Number | unrealized | |||||||||||||||||||||||||
(Dollars in millions) | of issues | gain/loss | of issues | gain/loss | of issues | gain/loss | of issues | gain/loss | ||||||||||||||||||||||||
Taxable fixed maturities: |
||||||||||||||||||||||||||||||||
Trading below 70% of book value |
0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | ||||||||||||||||||||
Trading at 70% to less than 100% of
book value |
32 | (1 | ) | 91 | (9 | ) | 179 | (32 | ) | 34 | (12 | ) | ||||||||||||||||||||
Trading at 100% and above of book value |
119 | 8 | 10 | 1 | 5 | 2 | 276 | 74 | ||||||||||||||||||||||||
Total |
151 | 7 | 101 | (8 | ) | 184 | (30 | ) | 310 | 62 | ||||||||||||||||||||||
Tax-exempt fixed maturities: |
||||||||||||||||||||||||||||||||
Trading below 70% of book value |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of
book value |
6 | 0 | 21 | 0 | 234 | (4 | ) | 23 | (2 | ) | ||||||||||||||||||||||
Trading at 100% and above of book value |
468 | 12 | 2 | 0 | 2 | 0 | 352 | 34 | ||||||||||||||||||||||||
Total |
474 | 12 | 23 | 0 | 236 | (4 | ) | 375 | 32 | |||||||||||||||||||||||
Common equities: |
||||||||||||||||||||||||||||||||
Trading below 70% of book value |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of
book value |
2 | (2 | ) | 2 | (8 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
Trading at 100% and above of book value |
8 | 63 | 2 | 168 | 4 | 12 | 31 | 4,441 | ||||||||||||||||||||||||
Total |
10 | 61 | 4 | 160 | 4 | 12 | 31 | 4,441 | ||||||||||||||||||||||||
Preferred equities: |
||||||||||||||||||||||||||||||||
Trading below 70% of book value |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of
book value |
5 | 0 | 1 | 0 | 2 | 0 | 1 | (1 | ) | |||||||||||||||||||||||
Trading at 100% and above of book value |
19 | 3 | 1 | 0 | 1 | 0 | 4 | 6 | ||||||||||||||||||||||||
Total |
24 | 3 | 2 | 0 | 3 | 0 | 5 | 5 | ||||||||||||||||||||||||
Summary: |
||||||||||||||||||||||||||||||||
Trading below 70% of book value |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of
book value |
45 | (3 | ) | 115 | (17 | ) | 415 | (36 | ) | 58 | (15 | ) | ||||||||||||||||||||
Trading at 100% and above of book value |
614 | 86 | 15 | 169 | 12 | 14 | 663 | 4,555 | ||||||||||||||||||||||||
Total |
659 | $ | 83 | 130 | $ | 152 | 427 | $ | (22 | ) | 721 | $ | 4,540 | |||||||||||||||||||
Cincinnati Financial Corporation |
||
Form 10-Q for the quarter ended September 30, 2006
|
43 |
| that information required to be disclosed in the companys reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and |
| that such information is accumulated and communicated to the companys management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. |
Cincinnati Financial Corporation | ||
44
|
Form 10-Q for the quarter ended September 30, 2006 |
Total number of shares | Maximum number of | |||||||||||||||
purchased as part of | shares that may yet be | |||||||||||||||
Total number of | Average price | publicly announced | purchased under the | |||||||||||||
Month | shares purchased(1) | paid per share | plans or programs(2) | plans or programs | ||||||||||||
January 1-31, 2006 |
0 | $ | 0.00 | 0 | 9,466,035 | |||||||||||
February 1-28, 2006 |
537,322 | 44.12 | 537,322 | 8,928,713 | ||||||||||||
March 1-31, 2006 |
1,316,978 | 43.97 | 1,312,678 | 7,616,035 | ||||||||||||
April 1-30, 2006 |
0 | 0.00 | 0 | 7,616,035 | ||||||||||||
May 1-31, 2006 |
0 | 0.00 | 0 | 7,616,035 | ||||||||||||
June 1-30, 2006 |
150,000 | 45.89 | 150,000 | 7,466,035 | ||||||||||||
July 1-31, 2006 |
0 | 0.00 | 0 | 7,466,035 | ||||||||||||
August 1-31, 2006 |
31,666 | 45.98 | 31,666 | 7,434,369 | ||||||||||||
September 1-30, 2006 |
113,598 | 46.23 | 110,900 | 7,323,469 | ||||||||||||
Totals |
2,149,564 | 44.29 | 2,142,566 | |||||||||||||
1. | Includes 4,300 and 2,987 shares acquired in March and September, 2006, respectively, in satisfaction of withholding taxes due upon exercise of stock options. | |
2. | The current repurchase program was announced on August 19, 2005, and became effective on September 1, 2005. It replaced a program which had been in effect since 1999. | |
3. | The share amount approved for repurchase in 1999 was 17 million shares. | |
4. | The repurchase program has no expiration date. | |
5. | No repurchase program has expired during the period covered by the above table, but the 1999 program was superseded by the 2005 program and no further repurchases will occur under the 1999 program. | |
6. | The share amount approved for repurchase under the 2005 program is 10 million shares. At the time the 1999 program was replaced by the 2005 program, it had 2,739,942 shares remaining. All of the repurchases reported in the table above were repurchased under the 2005 program. |
Cincinnati Financial Corporation |
||
Form 10-Q for the quarter ended September 30, 2006
|
45 |
Exhibit No. | Exhibit Description | |
3.1A
|
Amended Articles of Incorporation of Cincinnati Financial Corporation (1) | |
3.1B
|
Amendment to Article Fourth of Amended Articles of Incorporation of Cincinnati Financial Corporation (2) | |
3.2
|
Regulations of Cincinnati Financial Corporation (3) | |
4.1
|
Indenture with The Bank of New York Trust Company (4) | |
4.2
|
Supplemental Indenture with The Bank of New York Trust Company (4) | |
4.3
|
Second Supplemental Indenture with The Bank of New York Trust Company (5) | |
4.4
|
Form of 6.125% Exchange Note Due 2034 (included in Exhibit 4.2) | |
4.5
|
Form of 6.92% Debentures Due 2028 (included in Exhibit 4.3) | |
4.6
|
Indenture with the First National Bank of Chicago (subsequently assigned to The Bank of New York Trust Company) (6) | |
4.7
|
Form of 6.90% Debentures Due 2028 (included in Exhibit 4.6) | |
10.1
|
Agreement with Messer Construction (7) | |
10.2
|
Stock Repurchase Agreement dated November 12, 2004 with Robert C. Schiff, Trustee, Robert C. Schiff Revocable Trust (7) | |
10.3
|
Purchase Agreement with J.P. Morgan Securities Inc. and UBS Securities LLC (8) | |
10.4
|
2003 Non-Employee Directors Stock Plan (9) | |
10.5
|
Cincinnati Financial Corporation Stock Option Plan No. VI (10) | |
10.6
|
Cincinnati Financial Corporation Stock Option Plan No. VII (11) | |
10.7
|
Standard Form of Nonqualified and Incentive Option Agreements for Stock Option Plan No. VI (7) | |
10.8
|
Registration Rights Agreement with J.P. Morgan Securities Inc. and UBS Securities LLC (4) | |
10.9
|
Form of Dealer Manager Agreement between Cincinnati Financial and UBS Securities LLC (12) | |
10.10
|
Cincinnati Financial Corporation Incentive Compensation Plan (13) | |
10.11
|
Cincinnati Financial Corporation 2006 Stock Compensation Plan (13) | |
10.12
|
Standard Form of Combined Incentive/Nonqualified Stock Option for Stock Option Plan VI (14) | |
10.13
|
364-Day Credit Agreement by and among Cincinnati Financial Corporation and CFC Investment Company, as Borrowers, and Fifth Third Bank, as Lender (15) | |
10.14
|
Director and Named Executive Officer Compensation Summary (13) | |
10.15
|
Executive Compensation Plan (16) | |
10.16
|
Amendment No. 1 to Credit Agreement by and among Cincinnati Financial Corporation and CFC investment Company, as Borrower, and Fifth Third Bank, as lender. (17) |
(1) | Incorporated by reference to the companys 1999 Annual Report on Form 10-K dated March 23, 2000 (File No. 000-04604). | |
(2) | Incorporated by reference to Exhibit 3(i) filed with the companys Current Report on Form 8-K dated July 15, 2005. | |
(3) | Incorporated by reference to the companys Definitive Proxy Statement dated March 2, 1992, Exhibit 2 (File No. 000-04604). | |
(4) | Incorporated by reference to the companys Current Report on Form 8-K dated November 2, 2004, filed with respect to the issuance of the companys 6.125% Senior Notes due November 1, 2034. | |
(5) | Incorporated by reference to the companys Current Report on Form 8-K dated May 9, 2005, filed with respect to the completion of the companys exchange offer and rescission offer for its 6.90% senior debentures due 2028. | |
(6) | Incorporated by reference to the companys registration statement on Form S-3 effective May 22, 1998 (File No. 333-51677). | |
(7) | Incorporated by reference to the companys 2004 Annual Report on Form 10-K dated March 11, 2005. | |
(8) | Incorporated by reference to the companys Current Report on Form 8-K dated November 1, 2004, filed with respect to the issuance of the companys 6.125% Senior Notes due November 1, 2034. | |
(9) | Incorporated by reference to the companys Definitive Proxy Statement dated March 21, 2005. | |
(10) | Incorporated by reference to the companys Definitive Proxy Statement dated March 1, 1999 | |
(11) | Incorporated by reference to the companys Definitive Proxy Statement dated March 8, 2002. | |
(12) | Incorporated by reference to the companys Registration Statement on Form S-4 filed March 21, 2005 (File No. 333-123471). | |
(13) | Incorporated by reference to the companys Definitive Proxy Statement dated March 30, 2006. | |
(14) | Incorporated by reference to Exhibit 10.3 filed with the companys Current Report on Form 8-K dated July 15, 2005. | |
(15) | Incorporated by reference to Exhibit 10.1 filed with the companys Current Report on Form 8-K dated May 31, 2005. | |
(16) | Incorporated by reference to Exhibit 10.2 filed with the companys Current Report on Form 8-K dated November 23, 2005. | |
(17) | Incorporated by reference to Exhibit 10.01 filed with the companys Current Report on Form 8-K dated May 26, 2006. |
Cincinnati Financial Corporation | ||
46
|
Form 10-Q for the quarter ended September 30, 2006 |
10.17
|
Cincinnati Financial Corporation Supplemental Retirement Plan | |
10.18
|
Standard Form of Incentive Stock Option Agreement for Stock Option Plan VII (18) | |
10.19
|
Standard Form of Nonqualified Stock Option Agreement for Stock Option Plan VII (19) | |
10.20
|
Standard Form of Incentive Stock Option Agreement for the 2006 Stock Compensation Plan (20) | |
10.21
|
Standard Form of Nonqualified Stock Option Agreement for the 2006 Stock Compensation Plan (21) | |
11
|
Statement re: Computation of per share earnings for the three months ended September 30, 2006 and 2005, contained in Exhibit 11 of this report, Page 49 | |
14
|
Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers (22) | |
21
|
Cincinnati Financial Corporation Subsidiaries contained in the 2005 Annual Report on Form 10-K, Part I, Item 1, Page 1 | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Chief Executive Officer, Page 50 | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Chief Financial Officer, Page 51 | |
32
|
Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, Page 52 | |
(18) | Incorporated by reference to Exhibit 10.1 filed with the companys Current Report on Form 8-K dated October 20, 2006. | |
(19) | Incorporated by reference to Exhibit 10.2 filed with the companys Current Report on Form 8-K dated October 20, 2006. | |
(20) | Incorporated by reference to Exhibit 10.3 filed with the companys Current Report on Form 8-K dated October 20, 2006. | |
(21) | Incorporated by reference to Exhibit 10.4 filed with the companys Current Report on Form 8-K dated October 20, 2006. | |
(22) | Incorporated by reference to the companys Definitive Proxy Statement dated March 18, 2004. |
Cincinnati Financial Corporation |
||
Form 10-Q for the quarter ended September 30, 2006
|
47 |
CINCINNATI FINANCIAL CORPORATION |
||
Date: November 1, 2006 |
||
/S/ Kenneth W. Stecher |
||
Kenneth W. Stecher |
||
Chief
Financial Officer, Executive Vice President, Secretary and Treasurer |
||
(Principal Accounting Officer) |
Cincinnati Financial Corporation | ||
48
|
Form 10-Q for the quarter ended September 30, 2006 |
Page | ||||
Article 1 ESTABLISHMENT OF THE PLAN |
1 | |||
1.1 Establishment |
1 | |||
1.2 Purpose |
1 | |||
Article 2 DEFINITIONS |
2 | |||
2.1 Actuarially Adjusted |
2 | |||
2.2 Average Monthly Earnings |
2 | |||
2.3 Beneficiary |
2 | |||
2.4 Board of Directors |
2 | |||
2.5 CFC Retirement Plan |
2 | |||
2.6 Code |
2 | |||
2.7 Committee |
2 | |||
2.8 Disabled |
2 | |||
2.9 Disability Retirement Date |
3 | |||
2.10 Employer |
3 | |||
2.11 Early Retirement Date |
3 | |||
2.12 Earnings |
3 | |||
2.13 Key Employee |
3 | |||
2.14 Normal Retirement Date |
3 | |||
2.15 Participant |
4 | |||
2.16 Plan |
4 | |||
2.17 Plan Year |
4 | |||
2.18 Retirement Date |
4 | |||
2.19 Separation from Service |
4 | |||
2.20 Social Security Integration Level |
4 | |||
2.21 Supplemental Benefit |
4 | |||
2.22 Year of Service |
4 | |||
Article 3 ELIGIBILITY FOR BENEFITS |
5 | |||
3.1 Commencement of Retirement Benefits |
5 | |||
3.2 Vesting |
5 | |||
3.3 Lost Payees |
5 | |||
3.4 Non-Compete Provision/Discharge for Cause |
5 | |||
Article 4 BENEFITS PAYABLE UNDER THE PLAN |
6 | |||
4.1 Normal Retirement Benefit |
6 | |||
4.2 Early Retirement Benefit |
6 | |||
4.3 Deferred Retirement Benefit |
7 | |||
4.4 Disability Retirement Benefit |
7 | |||
4.5 Death Benefits |
7 |
i
Page | ||||
Article 5 PAYMENT OF SUPPLEMENTAL BENEFITS |
9 | |||
5.1 Form of Benefit |
9 | |||
5.2 Date of Payment |
9 | |||
5.3 Key Employees |
10 | |||
5.4 Domestic Relations Orders |
10 | |||
5.5 Code §409A Failures |
10 | |||
5.6 Discretionary Delay In Benefit Payments |
10 | |||
5.7 Tax Withholding |
11 | |||
Article 6 CLAIMS |
12 | |||
6.1 Initial Claims Procedure |
12 | |||
6.2 Claim Review Procedure |
13 | |||
6.3 Required Exhaustion of Administrative Remedies |
15 | |||
Article 7 PLAN ADMINISTRATION |
17 | |||
7.1 Plan Administration |
17 | |||
Article 8 MISCELLANEOUS PROVISIONS |
18 | |||
8.1 Termination and Amendment |
18 | |||
8.2 Entire Agreement |
18 | |||
8.3 Financing |
18 | |||
8.4 Non-Transferability |
19 | |||
8.5 Severability |
19 | |||
8.6 Gender and Number |
19 | |||
8.7 Headings and Captions |
19 | |||
8.8 No Rights Conferred |
19 | |||
8.9 No Guarantee of Tax Consequences |
19 | |||
8.10 Applicable Law |
19 | |||
Appendix A |
A-1 | |||
Appendix B |
B-1 | |||
Appendix C |
C-1 |
ii
1.1 | Establishment. Cincinnati Financial Corporation originally established the Cincinnati Financial Corporation Supplemental Retirement Plan (the Plan) effective January 1, 1989 as an unfunded supplemental retirement plan for eligible executives. The Plan is intended to qualify as a top-hat plan for purposes of the Employee Retirement Income Security Act of 1974, as amended. Additionally, the Plan is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the Code), and the regulations issued thereunder, as such authorities are interpreted by the Committee. | |
1.2 | Purpose. The purpose of the Plan is to provide eligible executives with benefits in addition to those provided under the Cincinnati Financial Corporation Retirement Plan (the CFC Retirement Plan). |
- 1 -
2.1 | Actuarially Adjusted means, for purposes of determining the deferred retirement benefit under Section 4.3, the adjustment based on the mortality table and interest rate used to determine a lump sum benefit under the CFC Retirement Plan as of the date of a Participants Retirement Date. For purposes of determining the death benefit under Section 4.5, Actuarially Adjusted means the adjustment based on the mortality table and interest rate used by the CFC Retirement Plan to determine optional forms of benefit payments. | |
2.2 | Average Monthly Earnings shall have the same meaning as such term has in the CFC Retirement Plan. | |
2.3 | Beneficiary means the individual (if any) that is entitled to receive death benefits under the CFC Retirement Plan. If no individual is entitled to receive death benefits under the CFC Retirement Plan, there is no Beneficiary for the purposes of the Plan and no individual is entitled to Death Benefits under the Plan. | |
2.4 | Board of Directors means the Board of Directors of Cincinnati Financial Corporation. | |
2.5 | CFC Retirement Plan means the Cincinnati Financial Corporation Retirement Plan, as may be amended from time to time. | |
2.6 | Code means the Internal Revenue Code of 1986, as amended. | |
2.7 | Committee means the committee appointed by the Board of Directors to administer the Plan. | |
2.8 | Disabled means a Participant is: (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (b) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a |
- 2 -
continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Employer. | ||
2.9 | Disability Retirement Date means the date on which a Participant becomes Disabled. | |
2.10 | Employer means Cincinnati Financial Corporation, and any affiliated company which adopts the Plan in the manner designated by Cincinnati Financial Corporation, or any successor or assign of any of them. | |
2.11 | Early Retirement Date means the date before the Participants Normal Retirement Date on which the Participant is first eligible to receive monthly benefit payments from the CFC Retirement Plan. | |
2.12 | Earnings shall have the same meaning as such term has in the CFC Retirement Plan, except that any limitation imposed by Code §401(a)(17) shall not apply. | |
2.13 | Key Employee means an employee of the Employer (or a related employer under Code §414) who, as of the annual identification date, is: (a) an officer of the Employer (or a related employer under Code §414) having annual compensation greater than $ 130,000 (as adjusted for inflation pursuant to Code §416(i), and limited to 50 employees); (b) a more than 5% owner of the Employer (or a related employer under Code §414); or (c) a more than 1% owner of the Employer (or a related employer under Code §414) who has annual compensation from the Employer (or a related employer under Code §414) greater than $150,000, as determined by the Committee and consistent with the Committees interpretation of Code §409A and the regulations issued thereunder. An individual described above shall be considered a Key Employee for the 12-month period beginning on the 1st day of the 4th month following the annual identification date.Unless otherwise provided by the Committee, the annual identification date shall be December 31st. | |
2.14 | Normal Retirement Date means the 1st day of the month on or after the Participants 65th birthday. |
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2.15 | Participant means any employee or former employee of the Employer designated by the Committee as a participating member of the Plan as specified in Appendix A. The Committee has the sole and absolute discretion of determining whether an individual is a Participant. No retroactive characterization of an individuals status for any other purpose shall make an individual a Participant for purposes of the Plan unless specifically determined by the Committee for the purposes of the Plan. | |
2.16 | Plan means the Cincinnati Financial Corporation Supplemental Retirement Plan described in this instrument, as may be amended from time to time. | |
2.17 | Plan Year means January 1 to December 31. | |
2.18 | Retirement Date means, prior to January 1, 2007, the date on which a Participant first commences receipt of benefit payments under the CFC Retirement Plan. Beginning on, or after, January 1, 2007, Retirement Date means the date on which a Participant has a Separation from Service and on which the earliest of the following events occur: (a) the Participant attains age 65; (b) the Participant attains age 60 and has completed 5 or more Years of Service; or (c) the Participants Disability Retirement Date. | |
2.19 | Separation from Service means a Participants separation from service (defined by Code §409A and the regulations thereunder as interpreted by the Committee) with the Employer (and all related employers under Code §414) for reasons other than being discharged for cause. | |
2.20 | Social Security Integration Level means 1/12th of the average of the following: (a) for each Year of Service before January 1, 1976, $6,000; and (b) for each Year of Service after January 1, 1976, the lesser of the taxable wage base under the Federal Insurance Contribution Act in effect at the beginning of a Plan Year and the Participants Earnings for that Plan Year. | |
2.21 | Supplemental Benefit means the benefit determined pursuant to Article 4. | |
2.22 | Year of Service shall have the same meaning as such term has in the CFC Retirement Plan. |
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3.1 | Commencement of Retirement Benefits. Subject to the Plans vesting provisions, each Participant is eligible to retire and receive a Supplemental Benefit payable as of the Participants Retirement Date. | |
3.2 | Vesting. Participants shall be fully vested in their Supplemental Benefits accrued as of December 31, 2005 unless otherwise provided in Sections 3.3 or 3.4. For Supplemental Benefits accrued after December 31, 2005, Participants shall be vested to the same extent they are vested in their accrued benefits under the CFC Retirement Plan unless otherwise provided in Sections 3.3 or 3.4. | |
3.3 | Lost Payees. Benefits payable under the Plan shall be forfeited if the Committee is unable to locate an individual to whom payment is due; provided, however, that, in the discretion of the Committee, such benefit shall be reinstated if a claim is made by the proper payee for the forfeited benefit. If forfeited, the Employer shall have no further obligation for such benefit to the Participant or anyone else. | |
3.4 | Non-Compete Provision/Discharge for Cause. Notwithstanding any contrary provision of the Plan, if a Participant who is entitled to receive a Supplemental Benefit engages in competition with the Employer or any related employer (without prior written authorization given by the Employer), or is discharged for cause, the Participants Supplemental Benefit will, at the discretion of the Employer, be forfeited. If forfeited, the Employer shall have no further obligation for such benefit to the Participant or anyone else. |
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4.1 | Normal Retirement Benefit. A Participant whose Retirement Date is on his Normal Retirement Date shall be entitled to a Supplemental Benefit, payable pursuant to the provisions of Article 5. The Supplemental Benefit shall be equal to the excess of (a) over (b) below. |
(a) | The greater of (i), (ii) or (iii) below. |
(i) | For each Participant specified in Appendix B, 3/4% of the Participants Average Monthly Earnings below the Social Security Integration Level plus 1-1/4% of the Participants Average Monthly Earnings in excess of the Social Security Integration Level, such sum multiplied by the Participants Years of Service. | ||
(ii) | For each Participant specified in Appendix C, the monthly benefit that the Participant would have been entitled to had he continued to participate under the Inter-Ocean Employees Retirement Plan or Inter-Ocean Insurance Company Retirement Plan for Field Employees, as the case may be, until the termination of his employment with the Employer (or a related employer under Code §414). | ||
(iii) | Participants monthly benefit determined under the CFC Retirement Plan as of the Participants Retirement Date ignoring the limit on earnings under Code §401(a)(17) and ignoring any limit on benefits under Code §415. |
(b) | The Participants monthly benefit payable under the CFC Retirement Plan as of the Participants Retirement Date. |
4.2 | Early Retirement Benefit. A Participant whose Retirement Date is on or after his Early Retirement Date but before his Normal Retirement Date shall be entitled to a Supplemental Benefit, payable pursuant to the provisions of Article 5. The Supplemental |
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Benefit shall be equal to an amount calculated under Section 4.1(a) as of the Participants Retirement Date, reduced by 1/2% for each month that the Participants Retirement Date precedes his Normal Retirement Date. The resulting amount shall be further reduced by the monthly benefit payable to the Participant under the CFC Retirement Plan as of the Participants Retirement Date. | ||
4.3 | Deferred Retirement Benefit. A Participant whose Retirement Date is after his Normal Retirement Date shall be entitled to a Supplemental Benefit, payable pursuant to the provisions of Article 5. The Supplemental Benefit shall be equal to the excess of (a) over (b) below. |
(a) | The greater of (i) or (ii) below. |
(i) | The amount calculated under Section 4.1(a) as of the Participants Retirement Date. | ||
(ii) | The amount calculated under Section 4.1(a) as of the Participants Normal Retirement Date Actuarially Adjusted for the Participants deferred Retirement Date. |
(b) | The Participants monthly benefit payable under the CFC Retirement Plan as of the Participants Retirement Date. |
4.4 | Disability Retirement Benefit. A Participant whose Retirement Date is on his Disability Retirement Date shall be entitled to a Supplemental Benefit, payable pursuant to the provisions of Article 5. The Supplemental Benefit shall be equal to an amount calculated under Section 4.1(a) as of the Participants Disability Retirement Date, reduced by 1/2% for each month that the Participants Disability Retirement Date precedes the Participants Normal Retirement Date. The resulting amount shall be reduced by the monthly benefit payable to the Participant under the CFC Retirement Plan as of the Participants Disability Retirement Date. | |
4.5 | Death Benefits. If a Participant who is entitled to a benefit under the CFC Retirement Plan dies before his Retirement Date, or after Retirement Date but before the |
- 7 -
Participants Supplemental Benefit has been paid, the Participants Beneficiary shall be entitled to receive the Participants Supplemental Benefit payable in accordance with the provisions of Article 5. The Supplemental Benefit shall be equal to 100% of the amount of the Participants Supplemental Benefit determined in accordance with Article 4, Actuarially Adjusted and reduced in the same manner as is applicable under the CFC Retirement Plan, as if the Participant had terminated employment with the Employer as of his date of death and commenced benefit payments from the CFC Retirement Plan on the date on which the Beneficiary first commences benefit payments from the CFC Retirement Plan. The resulting amount shall be reduced by the monthly benefit payable to the Beneficiary under the CFC Retirement Plan. If no individual is entitled to receive death benefits under the CFC Retirement Plan, then no individual is entitled to Death Benefits under the Plan. |
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5.1 | Form of Benefit. The vested Supplemental Benefit payable to a Participant or his Beneficiary shall only be paid in the form of a single lump sum payment. The lump sum payment shall be the actuarial equivalent of a life annuity payable to the Participant in monthly installments equal to the Participants Supplemental Benefit. The determination of the lump sum payment shall be calculated in the same manner and using the same actuarial assumptions as used in the calculation of optional lump sum payments under the CFC Retirement Plan. However, if such calculated lump sum payment under the CFC Retirement Plan is limited by Code §415, the Participants lump sum payment under the Plan shall be increased in an amount equal to the amount that the calculated lump sum payment under the CFC Retirement Plan is limited by Code §415. | |
5.2 | Date of Payment. |
(a) | Retirement Benefits. Subject to Sections 5.3, 5.4, 5.5 and 5.6, a vested Supplemental Benefit payable in accordance with Article 4 on account of retirement will be paid on a Participants Retirement Date, or as provided in (c) below. | ||
(b) | Death Benefits. Subject to Sections 5.4, 5.5 and 5.6, a vested Supplemental Benefit payable in accordance with Article 4 on account of the Participants death will be paid as follows, or as otherwise provided in (c) below: (a) prior to January 1, 2007, the date on which the Beneficiary first commences benefit payments under the CFC Retirement Plan; and (b) on, or after, January 1, 2007, on the Participants date of death. | ||
(c) | Administration of Benefit Payments. The payment of vested benefits under the Plan shall be paid on the payment dates specified in (a) and (b) above (as applicable), or as soon as administratively practicable thereafter, but not later than the later of: (i) December 31st of the calendar year in which the payment dates specified in (a) and (b) above occur (as applicable); or (ii) the 15th day of the 3rd |
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calendar month following the payment dates specified in (a) and (b) above (as applicable). |
5.3 | Key Employees. Notwithstanding Section 5.2(a), if required by Code §409A and the regulations thereunder as interpreted by the Committee, any vested benefit payable under the Plan to a Participant who is a Key Employee may not be paid before the date that is 6 months after the Participants Separation from Service, or if earlier, the date of the Participants death. The amount of such benefit (the Delayed Benefit) shall be equal to the Participants vested Supplemental Benefit determined as of the date of the Participants Separation from Service increased by interest credited during the period beginning on the Participants Separation from Service and ending on the date the Delayed Benefit is paid. The interest rate used to credit interest during the 6-month period shall be the same as the rate used to determine lump sum payment amounts under Section 5.1. The Delayed Benefit shall be paid on the last day of the 6-month period or as soon as administratively practicable thereafter, but not later than the later of: (a) December 31st of the calendar year in which last day of the 6-month period occurs; or (b) the 15th day of the 3rd calendar month following the last day of the 6-month period. | |
5.4 | Domestic Relations Orders. Notwithstanding Sections 5.2(a) and 5.2(b), the payment of vested benefits due under the Plan shall be accelerated and paid as is necessary to satisfy a domestic relations order (as defined in Code §414(p)(1)(B)). | |
5.5 | Code §409A Failures. Notwithstanding Sections 5.2(a) and 5.2(b), the payment of vested benefits due under the Plan shall be accelerated and paid to a Participant or Beneficiary if the Plan fails to satisfy Code §409A. Benefit payments made pursuant to this section may not exceed the amount required to be included in the Participants or Beneficiarys income as a result of the Plans failure to comply with Code §409A. The Participant (or Beneficiary) shall be solely responsible for all taxes, penalties and/or interest with respect to his benefit under the Plan, including the interest and/or additional taxes provided in Code §409A(a)(1)(B). | |
5.6 | Discretionary Delay In Benefit Payments. Notwithstanding Sections 5.2(a) and 5.2(b), the Committee may delay the payment of vested benefits due under the Plan by reason of |
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any events or conditions permitted under Code §409A and the regulations thereunder as interpreted by the Committee, including but not limited to situations where the Committee reasonably determines that any of the events described in (a) through (c) below would occur. |
(a) | The Employers tax deduction attributable to a benefit payment would be limited or eliminated by Code §162(m). Such benefit shall be paid on the earliest date the Committee reasonably believes that the deduction attributable to the benefit payment will not be limited or eliminated by Code §162(m). | ||
(b) | Making a benefit payment would violate the terms of a loan or similar agreement to which the Employer is a party, and such violation would cause material harm to the Employer. Such benefit payment shall be made on the earliest date the Committee reasonably believes that making the payment will not cause a violation of the terms of a loan or similar agreement, or will not cause material harm to the Employer. | ||
(c) | Making a benefit payment would violate federal securities laws or other applicable laws. Such benefit payment shall be made on the earliest date the Committee reasonably believes that making the payment will not cause a violation of federal securities laws or other applicable laws. |
5.7 | Tax Withholding. As a condition to entitlement to benefits under the Plan, the Employer may deduct (or cause to be deducted) from any amounts payable to an individual (whether from the Plan or otherwise), or, in the Employers discretion, to otherwise to collect from the individual any withholding for federal, state or other taxes with respect to benefits under the Plan as determined by the Employer. |
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6.1 | Initial Claims Procedure. |
(a) | Claim. In order to present a complaint regarding the nonpayment of a Plan benefit or a portion thereof (a Claim), a Participant or other beneficiary under the Plan (a Claimant) or his duly authorized representative must file such Claim by mailing or delivering a writing stating such Claim to the Committee. Upon such receipt of a Claim, the Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (b)(i) below and of the effect, pursuant to (b)(iii) below, of failure to decide the Claim within such time limit. | ||
(b) | Initial Decision. |
(i) | Time Limit. The Committee shall decide upon a Claim within a reasonable period of time after receipt of such Claim; provided, however, that such period shall in no event exceed 90 days, unless special circumstances require an extension of time for processing. If such an extension of time for processing is required, then the Claimant shall, prior to the termination of the initial 90-day period, be furnished a written notice indicating such special circumstances and the date by which the Committee expects to render a decision. In no event shall an extension exceed a period of 90 days from the end of the initial period. | ||
(ii) | Notice of Denial. If the Claim is wholly or partially denied, then the Committee shall furnish to the Claimant, within the time limit applicable under (i) above, a written notice setting forth in a manner calculated to be understood by the Claimant: |
(A) | the specific reason or reasons for such denial; |
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(B) | specific reference to the pertinent Plan provisions on which such denial is based; | ||
(C) | a description of any additional material or information necessary for such Claimant to perfect his Claim and an explanation of why such material or information is necessary; and | ||
(D) | appropriate information as to the steps to be taken if such Claimant wishes to submit his Claim for review pursuant to Section 6.2, including notice of the time limits set forth in Section 6.2(b)(ii). |
(iii) | Deemed Denial for Purposes of Review. If a Claim is not granted and if, despite the provisions of (i) and (ii) above, notice of the denial of a Claim is not furnished within the time limit applicable under (i) above, then the Claimant may deem such Claim denied and may request a review of such deemed denial pursuant to the provisions of Section 6.2. |
6.2 | Claim Review Procedure. |
(a) | Claimants Rights. If a Claim is wholly or partially denied under Section 6.1, then the Claimant or his duly authorized representative shall have the following rights: |
(i) | to obtain, subject to (b) below, a full and fair review by the Committee; | ||
(ii) | to review pertinent documents; and | ||
(iii) | to submit issues and comments in writing. |
(b) | Request for Review. |
(i) | Filing. To obtain a review pursuant to (a) above, a Claimant entitled to such a review or his duly authorized representative shall, subject to (ii) below, mail or deliver a written request for such a review (a Request for Review) to the Committee. |
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(ii) | Time Limits for Requesting a Review. A Request for Review must be mailed or delivered within 60 days after receipt by the Claimant of written notice of the denial of the Claim. | ||
(iii) | Acknowledgment. Upon such receipt of a Request for Review, the Committee shall furnish to the Claimant a written acknowledgment which shall inform such Claimant of the time limit set forth in (c)(i) below and of the effect, pursuant to (c)(iii) below, of failure to furnish a decision on review within such time limit. |
(c) | Decision on Review. |
(i) | Time Limit. |
(A) | General. If, pursuant to (b) above, a review is requested, then, except as otherwise provided in (B) below, the Committee or its delegate (but only if such delegate has been given the authority to make a final decision on the Claim) shall make a decision promptly and no later than 60 days after receipt of the Request for Review; except that, if special circumstances require an extension of time for processing, then the decision shall be made as soon as possible but not later than 120 days after receipt of the Request for Review. The Committee must furnish the Claimant written notice of any extension prior to its commencement. | ||
(B) | Regularly Scheduled Meetings. Anything to the contrary in (A) above notwithstanding, if the Committee holds regularly scheduled meetings at least quarterly, then its decision on review shall be made no later than the date of the meeting which immediately follows the receipt of the Request for Review; provided, however, if such Request for Review is received within 30 days preceding the date of such meeting, then such decision on review shall be made no later than the date of the 2nd meeting which follows such |
- 14 -
receipt; and provided further that, if special circumstances require a further extension of time for processing, and if the Claimant is furnished written notice of such extension prior to its commencement, then such decision on review shall be rendered no later than the 3rd meeting which follows such receipt. |
(ii) | Notice of Decision. The Committee or its delegate shall furnish to the Claimant, within the time limit applicable under (i) above, a written notice setting forth in a manner calculated to be understood by the Claimant: |
(A) | the specific reason or reasons for the decision on review; | ||
(B) | specific reference to the pertinent Plan provisions on which the decision on review is based; | ||
(C) | a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimants Claim; and | ||
(D) | a statement of the Claimants right to bring an action under section 502(a) of the Employee Retirement Income Security Act of 1974. |
(iii) | Deemed Denial. If, despite the provisions of (i) and (ii) above, the decision on review is not furnished within the time limit applicable under (i) above, then the Claimant shall be deemed to have exhausted his remedies under the Plan and he may deem the Claim to have been denied on review. |
6.3 | Required Exhaustion of Administrative Remedies. Before a Participant may file a lawsuit regarding the Plan or benefits under the Plan, the Participant must first use the |
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Plans initial claims procedure and the claims review procedure (including the requirement of a timely Request for Review) described above. |
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7.1 | Plan Administration. The Committee, in addition to the powers which are expressly provided in the Plan, shall have the power and authority in its sole, absolute and uncontrolled discretion to control and manage the operation and administration of the Plan and shall have all powers necessary to accomplish these purposes including, but not limited to the following: |
(a) | the power to determine who is a Participant; | ||
(b) | the power to determine Supplemental Benefits; | ||
(c) | the power to determine when, to whom, in what amount, and in what form distributions are to be made; and | ||
(d) | such powers as are necessary, appropriate or desirable to enable it to perform its responsibilities, including the power to interpret the Plan, establish rules, regulations and forms with respect thereto. |
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8.1 | Termination and Amendment. |
(a) | Amendment. The Board of Directors may, in its discretion, amend the Plan at any time and in any manner that it deems advisable. Notwithstanding the foregoing, the Committee may make amendments that are necessary for the Plan to comply with applicable laws, to revise Appendix A, Appendix B and/or Appendix C, and minor amendments which do not materially affect the rights conferred under the Plan. Any amendment or termination may be given retroactive effect as determined by the Committee. | ||
(b) | Termination. The Board of Directors may, in its discretion, terminate the Plan at any time and in any manner that it deems advisable. |
8.2 | Entire Agreement. This Plan document constitutes the entire agreement between the Employer and any Participant (or Beneficiary), and supersedes all other prior agreements, undertakings, both written and oral, with respect to the subject matter hereof. The Plan document may not be amended orally or by any course or purported course of dealing, but only by an amendment in accordance with Section 8.1 specifically identified as a Plan amendment. Written communications and descriptions not specifically identified within their text as amendments, shall not constitute amendments and shall have no interpretive or controlling effect on the interpretation of the Plan. Oral communications shall not constitute amendments and shall have no interpretation or controlling effect on the interpretation of the Plan. | |
8.3 | Financing. Supplemental Benefits shall be paid from the general assets of the Employer, and shall not be funded, or segregated, in any way. To the extent that any individual acquires a right to receive Supplemental Benefits, such right shall be no greater than the right of any unsecured creditor of the Employer. No individual shall have any claim to or against a specific asset, or general assets, of the Employer. |
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8.4 | Non-Transferability. To the maximum extent permitted by law, Supplemental Benefits payable under the Plan shall not be assignable or subject to any manner of alienation, sale, transfer, claims of creditors, pledge, attachment, or encumbrances of any kind unless provided in Section 5.4. | |
8.5 | Severability. If any provision of the Plan are held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provision had not been included. | |
8.6 | Gender and Number. As used in the Plan, except when otherwise indicated by the context, the genders of pronouns and the singular and plural numbers of terms shall be interchangeable. | |
8.7 | Headings and Captions. The headings and captions within the Plan are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. | |
8.8 | No Rights Conferred. Nothing contained herein will confer upon a Participant the right to be retained in the service of the Employer, nor will it interfere with the right of the Employer to discharge the Participant. | |
8.9 | No Guarantee of Tax Consequences. The Participant (or Beneficiary) shall be responsible for all taxes, penalties and/or interest with respect to his benefit under the Plan. The Employer does not guarantee any particular tax consequences. | |
8.10 | Applicable Law. This instrument shall be construed in accordance with and governed by the laws of the State of Ohio to the extent not superseded by the laws of the United States. |
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1. | Gerard R. Behnen | |
2. | John Beiting | |
3. | James E. Benoski | |
4. | Richard M. Cumming | |
5. | Donald J. Doyle, Jr. | |
6. | Craig W. Forrester | |
7. | Michael J. Gagnon | |
8. | Thomas A. Joseph | |
9. | Eric N. Matthews | |
10. | Daniel T. McCurdy, Jr. | |
11. | Kenneth S. Miller | |
12. | Robert B. Morgan | |
13. | Glenn Nicholson | |
14. | Larry R. Plum | |
15. | David Popplewell | |
16. | Jacob F. Scherer, Jr. | |
17. | John J. Schiff, Jr. | |
18. | Kenneth W. Stecher | |
19. | Timothy L. Timmel | |
20. | Jody L. Wainscott |
A-1
1. | Gerard R. Behnen | |
2. | John Beiting | |
3. | James E. Benoski | |
4. | Richard M. Cumming | |
5. | Michael J. Gagnon | |
6. | Daniel T. McCurdy | |
7. | Robert B. Morgan | |
8. | Larry R. Plum | |
9. | John J. Schiff, Jr. | |
10. | Jody L. Wainscott |
B-1
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
(Dollars in millions except share data) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Numerator: |
||||||||||||||||
Net incomebasic and diluted |
$ | 115 | $ | 117 | $ | 800 | $ | 419 | ||||||||
Denominator: |
||||||||||||||||
Weighted-average common shares outstanding |
173,224,254 | 174,811,150 | 173,555,925 | 175,194,545 | ||||||||||||
Effect of stock options |
2,035,809 | 1,995,117 | 1,986,691 | 2,018,132 | ||||||||||||
Adjusted weighted-average shares |
175,260,063 | 176,806,267 | 175,542,616 | 177,212,677 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.67 | $ | 0.67 | $ | 4.61 | $ | 2.39 | ||||||||
Diluted |
$ | 0.66 | $ | 0.66 | $ | 4.56 | $ | 2.37 |
Three months ended Sept. 30, | Nine months ended Sept. 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Number of
anti-dilutive
option shares |
1,343,850 | 1,746,182 | 2,777,770 | 1,481,578 | ||||||||||||
Exercise price |
$ | $45.26 | $ | 41.14-41.62 | $ | 41.62-45.26 | $ | 41.62 |
Cincinnati Financial Corporation |
||
Form 10-Q for the quarter ended September 30, 2006
|
49 |
1. | I have reviewed this Quarterly Report on Form 10-Q of Cincinnati Financial Corporation; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c. | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d. | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 1, 2006 |
||
/S/ John J. Schiff, Jr. |
||
John J. Schiff, Jr. |
||
Chairman and Chief Executive Officer |
Cincinnati Financial Corporation | ||
50
|
Form 10-Q for the quarter ended September 30, 2006 |
1. | I have reviewed this Quarterly Report on Form 10-Q of Cincinnati Financial Corporation; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c. | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d. | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 1, 2006 |
||
/S/ Kenneth W. Stecher |
||
Kenneth W. Stecher |
||
Chief Financial Officer, |
||
Executive Vice President, |
||
Secretary and Treasurer |
||
(Principal Accounting Officer) |
Cincinnati Financial Corporation |
||
Form 10-Q for the quarter ended September 30, 2006
|
51 |
1. | the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act of 1934; and | ||
2. | the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Cincinnati Financial Corporation. |
Date: November 1, 2006 |
||
/S/ John J. Schiff, Jr. |
||
John J. Schiff, Jr. |
||
Chairman and Chief Executive Officer |
||
/S/ Kenneth W. Stecher |
||
Kenneth W. Stecher |
||
Chief Financial Officer, |
||
Executive Vice President, |
||
Secretary and Treasurer |
||
(Principal Accounting Officer) |
Cincinnati Financial Corporation | ||
52
|
Form 10-Q for the quarter ended September 30, 2006 |
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