e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2009.
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¨ |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 0-4604
CINCINNATI FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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31-0746871 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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6200 S. Gilmore Road, Fairfield, Ohio
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45014-5141 |
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(Address of principal executive offices)
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(Zip code) |
Registrants telephone number, including area code: (513) 870-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.
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þ Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer
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o Smaller reporting company |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
o Yes þ No
As of October 26, 2009, there were 162,701,291 shares of common stock outstanding.
Cincinnati Financial 3Q09 10-Q 1
CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
Cincinnati Financial 3Q09 10-Q 2
Part I Financial Information
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Item 1. |
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Financial Statements (unaudited) |
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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September 30, |
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December 31, |
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(In millions except per share data) |
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2009 |
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2008 |
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ASSETS |
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Investments |
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Fixed maturities, at fair value (amortized cost: 2009$7,274; 2008$6,058) |
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$ |
7,668 |
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$ |
5,827 |
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Equity securities, at fair value (cost: 2009$1,972; 2008$2,077) |
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2,669 |
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2,896 |
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Short-term investments, at fair value (amortized cost: 2009$12; 2008$84) |
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12 |
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84 |
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Other invested assets |
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79 |
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83 |
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Total investments |
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10,428 |
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8,890 |
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Cash and cash equivalents |
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448 |
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1,009 |
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Investment income receivable |
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109 |
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98 |
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Finance receivable |
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74 |
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71 |
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Premiums receivable |
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1,046 |
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1,059 |
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Reinsurance receivable |
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707 |
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759 |
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Prepaid reinsurance premiums |
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14 |
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15 |
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Deferred policy acquisition costs |
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485 |
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509 |
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Deferred income tax |
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126 |
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Land,
building and equipment, net, for company use (accumulated depreciation: 2009$318; 2008$297) |
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258 |
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236 |
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Other assets |
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71 |
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49 |
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Separate accounts |
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586 |
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548 |
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Total assets |
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$ |
14,226 |
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$ |
13,369 |
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LIABILITIES |
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Insurance reserves |
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Loss and loss expense reserves |
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$ |
4,195 |
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$ |
4,086 |
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Life policy reserves |
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1,698 |
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1,551 |
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Unearned premiums |
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1,557 |
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1,544 |
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Other liabilities |
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583 |
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618 |
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Deferred income tax |
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142 |
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Note payable |
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49 |
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49 |
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6.125% senior notes due 2034 |
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371 |
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371 |
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6.9% senior debentures due 2028 |
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28 |
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28 |
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6.92% senior debentures due 2028 |
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391 |
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392 |
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Separate accounts |
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586 |
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548 |
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Total liabilities |
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9,600 |
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9,187 |
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Commitments and contingent liabilities (Note 9) |
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SHAREHOLDERS EQUITY |
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Common stock, par value$2 per share; (authorized: 2009500 million shares,
2008500 million shares; issued: 2009196 million shares, 2008196 million shares) |
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393 |
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393 |
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Paid-in capital |
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1,078 |
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1,069 |
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Retained earnings |
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3,681 |
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3,579 |
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Accumulated other comprehensive income |
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675 |
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347 |
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Treasury stock at cost (200934 million shares, 200834 million shares) |
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(1,201 |
) |
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(1,206 |
) |
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Total shareholders equity |
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4,626 |
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4,182 |
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Total liabilities and shareholders equity |
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$ |
14,226 |
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$ |
13,369 |
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Accompanying notes are an integral part of these condensed consolidated financial statements.
Cincinnati Financial 3Q09 10-Q 3
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
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Three months ended September 30, |
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Nine months ended September 30, |
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(In millions except per share data) |
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2009 |
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2008 |
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2009 |
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2008 |
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REVENUES |
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Earned premiums |
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Property casualty |
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$ |
733 |
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$ |
751 |
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$ |
2,198 |
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$ |
2,262 |
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Life |
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33 |
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30 |
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103 |
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93 |
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Investment income, net of expenses |
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127 |
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130 |
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370 |
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412 |
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Other income |
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4 |
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3 |
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9 |
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11 |
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Realized
investment gains (losses), net |
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Other-than-temporary impairments on fixed
maturity securities |
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(11 |
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(41 |
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(54 |
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(77 |
) |
Other-than-temporary impairments on fixed
maturity securities
transferred to Other Comprehensive Income |
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Other realized investment gains, net |
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121 |
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313 |
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144 |
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105 |
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Total realized investment gains (losses), net |
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110 |
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272 |
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90 |
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28 |
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Total revenues |
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1,007 |
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1,186 |
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2,770 |
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2,806 |
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BENEFITS AND EXPENSES |
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Insurance losses and policyholder benefits |
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498 |
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563 |
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1,737 |
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1,693 |
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Underwriting, acquisition and insurance expenses |
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247 |
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248 |
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750 |
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738 |
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Other operating expenses |
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4 |
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5 |
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14 |
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16 |
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Interest expense |
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14 |
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14 |
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42 |
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39 |
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Total benefits and expenses |
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763 |
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830 |
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2,543 |
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2,486 |
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INCOME BEFORE INCOME TAXES |
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244 |
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356 |
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227 |
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320 |
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PROVISION (BENEFIT) FOR INCOME TAXES |
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Current |
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59 |
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140 |
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6 |
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146 |
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Deferred |
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14 |
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(31 |
) |
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34 |
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(94 |
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Total provision for income taxes |
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73 |
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109 |
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40 |
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52 |
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NET INCOME |
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$ |
171 |
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$ |
247 |
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$ |
187 |
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$ |
268 |
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PER COMMON SHARE |
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Net incomebasic |
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$ |
1.05 |
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$ |
1.51 |
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$ |
1.15 |
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$ |
1.64 |
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Net incomediluted |
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1.05 |
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1.50 |
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1.15 |
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1.64 |
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Accompanying notes are an integral part of these condensed consolidated financial statements.
Cincinnati Financial 3Q09 10-Q 4
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders Equity
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Nine months ended September 30, |
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(In millions) |
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2009 |
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2008 |
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COMMON STOCK |
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Beginning of year |
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$ |
393 |
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$ |
393 |
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End of period |
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393 |
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393 |
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PAID-IN CAPITAL |
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Beginning of year |
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1,069 |
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|
1,049 |
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Stock options exercised |
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4 |
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Stock-based compensation |
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8 |
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9 |
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Other |
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1 |
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1 |
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|
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End of period |
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1,078 |
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|
1,063 |
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RETAINED EARNINGS |
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Beginning of year |
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3,579 |
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|
3,404 |
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Cumulative effect of change in accounting for other-than-temporary impairments as of
April 1,2009, net of tax |
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106 |
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Net income |
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187 |
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|
268 |
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Dividends declared |
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(191 |
) |
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(190 |
) |
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End of period |
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3,681 |
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3,482 |
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ACCUMULATED OTHER COMPREHENSIVE INCOME |
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Beginning of year |
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347 |
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|
2,151 |
|
Cumulative effect of change in accounting for other-than-temporary impairments as of
April 1, 2009, net of tax |
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(106 |
) |
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Other comprehensive income (loss), net |
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434 |
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(1,195 |
) |
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|
|
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End of period |
|
|
675 |
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|
956 |
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TREASURY STOCK |
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Beginning of year |
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(1,206 |
) |
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(1,068 |
) |
Purchased |
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(139 |
) |
Reissued |
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5 |
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End of period |
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(1,201 |
) |
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(1,207 |
) |
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Total shareholders equity |
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$ |
4,626 |
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$ |
4,687 |
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COMMON STOCK NUMBER OF SHARES OUTSTANDING |
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Beginning of year |
|
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162 |
|
|
|
166 |
|
Purchase of treasury shares |
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(4 |
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Reissuance of treasury shares |
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|
|
|
|
|
|
|
|
|
|
|
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End of period |
|
|
162 |
|
|
|
162 |
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|
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|
|
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COMPREHENSIVE INCOME |
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|
|
|
|
|
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Net income |
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$ |
187 |
|
|
$ |
268 |
|
Other comprehensive income (loss), net |
|
|
434 |
|
|
|
(1,195 |
) |
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
621 |
|
|
$ |
(927 |
) |
|
|
|
|
|
|
|
Accompanying notes are an integral part of these condensed consolidated financial statements.
Cincinnati Financial 3Q09 10-Q 5
Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
187 |
|
|
$ |
268 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
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|
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|
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Depreciation, amortization and other non-cash items |
|
|
21 |
|
|
|
27 |
|
Realized gains on investments |
|
|
(90 |
) |
|
|
(28 |
) |
Stock-based compensation |
|
|
8 |
|
|
|
9 |
|
Interest credited to contract holders |
|
|
30 |
|
|
|
28 |
|
Deferred income tax |
|
|
34 |
|
|
|
(94 |
) |
Changes in: |
|
|
|
|
|
|
|
|
Investment income receivable |
|
|
(11 |
) |
|
|
28 |
|
Premiums and reinsurance receivable |
|
|
65 |
|
|
|
(88 |
) |
Deferred policy acquisition costs |
|
|
(16 |
) |
|
|
(18 |
) |
Other assets |
|
|
(4 |
) |
|
|
4 |
|
Loss and loss expense reserves |
|
|
109 |
|
|
|
199 |
|
Life policy reserves |
|
|
80 |
|
|
|
71 |
|
Unearned premiums |
|
|
13 |
|
|
|
19 |
|
Other liabilities |
|
|
(13 |
) |
|
|
(30 |
) |
Current income tax receivable/payable |
|
|
(51 |
) |
|
|
87 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
362 |
|
|
|
482 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Sale of fixed maturities |
|
|
128 |
|
|
|
119 |
|
Call or maturity of fixed maturities |
|
|
577 |
|
|
|
933 |
|
Sale of equity securities |
|
|
905 |
|
|
|
1,036 |
|
Collection of finance receivables |
|
|
22 |
|
|
|
29 |
|
Purchase of fixed maturities |
|
|
(1,769 |
) |
|
|
(1,346 |
) |
Purchase of equity securities |
|
|
(656 |
) |
|
|
(591 |
) |
Change in short-term investments, net |
|
|
72 |
|
|
|
(110 |
) |
Investment in buildings and equipment, net |
|
|
(31 |
) |
|
|
(28 |
) |
Investment in finance receivables |
|
|
(25 |
) |
|
|
(12 |
) |
Change in other invested assets, net |
|
|
(7 |
) |
|
|
(14 |
) |
Change in securities lending collateral invested |
|
|
|
|
|
|
741 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(784 |
) |
|
|
757 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Payment of cash dividends to shareholders |
|
|
(186 |
) |
|
|
(186 |
) |
Purchase of treasury shares |
|
|
|
|
|
|
(139 |
) |
Proceeds from stock options exercised |
|
|
|
|
|
|
4 |
|
Contract holder funds deposited |
|
|
102 |
|
|
|
13 |
|
Contract holder funds withdrawn |
|
|
(49 |
) |
|
|
(46 |
) |
Change in securities lending payable |
|
|
|
|
|
|
(760 |
) |
Other |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(139 |
) |
|
|
(1,118 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(561 |
) |
|
|
121 |
|
Cash and cash equivalents at beginning of year |
|
|
1,009 |
|
|
|
226 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
448 |
|
|
$ |
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid (net of capitalized interest: 2009$0; 2008$3) |
|
$ |
28 |
|
|
$ |
26 |
|
Income taxes paid |
|
|
57 |
|
|
|
58 |
|
Non-cash activities: |
|
|
|
|
|
|
|
|
Conversion of securities |
|
$ |
12 |
|
|
$ |
3 |
|
Equipment acquired under capital lease obligations |
|
|
15 |
|
|
|
|
|
Accompanying notes are an integral part of these condensed consolidated financial
statements.
Cincinnati Financial 3Q09 10-Q 6
Notes To Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 Accounting Policies
The condensed consolidated financial statements include the accounts of Cincinnati
Financial Corporation and its consolidated subsidiaries, each of which are wholly owned,
and are presented in conformity with accounting principles generally accepted in the United
States of America (GAAP). All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect amounts reported in the financial statements and
accompanying notes. Our actual results could differ from those estimates. The December 31,
2008, consolidated balance sheet amounts are derived from the audited financial statements
but do not include all disclosures required by GAAP.
Our September 30, 2009, condensed consolidated financial statements are unaudited. Certain
financial information that is included in annual financial statements prepared in
accordance with GAAP is not required for interim reporting and has been condensed or
omitted. We believe that we have made all adjustments, consisting only of normal recurring
accruals that are necessary for fair presentation. These condensed consolidated financial
statements should be read in conjunction with our consolidated financial statements
included in our 2008 Annual Report on Form 10-K. The results of operations for interim
periods do not necessarily indicate results to be expected for the full year.
We have changed our presentation of underwriting expenses in our condensed consolidated
statements of operations, effective the second quarter 2009. We have summarized
commissions, insurance operating expenses, increase in deferred acquisition costs and
taxes, licenses and fees to a single caption, Underwriting, acquisition and insurance
expenses.
An updated description of our property casualty insurance accounting policy for our
financial statements, related to policy acquisition costs, is stated in the following two
paragraphs:
Property casualty policy written premiums are deferred and recorded as earned premiums on a
pro rata basis over the terms of the policies. We record as unearned premium the portion of
written premiums that applies to unexpired policy terms. The expenses associated with
issuing policies primarily commissions, premium taxes and underwriting costs are
deferred and amortized over the terms of the policies. Our standard market insurance
operations consist of two segments, commercial lines and personal lines. We assess
recoverability of deferred acquisition costs at the segment level, consistent with the ways
we acquire, service, manage and measure profitability. We also have deferred acquisition
costs in our surplus lines operation, which is reported in Other. We analyze our
acquisition cost assumptions periodically to reflect actual experience; we evaluate our
deferred acquisition cost for recoverability; and we regularly conduct reviews for
potential premium deficiencies.
A premium deficiency is recorded when the sum of expected loss and loss adjustment
expenses, expected policyholder dividends, unamortized acquisition costs and maintenance
costs exceeds the total of unearned premiums and anticipated investment income. A premium
deficiency is first recognized by charging any unamortized acquisition costs to expense to
the extent required to eliminate the deficiency. If the premium deficiency is greater than
unamortized acquisition costs, a liability is accrued for the excess deficiency.
There were no subsequent events requiring adjustment to the financial statements or
disclosure through October 29, 2009, the date that we issued our financial statements.
Investments in Debt Securities
As discussed below, on April 1, 2009, we adopted Accounting Standards Codification
(ASC) 320, Recognition and Presentation of Other-Than-Temporary Impairments. Our invested
asset impairment policy now states that fixed maturities the company 1) intends to sell or
2) more likely than not will be required to sell before recovery of their amortized cost
basis are deemed to be other-than-temporarily impaired. The book value of any such
securities is reduced to fair value as the new cost basis, and a realized loss is recorded
in the quarter in which it is recognized. When these two criteria are not met, and the
company believes that full collection of interest and/or principal is not likely, we
determine the net present value of future cash flows by using the effective interest rate
implicit in the security at the date of acquisition as the discount rate and compare that
amount to the amortized cost and fair value of the security. The difference between the net
present value of the expected future cash flows and amortized cost of the security is
considered a credit loss and recognized as a realized loss in the quarter in which it
occurred. The difference between the fair value and the net present value of the cash flows
of the security, the non-credit loss, is recognized in other comprehensive income as an
unrealized loss. With the adoption of this ASC in the second quarter of 2009, we recognized
a cumulative effect adjustment of $106 million, net of tax, to reclassify the non-credit
component of previously recognized impairments by increasing retained earnings and reducing
accumulated other comprehensive income.
Cincinnati Financial 3Q09 10-Q 7
ASC 320 does not allow retrospective application of the new other-than-temporary impairment
model. Our Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2009, are not measured on the same basis as prior period amounts and,
accordingly, these amounts are not comparable.
Adopted Accounting Updates
ASC 105, The Financial Accounting Standards Board (FASB) Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
a replacement of FASB Statement No. 162
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162. ASC 105establishes a single source of authoritative, nongovernmental U.S. GAAP,
except for rules and interpretive releases of the SEC. The effective date of ASC 105 is for
interim and annual reporting periods ending after September 15, 2009. ASC 105 does not have
an impact on our companys financial position or results of operations as it does not
change authoritative guidance.
ASC 855, Subsequent Events
In May 2009, the FASB issued ASC 855, Subsequent Events. ASC 855 provides guidance on
the disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The date through which any subsequent
events have been evaluated and the basis for that date must be disclosed. ASC 855 requires
that we disclose the analysis of subsequent events through the date that our Financial
Statements are issued. ASC 855 also defines the circumstances under which an entity should
recognize such events or transactions and the related disclosures of such events or
transactions that occur after the balance sheet date. The effective date of ASC 855 is the
companys interim or annual financial periods ending after June 15, 2009.
ASC 820-10-50, Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued ASC 820-10-50, Interim Disclosures about Fair Value of
Financial Instruments. ASC 820-10-50 is an amendment of ASC 825-10-50, Disclosures about
Fair Value of Financial Instruments and APB 28, Interim Financial Reporting. ASC 820-10-50
expands the fair value disclosures for all financial instruments within the scope of ASC
825-10-50 to interim reporting periods. We have adopted ASC 820-10-50, and it is effective
for interim reporting periods ending after June 15, 2009. ASC 820-10-50 does not have an
impact on our companys financial position or results of operations as it focuses on
additional disclosures.
ASC 320, Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB issued ASC 320, Recognition and Presentation of
Other-Than-Temporary Impairments effective for interim and annual reporting periods ending
after June 15, 2009. ASC 320 is an amendment of ASC 320-10, Accounting for Certain
Investments in Debt and Equity Securities and ASC 958-320, Accounting for Certain
Investments Held by Not-for-Profit Organizations. ASC 320 amends the other-than-temporary
impairment guidance for debt securities and expands the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial statements.
We adopted this ASC as of April 1, 2009.
ASC 820-10-65-4, Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly
In April 2009, the FASB issued ASC 820-10-65-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. ASC 820-10-65-4 is an amendment of ASC
820-10, Fair Value Measurements. ASC 820-10-65-4 applies to all assets and liabilities and
provides guidance on measuring fair value when the volume and level of activity has
significantly decreased and guidance on identifying transactions that are not orderly. ASC
820-10-65-4 requires interim and annual disclosures of the inputs and valuation techniques
used to measure fair value and a discussion of changes in valuation techniques and related
inputs, if any, that occurred during the period. We have adopted ASC 820-10-65-4, which is
effective for interim and annual reporting periods ending after June 15, 2009. ASC
820-10-65-4 does not have a material impact on our companys financial position or results
of operations.
Pending Accounting Updates
ASC 715-20-65-2, Financial Disclosures about Postretirement Benefit Plan Assets
In
December 2008, the FASB issued ASC 715-20-65-2, Employers Disclosures about
Postretirement Benefit Plan Assets. ASC 715-20-65-2 is an amendment of ASC 715-20, Employers
Disclosures about Pensions and Other Postretirement Benefits, an amendment of ASC 715-10,
715-30, and 715-60. ASC 715-20-65-2 provides guidance on an employers disclosures about plan
assets of a defined benefit pension or other
Cincinnati Financial 3Q09 10-Q 8
postretirement plan. The effective date of ASC 715-20-65-2 is the companys fiscal year
ending after December 15, 2009. ASC 715-20-65-2 will not have an impact on our companys
financial position or results of operations as it focuses on additional disclosures.
Accounting Standard Update (ASU) 2009-05, Measuring Liabilities at Fair Value
In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value. ASU 2009-05
is an amendment of ASC 820, Fair Value Measurements and Disclosures. ASU 2009-05 applies to all
entities that measure liabilities at fair value within the scope of ASC 820, Fair Value
Measurements and Disclosures. ASU 2009-05 provides guidance on measuring fair value of liabilities
under circumstances in which a quoted price in an active market for the identical liability is not
available. ASU 2009-05, which is effective for the first interim or annual reporting period
beginning after August 28, 2009, will not have a material impact on our companys financial
position or results of operations.
ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent)
In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 provides guidance on
estimating fair value of alternative investments when using the net asset value per share
provided by the investment entity. The effective date of ASU 2009-12 is for interim and
annual periods ending after December 15, 2009, with early adoption permitted. ASU 2009-12
will not have a material impact on our companys financial position or results of
operations.
NOTE 2 Investments
Fixed maturities (bonds and redeemable preferred stocks), equity securities (common
and non-redeemable preferred stocks) and short-term investments have been classified as
available for sale and are stated at fair values at September 30, 2009, and December 31,
2008.
The change in unrealized gains and losses on investments, net of taxes, described in the
following table, is included in other comprehensive income and shareholders equity. See
Note 1, Accounting Policies, Pages 7-8, for additional discussion of ASC 320, Recognition
and Presentation of Other-Than-Temporary Impairments. Included in Other is an interest-rate
swap of less than $1 million that expired on August 29,
2009. On August 29, 2009, we entered into a new interest-rate swap that will expire August
29, 2012. As we did not elect hedge accounting, all changes in fair value for the
interest-rate swap will be recorded in the consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Change in unrealized investment gains and losses and other summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
407 |
|
|
$ |
(147 |
) |
|
$ |
787 |
|
|
$ |
(280 |
) |
Equity securities |
|
|
165 |
|
|
|
(150 |
) |
|
|
(121 |
) |
|
|
(1,536 |
) |
Adjustment to deferred acquisition costs and life policy reserves |
|
|
(14 |
) |
|
|
8 |
|
|
|
(24 |
) |
|
|
13 |
|
Pension obligations |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Other |
|
|
14 |
|
|
|
(30 |
) |
|
|
26 |
|
|
|
(40 |
) |
Income taxes on above |
|
|
(201 |
) |
|
|
112 |
|
|
|
(235 |
) |
|
|
647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
371 |
|
|
$ |
(207 |
) |
|
$ |
434 |
|
|
$ |
(1,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 9
The following table analyzes cost or amortized cost, gross unrealized gains, gross
unrealized losses and fair value for our investments, along with the amount of cumulative
non-credit other-than-temporary impairment (OTTI) losses transferred to accumulated other
comprehensive income (AOCI) in accordance with ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments, for securities
that also had a credit impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
amortized |
|
|
Gross unrealized |
|
|
Fair |
|
|
|
|
(In millions) |
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
OTTI in AOCI |
|
|
At September 30, |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
$ |
3,006 |
|
|
$ |
199 |
|
|
$ |
3 |
|
|
$ |
3,202 |
|
|
$ |
|
|
Convertibles and bonds with warrants attached |
|
|
116 |
|
|
|
1 |
|
|
|
|
|
|
|
117 |
|
|
|
|
|
United States government |
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Government-sponsored enterprises |
|
|
304 |
|
|
|
|
|
|
|
1 |
|
|
|
303 |
|
|
|
|
|
Foreign government |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Short-term investments |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
38 |
|
|
|
|
|
|
|
10 |
|
|
|
28 |
|
|
|
|
|
Corporate bonds |
|
|
3,803 |
|
|
|
263 |
|
|
|
56 |
|
|
|
4,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,286 |
|
|
$ |
464 |
|
|
$ |
70 |
|
|
$ |
7,680 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,972 |
|
|
$ |
760 |
|
|
$ |
63 |
|
|
$ |
2,669 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
$ |
2,704 |
|
|
$ |
60 |
|
|
|
31 |
|
|
$ |
2,733 |
|
|
|
|
|
Convertibles and bonds with warrants attached |
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
United States government |
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Government-sponsored enterprises |
|
|
391 |
|
|
|
|
|
|
|
2 |
|
|
|
389 |
|
|
|
|
|
Foreign government |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
All other corporate bonds and short-term investments |
|
|
2,938 |
|
|
|
44 |
|
|
|
303 |
|
|
|
2,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,142 |
|
|
$ |
105 |
|
|
$ |
336 |
|
|
$ |
5,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
2,077 |
|
|
$ |
1,079 |
|
|
$ |
260 |
|
|
$ |
2,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized investment gains at September 30, 2009, were largely due to a long-term net
gain position of $680 million for our common stock portfolio. Contributing 10 percent or
more of that net gain position were three holdings totaling $391 million: Wyeth (NYSE:WYE),
The Procter & Gamble Company (NYSE:PG) and Exxon Mobil Corporation (NYSE:XOM). At September
30, 2009, we had $106 million fair value of hybrid securities included in fixed maturities
that follow ASC 815-15-25, Accounting for Certain Hybrid Financial Instruments.
The table below provides fair values and unrealized losses by investment category and by
the duration of the securities continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(In millions) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
At September 30, |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
$ |
7 |
|
|
$ |
1 |
|
|
$ |
32 |
|
|
$ |
2 |
|
|
$ |
39 |
|
|
$ |
3 |
|
Government-sponsored enterprises |
|
|
116 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
1 |
|
Short-term investments |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
10 |
|
|
|
5 |
|
|
|
16 |
|
|
|
5 |
|
|
|
26 |
|
|
|
10 |
|
Corporate bonds |
|
|
321 |
|
|
|
35 |
|
|
|
399 |
|
|
|
21 |
|
|
|
720 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
455 |
|
|
|
42 |
|
|
|
447 |
|
|
|
28 |
|
|
|
902 |
|
|
|
70 |
|
Equity securities |
|
|
145 |
|
|
|
7 |
|
|
|
368 |
|
|
|
56 |
|
|
|
513 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
600 |
|
|
$ |
49 |
|
|
$ |
815 |
|
|
$ |
84 |
|
|
$ |
1,415 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
$ |
592 |
|
|
$ |
26 |
|
|
$ |
94 |
|
|
$ |
5 |
|
|
$ |
686 |
|
|
$ |
31 |
|
Convertibles and bonds with warrants attached |
|
|
195 |
|
|
|
15 |
|
|
|
38 |
|
|
|
5 |
|
|
|
233 |
|
|
|
20 |
|
Government-sponsored enterprises |
|
|
141 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
141 |
|
|
|
2 |
|
All other corporate bonds and short-term
investments |
|
|
1,367 |
|
|
|
215 |
|
|
|
254 |
|
|
|
68 |
|
|
|
1,621 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,295 |
|
|
|
258 |
|
|
|
386 |
|
|
|
78 |
|
|
|
2,681 |
|
|
|
336 |
|
Equity securities |
|
|
820 |
|
|
|
219 |
|
|
|
79 |
|
|
|
41 |
|
|
|
899 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,115 |
|
|
$ |
477 |
|
|
$ |
465 |
|
|
$ |
119 |
|
|
$ |
3,580 |
|
|
$ |
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 10
Other-than-temporary Impairment Charges
The following table provides the amount of OTTI for the three and nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Other-than-temporary impairment charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
11 |
|
|
$ |
41 |
|
|
$ |
54 |
|
|
$ |
77 |
|
Equity securities |
|
|
|
|
|
|
80 |
|
|
|
59 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11 |
|
|
$ |
121 |
|
|
$ |
113 |
|
|
$ |
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the amount of credit losses on fixed-maturity securities for
which a portion of OTTI has been recognized in other comprehensive income:
|
|
|
|
|
(In millions) |
|
|
|
|
|
Impairments due to credit losses reconciliation |
|
|
|
|
Balance at July 1, 2009 |
|
$ |
4 |
|
Additional credit impairments on: |
|
|
|
|
Previously impaired securities |
|
|
|
|
Securities without prior impairments |
|
|
|
|
Reductions |
|
|
(4 |
) |
|
|
|
|
Balance September 30, 2009 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Impairments due to credit losses reconciliation |
|
|
|
|
Balance at April 1, 2009 |
|
$ |
4 |
|
Additional credit impairments on: |
|
|
|
|
Previously impaired securities |
|
|
1 |
|
Securities without prior impairments |
|
|
|
|
Reductions |
|
|
(5 |
) |
|
|
|
|
Balance September 30, 2009 |
|
$ |
|
|
|
|
|
|
During the quarter ended September 30, 2009, we impaired 13 fixed-maturity securities for a
total of $11 million. At September 30, 2009, 135 fixed-maturity investments with a total
unrealized loss of $28 million had been in an unrealized loss position for 12 months or
more. Of that total, six fixed-maturity investments with a total unrealized loss of $2
million were trading below 70 percent of book value. Eleven equity securities with a total
unrealized loss of $56 million had been in an unrealized loss position for 12 months or
more, but none were trading below 70 percent of book value.
During 2008, we impaired 126 securities. At December 31, 2008, 142 fixed maturity
investments with a total unrealized loss of $78 million had been in an unrealized loss
position for 12 months or more. Of that total, no fixed maturity investments were trading
below 70 percent of book value. Six equity investments with a total unrealized loss of $41
million had been in an unrealized loss position for 12 months or more as of December 31,
2008, with two trading below 70 percent of book value. As a result of this evaluation, we
did not record impairment on the six equity securities in an unrealized loss position in
excess of 12 months at December 31, 2008.
When determining OTTI charges for our fixed-maturity portfolio, management places
significant emphasis on whether issuers of debt are current on contractual payments and
whether future contractual amounts are likely to be paid. As required by the new accounting
standard for fixed-maturity securities, our invested asset impairment policy states that
OTTI is considered to have occurred (1) if we intend to sell the impaired fixed maturity
security; (2) if it is more likely than not we will be required to sell the fixed maturity
security before recovery of its amortized cost basis; or (3) the present value of the
expected cash flows is not sufficient to recover the entire amortized cost basis. If we
intend to sell or it is more likely than not we will be required to sell, the book value of
any such securities is reduced to fair value as the new cost basis, and a realized loss is
recorded in the quarter in which it is recognized. When we believe that full collection of
interest and/or principal is not likely, we determine the net present value of future cash
flows by using the effective interest
rate implicit in the security at the date of acquisition as the discount rate and compare
that amount to the amortized cost and fair value of the security. The difference between
the net present value of the expected future cash flows and amortized cost of the security
is considered a credit loss and recognized as a realized
Cincinnati Financial 3Q09 10-Q 11
loss in the quarter in which it
occurred. The difference between the fair value and the net present value of the cash flows
of the security, the non-credit loss, is recognized in other comprehensive income as an
unrealized loss.
With the adoption of ASC 320 in the second quarter of 2009, we recognized a cumulative
effect adjustment of $106 million, net of tax, to reclassify the non-credit component of
previously recognized impairments by increasing retained earnings and reducing accumulated
other comprehensive income. ASC 320 does not allow retrospective application of the new
OTTI model. Our Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2009, are not measured on the same basis as prior period amounts
and, accordingly, these amounts are not comparable.
When determining OTTI charges for our equity portfolio, our invested asset impairment
policy considers qualitative and quantitative factors, including facts and circumstances
specific to individual securities, asset classes, the financial condition of the issuer,
changes in dividend payment, the length of time fair value had been less than book value,
the severity of the decline in fair value below book value, the volatility of the security
and our ability and intent to hold each position until its forecasted recovery.
For each of our equity securities in an unrealized loss position at September 30, 2009, we
applied the objective quantitative and qualitative criteria of our invested asset
impairment policy for OTTI. Our long-term equity investment philosophy, emphasizing
companies with strong indications of paying and growing dividends, combined with our strong
surplus, liquidity and cash flow, provide us the ability to hold these investments through what we
believe to be slightly longer recovery periods occasioned by the recession and historic
levels of market volatility. Each quarter we review the expected recovery period by
individual security. Based on the individual qualitative and quantitative factors, as
discussed above, we evaluate and determine an expected recovery period for each security. A
change in the condition of a security can warrant impairment before the expected recovery
period. If the security has not recovered cost within the expected recovery period, the
security is impaired.
Collateralized Mortgage Obligations
As indicated in our 2008 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page
106, the securities lending program was terminated during the third quarter of 2008. In
conjunction with the program termination, we chose to retain a small portfolio of
collateralized mortgage obligations (CMOs) rather than sell them at what we felt were
distressed prices in an illiquid market. The $28 million fair value ($39 million amortized
cost) of CMOs represents less than 1 percent of our invested assets fair value as of
September 30, 2009.
Cincinnati Financial 3Q09 10-Q 12
NOTE 3 Fair Value Measurements
Fair Value Hierarchy
In accordance with fair value measurements and disclosures, we categorized our
financial instruments, based on the priority of the observable and market-based data for
valuation technique, into a three-level fair value hierarchy. The fair value hierarchy
gives the highest priority to quoted prices with readily available independent data in
active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable market inputs (Level 3). Our valuation techniques have not changed from
December 31, 2008, and ultimately management determines fair value.
When various inputs for measurement fall within different levels of the fair value
hierarchy, the lowest observable input that has a significant impact on fair value
measurement is used.
Financial instruments are categorized based upon the following characteristics or inputs to
the valuation techniques:
|
|
Level 1 Financial assets and liabilities for which inputs are observable and are obtained from
reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most
reliable fair value measurement and includes, for example, active exchange-traded equity securities. |
|
|
|
Level 2 Financial assets and liabilities for which values are based on quoted prices in markets that
are not active or for which values are based on similar assets and liabilities that are actively
traded. This also includes pricing models for which the inputs are corroborated by market data. |
|
|
|
Level 3 Financial assets and liabilities for which values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. Level 3 inputs include the following: |
|
o |
|
Quotes from brokers or other external sources that are not considered binding; |
|
|
o |
|
Quotes from brokers or other external sources where it can not be determined
that market participants would in fact transact for the asset or liability at the
quoted price; |
|
|
o |
|
Quotes from brokers or other external sources where the inputs are not deemed
observable. |
We conduct a thorough review of fair value hierarchy classifications on a quarterly basis.
Reclassification of certain financial instruments may occur when input observability
changes. As noted below in the Level 3 disclosure table, reclassifications are reported as
transfers in/out of the Level 3 category as of the beginning of the quarter in which the
reclassification occurred.
The following tables illustrate the fair value hierarchy for those assets measured at fair
value on a recurring basis for the periods ended September 30, 2009, and December 31, 2008.
We do not have any material liabilities carried at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset fair value measurements at September 30, 2009 using: |
|
|
|
Quoted prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
active markets for |
|
|
Significant other |
|
|
unobservable |
|
|
|
|
|
|
identical assets |
|
|
observable inputs |
|
|
inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
Fixed maturities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
|
|
|
$ |
4,103 |
|
|
$ |
24 |
|
|
$ |
4,127 |
|
Foreign government |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
U.S. Treasury and U.S. government agencies |
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
308 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
States, municipalities and political subdivisions |
|
|
|
|
|
|
3,197 |
|
|
|
5 |
|
|
|
3,202 |
|
Taxable fixed maturities separate accounts |
|
|
100 |
|
|
|
461 |
|
|
|
|
|
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
411 |
|
|
|
7,789 |
|
|
|
29 |
|
|
|
8,229 |
|
Common equities, available for sale |
|
|
2,515 |
|
|
|
|
|
|
|
62 |
|
|
|
2,577 |
|
Preferred equities, available for sale |
|
|
|
|
|
|
88 |
|
|
|
4 |
|
|
|
92 |
|
Short-term investments |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
Top Hat Savings Plan |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,932 |
|
|
$ |
7,889 |
|
|
$ |
95 |
|
|
$ |
10,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset fair value measurements at December 31, 2008 using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
other |
|
|
Significant |
|
|
|
|
|
|
active markets for |
|
|
observable |
|
|
unobservable |
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
|
inputs |
|
|
|
|
(In millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable fixed maturities |
|
$ |
395 |
|
|
$ |
2,619 |
|
|
$ |
50 |
|
|
$ |
3,064 |
|
Taxable fixed maturities separate accounts |
|
|
65 |
|
|
|
422 |
|
|
|
6 |
|
|
|
493 |
|
Tax-exempt fixed maturities |
|
|
|
|
|
|
2,728 |
|
|
|
5 |
|
|
|
2,733 |
|
Common equities |
|
|
2,657 |
|
|
|
|
|
|
|
64 |
|
|
|
2,721 |
|
Preferred equities |
|
|
|
|
|
|
153 |
|
|
|
22 |
|
|
|
175 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
30 |
|
Short-term investments |
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
84 |
|
Top Hat Savings Plan |
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,121 |
|
|
$ |
6,037 |
|
|
$ |
147 |
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each financial instrument that was deemed to have significant unobservable inputs when
determining valuation is identified in the tables below by security type with a summary of
changes in fair value for the three months ended September 30, 2009 and 2008. As of
September 30, 2009, total Level 3 assets were less than 1 percent of financial assets
measured at fair value compared with less than 1 percent as of June 30, 2009 and 1.2
percent and 1.6 percent at March 31, 2009, and December 31, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset fair value measurements using significant unobservable inputs (Level 3) |
|
|
|
|
|
|
|
|
|
|
|
States, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
Taxable fixed |
|
|
and political |
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
maturities- |
|
|
subdivisions |
|
|
Common |
|
|
Preferred |
|
|
|
|
(In millions) |
|
maturities |
|
|
separate accounts |
|
|
fixed maturities |
|
|
equities |
|
|
equities |
|
|
Total |
|
|
Beginning balance, June 30, 2009 |
|
$ |
20 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
64 |
|
|
$ |
8 |
|
|
$ |
97 |
|
Total gains or losses (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net
assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(1 |
) |
Purchases, sales, issuances, and settlements |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
1 |
|
Transfers in and/or out of Level 3 |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2009 |
|
$ |
24 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
62 |
|
|
$ |
4 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset fair value measurements using significant unobservable inputs (Level 3) |
|
|
|
Taxable |
|
|
Taxable fixed |
|
|
Tax-exempt |
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
maturities-separate |
|
|
fixed |
|
|
Common |
|
|
Preferred |
|
|
|
|
(In millions) |
|
maturities |
|
|
accounts |
|
|
maturities |
|
|
equities |
|
|
equities |
|
|
Total |
|
|
Beginning balance, June 30, 2008 |
|
$ |
57 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
63 |
|
|
$ |
47 |
|
|
$ |
175 |
|
Total gains or losses (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net
assets) |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(15 |
) |
Included in other comprehensive income |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
1 |
|
Purchases, sales, issuances, and settlements |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Transfers in and/or out of Level 3 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2008 |
|
$ |
49 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
63 |
|
|
$ |
38 |
|
|
$ |
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant transfers to or from the Level 3 hierarchy during the third
quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset fair value measurements using significant unobservable inputs (Level 3) |
|
|
|
|
|
|
|
|
|
|
|
States, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
Taxable fixed |
|
|
and political |
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
maturities- |
|
|
subdivisions |
|
|
Common |
|
|
Preferred |
|
|
|
|
(In millions) |
|
maturities |
|
|
separate accounts |
|
|
fixed maturities |
|
|
equities |
|
|
equities |
|
|
Total |
|
|
Beginning balance, December 31, 2008 |
|
$ |
50 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
64 |
|
|
$ |
22 |
|
|
$ |
147 |
|
Total gains or losses (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net
assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
Included in other comprehensive income |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
4 |
|
|
|
1 |
|
Purchases, sales, issuances, and settlements |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
1 |
|
Transfers in and/or out of Level 3 |
|
|
(30 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2009 |
|
$ |
24 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
62 |
|
|
$ |
4 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset fair value measurements using significant unobservable inputs (Level 3) |
|
|
|
Taxable |
|
|
Taxable fixed |
|
|
Tax-exempt |
|
|
|
|
|
|
|
|
|
|
|
|
fixed |
|
|
maturities- |
|
|
fixed |
|
|
Common |
|
|
Preferred |
|
|
|
|
(In millions) |
|
maturities |
|
|
separate accounts |
|
|
maturities |
|
|
equities |
|
|
equities |
|
|
Total |
|
|
Beginning balance, December 31, 2007 |
|
$ |
85 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
59 |
|
|
$ |
58 |
|
|
$ |
210 |
|
Total gains or losses (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net
assets) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
(20 |
) |
Included in other comprehensive income |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
Purchases, sales, issuances, and settlements |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
(10 |
) |
Transfers in and/or out of Level 3 |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2008 |
|
$ |
49 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
63 |
|
|
$ |
38 |
|
|
$ |
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009, two preferred equity securities totaling $15
million were transferred from Level 3 to Level 2. There was also a $3 million OTTI of one
preferred equity during the first quarter of 2009. Corporate fixed-maturity securities
decreased $30 million as seven securities transferred from Level 3 to Level 2 as a result
of observable inputs as of June 30, 2009, and September 30, 2009. At September 30, 2009,
total fair value of assets priced with broker quotes and other non-observable market inputs
for the fair value measurements and disclosures was $33 million.
Fair Value Disclosure for Senior Debt and Life Insurance Liabilities
The following provides the quarterly fair value disclosure for financial instruments
in accordance with the second-quarter adoption of interim disclosures about fair value of
financial instruments. The disclosures below are not affected by the fair value hierarchy
but are presented to provide timely information about the effects of current market
conditions on financial instruments that are not reported at fair value in our financial
statements.
This table summarizes the principal amounts of our long-term debt excluding unamortized
discounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Interest rate |
Year of issue |
|
|
|
|
2009 |
|
|
2008 |
|
|
|
6.900 |
% |
|
|
1998 |
|
|
Senior debentures, due 2028 |
|
$ |
28 |
|
|
$ |
28 |
|
|
6.920 |
% |
|
|
2005 |
|
|
Senior debentures, due 2028 |
|
|
391 |
|
|
|
392 |
|
|
6.125 |
% |
|
|
2004 |
|
|
Senior notes, due 2034 |
|
|
375 |
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
794 |
|
|
$ |
795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our senior debt approximated $716 million at September 30, 2009, compared
with $595 million at year-end 2008. Fair value was determined under the fair value
measurements and disclosures accounting rules based on market pricing of these or similar
debt instruments that are actively trading. Fair value can vary with macro-economic
concerns. Regardless of the fluctuations in fair value, the outstanding principal amount of
our long-term debt is $794 million. None of the notes are encumbered by rating triggers.
Also, we have a note payable with outstanding principal amount of $49 million which
approximates fair value.
Reserves for deferred annuities and other investment contracts were $670 million and $569
million for September 30, 2009, and December 31, 2008, respectively. Fair value for these
deferred annuities and investment contracts was $659 million and $460 million for September
30, 2009, and December 31, 2008, respectively. Fair values of liabilities associated with
certain investment contracts are calculated based upon internally developed models because
active, observable markets do not exist for those items. To determine the fair value, we
make the following significant assumptions: (1) the discount rates used to calculate the
present value of expected payments are the risk-free spot rates plus an A3 rated bond
spread for financial issuers as of September 30, 2009, to account for non-performance risk;
(2) the rate of interest credited to policyholders is the portfolio net earned interest
rate less a spread for expenses and profit; and (3) additional lapses occur when the
credited interest rate is exceeded by an assumed competitor credited rate, which is a
function of the risk-free rate of the economic scenario being modeled. The fair value of
life policy loans outstanding principal and interest approximated $43 million, compared
with book value of $38 million.
NOTE 4 DEFERRED ACQUISITION COSTS
The expenses associated with issuing insurance policies primarily commissions,
premium taxes and underwriting costs are deferred and amortized over the terms of the
policies. We update our acquisition cost assumptions periodically to reflect actual
experience, and we evaluate our deferred acquisition cost for recoverability. Other
underwriting operating expenses were $87 million and $275 million in the three and nine
months ended September 30, 2009, compared to $91 million and $264 million for the
comparative 2008 periods. The table below shows the deferred policy acquisition costs and
asset reconciliation, including the amortized deferred policy acquisition costs.
Cincinnati Financial 3Q09 10-Q 15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Deferred policy acquisition costs asset at beginning of the period |
|
$ |
500 |
|
|
$ |
487 |
|
|
$ |
509 |
|
|
$ |
461 |
|
Capitalized deferred policy acquisition costs |
|
|
168 |
|
|
|
159 |
|
|
|
492 |
|
|
|
492 |
|
Amortized deferred policy acquisition costs |
|
|
(160 |
) |
|
|
(157 |
) |
|
|
(475 |
) |
|
|
(474 |
) |
Amortized shadow deferred policy acquisition costs |
|
|
(23 |
) |
|
|
12 |
|
|
|
(41 |
) |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs asset at September 30, |
|
$ |
485 |
|
|
$ |
501 |
|
|
$ |
485 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no premium deficiencies for the reported consolidated statements of
operations, as the sum of the anticipated loss and loss adjustment expenses, policyholder
dividends, maintenance expenses and underwriting expenses did not exceed the related
unearned premiums and anticipated investment income.
NOTE 5 Property Casualty Loss and Loss Expenses
This table summarizes activity for our consolidated property casualty loss and loss
expense reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Gross loss and loss expense reserves, beginning of period |
|
$ |
4,187 |
|
|
$ |
4,092 |
|
|
$ |
4,040 |
|
|
$ |
3,925 |
|
Less reinsurance receivable |
|
|
501 |
|
|
|
558 |
|
|
|
542 |
|
|
|
528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense reserves, beginning of period |
|
|
3,686 |
|
|
|
3,534 |
|
|
|
3,498 |
|
|
|
3,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred loss and loss expenses related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
550 |
|
|
|
625 |
|
|
|
1,736 |
|
|
|
1,784 |
|
Prior accident years |
|
|
(91 |
) |
|
|
(102 |
) |
|
|
(113 |
) |
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred |
|
|
459 |
|
|
|
523 |
|
|
|
1,623 |
|
|
|
1,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid loss and loss expenses related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
271 |
|
|
|
317 |
|
|
|
659 |
|
|
|
668 |
|
Prior accident years |
|
|
201 |
|
|
|
232 |
|
|
|
789 |
|
|
|
802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid |
|
|
472 |
|
|
|
549 |
|
|
|
1,448 |
|
|
|
1,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense reserves, September 30 |
|
|
3,673 |
|
|
|
3,508 |
|
|
|
3,673 |
|
|
|
3,507 |
|
Plus reinsurance receivable |
|
|
478 |
|
|
|
617 |
|
|
|
478 |
|
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss and loss expense reserves, September 30 |
|
$ |
4,151 |
|
|
$ |
4,125 |
|
|
$ |
4,151 |
|
|
$ |
4,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We use actuarial methods, models, and judgment to estimate, as of a financial
statement date, the property casualty loss and loss expense reserves required to pay for
and settle all outstanding insured claims, including incurred but not reported (IBNR)
claims, as of that date. The actuarial estimate is subject to review and adjustment by an
inter-departmental committee that includes actuarial management and is familiar with
relevant company and industry business, claims and underwriting trends, as well as general
economic and legal trends, that could affect future loss and loss expense payments.
Because of changes in estimates of insured events in prior years, we decreased the
provision for loss and loss expenses by $91 million and $102 million for the three months
ended September 30, 2009 and 2008 and $113 million and $203 million for the nine months
ended September 30, 2009 and 2008, respectively. The reserve for loss and loss expenses in
the consolidated balance sheets also includes $44 million for the period ended September
30, 2009, and $46 million for the period ended December 31, 2008, for certain life and
health losses.
NOTE 6 Reinsurance
Our statements of operations include earned consolidated property casualty insurance
premiums on assumed and ceded business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Direct earned premiums |
|
$ |
773 |
|
|
$ |
799 |
|
|
$ |
2,317 |
|
|
$ |
2,389 |
|
Assumed earned premiums |
|
|
3 |
|
|
|
3 |
|
|
|
10 |
|
|
|
8 |
|
Ceded earned premiums |
|
|
(43 |
) |
|
|
(51 |
) |
|
|
(129 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
$ |
733 |
|
|
$ |
751 |
|
|
$ |
2,198 |
|
|
$ |
2,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our statements of operations include incurred consolidated property casualty insurance loss
and loss expenses on assumed and ceded business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Direct incurred loss and loss expenses |
|
$ |
486 |
|
|
$ |
598 |
|
|
$ |
1,671 |
|
|
$ |
1,715 |
|
Assumed incurred loss and loss expenses |
|
|
1 |
|
|
|
2 |
|
|
|
8 |
|
|
|
2 |
|
Ceded incurred loss and loss expenses |
|
|
(29 |
) |
|
|
(78 |
) |
|
|
(60 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred loss and loss expenses |
|
$ |
458 |
|
|
$ |
522 |
|
|
$ |
1,619 |
|
|
$ |
1,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 16
Our
statements of operations include earned life and accident and health
insurance premiums on assumed
and ceded business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Direct earned premiums |
|
$ |
45 |
|
|
$ |
43 |
|
|
$ |
139 |
|
|
$ |
131 |
|
Assumed earned premiums |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Ceded earned premiums |
|
|
(12 |
) |
|
|
(13 |
) |
|
|
(36 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
$ |
33 |
|
|
$ |
30 |
|
|
$ |
103 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our statements of operations include life insurance contract holder benefits incurred on
assumed and ceded business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Direct contract holders benefits incurred |
|
$ |
48 |
|
|
$ |
54 |
|
|
$ |
147 |
|
|
$ |
148 |
|
Assumed contract holders benefits incurred |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Ceded contract holders benefits incurred |
|
|
(8 |
) |
|
|
(13 |
) |
|
|
(29 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred loss and loss expenses |
|
$ |
40 |
|
|
$ |
41 |
|
|
$ |
118 |
|
|
$ |
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 Employee Retirement Benefits
The following summarizes the components of net periodic costs for our qualified and
supplemental pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Service cost |
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
7 |
|
|
$ |
12 |
|
Interest cost |
|
|
3 |
|
|
|
4 |
|
|
|
9 |
|
|
|
13 |
|
Expected return on plan assets |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(12 |
) |
Amortization of actuarial
loss, prior service cost and
transition asset |
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
|
|
1 |
|
Curtailment |
|
|
0 |
|
|
|
3 |
|
|
|
0 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
3 |
|
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, we changed the form of retirement benefit we offer associates to a company
match on employee contributions to the 401(k) savings plan from the defined benefit pension
plan. For a discussion of these benefit changes, see our 2008 Annual Report on Form 10-K,
Item 8, Note 13, Employee Retirement Benefits, Page 113. We made matching contributions of
$2 million and $6 million to our 401(k) savings plan during the third quarter and first
nine months of 2009, respectively.
We contributed $33 million to the qualified pension plan during the third quarter of 2009.
We do not anticipate further contributions during the remainder of 2009.
NOTE 8 Stock-Based Associate Compensation Plans
We currently have four equity compensation plans that together permit us to grant
various types of equity awards. We currently grant incentive stock options, non-qualified
stock options, service-based restricted stock units and performance-based restricted stock
units under our shareholder-approved plans. We also have a Holiday Stock Plan that permits
annual awards of one share of common stock to each full-time associate for each year of
service up to a maximum of 10 shares. One of our equity compensation plans permits us to
grant restricted stock to our outside directors as a component of their annual
compensation. For additional information about our equity compensation plans, see our 2008
Annual Report on Form 10-K, Item 8, Note 17, Stock-Based Associate Compensation Plans, Page
117.
A total of 17 million shares are authorized to be granted under the shareholder-approved
plans. At September 30, 2009, 8 million shares were available for future issuance under the
plans. During the second quarter of 2009, our shareholders approved the Directors Stock
Plan of 2009, which authorizes 300,000 shares to be granted to our directors. During the
first nine months of 2009, we granted 23,944 shares of common stock under the expiring plan
to our directors for 2008 board service fees. No stock-based awards were granted to
associates during the nine-month period ended September 30, 2009.
Our pretax and after-tax stock-based compensation costs are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Stock-based compensation cost |
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
8 |
|
|
$ |
9 |
|
Income tax benefit |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost after tax |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 17
Stock-Based Awards
Stock options are granted to associates at an exercise price that is equal to the fair
value as reported on the NASDAQ Global Select Market for the grant date and are exercisable
over 10-year periods. The stock options generally vest ratably over a three-year period. In
determining the stock-based compensation amounts, the fair value of each option granted is
estimated on the date of grant using the binomial option-pricing model. Service-based and
performance-based restricted stock units are granted to associates at the fair value of the
shares on the date of grant less the present value of the dividends that holders of
restricted stock units will not receive on the shares underlying the restricted stock units
during the vesting period. Service-based restricted stock units cliff vest three years
after the date of grant. If certain performance targets are attained, performance-based
restricted stock units vest on the first day of March after a three-calendar year
performance period. Quarterly, management reviews and determines the likelihood that the
company will achieve the performance targets for the outstanding groups of
performance-based restricted stock units.
As of September 30, 2009, $14 million of unrecognized compensation costs related to
non-vested awards are expected to be recognized over a weighted-average period of 1.7
years.
NOTE 9 Commitments And Contingent Liabilities
In the ordinary course of conducting business, the company and its subsidiaries are
named as defendants in various legal proceedings. Most of these proceedings are claims
litigation involving the companys insurance subsidiaries in which the company is either
defending or providing indemnity for third-party claims brought against insureds who are
litigating first-party coverage claims. The company accounts for such activity through the
establishment of unpaid loss and loss adjustment expense reserves. We believe that the
ultimate liability, if any, with respect to such ordinary-course claims litigation, after
consideration of provisions made for potential losses and costs of defense, is immaterial
to our consolidated financial condition, results of operations and cash flows.
The company and its subsidiaries also are occasionally involved in other legal actions,
some of which assert claims for substantial amounts. These actions include, among others,
putative class actions seeking certification of a state or national class. Such putative
class actions have alleged, for example, improper reimbursement of medical providers paid
under workers compensation insurance policies, erroneous coding of municipal tax locations
and excessive premium charges for uninsured motorist coverage. The companys insurance
subsidiaries also are occasionally parties to individual actions in which extra-contractual
damages, punitive damage or penalties are sought, such as claims alleging bad faith in the
handling of insurance claims.
On a quarterly basis, we review the outstanding lawsuits seeking such recourse. Based on
our quarterly review, we believe we have valid defenses to each. We believe the ultimate
liability, if any, with respect to these lawsuits, after consideration of provisions made
for estimated losses, is immaterial to our consolidated financial position.
Nonetheless, given the potential for large awards in certain of these actions and the
inherent unpredictability of litigation, an adverse outcome could have a material adverse
effect on the companys consolidated results of operations or cash flows.
NOTE 10 Income Taxes
As of December 31, 2008, we had a gross liability for unrecognized tax benefits of $2
million. Details about our liability for unrecognized tax benefits are found in our 2008
Annual Report on Form 10-K, Item 8, Note 11, Income Taxes, Page 112.
As a result of positions taken in our 2008 federal tax return filed this quarter with the
Internal Revenue Service (IRS), we believe it is more likely than not that tax positions
for which we previously carried a liability for unrecognized tax benefits will be sustained
upon examination by the IRS. Based on our current tax return positions, we have no
liability for unrecognized tax benefits as of September 30, 2009.
The IRS has begun the audit of tax years 2007 and 2008. It is reasonably possible that a
change in our liability for unrecognized tax benefits may occur once the examination phase
of this audit has concluded. At this time, we can neither estimate the settlement date of,
nor quantify an estimated range for any potential change to, our liability for unrecognized
tax benefits relating to these years.
Cincinnati Financial 3Q09 10-Q 18
NOTE 11 Segment Information
We operate primarily in two industries, property casualty insurance and life
insurance. We regularly review four different reporting segments to make decisions about
allocating resources and assessing performance:
|
|
Commercial lines property casualty insurance |
|
|
Personal lines property casualty insurance |
We report as Other the non-investment operations of the parent company and its
non-insurer subsidiaries, CFC Investment Company and CSU Producer Resources Inc. We also
report as Other the results of The Cincinnati Specialty Underwriters Insurance Company,
as well as other income of our standard market property casualty insurance subsidiary. Also
included in 2008 and year-to-date 2009 results for this segment are the operations of a
former subsidiary, CinFin Capital Management Company (excluding client investment
activities). CinFin Capital Management terminated all operations and the company was
dissolved effective February 28, 2009. See our 2008 Annual Report on Form 10-K, Item 8,
Note 18, Segment Information, Page 119, for a description of revenue, income or loss before
income taxes and identifiable assets for each of the four segments.
Segment information is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty |
|
$ |
180 |
|
|
$ |
197 |
|
|
$ |
546 |
|
|
$ |
580 |
|
Commercial property |
|
|
122 |
|
|
|
120 |
|
|
|
362 |
|
|
|
364 |
|
Commercial auto |
|
|
99 |
|
|
|
103 |
|
|
|
296 |
|
|
|
308 |
|
Workers compensation |
|
|
82 |
|
|
|
93 |
|
|
|
253 |
|
|
|
282 |
|
Specialty packages |
|
|
37 |
|
|
|
35 |
|
|
|
110 |
|
|
|
107 |
|
Surety and executive risk |
|
|
27 |
|
|
|
27 |
|
|
|
77 |
|
|
|
80 |
|
Machinery and equipment |
|
|
8 |
|
|
|
7 |
|
|
|
23 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines insurance |
|
|
555 |
|
|
|
582 |
|
|
|
1,667 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto |
|
|
80 |
|
|
|
81 |
|
|
|
239 |
|
|
|
245 |
|
Homeowner |
|
|
68 |
|
|
|
64 |
|
|
|
207 |
|
|
|
208 |
|
Other personal lines |
|
|
22 |
|
|
|
22 |
|
|
|
67 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines insurance |
|
|
170 |
|
|
|
167 |
|
|
|
513 |
|
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance |
|
|
33 |
|
|
|
30 |
|
|
|
104 |
|
|
|
94 |
|
Investment operations |
|
|
237 |
|
|
|
402 |
|
|
|
460 |
|
|
|
440 |
|
Other |
|
|
12 |
|
|
|
5 |
|
|
|
26 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,007 |
|
|
$ |
1,186 |
|
|
$ |
2,770 |
|
|
$ |
2,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance underwriting results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines insurance |
|
$ |
42 |
|
|
$ |
30 |
|
|
$ |
(31 |
) |
|
$ |
59 |
|
Personal lines insurance |
|
|
(4 |
) |
|
|
(38 |
) |
|
|
(96 |
) |
|
|
(82 |
) |
Life insurance |
|
|
1 |
|
|
|
(6 |
) |
|
|
2 |
|
|
|
(6 |
) |
Investment operations |
|
|
220 |
|
|
|
386 |
|
|
|
410 |
|
|
|
393 |
|
Other |
|
|
(15 |
) |
|
|
(16 |
) |
|
|
(58 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
244 |
|
|
$ |
356 |
|
|
$ |
227 |
|
|
$ |
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
Property casualty insurance |
|
$ |
2,305 |
|
|
$ |
2,676 |
|
Life insurance |
|
|
1,112 |
|
|
|
1,091 |
|
Investment operations |
|
|
10,463 |
|
|
|
8,907 |
|
Other |
|
|
346 |
|
|
|
695 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,226 |
|
|
$ |
13,369 |
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 19
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
The following discussion highlights significant factors influencing the consolidated
results of operations and financial position of Cincinnati Financial Corporation (CFC). It
should be read in conjunction with the consolidated financial statements and related notes
included in our 2008 Annual Report on Form 10-K. Unless otherwise noted, the industry data
is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and
financial strength rating organization. Information from A.M. Best is presented on a
statutory basis. When we provide our results on a comparable statutory basis, we label it
as such; all other company data is presented in accordance with accounting principles
generally accepted in the United States of America (GAAP).
We present per share data on a diluted basis unless otherwise noted, adjusting those
amounts for all stock splits and dividends. Dollar amounts are rounded to millions;
calculations of percent changes are based on whole dollar amounts or dollar amounts rounded
to the nearest thousand. Certain percentage changes are identified as not meaningful (nm).
SAFE HARBOR STATEMENT
This is our Safe Harbor statement under the Private Securities Litigation Reform Act
of 1995. Our business is subject to certain risks and uncertainties that may cause actual
results to differ materially from those suggested by the forward-looking statements in this
report. Some of those risks and uncertainties are discussed in our 2008 Annual Report on
Form 10-K, Item 1A, Risk Factors, Page 25. Although we often review or update our
forward-looking statements when events warrant, we caution our readers that we undertake no
obligation to do so.
Factors that could cause or contribute to such differences include, but are not limited to:
|
|
Unusually high levels of catastrophe losses due to risk concentrations, changes in
weather patterns, environmental events, terrorism incidents or other causes |
|
|
Increased frequency and/or severity of claims |
|
|
Inadequate estimates or assumptions used for critical accounting estimates |
|
|
Recession or other economic conditions resulting in lower demand for insurance
products or increased payment delinquencies |
|
|
Delays in adoption and implementation of underwriting and pricing methods that
could increase our pricing accuracy, underwriting profit and competitiveness |
|
|
Inability to defer policy acquisition costs for our personal lines segment if
pricing and loss trends would lead management to conclude this segment could not
achieve sustainable profitability |
|
|
Declines in overall stock market values negatively affecting the companys equity
portfolio and book value |
|
|
Events, such as the credit crisis, followed by prolonged periods of economic
instability or recession, that lead to: |
|
o |
|
Significant or prolonged decline in the value of a particular security or group
of securities and impairment of the asset(s) |
|
o |
|
Significant decline in investment income due to reduced or eliminated dividend
payouts from a particular security or group of securities |
|
|
o |
|
Significant rise in losses from surety and director and officer policies written for financial institutions |
|
|
Prolonged low interest rate environment or other factors that limit the companys ability to generate growth in investment income or interest rate fluctuations
that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets |
|
|
|
Increased competition that could result in a significant reduction in the companys premium volume |
|
|
|
Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages |
|
|
|
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 |
|
|
|
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 |
|
Multi-notch downgrades of the companys financial strength ratings |
|
|
o |
|
Concerns that doing business with the company is too difficult |
Cincinnati Financial 3Q09 10-Q 20
|
o |
|
Perceptions that the companys level of service, particularly claims service,
is no longer a distinguishing characteristic in the marketplace |
|
|
o |
|
Delays or inadequacies in the development, implementation, performance and
benefits of technology projects and enhancements |
|
|
Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal
system of regulation from a state-based system, that: |
|
o |
|
Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business |
|
|
o |
|
Place the insurance industry under greater regulatory scrutiny or result in new
statutes, rules and regulations |
|
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 |
|
|
o |
|
Restrict our ability to execute our business model, including the way we compensate agents |
|
|
Adverse outcomes from litigation or administrative proceedings |
|
|
|
Events or actions, including unauthorized intentional circumvention of controls, that reduce the companys future
ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 |
|
|
|
Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes
that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding
relationships with insurance agents and others |
|
|
|
Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce
at our headquarters location |
Further, the companys insurance businesses are subject to the effects of changing social,
economic and regulatory environments. Public and regulatory initiatives have included
efforts to adversely influence and restrict premium rates, restrict the ability to cancel
policies, impose underwriting standards and expand overall regulation. The company also is
subject to public and regulatory initiatives that can affect the market value for its
common stock, such as recent measures affecting corporate financial reporting and
governance. The ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
Introduction
Corporate Financial Highlights
Income Statement and Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
Nine months ended September 30, |
(Dollars in millions except share data) |
|
2009 |
|
2008 |
|
Change % |
|
2009 |
|
2008 |
|
Change % |
|
Income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
766 |
|
|
$ |
781 |
|
|
|
(1.9 |
) |
|
$ |
2,301 |
|
|
$ |
2,355 |
|
|
|
(2.3 |
) |
Investment income, net of expenses |
|
|
127 |
|
|
|
130 |
|
|
|
(2.4 |
) |
|
|
370 |
|
|
|
412 |
|
|
|
(10.3 |
) |
Realized investment gains and losses
(pretax) |
|
|
110 |
|
|
|
272 |
|
|
|
(59.7 |
) |
|
|
90 |
|
|
|
28 |
|
|
|
211.1 |
|
Total revenues |
|
|
1,007 |
|
|
|
1,186 |
|
|
|
(15.1 |
) |
|
|
2,770 |
|
|
|
2,806 |
|
|
|
(1.3 |
) |
Net income |
|
|
171 |
|
|
|
247 |
|
|
|
(31.0 |
) |
|
|
187 |
|
|
|
268 |
|
|
|
(30.1 |
) |
Per share data (diluted) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1.05 |
|
|
|
1.50 |
|
|
|
(30.0 |
) |
|
|
1.15 |
|
|
|
1.64 |
|
|
|
(29.9 |
) |
Cash dividends declared |
|
|
0.395 |
|
|
|
0.39 |
|
|
|
1.3 |
|
|
|
1.175 |
|
|
|
1.17 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
162,901,396 |
|
|
|
164,242,185 |
|
|
|
(0.8 |
) |
|
|
162,794,767 |
|
|
|
163,834,163 |
|
|
|
(0.6 |
) |
Revenues were lower for the third quarter of 2009 compared with the third quarter of 2008
primarily due to lower realized investment gains. Revenues for the nine months ended
September 30, 2009, decreased compared with the same period of 2008 due to lower earned
premiums and investment income, partially offset by higher realized investment gains.
Revenue trends and investment revenues are discussed further in the respective sections of
Results of Operations, Page 29.
Realized investment gains and losses are recognized on the sales of investments or as
otherwise required by GAAP. We have substantial discretion in the timing of investment
sales, and that timing generally is independent of the insurance underwriting process. GAAP
also requires us to recognize in income the gains or losses from certain changes in market
(fair) values of securities even though we continue to hold the securities.
Cincinnati Financial 3Q09 10-Q 21
Net income decreased for the third quarter of 2009 compared with the third quarter of 2008
primarily due to lower realized investment gains while property casualty underwriting
results improved. For the nine-month period ended September 30, 2009, net income decreased
compared with the same period of 2008 primarily due to weaker underwriting results and
lower investment income, partially offset by higher realized investment gains. Property
casualty underwriting performance and investment results are discussed below in Results of
Operations, beginning on Page 29. As discussed in our 2008 Annual Report on Form 10-K, Item
7, Factors Influencing Our Future Performance, Page 38, there are several reasons that our
performance during 2009 may be below our long-term targets. In that annual report, as part
of Results of Operations, we also discussed the year 2009 outlook for each reporting
segment.
The board of directors is committed to rewarding shareholders directly through cash
dividends and through share repurchase authorizations. Through 2008, the company had
increased the indicated annual cash dividend rate for 48 consecutive years, a record we
believe was matched by only 11 other publicly traded companies. In August 2009, the board
of directors increased the fourth quarter dividend to 39.5 cents per share, marking the
49th year of increase. Our board regularly evaluates relevant factors in
dividend-related decisions, and the increase reflects confidence in our strong capital,
liquidity and financial flexibility, as well as progress through our initiatives to improve
earnings performance.
Balance Sheet Data and Performance Measures
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
At December 31, |
(Dollars in millions except share data) |
|
2009 |
|
2008 |
|
Balance sheet data |
|
|
|
|
|
|
|
|
Invested assets |
|
$ |
10,428 |
|
|
$ |
8,890 |
|
Total assets |
|
|
14,226 |
|
|
|
13,369 |
|
Short-term debt |
|
|
49 |
|
|
|
49 |
|
Long-term debt |
|
|
790 |
|
|
|
791 |
|
Shareholders equity |
|
|
4,626 |
|
|
|
4,182 |
|
Book value per share |
|
|
28.44 |
|
|
|
25.75 |
|
Debt-to-capital ratio |
|
|
15.3 |
% |
|
|
16.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
2009 |
|
2008 |
|
Performance measure |
|
|
|
|
|
|
|
|
Value creation ratio |
|
|
15.0 |
% |
|
|
(15.9 |
)% |
Invested assets and total assets increased compared with year-end 2008, largely because of
the increased market value of our investment portfolio at September 30, 2009, while
shareholders equity and book value per share increased approximately 10 percent. Our
debt-to-capital ratio (capital is the sum of debt plus shareholders equity) decreased
compared with the December 31, 2008, level. The value creation ratio, defined in the
following section, also increased for the first nine months of 2009 compared with 2008
primarily due to the improved market value of our investment portfolio.
Cincinnati Financial 3Q09 10-Q 22
Progress Toward Long-Term Value Creation
Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of
the 25 largest property casualty insurers in the nation, based on written premium volume
for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance
products through a select group of independent insurance agencies in 37 states as discussed
in our 2008 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 1.
Although 2009 is a difficult year for our economy, our industry and our company, our
long-term perspective guides us to address the immediate challenges while focusing on the
major decisions that best position the company for success through all market cycles. We
believe that this forward-looking view has consistently benefited our policyholders,
agents, shareholders and associates.
To measure our long-term progress, we have defined a value creation metric that we believe
captures the contribution of our insurance operations, the success of our investment
strategy and the importance we place on paying cash dividends to shareholders. Between 2010
and 2014, we expect to achieve a 12 percent to 15 percent average for the total of 1) our
rate of growth in book value per share plus 2) the ratio of dividends declared per share to
beginning book value per share.
When looking at our longer-term objectives, we see three performance drivers:
|
|
Premium growth We believe our agency relationships and initiatives can lead over
any five-year period to a property casualty written premium growth rate that exceeds
the industry average. The compound annual growth rate of our net written premiums was
1.3 percent over the years 2004 through 2008, equal to the estimated growth rate for
the property casualty insurance industry. |
|
|
For the first nine months of 2009, our property casualty net written premiums decreased
2.7 percent overall while our largest segment, commercial lines, decreased 4.7 percent.
A.M. Best reported that net written premiums declined 4.5 percent for the U.S. property
casualty industry during the first half of 2009 while the industrys commercial lines
segment declined 8.1 percent. A.M. Best also reported that competitive market conditions
still are causing rate decreases on most commercial lines of business and that the
overall property casualty insurance market is not likely to harden until 2010. In light
of continued weak pricing in the marketplace, we continue to exercise discipline for
risk selection and pricing. Our consistent underwriting approach and continued weakness
in the broader economy offset strong progress on growth initiatives discussed below in
Highlights of Initiatives Supporting Our Strategies. As a result of these growth
initiatives, property casualty new business written by our independent agents for the
first nine months of 2009 rose 16.0 percent to $311 million compared with $268 million
for the first nine months of 2008. |
|
|
Combined ratio We believe our underwriting philosophy and initiatives can
generate a GAAP combined ratio over any five-year period that is consistently below
100 percent. Our GAAP combined ratio averaged 92.8 percent over the five years ended
December 31, 2008. Our combined ratio was below 100 percent in each year during the
period except 2008, when we reported a ratio of 100.6 percent as we experienced a
record level of catastrophe losses as discussed in our 2008 Annual Report on Form
10-K, Item 7 Consolidated Property Casualty Insurance Results of Operations, Page 49.
Our statutory combined ratio averaged 92.6 percent for the five years ended December
31, 2008 compared with an estimated 98.5 percent for the industry. |
|
|
For the first nine months of 2009, our statutory combined ratio was 106.2 percent,
including 8.1 percentage points of catastrophe losses partially offset by 5.2 percentage
points of favorable loss reserve development on prior accident years, compared with
100.5 percent, including 9.7 percentage points of catastrophe losses and 8.9 percentage
points of favorable loss reserve development, for the first nine months of 2008. For the
first half of 2009, A.M. Best reported that the industrys statutory combined ratio was
100.5 percent, including 3.9 percentage points of catastrophe losses and a favorable
impact of 3.8 percentage points from prior accident year reserve releases. |
|
|
Investment contribution We believe our investment philosophy and initiatives can
drive investment income growth and lead to a total return on our equity investment
portfolio over a five-year period that exceeds the five-year return of the Standard &
Poors 500 Index (S&P 500 Index). |
|
o |
|
Investment income grew at a compound annual rate of 2.9 percent over the five
years ended December 31, 2008. It grew each year except 2008, when we experienced a
dramatic reduction in dividends from financial services companies held in our
equity portfolio, a risk we addressed aggressively during 2008. |
|
|
|
|
For the first nine months of 2009, pretax investment income was $370 million, down
10.3 percent from $412 million for the same period in 2008. The decrease reflected
reduced dividends and ongoing diversification of the equity portfolio during 2008
and the first quarter of 2009, with investment of sales proceeds and cash flow in
securities considered more secure but lower yielding |
Cincinnati Financial 3Q09 10-Q 23
|
|
|
compared with the previous portfolio mix. The current investment portfolio mix
provides a balance of income stability and growth with capital appreciation
potential. |
|
|
o |
|
Over the five years ended December 31, 2008, our compound annual equity
portfolio return was a negative 9.0 percent compared with a compound annual total
return of a negative 2.1 percent for the S&P 500 Index. Our equity portfolio
underperformed the market for the five-year period primarily because of the decline
in the market value of Fifth Third Bancorp (NASDAQ: FITB), our largest holding for
most of the period. In 2008, during which we sold most of that holding, our annual
equity portfolio return was a negative 31.5 percent, compared with a negative 36.9
percent for the S&P 500 Index. |
|
|
o |
|
For the first nine months of 2009, our equity portfolio underperformed the
market, with a return of 4.9 percent compared with 19.3 percent for the S&P 500
Index. Our underperformance was largely attributable to a relatively underweight
position in the information technology sector, the strongest-performing sector in
the S&P 500 Index for the year-to-date period, and an overweight position in
healthcare, which underperformed the broader market. Additionally, the market rally
has generally not favored the dividend growth stocks we prefer. |
Highlights of Initiatives Supporting Our Strategies
Management works with the board of directors to identify the strategies that can lead
to long term success. Our strategies are intended to position us to compete successfully in
the markets we have targeted while minimizing risk. We believe successful implementation of
the initiatives that support our strategies will help us to better serve our agent
customers and to generate superior financial results over the long-term for the benefit of
shareholders, while addressing risks related to volatility and the cyclical nature of the
economy, financial markets, insurance market pricing and weather-related catastrophes.
|
|
Preserve capital Implementing these initiatives is intended to preserve our
capital and liquidity so that we can successfully grow our insurance business. A
strong capital position provides the capacity to support premium growth and provides
the liquidity to sustain our investment in the people and infrastructure needed to
implement our other strategic initiatives while paying dividends to shareholders. |
|
|
Improve insurance profitability Implementing these operational initiatives is
intended to support improved cash flow and profitable growth for the agencies that
represent us and for our company. These initiatives primarily seek to strengthen our
relationships with agents, allowing them to serve clients faster and manage expenses
better. Others may streamline our internal processes so we can devote more resources
to agent service. |
|
|
Drive premium growth Implementing these operational initiatives is intended to
expand our geographic footprint and diversify our premium sources over time while
growing profitably without significant additional infrastructure expense. Diversified
growth also may reduce earnings volatility from catastrophe exposure risk and temper
negative changes that may occur in the economic, judicial or regulatory environments
in the territories we serve. |
We discuss initiatives supporting each of these strategies below, along with the metrics we
use to assess their progress.
Preserve Capital
The four primary initiatives supporting our capital preservation strategy are:
|
|
Maintain a diversified and stabilized investment portfolio by applying parameters
and tolerances We discuss our portfolio strategies in greater depth in our 2008
Annual Report on Form 10-K, Item 1, Investments Segment, Page 17. |
|
o |
|
High-quality fixed-maturity portfolio with fair value that matches or exceeds
our liability for total insurance reserves At September 30, 2009, the average
rating of the $7.668 billion fixed-maturity portfolio was A2/A, and the portfolio
value exceeded the total insurance reserve liability by approximately 30 percent.
In addition, we have assets in the form of receivables from reinsurers with A.M
Best insurer financial strength ratings of A or better. These assets directly
related to insurance reserves, offsetting over 10 percent of the liability. |
|
|
o |
|
Diversified equity portfolio that generally has no concentrated positions in
single stocks or industries At September 30, 2009, the largest single security
accounted for 8.5 percent of our portfolio of publicly traded common stocks, and
the largest single sector accounted for 24.6 percent. Because of the strength and
diversity of our fixed-maturity portfolio, we have the opportunity to invest for
both income growth and potential capital appreciation by purchasing equity
securities. We seek to achieve a total return on the equity portfolio over any
five-year period that exceeds that of the S&P 500 Index while taking equal or less
risk. |
|
|
o |
|
Parent company liquidity that increases our flexibility through all periods to
support our cash dividend and to continue to invest in and expand our insurance
operations At September 30, 2009, we held $1.061 billion of our cash and
marketable securities at the parent company level, of which |
Cincinnati Financial 3Q09 10-Q 24
|
|
|
$722 million, or 68.1 percent, was invested in common stocks and $65 million, or 6.1
percent, was cash or cash equivalents. |
|
|
Minimize reliance on debt as a source of capital, maintaining the ratio of debt to
total capital below 20 percent This target is higher than we had identified in
previous years because total capital declined in 2008 although debt levels were
essentially unchanged. At September 30, 2009, this ratio was well below the target at
15.3 percent compared with 16.7 percent at year-end 2008 and 15.5 percent at September
30, 2008. Our long-term debt consists of three non-convertible, non-callable
debentures, with two due in 2028 and one in 2034. |
|
|
Purchase reinsurance from highly rated reinsurers to mitigate underwriting risk and
to support our ability to hold investments until maturity See our 2008 Annual
Report on Form 10-K, Item 7, 2009 Reinsurance Programs, Page 81, for additional
details on these programs. |
|
|
Identify tolerances for other risks and calibrate management decisions accordingly
Among the areas we have focused on during 2009 are exposure to risks related to
disaster recovery and business continuity. We completed a conversion to a new
information technology back-up data center and continue work to address the risks
associated with a concentration of support operations at our headquarters location.
Our enterprise risk management efforts also include evaluating emerging risks such as
potential changes in regulation at both the state and federal levels and the potential
effects of increased inflation on assets and liabilities. |
|
|
We measure the overall success of our strategy to preserve capital primarily by
growing investment income and by achieving over any five-year period a total return on
our equity investment portfolio that exceeds the Standard & Poors 500 Indexs return.
We also monitor other measures. One of the most significant is our ratio of property
casualty net written premiums to statutory surplus, which was 0.85-to-1 for the 12
months ended September 30, 2009, compared with 0.89-to-1 at year-end 2008. This ratio
is a common measure of operating leverage used in the property casualty industry; the
lower the ratio the more capacity a company has for premium growth. Industrywide, this
ratio was estimated at 0.9-to-1 at year-end 2008. |
Another means of verifying our capital preservation strategy is our financial strength
ratings. Our parent companys senior debt is rated by four independent ratings firms. In
addition, the ratings firms award insurer financial strength ratings to our property
casualty and life companies based on their quantitative and qualitative analyses. These
ratings primarily assess an insurers ability to meet financial obligations to
policyholders and do not necessarily address all of the matters that may be important to
shareholders. Ratings may be subject to revision or withdrawal at any time by the rating
agency, and each rating should be evaluated independently of any other rating.
As of October 28, 2009, our credit and financial strength ratings were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Financial Strength Ratings |
|
|
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
Standard Market Property |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
Senior Debt |
|
|
|
Casualty Insurance |
|
|
|
Life Insurance |
|
|
|
Surplus Insurance |
|
|
|
|
|
Agency |
|
Rating |
|
|
|
Subsidiary |
|
|
|
Subsidiary |
|
|
|
Subsidiary |
|
|
|
Status (date) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier |
|
|
|
|
|
|
|
|
|
|
Tier |
|
|
|
|
|
|
|
|
|
|
Tier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. M. Best Co. |
|
a |
|
|
|
A+ |
|
|
Superior |
|
2 of 16 |
|
|
|
A |
|
|
Excellent |
|
3 of 16 |
|
|
|
A |
|
|
Excellent |
|
3 of 16 |
|
|
Stable outlook (12/19/08) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fitch Ratings |
|
BBB+ |
|
|
|
A+ |
|
|
Strong |
|
5 of 21 |
|
|
|
A+ |
|
|
Strong |
|
5 of 21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stable outlook (8/6/09) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys Investors Service |
|
A3 |
|
|
|
A1 |
|
|
Good |
|
5 of 21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stable outlook (9/25/08) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard & Poors Ratings Services |
|
BBB+ |
|
|
|
A+ |
|
|
Strong |
|
5 of 21 |
|
|
|
A+ |
|
|
Strong |
|
5 of 21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negative outlook (06/30/08) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our insurance subsidiaries continue to be highly rated. On August 6,
2009, Fitch Ratings lowered our ratings and changed the rating outlook to stable. Our
parent company senior debt rating was lowered from A- to BBB+ and our standard market
property casualty subsidiaries insurance and life insurance subsidiary financial
strength ratings were lowered from AA- to A+. Fitch said the rating action was
primarily driven by our unfavorable property casualty underwriting performance during
2008 and the first half of 2009. Fitch said it viewed favorably our steps taken with
our investment portfolio. Fitch also noted our strong capitalization and low operating
leverage. No other ratings agency actions have occurred in 2009. Our debt ratings are discussed in our 2008 Annual Report on Form 10-K, Item 7,
Additional Sources of Liquidity, Page 71. |
Cincinnati Financial 3Q09 10-Q 25
Improve Insurance Profitability
The three primary initiatives to improve insurance profitability are:
|
|
Implement technology projects to improve critical efficiencies and streamline
processes for our agencies, allowing us to win an increasing share of their business.
Enhanced technology and use of data also increases our ability to generate a
consistent underwriting profit through improved pricing and risk selection. During
2009 we have made significant progress in our key technology initiatives: |
|
o |
|
Predictive modeling tool for our workers compensation business line This
tool was in use by our underwriters for renewal business in all our territories by
the end of the third quarter of 2009, improving risk selection and pricing
capabilities. Predictive modeling increases pricing precision so that our agents
can better compete for the most desirable workers compensation business. We
anticipate meaningful improvement in the loss ratio for this line of business
within several quarters of use, and we are working to develop predictive models for
all major lines of commercial insurance. |
|
|
o |
|
Commercial lines policy administration system In October 2009, we deployed a
new system called e-CLAS® CPP for commercial package and auto to all of
our appointed agencies in five states representing approximately 40 percent of our
commercial premium volume. We plan to deploy the system to six additional states by
the end of 2009 and to as many as 19 more states in 2010. The new system includes
real-time quoting and policy issuance, direct bill capabilities with several
payment plans, and interface capabilities to transfer selected policy data from
agency management systems. We believe the new system will further improve our
position among the go-to carriers for our agencies, having a positive impact on
future growth of profitable commercial lines business. |
|
|
o |
|
Personal lines pricing and processing enhancements In 2009 personal lines
incorporated enhanced predictive modeling for our homeowner line of business to
improve pricing accuracy and profitability. The enhancements incorporate additional
attributes for better matching premiums to the risk of loss on individual policies.
Development is in progress for predictive modeling for our personal auto line of
business and is targeted for use in mid to late 2010. Several processing or service
enhancements were introduced during 2009, making it easier for agents to do
business with us so we can write a larger share of their most profitable accounts.
Significant improvements included providing single point of entry capability,
allowing our agents to rate homeowner and personal auto policies through their
agency management systems in real time, integrating processing capabilities with
additional comparative rating systems, and offering personal lines policyholders
whom we bill for our agents the convenience of making their premium payments by
phone or online. During the first six months of availability, almost 5 percent of
total personal lines premiums processed used these new payment options. |
|
|
o |
|
Personal lines policy administration system During 2009, we developed the
next version of this system, Diamond 5.x, and began testing early in the fourth
quarter. In early 2010, we plan to move our personal lines policy processing system
to this next generation platform. The Web-based system supports agency efficiency
through pre-filling of selected policy data, easy-to-use screens and system speed.
We continue to focus on making it easier for our agents to do business with us,
which we believe will significantly benefit our objective of writing their highest
quality accounts with superior profit margins. |
|
|
o |
|
Improved claims processes and agent access to claims information In early
2009, we enhanced our response time for new claims, making available online
submission of notices of loss from agencies that use Applied agency management
systems. Such improvements help sustain our reputation for superior claims service
by helping keep the agent better informed on the details and status of claims. We
have also improved our claims data management interface process, increasing
efficiency for handling digital documents, pictures and recording. |
|
|
o |
|
Improving our business data, supporting accurate underwriting, pricing and
decisions Over the next several years, we will deploy a full data management
program, including a data warehouse for property casualty and life insurance. One
of the greatest advantages will be enhanced granularity of pricing data. This is a
phased, long-term project that is currently in progress. |
|
|
Continue to staff field positions to ensure that we grow profitably and control
loss costs while providing superior claims service At September 30, 2009, we had
112 field marketing territories staffed by marketing representatives averaging 18
years of industry experience and nine years as a Cincinnati Insurance field marketing
representative. During 2009 we increased staffing in areas with the greatest new
business potential, such as Texas and Colorado, while combining other selected
territories. We had 111 field marketing territories at the end of 2008 and 108 as of
September 30, 2008. In addition we have several personal lines marketing
representatives with underwriting authority who visit agencies located in areas of
high new business potential such as states newer to our personal lines offerings. The
local
presence of our field marketing representatives is integral to carefully selecting and
evaluating new business on a case-by-case basis. During 2009, we also added to our staff
of loss control field |
Cincinnati Financial 3Q09 10-Q 26
|
|
representatives, premium audit field representatives and field
claims representatives specializing in workers compensation claims. In addition we are
developing capabilities for direct reporting of workers compensation claims, providing
detailed information to immediately assign the appropriate level of claims handling
expertise for each case. Obtaining more information sooner for specific claims allows
for medical care appropriate to the nature of the injury, benefiting injured workers,
employers and agents while ultimately lowering overall loss costs. Our team of field
associates plus headquarters support associates works together to form our
agent-centered business model that provides local expertise, helps us better understand
the accounts we underwrite and creates another market advantage for our agents. |
|
|
|
Improve internal efficiencies to make the best use of our resources During 2009
we have invested in technology and workflow improvements that will help us to grow our
business when insurance market conditions improve without proportional increases in
expenses. Through careful allocation of staff, we have added people in areas of
strategic significance while realizing efficiencies in other areas, resulting in a
relatively flat overall number of associates during the first nine months of 2009. We
continue to work toward improving efficiency through efforts such as studies of
transactional workflows and development of an energy efficiency plan for our
headquarters buildings. |
We measure the overall success of our strategy to improve insurance profitability primarily
through our GAAP combined ratio, which we believe can be consistently below 100 percent
over any five-year period.
In addition, we expect these initiatives to strengthen our rank as the No. 1 or No. 2
carrier based on premium volume in agencies that have represented us for at least five
years. In 2009, we again earned that rank in more than 75 percent of the agencies that have
represented Cincinnati Insurance for more than five years, based on 2008 premiums.
Drive Premium Growth
The five primary initiatives to drive premium growth are:
|
|
New agency appointments in 2009 During the first nine months of 2009, we
appointed 73 new agencies, exceeding our initial target of 65 for the entire year of
2009 as progress in Texas agency appointments exceeded our expectations. In our three
newest states, agency appointments totaled 27, including 20 in Texas, six in Colorado
and one in Wyoming. Agencies appointed during 2009 write an aggregate of nearly $1.4
billion in property casualty premiums annually with all carriers they represent for an
average of approximately $19 million per agency. As of September 30, 2009, a total of
1,174 agency relationships market our standard market insurance products from 1,455
reporting locations. We seek to build close, long-term relationships with each agency
we appoint and carefully evaluate the marketing reach of each new appointment to
ensure the territory can support both current and new agencies. |
|
|
New states With our entry into Wyoming in September 2009, Cincinnati Insurance
now is actively marketing our policies in 37 states. Our larger footprint expands our
opportunities well beyond our traditional operating area in the Midwest and South,
replicating and leveraging our highly successful agent-centered business model. In
recent years we expanded our presence in selected western states opening Colorado
and Wyoming in 2009, Texas in 2008, New Mexico and eastern Washington in 2007, which
will gradually help reduce earnings volatility from weather-related catastrophes.
While we continue to study the regulatory and competitive environment in other states
where we could decide to actively market property casualty products, we have not
announced the timetable for entry into additional states. |
|
|
We generally are able to earn a 10 percent share of an agencys business within 10 years
of its appointment. We also help our agents grow their business by attracting more
clients in their communities through the unique style of service we offer. In New Mexico
and Washington, which we entered in 2007, weve appointed 13 agencies that currently
write about $260 million annually with all the carriers they represent. During the first
nine months of 2009 our annualized written premiums with agencies in these two new
states totaled almost 4 percent of that total agency annual premium volume. By mid 2010,
we expect to have appointed Texas agencies that currently write a total of about $750
million in premiums annually with all carriers they represent, representing strong
potential for future premium growth. |
|
|
Personal lines We continue to position our personal lines business for
profitable future growth as pricing refinements and improved ease of use expand our
agents opportunities to market Cincinnatis policy advantages to their more
quality-conscious clientele. In the fourth quarter of 2009, we are enhancing our
tiered rating, helping to further improve our rate and credit structures to attract
and retain more accounts with the best prospects of long-term profitability. Personal
lines rate changes made in 2008 and 2009 are driving strong new business, including
over $15 million in rollovers of seasoned business our agencies previously placed with
other carriers. |
|
|
We also are more aggressively tapping our potential to market personal lines insurance
through agencies that already represent us for commercial lines. In early 2009, we began
marketing personal
|
Cincinnati Financial 3Q09 10-Q 27
|
|
lines in two additional states, bringing the total of states where we market personal lines to 29. In
seven states where we began writing personal lines business or significantly expanded
our product offerings and automation capabilities in 2008 or 2009, our agencies write
approximately $650 million in personal lines premiums annually with all carriers they
represent. |
|
|
Surplus lines insurance Another source of premium growth is our surplus lines
operation, which ended 2008 on track with products available in 33 states. We entered
this business area in 2008 to better serve agents of The Cincinnati Insurance
Companies. Today, those agents write about $2.5 billion annually of surplus lines
business with other carriers. We plan to earn a profitable share by bringing
Cincinnati-style service to agents and policyholders. In the fourth quarter of 2008,
we expanded product offerings from general liability, adding property and professional
liability lines of businesses. For the nine months of 2009, net written premiums were
$29 million compared with $8 million in the first nine months of 2008, our initial
period for surplus lines operations. |
|
|
Life insurance product development During the third quarter of 2009, we
introduced a new secondary guaranteed universal life product. In the fourth quarter,
we will introduce a new return of premium term life series. These initiatives support
opportunities to cross-sell life insurance products to clients of the independent
agencies that sell Cincinnatis property casualty insurance policies. |
We also expect a positive long-term impact on future premium growth as a result of our
commercial lines and personal lines policy administration system initiatives, discussed
above, as we earn a larger share of the total business written by our agents. Our agencies
value ease of use for agency staff and the option to have us bill the policyholder
directly. In addition to several payment plan options including electronic funds transfer
with the new commercial lines system, in 2009 we began offering direct billing of workers
compensation policies in all of our active territories.
We measure the overall success of this strategy to drive premium growth primarily through
changes in net written premiums, which we believe can grow faster than the industry average
over any five-year period. Many of our growth initiatives have been under way for a year or
more and helped us achieve 16.0 percent new business growth for the first nine months of
2009 although total written premiums declined on weak market pricing and economic
pressures.
Despite near-term challenges in insurance and financial markets that are reflected in
year-to-date 2009 financial performance, we have made significant progress on our
initiatives and remain confident that our strategy will deliver long-term value for
shareholders.
Cincinnati Financial 3Q09 10-Q 28
Results of Operations
The consolidated results of operations reflect the operating results of each of our
four segments along with the parent company and other activities reported as Other. The
four segments are:
|
|
Commercial lines property casualty insurance |
|
|
Personal lines property casualty insurance |
We report as Other the non-investment operations of the parent company and its
non-insurer subsidiaries, CFC Investment Company and CSU Producer Resources Inc. We also
report as Other the results of The Cincinnati Specialty Underwriters Insurance Company,
as well as other income of our standard market property casualty insurance subsidiary. Also
included in 2008 and year-to-date 2009 results for this segment are the operations of a
former subsidiary, CinFin Capital Management Company (excluding client investment
activities). CinFin Capital Management terminated all operations and the company was
dissolved effective February 28, 2009. See Item 1, Note 11, Segment Information, Page 19,
for discussion of the calculations of segment data. The following sections review results
of operations for each of the four segments.
Consolidated Property Casualty Insurance Results of Operations
Consolidated property casualty insurance results include premiums and expenses for our
standard market insurance (commercial lines and personal lines segments) as well as our
surplus lines operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Earned premiums |
|
$ |
733 |
|
|
$ |
751 |
|
|
|
(2.4 |
) |
|
$ |
2,198 |
|
|
$ |
2,262 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe
losses |
|
|
542 |
|
|
|
565 |
|
|
|
(4.1 |
) |
|
|
1,553 |
|
|
|
1,563 |
|
|
|
(0.7 |
) |
Current accident year catastrophe losses |
|
|
8 |
|
|
|
60 |
|
|
|
(85.8 |
) |
|
|
183 |
|
|
|
220 |
|
|
|
(16.8 |
) |
Prior accident years before catastrophe losses |
|
|
(89 |
) |
|
|
(105 |
) |
|
|
15.3 |
|
|
|
(107 |
) |
|
|
(201 |
) |
|
|
46.7 |
|
Prior accident year catastrophe losses |
|
|
(2 |
) |
|
|
3 |
|
|
|
(176.5 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(598.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss expenses |
|
|
459 |
|
|
|
523 |
|
|
|
(12.2 |
) |
|
|
1,623 |
|
|
|
1,581 |
|
|
|
2.6 |
|
Underwriting expenses |
|
|
238 |
|
|
|
237 |
|
|
|
0.2 |
|
|
|
716 |
|
|
|
707 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
$ |
36 |
|
|
$ |
(9 |
) |
|
nm |
|
|
$ |
(141 |
) |
|
$ |
(26 |
) |
|
|
(449.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums: |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
Pt. Change |
Current accident year before catastrophe
losses |
|
|
73.9 |
% |
|
|
75.3 |
% |
|
|
(1.4 |
) |
|
|
70.6 |
% |
|
|
69.1 |
% |
|
|
1.5 |
|
Current accident year catastrophe losses |
|
|
1.2 |
|
|
|
8.0 |
|
|
|
(6.8 |
) |
|
|
8.4 |
|
|
|
9.7 |
|
|
|
(1.3 |
) |
Prior accident years before catastrophe losses |
|
|
(12.1 |
) |
|
|
(14.0 |
) |
|
|
1.9 |
|
|
|
(4.9 |
) |
|
|
(8.9 |
) |
|
|
4.0 |
|
Prior accident year catastrophe losses |
|
|
(0.3 |
) |
|
|
0.4 |
|
|
|
(0.7 |
) |
|
|
(0.3 |
) |
|
|
0.0 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss expenses |
|
|
62.7 |
|
|
|
69.7 |
|
|
|
(7.0 |
) |
|
|
73.8 |
|
|
|
69.9 |
|
|
|
3.9 |
|
Underwriting expenses |
|
|
32.4 |
|
|
|
31.6 |
|
|
|
0.8 |
|
|
|
32.6 |
|
|
|
31.2 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
95.1 |
% |
|
|
101.3 |
% |
|
|
(6.2 |
) |
|
|
106.4 |
% |
|
|
101.1 |
% |
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio: |
|
|
95.1 |
% |
|
|
101.3 |
% |
|
|
(6.2 |
) |
|
|
106.4 |
% |
|
|
101.1 |
% |
|
|
5.3 |
|
Contribution from catastrophe losses and prior
years
reserve development |
|
|
(11.2 |
) |
|
|
(5.6 |
) |
|
|
(5.6 |
) |
|
|
3.2 |
|
|
|
0.8 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophe losses and
prior
years reserve development |
|
|
106.3 |
% |
|
|
106.9 |
% |
|
|
(0.6 |
) |
|
|
103.2 |
% |
|
|
100.3 |
% |
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our consolidated property casualty insurance operations generated an underwriting profit of
$36 million for the three months ended September 30, 2009, compared with an underwriting
loss of $9 million for the three months ended September 30, 2008. For the nine months ended
September 30, 2009, our property casualty insurance operations experienced an underwriting
loss of $141 million compared with an underwriting loss of $26 million for the same period
in 2008. The main drivers of the 2009 year-to-date underwriting loss were adverse
development on prior accident year loss reserves for our commercial lines workers
compensation business and higher catastrophe losses for personal lines homeowner business
as discussed below.
We measure and analyze property casualty underwriting results primarily by the combined
ratio and its component ratios. The combined ratio is the percentage of incurred losses
plus all expenses per each premium dollar the lower the ratio, the better the
performance. An underwriting profit results when the combined ratio is under 100 percent. A
combined ratio above 100 percent indicates that an insurance companys losses and expenses
exceeded premiums.
Cincinnati Financial 3Q09 10-Q 29
The combined ratio can be affected significantly by catastrophe losses and other large
losses as discussed in detail below. The combined ratio can also be affected by updated
estimates of loss and loss expense reserves established for claims that occurred in prior
periods, referred to as prior accident years. Development on prior accident year reserves
favorably affected the combined ratio by 12.4 and 5.2 percentage points in the third
quarter and first nine months of 2009 compared with a favorable impact of 13.6 and 8.9
percentage points in the three month and nine month periods of 2008. These ratios include
development on prior period catastrophe loss reserves as shown in the table above. The
lower amount of favorable development for the first nine months of 2009 compared with 2008
is primarily due to significant unfavorable development recognized in the first half of
2009 for the workers compensation line of business as discussed in Commercial Lines
Results of Operations on Page 30.
The underwriting expense ratio for the first nine months of 2009 increased compared with
the same periods of 2008. The increase was primarily due to lower earned premiums.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Agency renewal written premiums |
|
$ |
669 |
|
|
$ |
687 |
|
|
|
(2.7 |
) |
|
$ |
2,030 |
|
|
$ |
2,159 |
|
|
|
(6.0 |
) |
Agency new business written premiums |
|
|
107 |
|
|
|
93 |
|
|
|
15.4 |
|
|
|
311 |
|
|
|
268 |
|
|
|
16.0 |
|
Other written premiums |
|
|
(46 |
) |
|
|
(53 |
) |
|
|
13.8 |
|
|
|
(110 |
) |
|
|
(135 |
) |
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
|
|
730 |
|
|
|
727 |
|
|
|
0.5 |
|
|
|
2,231 |
|
|
|
2,292 |
|
|
|
(2.7 |
) |
Unearned premium change |
|
|
3 |
|
|
|
24 |
|
|
|
(86.7 |
) |
|
|
(33 |
) |
|
|
(30 |
) |
|
|
(9.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
733 |
|
|
$ |
751 |
|
|
|
(2.4 |
) |
|
$ |
2,198 |
|
|
$ |
2,262 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The trends in net written premiums and earned premiums summarized in the table above
reflect ongoing strong competition in our markets and economic recession impacts on insured
exposures, partially offset by the effects of the premium growth strategies we discussed in
our 2008 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 10. The
main drivers of trends for 2009 are discussed by segment on Pages 32-33 and 36-37.
Consolidated property casualty agency new business written for the three and nine months
ended September 30, 2009, increased $15 million and $44 million compared with the same
periods of 2008. The increase was primarily due to premium growth initiatives related to
geographic or product line expansion into new and underserved areas. While much of this
business was new to us due to our expansion initiatives, in many cases that business was
not new to the agent. We believe these seasoned accounts tend to be priced more accurately
than business that is less familiar to our agent due to it being recently obtained from a
competing agent. We entered the State of Texas in late 2008 for commercial lines and also
began writing business or significantly expanded our personal lines product offerings and
automation capabilities in seven states. This geographic expansion resulted in an increase
in agency new business of $9 million for the third quarter of 2009 and $16 million for the
first nine months of 2009. Our main product expansion initiative is our surplus lines
operation that began in 2008, accounting for $4 million and $16 million of the increase in
consolidated
property casualty new business for the respective periods. Our initiatives to appoint new
agencies in states other than Texas also contributed to the growth in new business.
Agencies appointed during 2008 and 2009, excluding Texas agencies, accounted for $13
million of commercial lines new business growth during the first nine months of 2009.
Other written premiums include amounts ceded to reinsurers through our reinsurance
programs. Ceded written premiums for the third-quarter and nine-month periods of 2009
include $3 million to restore affected layers of our catastrophe reinsurance treaty due to
losses from Hurricane Ike, compared to $11 million for the same periods of 2008.
Catastrophe losses contributed 0.9 and 8.1 percentage points to the combined ratio in the
three and nine months ended September 30, 2009, compared with 8.4 and 9.7 percentage points
in the same periods of 2008.
Cincinnati Financial 3Q09 10-Q 30
The following table shows catastrophe losses incurred, net of reinsurance, as well as
the effect of loss development on prior period catastrophe events. We individually list
catastrophe events for which our incurred losses reach or exceed $5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions, net of reinsurance) |
|
|
|
Commercial |
|
|
Personal |
|
|
|
|
|
|
Commercial |
|
|
Personal |
|
|
|
|
Dates |
|
Cause of loss |
|
Region |
|
lines |
|
|
lines |
|
|
Total |
|
|
lines |
|
|
lines |
|
|
Total |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 26-28 |
|
Flood, freezing, ice, snow |
|
South, Midwest |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
15 |
|
|
$ |
20 |
|
Feb. 10-13 |
|
Flood, hail, wind |
|
South, Midwest, East |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
14 |
|
|
|
24 |
|
|
|
38 |
|
Feb. 18-19 |
|
Wind, hail |
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
8 |
|
|
|
9 |
|
Apr. 9-11 |
|
Flood, hail, wind |
|
South, Midwest |
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
|
12 |
|
|
|
16 |
|
|
|
28 |
|
May 7-9 |
|
Flood, hail, wind |
|
South, Midwest |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
12 |
|
|
|
16 |
|
|
|
28 |
|
Jun. 2-6 |
|
Flood, hail, wind |
|
South, Midwest |
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
|
4 |
|
|
|
6 |
|
|
|
10 |
|
Jun. 10-18 |
|
Flood, hail, wind |
|
South, Midwest |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
14 |
|
|
|
7 |
|
|
|
21 |
|
Sep. 18-22 |
|
Flood, hail, wind |
|
South |
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
All
other 2009 catastrophes |
|
|
|
|
6 |
|
|
|
6 |
|
|
|
12 |
|
|
|
11 |
|
|
|
13 |
|
|
|
24 |
|
Development on 2008 and prior catastrophes |
|
|
|
|
(3 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
(10 |
) |
|
|
4 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar
year incurred total |
|
|
|
$ |
(7 |
) |
|
$ |
13 |
|
|
$ |
6 |
|
|
$ |
64 |
|
|
$ |
113 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 4-9 |
|
Wind, hail, flood, freezing |
|
South, Midwest |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
6 |
|
Jan. 29-30 |
|
Wind, hail |
|
Midwest |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
Feb. 5-6 |
|
Wind, hail, flood |
|
Midwest |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
6 |
|
|
|
7 |
|
|
|
13 |
|
Mar. 14 |
|
Tornadoes, wind, hail, flood |
|
South |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
4 |
|
|
|
1 |
|
|
|
5 |
|
Mar. 15-16 |
|
Wind, hail |
|
South |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
7 |
|
|
|
9 |
|
Apr. 9-11 |
|
Wind, hail, flood |
|
South |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
16 |
|
|
|
2 |
|
|
|
18 |
|
May 1 |
|
Wind, hail |
|
South |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
5 |
|
|
|
1 |
|
|
|
6 |
|
May 10-12 |
|
Wind, hail, flood |
|
South, Mid-Atlantic |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
May 22-26 |
|
Wind, hail |
|
Midwest |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
7 |
|
|
|
3 |
|
|
|
10 |
|
May 29- Jun 1 |
|
Wind, hail, flood |
|
Midwest |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
6 |
|
|
|
5 |
|
|
|
11 |
|
Jun. 2-4 |
|
Wind, hail, flood |
|
Midwest |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
6 |
|
|
|
5 |
|
|
|
11 |
|
Jun. 5-8 |
|
Wind, hail, flood |
|
Midwest |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(8 |
) |
|
|
9 |
|
|
|
7 |
|
|
|
16 |
|
Jun. 11-12 |
|
Wind, hail, flood |
|
Midwest |
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
11 |
|
|
|
6 |
|
|
|
17 |
|
Jun. 25 |
|
Wind, hail, flood |
|
Midwest |
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
Jul. 19 |
|
Wind, hail, flood |
|
Midwest |
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
Jul. 26 |
|
Wind, hail, flood |
|
Midwest |
|
|
1 |
|
|
|
8 |
|
|
|
9 |
|
|
|
1 |
|
|
|
8 |
|
|
|
9 |
|
Sep. 12-14 |
|
Hurricane Ike |
|
South, Midwest |
|
|
20 |
|
|
|
37 |
|
|
|
57 |
|
|
|
20 |
|
|
|
37 |
|
|
|
57 |
|
All other 2008 catastrophes |
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
Development on 2007 and prior catastrophes |
|
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year incurred total |
|
|
|
$ |
23 |
|
|
$ |
40 |
|
|
$ |
63 |
|
|
$ |
112 |
|
|
$ |
107 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 31
Commercial Lines Insurance Results of Operations
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Earned premiums |
|
$ |
555 |
|
|
$ |
582 |
|
|
|
(4.7 |
) |
|
$ |
1,667 |
|
|
$ |
1,743 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe
losses |
|
|
407 |
|
|
|
437 |
|
|
|
(6.8 |
) |
|
|
1,173 |
|
|
|
1,208 |
|
|
|
(2.9 |
) |
Current accident year catastrophe losses |
|
|
(4 |
) |
|
|
22 |
|
|
|
(117.2 |
) |
|
|
74 |
|
|
|
114 |
|
|
|
(34.8 |
) |
Prior accident years before catastrophe losses |
|
|
(71 |
) |
|
|
(89 |
) |
|
|
19.8 |
|
|
|
(78 |
) |
|
|
(174 |
) |
|
|
55.3 |
|
Prior accident year catastrophe losses |
|
|
(3 |
) |
|
|
1 |
|
|
nm |
|
|
|
(10 |
) |
|
|
(2 |
) |
|
|
(492.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss expenses |
|
|
329 |
|
|
|
371 |
|
|
|
(11.5 |
) |
|
|
1,159 |
|
|
|
1,146 |
|
|
|
1.2 |
|
Underwriting expenses |
|
|
184 |
|
|
|
181 |
|
|
|
1.6 |
|
|
|
539 |
|
|
|
538 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
$ |
42 |
|
|
$ |
31 |
|
|
|
41.5 |
|
|
$ |
(31 |
) |
|
$ |
59 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums: |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe
losses |
|
|
73.3 |
% |
|
|
75.0 |
% |
|
|
(1.7 |
) |
|
|
70.4 |
% |
|
|
69.3 |
% |
|
|
1.1 |
|
Current accident year catastrophe losses |
|
|
(0.6 |
) |
|
|
3.8 |
|
|
|
(4.4 |
) |
|
|
4.4 |
|
|
|
6.5 |
|
|
|
(2.1 |
) |
Prior accident years before catastrophe losses |
|
|
(12.8 |
) |
|
|
(15.2 |
) |
|
|
2.4 |
|
|
|
(4.6 |
) |
|
|
(10.0 |
) |
|
|
5.4 |
|
Prior accident year catastrophe losses |
|
|
(0.6 |
) |
|
|
0.2 |
|
|
|
(0.8 |
) |
|
|
(0.6 |
) |
|
|
(0.1 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss expenses |
|
|
59.3 |
|
|
|
63.8 |
|
|
|
(4.5 |
) |
|
|
69.6 |
|
|
|
65.7 |
|
|
|
3.9 |
|
Underwriting expenses |
|
|
33.1 |
|
|
|
31.1 |
|
|
|
2.0 |
|
|
|
32.3 |
|
|
|
30.9 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.4 |
% |
|
|
94.9 |
% |
|
|
(2.5 |
) |
|
|
101.9 |
% |
|
|
96.6 |
% |
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio: |
|
|
92.4 |
% |
|
|
94.9 |
% |
|
|
(2.5 |
) |
|
|
101.9 |
% |
|
|
96.6 |
% |
|
|
5.3 |
|
Contribution from catastrophe losses and prior years
reserve development |
|
|
(14.0 |
) |
|
|
(11.2 |
) |
|
|
(2.8 |
) |
|
|
(0.8 |
) |
|
|
(3.6 |
) |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophe losses and prior
years reserve development |
|
|
106.4 |
% |
|
|
106.1 |
% |
|
|
0.3 |
|
|
|
102.7 |
% |
|
|
100.2 |
% |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-quarter performance highlights for the commercial lines segment include:
|
|
Premiums Commercial lines earned premiums and net written premiums declined
during the third quarter and first nine months of 2009 due to lower insured exposure
levels from the weak economy, lower pricing and continued strong competition that
caused us to decline opportunities to write new or renewal business we considered
underpriced. The premiums table below analyzes the components of earned premiums. |
|
|
|
Weak economic conditions continue to drive exposures to lower levels, particularly for
contractor-related business primarily affecting certain lines of business, as discussed
in our 2008 Annual Report on Form 10-K, Item 7, Commercial Lines Insurance Results of
Operations, Page 52. These lower exposures are reflected by the more significant
decrease in written premiums for our commercial casualty and workers compensation
business relative to other commercial business as shown in the Commercial Lines of
Business Analysis below. Premiums for these two lines of business include the result of
policy audits that adjust initial premium amounts based on differences between estimated
and actual sales or payroll related to a specific policy. Written and earned premiums
from audits decreased $9 million and $23 million for the third quarter and first nine
months of 2009 compared with the same periods of 2008. |
|
|
|
The decrease in agency renewal written premiums was also due in part to lower pricing.
We continue to work with our agents to retain accounts with manageable risk
characteristics that support the lower average prevailing prices in the marketplace. Our
agents and field force provide us with insight on local market conditions, which we use
in making decisions intended to adequately price business and maintain underwriting
discipline. We measure average changes in commercial lines renewal pricing as the rate
of change in renewal premium for the new policy period compared with the premium for the
expiring policy period, assuming no change in the level of insured exposures or policy
coverage between those periods for respective policies. Our commercial lines policies
averaged a decline in the low-single-digit range during the third quarter of 2009, with
the rate of decline improving slightly from the second-quarter 2009 average. During the
second half of 2008 the average rate of decline reached the high-single-digit range.
Compared with the average, steeper declines sometimes occur, particularly for
larger accounts. |
|
|
|
New business written premiums for commercial lines decreased slightly during the third
quarter of 2009 while increasing slightly during the first nine months of 2009,
including the contribution of strong new business growth in Texas. We began actively
marketing in Texas in late 2008, and agencies in that state generated new business
growth of $4 million and $7 million for the three-month and nine-month periods |
Cincinnati Financial 3Q09 10-Q 32
|
|
of 2009.
Agencies appointed during 2008 and 2009, excluding Texas, contributed $17 million of our
new commercial lines business for the first nine months of 2009, an increase of $13
million compared with the same period of 2008. The trend of writing fewer policies with
annual premiums of $100,000 or more continued during the third quarter, reflecting
significant competition for larger accounts. Some of our 2009 new business came from
accounts that were not new to the agent. We believe these seasoned accounts tend to be
priced more accurately than business that is less familiar to our agent because it was
recently obtained from a competing agent. As we appoint new agencies who choose to move
accounts to us, we report these accounts as new business to us. |
|
|
|
Combined ratio The commercial lines combined ratio for the third quarter of 2009
improved 2.5 percentage points compared with the third quarter of 2008. The
improvement was primarily due to lower weather-related catastrophe losses. The ratio
for the nine-months ended September 30, 2009, was higher than the same period of 2008
primarily due to adverse development on prior accident year reserves for our workers
compensation business recognized during the first half of 2009. The effect of
catastrophe losses on the combined ratio was lower for both the third quarter and
nine-month periods of 2009. The ratio for current accident year loss and loss expenses
before catastrophe losses increased
1.1 percentage points during the first nine months of 2009, a reflection of softer
market pricing, normal loss cost inflation and the application of consistent loss
reserving practices. |
|
|
|
For commercial lines of business other than workers compensation, the net effect of
reserve development for prior accident years during the three and nine month 2009
periods was favorable, totaling $70 million and $133 million, respectively, compared
with favorable amounts of $83 million and $157 million for the same periods in 2008. For
the first nine months of 2009, most of the favorable reserve development for prior
accident years occurred in the commercial casualty line of business for accident years
2006 through 2008. The favorable reserve development recognized for commercial casualty
is due mainly to umbrella coverages, which have exhibited nearly flat paid loss cost
inflation since 2002. Reserve estimates are inherently uncertain as described in our
2008 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss
Expense Reserves, Page 41. |
|
|
|
As discussed on Page 26, predictive modeling for workers compensation is expected to
improve pricing accuracy, therefore improving profitability and the related ratios.
Other actions taken to improve workers compensation results include assigning
additional staff to specialize in workers compensation claims handling, more timely
reporting of claims, and increased use of loss control risk evaluation services. More
specialized claims handling and earlier reporting are expected to better contain costs
of claims that have already occurred while additional loss control services are intended
to prevent worker-related accidents or lessen the severity of injuries when accidents
occur. |
|
|
|
The companys workers compensation reserve analyses completed during the first and
second quarter of 2009 indicated that loss cost inflation was higher than previously
estimated, leading us to make more conservative assumptions about loss cost inflation
and thereby significantly increasing losses incurred. Prior analyses attributed a larger
share of the rise in claim payments for recent accident years to exposure growth rather
than loss cost inflation. However, declining claim frequencies reflected in reserving
data as of December 31, 2008, indicated that exposure growth was less of a source of the
rise in claim payments for recent accident years than was loss cost inflation. The
higher estimates of loss cost inflation derived from analyses during 2009 affected
reserves estimated for many prior accident years, resulting in recognition of $49
million of unfavorable development on workers compensation reserves for prior accident
years during the first half 2009. Workers compensation prior accident year development
was favorable by $4 million for the third quarter of 2009 and was unfavorable by
$45 million for the first nine months of 2009 compared with favorable amounts of
$5 million and $19 million for the same periods in 2008. This reserve development
unfavorably affected the 2009 commercial lines combined ratio for the first nine months
of 2009 by 2.7 percentage points, compared with a favorable impact of 1.1 percentage
points on the corresponding 2008 ratio. |
|
|
|
Of the $45 million increase in workers compensation reserves for prior accident years
recognized during the first nine months of 2009, the net amount for accident years 2006
through 2008 was zero while the remainder related to older accident years extending back
as far as 1987. During the entire year of 2008, workers compensation loss reserves on
2007 and prior accident years also increased. However, workers compensation loss
expense reserves on 2007 and prior accident years decreased, resulting in a net decrease
on prior accident years of $2 million. |
|
|
|
The underwriting expense ratio for the first nine months of 2009 increased compared with
the same periods of 2008. The increase was primarily due to lower earned premiums. |
|
|
|
Other factors contributing to the change in the commercial lines combined ratio were
lower pricing, lower audit premiums and normal loss cost inflation. Underwriting results
and related measures for the combined ratio are summarized in the table above. The
tables and discussion below provide additional details for the primary drivers of
underwriting results. |
Cincinnati Financial 3Q09 10-Q 33
Commercial Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
Change % |
|
|
Agency renewal written premiums |
|
$ |
489 |
|
|
$ |
502 |
|
|
|
(2.5 |
) |
|
$ |
1,535 |
|
|
$ |
1,642 |
|
|
|
(6.5 |
) |
Agency new business written premiums |
|
|
76 |
|
|
|
77 |
|
|
|
(0.4 |
) |
|
|
231 |
|
|
|
229 |
|
|
|
0.8 |
|
Other written premiums |
|
|
(37 |
) |
|
|
(41 |
) |
|
|
8.1 |
|
|
|
(88 |
) |
|
|
(112 |
) |
|
|
21.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
|
|
528 |
|
|
|
538 |
|
|
|
(1.8 |
) |
|
|
1,678 |
|
|
|
1,759 |
|
|
|
(4.7 |
) |
Unearned premium change |
|
|
27 |
|
|
|
44 |
|
|
|
(40.1 |
) |
|
|
(11 |
) |
|
|
(16 |
) |
|
|
36.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
555 |
|
|
$ |
582 |
|
|
|
(4.7 |
) |
|
$ |
1,667 |
|
|
$ |
1,743 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines Insurance Losses by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
New losses greater than $4,000,000 |
|
$ |
13 |
|
|
$ |
5 |
|
|
|
162.4 |
|
|
$ |
43 |
|
|
$ |
31 |
|
|
|
38.2 |
|
New losses $2,000,000-$4,000,000 |
|
|
19 |
|
|
|
17 |
|
|
|
15.9 |
|
|
|
58 |
|
|
|
56 |
|
|
|
3.4 |
|
New losses $1,000,000-$2,000,000 |
|
|
14 |
|
|
|
26 |
|
|
|
(46.2 |
) |
|
|
38 |
|
|
|
60 |
|
|
|
(37.0 |
) |
New losses $750,000-$1,000,000 |
|
|
7 |
|
|
|
12 |
|
|
|
(45.7 |
) |
|
|
23 |
|
|
|
31 |
|
|
|
(25.9 |
) |
New losses $500,000-$750,000 |
|
|
15 |
|
|
|
14 |
|
|
|
11.1 |
|
|
|
34 |
|
|
|
34 |
|
|
|
1.5 |
|
New losses $250,000-$500,000 |
|
|
22 |
|
|
|
25 |
|
|
|
(14.7 |
) |
|
|
72 |
|
|
|
70 |
|
|
|
2.6 |
|
Case reserve development above $250,000 |
|
|
49 |
|
|
|
57 |
|
|
|
(14.5 |
) |
|
|
163 |
|
|
|
153 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total large losses incurred |
|
|
139 |
|
|
|
156 |
|
|
|
(11.2 |
) |
|
|
431 |
|
|
|
435 |
|
|
|
(1.0 |
) |
Other losses excluding catastrophe losses |
|
|
124 |
|
|
|
144 |
|
|
|
(13.5 |
) |
|
|
449 |
|
|
|
421 |
|
|
|
6.6 |
|
Catastrophe losses |
|
|
(7 |
) |
|
|
23 |
|
|
|
(129.8 |
) |
|
|
64 |
|
|
|
112 |
|
|
|
(42.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses incurred |
|
$ |
256 |
|
|
$ |
323 |
|
|
|
(20.8 |
) |
|
$ |
944 |
|
|
$ |
968 |
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums: |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New losses greater than $4,000,000 |
|
|
2.4 |
% |
|
|
0.9 |
% |
|
|
1.5 |
|
|
|
2.6 |
% |
|
|
1.8 |
% |
|
|
0.8 |
|
New losses $2,000,000-$4,000,000 |
|
|
3.5 |
|
|
|
2.9 |
|
|
|
0.6 |
|
|
|
3.5 |
|
|
|
3.2 |
|
|
|
0.3 |
|
New losses $1,000,000-$2,000,000 |
|
|
2.6 |
|
|
|
4.5 |
|
|
|
(1.9 |
) |
|
|
2.3 |
|
|
|
3.4 |
|
|
|
(1.1 |
) |
New losses $750,000-$1,000,000 |
|
|
1.2 |
|
|
|
2.1 |
|
|
|
(0.9 |
) |
|
|
1.4 |
|
|
|
1.8 |
|
|
|
(0.4 |
) |
New losses $500,000-$750,000 |
|
|
2.7 |
|
|
|
2.3 |
|
|
|
0.4 |
|
|
|
2.1 |
|
|
|
1.9 |
|
|
|
0.2 |
|
New losses $250,000-$500,000 |
|
|
3.9 |
|
|
|
4.3 |
|
|
|
(0.4 |
) |
|
|
4.3 |
|
|
|
4.0 |
|
|
|
0.3 |
|
Case reserve development above $250,000 |
|
|
8.8 |
|
|
|
9.8 |
|
|
|
(1.0 |
) |
|
|
9.8 |
|
|
|
8.8 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total large loss ratio |
|
|
25.1 |
|
|
|
26.8 |
|
|
|
(1.7 |
) |
|
|
26.0 |
|
|
|
24.9 |
|
|
|
1.1 |
|
Other losses excluding catastrophe losses |
|
|
22.3 |
|
|
|
24.6 |
|
|
|
(2.3 |
) |
|
|
26.9 |
|
|
|
24.2 |
|
|
|
2.7 |
|
Catastrophe losses |
|
|
(1.2 |
) |
|
|
4.0 |
|
|
|
(5.2 |
) |
|
|
3.8 |
|
|
|
6.4 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss ratio |
|
|
46.2 |
% |
|
|
55.4 |
% |
|
|
(9.2 |
) |
|
|
56.7 |
% |
|
|
55.5 |
% |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $250,000 for
trends in factors such as initial reserve levels, loss cost inflation and settlement
expenses. Our analysis continues to indicate no unexpected concentration of these large
losses and case reserve increases by risk category, geographic region, policy inception,
agency or field marketing territory. In the third quarter of 2009, these losses and case
reserve increases were $17 million less than last years third quarter, primarily due to
the lowest level of workers compensation large losses since the first quarter of 2008. A
decline in workers compensation large losses was also the primary driver of lower large
losses for commercial lines in total for the first nine months of 2009. We believe results
for the three-month and nine-month periods largely reflected normal fluctuations in loss
patterns and normal variability in the large case reserves for claims above $250,000.
Commercial Lines of Business Analysis
Approximately 95 percent of our commercial lines premiums relate to accounts with
coverages from more than one of our business lines. As a result, we believe that the
commercial lines segment is best measured and evaluated on a segment basis. However, we
provide line of business data to summarize growth and profitability trends separately for
each line.
Cincinnati Financial 3Q09 10-Q 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
Change % |
|
2009 |
|
2008 |
|
Change % |
|
Commercial casualty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
168 |
|
|
$ |
171 |
|
|
|
(1.8 |
) |
|
$ |
548 |
|
|
$ |
582 |
|
|
|
(5.8 |
) |
Earned premiums |
|
|
180 |
|
|
|
197 |
|
|
|
(8.0 |
) |
|
|
546 |
|
|
|
580 |
|
|
|
(5.8 |
) |
Loss and loss expenses incurred |
|
|
81 |
|
|
|
87 |
|
|
|
(6.8 |
) |
|
|
281 |
|
|
|
275 |
|
|
|
2.4 |
|
Loss and loss expense ratio |
|
|
45.0 |
% |
|
|
44.4 |
% |
|
|
|
|
|
|
51.5 |
% |
|
|
47.4 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(28.8 |
) |
|
|
(31.2 |
) |
|
|
|
|
|
|
(19.9 |
) |
|
|
(23.5 |
) |
|
|
|
|
Commercial property: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
124 |
|
|
$ |
117 |
|
|
|
5.8 |
|
|
$ |
370 |
|
|
$ |
364 |
|
|
|
1.5 |
|
Earned premiums |
|
|
122 |
|
|
|
120 |
|
|
|
1.6 |
|
|
|
362 |
|
|
|
364 |
|
|
|
(0.5 |
) |
Loss and loss expenses incurred |
|
|
52 |
|
|
|
84 |
|
|
|
(37.8 |
) |
|
|
241 |
|
|
|
296 |
|
|
|
(18.4 |
) |
Loss and loss expense ratio |
|
|
42.8 |
% |
|
|
70.0 |
% |
|
|
|
|
|
|
66.6 |
% |
|
|
81.1 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
0.6 |
|
|
|
15.6 |
|
|
|
|
|
|
|
10.4 |
|
|
|
23.4 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(10.1 |
) |
|
|
(3.6 |
) |
|
|
|
|
|
|
(2.8 |
) |
|
|
(0.4 |
) |
|
|
|
|
Commercial auto: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
92 |
|
|
$ |
93 |
|
|
|
(0.6 |
) |
|
$ |
296 |
|
|
$ |
308 |
|
|
|
(4.0 |
) |
Earned premiums |
|
|
99 |
|
|
|
103 |
|
|
|
(3.8 |
) |
|
|
296 |
|
|
|
308 |
|
|
|
(3.9 |
) |
Loss and loss expenses incurred |
|
|
67 |
|
|
|
65 |
|
|
|
3.4 |
|
|
|
187 |
|
|
|
199 |
|
|
|
(5.9 |
) |
Loss and loss expense ratio |
|
|
67.9 |
% |
|
|
63.2 |
% |
|
|
|
|
|
|
63.4 |
% |
|
|
64.7 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
(0.8 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
0.8 |
|
|
|
1.0 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(8.9 |
) |
|
|
(8.7 |
) |
|
|
|
|
|
|
(4.3 |
) |
|
|
(5.4 |
) |
|
|
|
|
Workers compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
69 |
|
|
$ |
84 |
|
|
|
(17.8 |
) |
|
$ |
252 |
|
|
$ |
293 |
|
|
|
(14.0 |
) |
Earned premiums |
|
|
82 |
|
|
|
93 |
|
|
|
(12.5 |
) |
|
|
253 |
|
|
|
282 |
|
|
|
(10.3 |
) |
Loss and loss expenses incurred |
|
|
90 |
|
|
|
85 |
|
|
|
6.1 |
|
|
|
302 |
|
|
|
219 |
|
|
|
37.7 |
|
Loss and loss expense ratio |
|
|
110.2 |
% |
|
|
90.9 |
% |
|
|
|
|
|
|
119.5 |
% |
|
|
77.9 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(4.5 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
18.0 |
|
|
|
(6.8 |
) |
|
|
|
|
Specialty packages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
38 |
|
|
$ |
36 |
|
|
|
4.6 |
|
|
$ |
110 |
|
|
$ |
109 |
|
|
|
1.6 |
|
Earned premiums |
|
|
37 |
|
|
|
35 |
|
|
|
4.7 |
|
|
|
110 |
|
|
|
107 |
|
|
|
2.1 |
|
Loss and loss expenses incurred |
|
|
13 |
|
|
|
28 |
|
|
|
(56.2 |
) |
|
|
89 |
|
|
|
91 |
|
|
|
(2.3 |
) |
Loss and loss expense ratio |
|
|
33.5 |
% |
|
|
80.2 |
% |
|
|
|
|
|
|
81.0 |
% |
|
|
84.6 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
(18.2 |
) |
|
|
12.2 |
|
|
|
|
|
|
|
21.5 |
|
|
|
21.5 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(7.1 |
) |
|
|
(5.7 |
) |
|
|
|
|
|
|
(2.8 |
) |
|
|
(0.9 |
) |
|
|
|
|
Surety and executive risk: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
28 |
|
|
$ |
29 |
|
|
|
(1.0 |
) |
|
$ |
78 |
|
|
$ |
82 |
|
|
|
(5.2 |
) |
Earned premiums |
|
|
27 |
|
|
|
27 |
|
|
|
(0.9 |
) |
|
|
77 |
|
|
|
80 |
|
|
|
(3.6 |
) |
Loss and loss expenses incurred |
|
|
23 |
|
|
|
20 |
|
|
|
15.2 |
|
|
|
48 |
|
|
|
57 |
|
|
|
(16.5 |
) |
Loss and loss expense ratio |
|
|
85.6 |
% |
|
|
73.6 |
% |
|
|
|
|
|
|
61.7 |
% |
|
|
71.3 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
21.1 |
|
|
|
(21.5 |
) |
|
|
|
|
|
|
0.6 |
|
|
|
(2.4 |
) |
|
|
|
|
Machinery and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
9 |
|
|
$ |
8 |
|
|
|
11.5 |
|
|
$ |
24 |
|
|
$ |
22 |
|
|
|
10.4 |
|
Earned premiums |
|
|
8 |
|
|
|
7 |
|
|
|
8.2 |
|
|
|
23 |
|
|
|
22 |
|
|
|
7.4 |
|
Loss and loss expenses incurred |
|
|
3 |
|
|
|
2 |
|
|
|
28.3 |
|
|
|
11 |
|
|
|
9 |
|
|
|
23.0 |
|
Loss and loss expense ratio |
|
|
38.4 |
% |
|
|
32.4 |
% |
|
|
|
|
|
|
45.6 |
% |
|
|
39.8 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
(0.1 |
) |
|
|
2.8 |
|
|
|
|
|
|
|
1.8 |
|
|
|
1.3 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(7.6 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
3.0 |
|
|
|
2.9 |
|
|
|
|
|
As discussed above, the loss and loss expense ratio component of the combined ratio is
an important measure of underwriting profit and performance. Catastrophe losses are
volatile and can distort short-term profitability trends, particularly for certain lines of
business. Development of loss and loss expense reserves from prior accident years can also
distort measures of profitability trends for recently written business. To illustrate these
effects, we separate their impact on the ratios shown in the table above. For the nine
months ended September 30, 2009, the only commercial line of business with significant
adverse profitability trends is workers compensation. Most of the profit deterioration in
workers compensation is a result of prior accident year reserve development. As discussed
above, we are taking action to improve pricing and reduce loss costs, which is expected to
benefit future profitability trends.
Cincinnati Financial 3Q09 10-Q 35
Personal Lines Insurance Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Earned premiums |
|
$ |
170 |
|
|
$ |
167 |
|
|
|
1.8 |
|
|
$ |
513 |
|
|
$ |
518 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe
losses |
|
|
130 |
|
|
|
128 |
|
|
|
1.5 |
|
|
|
366 |
|
|
|
356 |
|
|
|
3.1 |
|
Current accident year catastrophe losses |
|
|
12 |
|
|
|
38 |
|
|
|
(67.6 |
) |
|
|
109 |
|
|
|
106 |
|
|
|
2.3 |
|
Prior accident years before catastrophe losses |
|
|
(18 |
) |
|
|
(17 |
) |
|
|
(9.4 |
) |
|
|
(29 |
) |
|
|
(28 |
) |
|
|
(8.6 |
) |
Prior accident year catastrophe losses |
|
|
1 |
|
|
|
2 |
|
|
|
(26.5 |
) |
|
|
4 |
|
|
|
1 |
|
|
|
384.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss expenses |
|
|
125 |
|
|
|
151 |
|
|
|
(17.2 |
) |
|
|
450 |
|
|
|
435 |
|
|
|
3.3 |
|
Underwriting expenses |
|
|
49 |
|
|
|
54 |
|
|
|
(8.8 |
) |
|
|
159 |
|
|
|
165 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss |
|
$ |
(4 |
) |
|
$ |
(38 |
) |
|
|
89.8 |
|
|
$ |
(96 |
) |
|
$ |
(82 |
) |
|
|
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums: |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe
losses |
|
|
76.1 |
% |
|
|
76.3 |
% |
|
|
(0.2 |
) |
|
|
71.3 |
% |
|
|
68.6 |
% |
|
|
2.7 |
|
Current accident year catastrophe losses |
|
|
7.3 |
|
|
|
22.9 |
|
|
|
(15.6 |
) |
|
|
21.2 |
|
|
|
20.6 |
|
|
|
0.6 |
|
Prior accident years before catastrophe losses |
|
|
(10.7 |
) |
|
|
(10.0 |
) |
|
|
(0.7 |
) |
|
|
(5.8 |
) |
|
|
(5.3 |
) |
|
|
(0.5 |
) |
Prior accident year catastrophe losses |
|
|
0.6 |
|
|
|
0.9 |
|
|
|
(0.3 |
) |
|
|
0.8 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss expenses |
|
|
73.3 |
|
|
|
90.1 |
|
|
|
(16.8 |
) |
|
|
87.5 |
|
|
|
84.0 |
|
|
|
3.5 |
|
Underwriting expenses |
|
|
29.0 |
|
|
|
32.4 |
|
|
|
(3.4 |
) |
|
|
31.2 |
|
|
|
31.9 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
102.3 |
% |
|
|
122.5 |
% |
|
|
(20.2 |
) |
|
|
118.7 |
% |
|
|
115.9 |
% |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio: |
|
|
102.3 |
% |
|
|
122.5 |
% |
|
|
(20.2 |
) |
|
|
118.7 |
% |
|
|
115.9 |
% |
|
|
2.8 |
|
Contribution from catastrophe losses and prior years
reserve development |
|
|
(2.8 |
) |
|
|
13.8 |
|
|
|
(16.6 |
) |
|
|
16.2 |
|
|
|
15.4 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio before catastrophe losses and prior
years reserve development |
|
|
105.1 |
% |
|
|
108.7 |
% |
|
|
(3.6 |
) |
|
|
102.5 |
% |
|
|
100.5 |
% |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the personal lines segment include:
|
|
Premiums Personal lines written premiums increased for the third quarter while
declining slightly for the nine months ended September 30, 2009, compared with the
same periods of 2008. The increase was partially due to a lower amount of premiums
ceded to reinsurers to reinstate coverage for catastrophe reinsurance. During the
third quarter of 2009, the ceded reinsurance reinstatement premium was $1 million
compared with $7 million for the third quarter of 2008, with both amounts triggered by
losses incurred from Hurricane Ike of 2008. |
|
|
For business written through our agencies, growth in new business during 2009 has
essentially offset lower renewal written premiums related to pricing changes initiated
in 2008 that affected policies renewing during 2009. Pricing changes included an
expansion of pricing points and pricing sophistication that incorporates insurance
scores and is intended to improve our ability to compete for our agents highest quality
personal lines accounts. Various rate changes are being implemented beginning
October 2009 for states representing approximately 80 percent of our personal lines
business. These changes include rate increases that respond to weather-related loss
trends as well as other trends in loss costs. The increases for the homeowner line of
business average approximately 6 percent although some individual policies will have
increases in the double-digit range. |
|
|
|
Personal lines new business written premiums continued a strong growth trend, increasing
significantly for the three and nine months ended September 30, 2009. The growth
reflects our success in attracting more of our agents preferred business as the average
quality of our book of business continues to improve. In addition, agencies that
initiated or expanded their use of Cincinnatis personal lines products in the past two
years were an important part of that growth. Personal lines new business increased
$10 million during the third quarter and $25 million during the first nine months of
2009, with $4 million and $9 million, respectively, from seven states where we began
writing business or significantly expanded our personal lines product offerings and
automation capabilities during 2008. Some of what we report as new business came from
accounts that were not new to the agent. We believe these seasoned accounts tend to be
priced more accurately than business that is less familiar to our agent. |
|
|
|
We continue to implement strategies discussed in our 2008 Annual Report on Form 10-K,
Item 1, Our Business and Our Strategy, Page 10, to enhance our response to marketplace
changes and help achieve our long-term objectives for personal lines growth and
profitability. These strategies include expansion during recent years into four western
states with historical industry catastrophe loss ratios |
Cincinnati Financial 3Q09 10-Q 36
|
|
that are significantly better
than our historical ratios for states where we operated prior to that expansion. |
|
|
|
Combined ratio The personal lines combined ratio for the third quarter of 2009
improved 20.2 percentage points compared with the third quarter of 2008, primarily due
to lower weather-related catastrophe losses. The ratio for the nine-months ended
September 30, 2009, was higher than the same period of 2008 primarily due to higher
catastrophes losses and other losses. During the third quarter of 2009, one unusually
large fire loss for our homeowner line of business contributed $5 million, or
2.9 combined ratio points, to personal lines segment losses. |
|
|
|
In addition to the rate increases discussed above, we continue to refine our pricing to
better match premiums to the risk of loss on individual policies. For our homeowner
line, refinements include further development of our predictive modeling with the intent
to attract and retain business with the best prospect for long-term profitability. We
also continue to increase pricing sophistication that considers insurance scores and
other attributes such as age of a home and prior loss experience. Our predictive
modeling efforts over the past year have improved the average quality of our homeowner
business as the proportion with insurance scores in our preferred tiers has increased.
The results of improved pricing per risk and the broad-based rate increases are expected
to improve the combined ratio over the next several quarters. In addition, greater
geographic diversification is expected over time to reduce the volatility of homeowner
underwriting results attributable to weather-related catastrophe losses. |
|
|
|
Personal lines reserve development for prior accident years during the three-month and
nine-month 2009 periods trended favorably, similar to trends for the same periods of
2008. Most of the favorable reserve development for prior accident years recognized
during 2009 occurred in the other personal line of business, mainly due to umbrella
coverages, which have exhibited nearly flat paid loss cost inflation since 2002. Reserve
estimates are inherently uncertain as described in our 2008 Annual Report on Form 10-K,
Item 7, Property Casualty Insurance Loss and Loss Expense Reserves, Page 41 |
The underwriting expense ratio for the first nine months of 2009 decreased compared with
the same periods of 2008 as indicated in the table above. The decrease was largely due to
lower technology costs as additional expenses for expansion into new states occurred
primarily during 2008.
Personal Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Agency renewal written premiums |
|
$ |
177 |
|
|
$ |
185 |
|
|
|
(4.7 |
) |
|
$ |
490 |
|
|
$ |
517 |
|
|
|
(5.3 |
) |
Agency new business written premiums |
|
|
21 |
|
|
|
11 |
|
|
|
90.9 |
|
|
|
55 |
|
|
|
30 |
|
|
|
82.0 |
|
Other written premiums |
|
|
(8 |
) |
|
|
(12 |
) |
|
|
36.5 |
|
|
|
(21 |
) |
|
|
(22 |
) |
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
|
|
190 |
|
|
|
184 |
|
|
|
3.2 |
|
|
|
524 |
|
|
|
525 |
|
|
|
(0.2 |
) |
Unearned premium change |
|
|
(20 |
) |
|
|
(17 |
) |
|
|
(16.3 |
) |
|
|
(11 |
) |
|
|
(7 |
) |
|
|
(56.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
170 |
|
|
$ |
167 |
|
|
|
1.8 |
|
|
$ |
513 |
|
|
$ |
518 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 37
Personal Lines Insurance Losses by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
New losses greater than $4,000,000 |
|
$ |
5 |
|
|
$ |
5 |
|
|
|
0.0 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
|
0.0 |
|
New losses $2,000,000-$4,000,000 |
|
|
5 |
|
|
|
|
|
|
nm |
|
|
|
5 |
|
|
|
|
|
|
nm |
|
New losses $1,000,000-$2,000,000 |
|
|
5 |
|
|
|
6 |
|
|
|
(26.5 |
) |
|
|
10 |
|
|
|
12 |
|
|
|
(21.1 |
) |
New losses $750,000-$1,000,000 |
|
|
2 |
|
|
|
2 |
|
|
|
8.4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
(3.8 |
) |
New losses $500,000-$750,000 |
|
|
3 |
|
|
|
2 |
|
|
|
26.9 |
|
|
|
8 |
|
|
|
6 |
|
|
|
28.0 |
|
New losses $250,000-$500,000 |
|
|
7 |
|
|
|
8 |
|
|
|
(11.5 |
) |
|
|
22 |
|
|
|
20 |
|
|
|
14.4 |
|
Case reserve development above $250,000 |
|
|
2 |
|
|
|
2 |
|
|
|
0.2 |
|
|
|
14 |
|
|
|
9 |
|
|
|
54.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total large losses incurred |
|
|
29 |
|
|
|
25 |
|
|
|
12.3 |
|
|
|
68 |
|
|
|
56 |
|
|
|
21.0 |
|
Other losses excluding catastrophe losses |
|
|
65 |
|
|
|
68 |
|
|
|
(4.1 |
) |
|
|
215 |
|
|
|
220 |
|
|
|
(2.4 |
) |
Catastrophe losses |
|
|
13 |
|
|
|
40 |
|
|
|
(66.2 |
) |
|
|
113 |
|
|
|
107 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses incurred |
|
$ |
107 |
|
|
$ |
133 |
|
|
|
(19.5 |
) |
|
$ |
396 |
|
|
$ |
383 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums: |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
Pt. Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New losses greater than $4,000,000 |
|
|
2.9 |
% |
|
|
3.0 |
% |
|
|
(0.1 |
) |
|
|
1.0 |
% |
|
|
1.0 |
% |
|
|
0.0 |
|
New losses $2,000,000-$4,000,000 |
|
|
3.0 |
|
|
|
0.0 |
|
|
|
3.0 |
|
|
|
1.0 |
|
|
|
0.0 |
|
|
|
1.0 |
|
New losses $1,000,000-$2,000,000 |
|
|
2.7 |
|
|
|
3.8 |
|
|
|
(1.1 |
) |
|
|
1.8 |
|
|
|
2.3 |
|
|
|
(0.5 |
) |
New losses $750,000-$1,000,000 |
|
|
1.1 |
|
|
|
1.0 |
|
|
|
0.1 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
(0.1 |
) |
New losses $500,000-$750,000 |
|
|
1.7 |
|
|
|
1.3 |
|
|
|
0.4 |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
|
0.3 |
|
New losses $250,000-$500,000 |
|
|
4.2 |
|
|
|
4.8 |
|
|
|
(0.6 |
) |
|
|
4.4 |
|
|
|
3.8 |
|
|
|
0.6 |
|
Case reserve development above $250,000 |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
(0.1 |
) |
|
|
2.7 |
|
|
|
1.7 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total large losses incurred |
|
|
16.9 |
|
|
|
15.3 |
|
|
|
1.6 |
|
|
|
13.2 |
|
|
|
10.9 |
|
|
|
2.3 |
|
Other losses excluding catastrophe losses |
|
|
38.3 |
|
|
|
40.6 |
|
|
|
(2.3 |
) |
|
|
41.9 |
|
|
|
42.6 |
|
|
|
(0.7 |
) |
Catastrophe losses |
|
|
7.9 |
|
|
|
23.8 |
|
|
|
(15.9 |
) |
|
|
22.0 |
|
|
|
20.7 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss ratio |
|
|
63.1 |
% |
|
|
79.7 |
% |
|
|
(16.6 |
) |
|
|
77.1 |
% |
|
|
74.2 |
% |
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $250,000 for
trends in factors such as initial reserve levels, loss cost inflation and settlement
expenses. Our analysis continues to indicate no unexpected concentration of these large
losses and case reserve increases by risk category, geographic region, policy inception,
agency or field marketing territory. In the third quarter of 2009, these losses and case
reserves increased $4 million compared with last years third quarter. The increase was
largely due to more claims with losses of $2 million or greater. Homeowner fire losses were
primarily responsible for the $12 million increase in total personal lines large losses for
the first nine months of 2009. We believe results for the three-month and nine-month
periods largely reflected normal fluctuations in loss patterns and normal variability in
the large case reserves for claims above $250,000.
Cincinnati Financial 3Q09 10-Q 38
Personal Lines of Business Analysis
We prefer to write personal lines coverages on an account basis that includes both
auto and homeowner coverages as well as coverages from the other personal business line. As
a result, we believe that the personal lines segment is best measured and evaluated on a
segment basis. However, we provide the line of business data to summarize growth and
profitability trends separately for each line.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
Change % |
|
2009 |
|
2008 |
|
Change % |
|
Personal auto: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
90 |
|
|
$ |
88 |
|
|
|
2.0 |
|
|
$ |
246 |
|
|
$ |
246 |
|
|
|
0.2 |
|
Earned premiums |
|
|
80 |
|
|
|
81 |
|
|
|
(1.2 |
) |
|
|
239 |
|
|
|
245 |
|
|
|
(2.5 |
) |
Loss and loss expenses incurred |
|
|
52 |
|
|
|
52 |
|
|
|
0.6 |
|
|
|
163 |
|
|
|
154 |
|
|
|
5.9 |
|
Loss and loss expense ratio |
|
|
64.9 |
% |
|
|
63.7 |
% |
|
|
|
|
|
|
68.1 |
% |
|
|
62.7 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
0.6 |
|
|
|
1.7 |
|
|
|
|
|
|
|
1.4 |
|
|
|
2.2 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(3.9 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
|
(3.1 |
) |
|
|
|
|
Homeowner: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
75 |
|
|
$ |
72 |
|
|
|
3.8 |
|
|
$ |
208 |
|
|
$ |
212 |
|
|
|
(1.9 |
) |
Earned premiums |
|
|
68 |
|
|
|
64 |
|
|
|
4.8 |
|
|
|
207 |
|
|
|
208 |
|
|
|
(0.3 |
) |
Loss and loss expenses incurred |
|
|
65 |
|
|
|
79 |
|
|
|
(17.7 |
) |
|
|
261 |
|
|
|
238 |
|
|
|
9.6 |
|
Loss and loss expense ratio |
|
|
96.4 |
% |
|
|
122.8 |
% |
|
|
|
|
|
|
126.0 |
% |
|
|
114.6 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
18.0 |
|
|
|
54.5 |
|
|
|
|
|
|
|
49.4 |
|
|
|
46.2 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(4.3 |
) |
|
|
(4.0 |
) |
|
|
|
|
|
|
2.4 |
|
|
|
(0.9 |
) |
|
|
|
|
Other personal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written premiums |
|
$ |
25 |
|
|
$ |
24 |
|
|
|
5.9 |
|
|
$ |
70 |
|
|
$ |
67 |
|
|
|
4.4 |
|
Earned premiums |
|
|
22 |
|
|
|
22 |
|
|
|
4.4 |
|
|
|
67 |
|
|
|
65 |
|
|
|
2.7 |
|
Loss and loss expenses incurred |
|
|
8 |
|
|
|
20 |
|
|
|
(61.5 |
) |
|
|
26 |
|
|
|
43 |
|
|
|
(40.6 |
) |
Loss and loss expense ratio |
|
|
33.8 |
% |
|
|
91.5 |
% |
|
|
|
|
|
|
38.0 |
% |
|
|
65.8 |
% |
|
|
|
|
Contribution from catastrophe losses |
|
|
3.4 |
|
|
|
14.5 |
|
|
|
|
|
|
|
11.0 |
|
|
|
8.9 |
|
|
|
|
|
Contribution from prior period reserve development |
|
|
(49.1 |
) |
|
|
(38.5 |
) |
|
|
|
|
|
|
(42.6 |
) |
|
|
(26.3 |
) |
|
|
|
|
As discussed above, the loss and loss expense ratio component of the combined ratio is
an important measure of underwriting profit and performance. Catastrophe losses are
volatile and can distort short-term profitability trends, particularly for certain lines of
business. Development of loss and loss expense reserves from prior accident years can also
distort measures of profitability trends for recently written business. To illustrate these
effects, we separate their impact on the ratios shown in the table above. For the nine
months ended September 30, 2009, the personal line of business with the most significant
adverse profitability trend was homeowner. As discussed above, we continue to take action
to improve pricing per risk and overall rates, which is expected to improve future
profitability trends. In addition we anticipate that the unusually high catastrophe loss
levels of 2009 to return near the historical average, with the long-term future average to
improving due to gradual geographic diversification into states less prone to catastrophe
losses.
Cincinnati Financial 3Q09 10-Q 39
Life Insurance Results of Operations
Overview
Performance highlights for the life insurance segment include:
|
|
Revenues Revenues were higher for the three and nine months ended September
30, 2009, because of increased earned premiums. |
|
|
|
Earned premiums increased largely due to growth in term life insurance. Term life
insurance earned premiums increased 13.9 percent in the first nine months of 2009
compared with the first nine months of 2008. |
|
|
|
Net written premiums increased for the three and nine months ended September 30, 2009 to
$110 million and $233 million compared with $44 million and $135 million in the
comparable 2008 period. The increase in written premiums primarily was due to sales of
fixed annuity products. Fixed annuity written premiums for the third quarter and first
nine months of 2009 were $70 million and $113 million compared with $8 million and $23
million for the same periods of 2008. Fixed annuity written premiums have a minimal
impact to earned premiums. We do not write variable or equity-indexed annuities. |
|
|
|
Gross in-force policy face amounts increased to $68.895 billion at September 30, 2009,
from $65.888 billion at year-end 2008. |
Life Insurance Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Written premiums |
|
$ |
110 |
|
|
$ |
44 |
|
|
|
150.1 |
|
|
$ |
233 |
|
|
$ |
135 |
|
|
|
73.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
33 |
|
|
$ |
30 |
|
|
|
10.7 |
|
|
$ |
103 |
|
|
$ |
93 |
|
|
|
11.0 |
|
Separate account investment management fees |
|
|
|
|
|
|
|
|
|
|
nm |
|
|
|
1 |
|
|
|
1 |
|
|
|
(56.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
33 |
|
|
|
30 |
|
|
|
12.1 |
|
|
|
104 |
|
|
|
94 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract holders benefits incurred |
|
|
40 |
|
|
|
41 |
|
|
|
(1.0 |
) |
|
|
118 |
|
|
|
114 |
|
|
|
3.1 |
|
Investment interest credited to contract holders |
|
|
(17 |
) |
|
|
(16 |
) |
|
|
10.1 |
|
|
|
(50 |
) |
|
|
(47 |
) |
|
|
7.6 |
|
Operating expenses incurred |
|
|
9 |
|
|
|
11 |
|
|
|
(16.7 |
) |
|
|
34 |
|
|
|
33 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
32 |
|
|
|
36 |
|
|
|
(10.7 |
) |
|
|
102 |
|
|
|
100 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance segment gain |
|
$ |
1 |
|
|
$ |
(6 |
) |
|
nm |
|
|
$ |
2 |
|
|
$ |
(6 |
) |
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability The life insurance segment frequently reports only a small
profit or loss on a GAAP basis because most of its investment income is included in
investment segment results. We include investment income credited to contract holders
(interest assumed in life insurance policy reserve calculations) in life insurance
segment results. The segment reported a $1 million profit in the third quarter of 2009
primarily due to increased earned premiums and reduced operating expenses. Primarily
due to increased earned premiums, the segment reported a profit of $2 million for the
nine months ended September 30, 2009. Life insurance segment profitability for the
third quarter and first nine months of 2009 compares favorably to a reported $6
million loss for the same periods of 2008 when the segment experienced less favorable
mortality expense. |
|
|
|
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. On a basis that includes
investment income and realized gains or losses from life insurance-related invested
assets, the life insurance company reported a net gain of $8 million and $5 million in
the three and nine months ended September 30, 2009, compared with a net loss of
$24 million and $20 million in the three and nine months ended September 30, 2008. The
life insurance company portfolio had after-tax realized investment gains of $1 million
in the third quarter and realized investment losses of $21 million in the nine months
ended September 30, 2009. For the three and nine months ended September 30, 2008,
after-tax realized investment losses totaled $29 million and $44 million, respectively. |
|
|
|
Life segment expenses consist principally of contract holders (policyholders) benefits
incurred related to traditional life and interest-sensitive products and operating
expenses incurred, net of deferred acquisition costs. |
Cincinnati Financial 3Q09 10-Q 40
Investments Results of Operations
Overview
The investment segment contributes investment income and realized gains and losses to
results of operations. Investments traditionally are our primary source of pretax and
after-tax profits.
Investment Income
Pretax investment income declined 2.4 percent and 10.3 percent for the three and nine
months ended September 30, 2009, primarily due to dividend reductions for holdings in our
equity portfolio. Interest income increased significantly, nearly offsetting the reduction
in dividends for the third quarter, as we have allocated a larger portion of our investment
portfolio to fixed-maturity securities. In our 2008 Form 10-K, Item 7, Investments Outlook,
Page 69, we discussed our portfolio strategies. We discuss risks related to our investment
income and our fixed-maturity and equity investment portfolios in Item 3, Quantitative
and Qualitative Disclosures About Market Risk, Page 49.
Investment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
104 |
|
|
$ |
83 |
|
|
|
26.0 |
|
|
$ |
296 |
|
|
$ |
238 |
|
|
|
24.5 |
|
Dividends |
|
|
24 |
|
|
|
46 |
|
|
|
(48.0 |
) |
|
|
74 |
|
|
|
169 |
|
|
|
(56.2 |
) |
Other |
|
|
1 |
|
|
|
3 |
|
|
|
(70.4 |
) |
|
|
6 |
|
|
|
10 |
|
|
|
(47.3 |
) |
Investment expenses |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(18.0 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(11.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income, net of expenses |
|
|
127 |
|
|
|
130 |
|
|
|
(2.4 |
) |
|
|
370 |
|
|
|
412 |
|
|
|
(10.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment interest credited to contract holders |
|
|
(17 |
) |
|
|
(16 |
) |
|
|
(10.1 |
) |
|
|
(50 |
) |
|
|
(47 |
) |
|
|
(7.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains and losses summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains and losses, net |
|
|
106 |
|
|
|
401 |
|
|
|
(73.6 |
) |
|
|
180 |
|
|
|
441 |
|
|
|
(59.1 |
) |
Change in fair value of securities with embedded
derivatives |
|
|
15 |
|
|
|
(8 |
) |
|
|
296.0 |
|
|
|
23 |
|
|
|
(13 |
) |
|
|
268.0 |
|
Other-than-temporary impairment charges |
|
|
(11 |
) |
|
|
(121 |
) |
|
|
90.8 |
|
|
|
(113 |
) |
|
|
(400 |
) |
|
|
71.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains and losses, net |
|
|
110 |
|
|
|
272 |
|
|
|
(59.6 |
) |
|
|
90 |
|
|
|
28 |
|
|
|
218.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment operations income |
|
$ |
220 |
|
|
$ |
386 |
|
|
|
(43.2 |
) |
|
$ |
410 |
|
|
$ |
393 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gains and Losses
We reported net realized investment gains of $110 million and $90 million in the three
months and nine months ended September 30, 2009, driven by net gains from investment sales
and bond calls that were partially offset by other-than-temporary impairment charges. We
reported $272 million and $28 million of net realized investment gains in the three months and nine months ended September 30, 2008.
Investment gains or losses are recognized upon the sales of investments or as otherwise
required under GAAP. The timing of realized gains or losses from sales can have a material
effect on results in any quarter. However, such gains or losses usually have little, if
any, effect on total shareholders equity because most equity and fixed-maturity
investments are carried at fair value, with the unrealized gain or loss included as a
component of other comprehensive income. Accounting requirements for other-than-temporary
impairment charges for the fixed-maturity portfolio are disclosed in
Item 1, Note 2, Investments on Pages 11-12.
The total realized investment gains for the first nine months of 2009 reflected:
|
|
$366 million in gains from equity sales including $123 million from sale of
ExxonMobil; $87 million from the sale of Procter & Gamble; $67 million from the sale
of Fifth Third Bancorp; and $89 million from the sale of various other common stock
holdings. These gains were partially offset by realized losses of $161 million from
sales of various equity securities, including $52 million from the sale of General
Electric Co. (NYSE: GE). |
|
|
|
$19 million in net losses from fixed-maturity sales and calls and $6 million in net
losses from a write-off of an other invested asset. |
|
|
|
$23 million in gains from changes in fair value of securities with embedded
derivatives. |
|
|
|
$113 million in other-than-temporary impairment charges to write down holdings of
fixed maturities, preferred stocks and common stocks. |
The
$180 million realized investment gains are net of realized losses. Of the $197.7 million in
realized losses on securities sold in the nine months ended September 30, 2009, $149.6
million occurred in the first quarter, $40.3 million occurred in the second quarter and
$7.7 million occurred in the third quarter.
Of the $149.6 million in first-quarter 2009 realized losses, $19.6 million of realized
losses were for securities that had been in an unrealized gain position at December 31,
2008, $1.3 million of first-quarter realized losses were for securities sold in connection
with dissolution of one of our subsidiaries in February 2009, and $0.4 million of
first-quarter realized losses was for one security that had been written down as an
other-than-temporary impairment at December 31, 2008. The remaining $128.3 million of the
$149.6 million of
Cincinnati Financial 3Q09 10-Q 41
realized losses on the sale of securities in the first quarter of 2009
resulted from sales of securities related to the financial services sector. These sales can
be divided into two groups: bank preferred stocks and two common stocks.
Certain bank preferred stocks accounted for $66.5 million of first-quarter 2009 realized
losses. At year-end 2008, bank preferred stocks were under pressure because of the
government takeover of Fannie Mae and Freddie Mac. Also adversely affecting the preferred
securities of financial services companies were government intervention in the financial
sector combined with declining asset bases. Although under pressure, these securities
continued to pay their dividends, supporting our ability and intent to hold these
securities pursuant to our investment policy, as we expected recovery to occur within a
reasonable period as the credit environment stabilized.
Subsequent to year-end, pressure on the securities of financial institutions intensified.
The likelihood for nationalization of banks was increasing, which would likely result in a
repeat of the effects of the takeovers of Fannie Mae and Freddie Mac, potentially squeezing
out this asset class, or at a minimum, could result in elimination of or deep cuts to the
dividends for these preferred securities. The impact of these events subsequent to year-end
was inconsistent with our investment policy of holding income-producing securities, and
therefore our intent to hold the securities changed from year-end. The BIX Index (S&P
Banking Index) declined by approximately 64 percent between December 31, 2008, and March 6,
2009, reinforcing both the market outlook for the sector and our decision to sell these
securities during the first quarter as these events unfolded.
The sale of two common stocks in the first quarter of 2009 accounted for the remaining
$61.8 million of realized losses. Our rationale for determining that the decline in the
value of both stocks at year-end 2008 was not other-than temporary was due to our intent to hold these securities. Both companies were maintaining their dividends and we
expected recovery to cost within a reasonable time. Following one companys announcement of
a dividend cut in February 2009, we sold our position, realizing a loss of $51.7 million.
The other company derived approximately 71 percent of its revenue from financial
institutions. The same industry concerns expressed above for bank preferred securities of
financial institutions emerged, leading us to a decision to sell our position, realizing a
loss of $10.1 million.
Of the $40.3 million in second-quarter 2009 realized losses, $3.5 million of the realized
losses were for the sale of securities that had been in an unrealized gain position at
March 31, 2009. One security, which accounted for $21.9 million of the realized loss,
suspended its dividend payment during the second quarter. Five fixed maturities, which
accounted for $7.5 million of the realized loss, were impaired in previous quarters,
reversed when ASC 320 was implemented, then subsequently were sold. One security, which
accounted for $1.0 million of the realized loss, was sold due to a company involved in a
pending merger. Of the remaining $6.4 million, one common stock amounting to $4.9 million
of the realized loss, was in an unrealized loss position at March 31, 2009.
Of the $7.7 million in third-quarter 2009 realized losses, $0.7 million of the realized
losses were for the sale of securities that had been in an unrealized gain position at June
30, 2009, $0.3 million was a write-off of an
expired interest rate swap and $6.7 million were write-offs of other invested assets,
including $6.1 million for a venture capital investment related to a bank failure that
occurred in the third quarter of 2009.
We believe that if the improving liquidity in the markets were to reverse, or the economic
recovery were to significantly stall, we could experience declines in portfolio values and
possible additional other-than-temporary-impairment charges. Of the 2,470 securities in the
portfolio, 18 were trading below 70 percent of book value at September 30, 2009. Of these
18 securities, none were equity securities. Our asset impairment committee regularly
monitors the portfolio.
Cincinnati Financial 3Q09 10-Q 42
The table below provides additional detail for other-than-temporary impairment charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
$ |
2 |
|
|
$ |
40 |
|
|
$ |
23 |
|
|
$ |
51 |
|
Other |
|
|
9 |
|
|
|
1 |
|
|
|
31 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
11 |
|
|
|
41 |
|
|
|
54 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184 |
|
Health |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
30 |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
Consumer discretionary |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Material |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common equities |
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
31 |
|
|
|
10 |
|
|
|
49 |
|
Agency |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
59 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total preferred equities |
|
|
|
|
|
|
80 |
|
|
|
10 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11 |
|
|
$ |
121 |
|
|
$ |
113 |
|
|
$ |
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
We report as Other the non-investment operations of the parent company and its
non-insurer subsidiaries, CFC Investment Company and CSU Producer Resources Inc. We also
report as Other the results of The Cincinnati Specialty Underwriters Insurance Company,
as well as other income of our standard market property casualty insurance subsidiary. Also
included in 2008 and year-to-date 2009 results for this segment are the operations of a
former subsidiary, CinFin Capital Management Company (excluding client investment
activities). CinFin Capital Management terminated all operations and the company was
dissolved effective February 28, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
2009 |
|
|
2008 |
|
|
Change % |
|
|
Interest and fees on loans and leases |
|
$ |
2 |
|
|
$ |
2 |
|
|
|
(5.8 |
) |
|
$ |
5 |
|
|
$ |
6 |
|
|
|
(14.1 |
) |
Earned premiums |
|
|
8 |
|
|
|
1 |
|
|
|
442.0 |
|
|
|
18 |
|
|
|
2 |
|
|
|
817.2 |
|
Money management fees |
|
|
|
|
|
|
1 |
|
|
nm |
|
|
|
|
|
|
|
2 |
|
|
nm |
|
Other revenues |
|
|
2 |
|
|
|
1 |
|
|
|
131.6 |
|
|
|
3 |
|
|
|
1 |
|
|
|
312.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
12 |
|
|
|
5 |
|
|
|
151.5 |
|
|
|
26 |
|
|
|
11 |
|
|
|
149.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14 |
|
|
|
15 |
|
|
|
(3.5 |
) |
|
|
42 |
|
|
|
40 |
|
|
|
6.1 |
|
Losses and loss expenses |
|
|
6 |
|
|
|
1 |
|
|
|
824.8 |
|
|
|
14 |
|
|
|
2 |
|
|
|
846.1 |
|
Underwriting expenses |
|
|
4 |
|
|
|
3 |
|
|
|
97.4 |
|
|
|
17 |
|
|
|
3 |
|
|
|
434.4 |
|
Operating expenses |
|
|
3 |
|
|
|
2 |
|
|
|
56.8 |
|
|
|
11 |
|
|
|
10 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
27 |
|
|
|
21 |
|
|
|
40.9 |
|
|
|
84 |
|
|
|
55 |
|
|
|
54.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(15 |
) |
|
$ |
(16 |
) |
|
|
6.1 |
|
|
$ |
(58 |
) |
|
$ |
(44 |
) |
|
|
(31.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 43
Taxes
We had $73 million and $40 million of income tax expense in the three months and nine
months ended September 30, 2009, compared with $109 million and $52 million for the same
periods of 2008. The effective tax rate for the three and nine months ended
September 30, 2009, was 29.9 percent and 17.5 percent compared with 30.6 percent and
16.2 percent in the same periods last year.
The change in our effective tax rate was the result of changes in pretax income from
underwriting results, changes in investment income from dividends and the amount of
realized investment gains and losses. A decrease in our dividends received deduction
compared to prior year also contributed to the change in the effective tax rates for 2009.
Historically, we have pursued a strategy of investing some portion of cash flow in
tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability
and maximize after-tax earnings. See Tax-Exempt Fixed Maturities, Page 50 for further
discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our
insurance subsidiaries, approximately 85 percent of income from tax-advantaged
fixed-maturity investments is exempt from federal tax. Our non-insurance companies own an
immaterial amount of tax-advantaged fixed-maturity investments. For our insurance
subsidiaries, the dividend received deduction, after the dividend proration of the 1986 Tax
Reform Act, exempts approximately 60 percent of dividends from qualified equities from
federal tax. For our non-insurance subsidiaries, the dividend received deduction exempts
70 percent of dividends from qualified equities. Details about our effective tax rate are
found in our 2008 Annual Report on Form 10-K, Item 8, Note 11, Income Taxes, Page 112.
Liquidity and Capital Resources
At September 30, 2009, shareholders equity was $4.626 billion compared with
$4.182 billion at December 31, 2008. Total debt was $839 million at September 30, 2009. At
September 30, 2009, cash and cash equivalents totaled $448 million compared with $1.009
billion at December 31, 2008, with the decline primarily due to purchases of securities for
our investment portfolio.
Sources of Liquidity
Subsidiary Dividends
Our lead insurance subsidiary did not declare any dividends to the parent company
during the first nine months of 2009 compared with $160 million declared in the first nine
months of 2008. State of Ohio regulatory requirements restrict the dividends our insurance
subsidiary can pay. During 2009, total dividends that our insurance subsidiary could pay to
our parent company without regulatory approval are approximately $336 million.
Investing Activities
Investment income is a source of liquidity for both the parent company and its
insurance subsidiary. We continue to focus on portfolio strategies to balance near-term
income generation and long-term book value growth.
Parent company obligations can be funded with income on investments held at the parent
company level or through realized gains on that portfolio, although we prefer to follow an
investment philosophy seeking to compound cash flows over the long term. These sources of
capital can help minimize subsidiary dividends to the parent company, protecting insurance
subsidiary capital.
See our 2008 Annual Report on Form 10-K, Item 1, Investments Segment, Page 17, for a
discussion of our historic investment strategy, portfolio allocation and quality.
Insurance Underwriting
Our property casualty and life insurance operations provide liquidity because we
generally receive premiums before paying losses under the policies purchased with those
premiums. After satisfying our cash requirements, we use excess cash flows for investment,
increasing future investment income.
This table
shows a summary of cash flow for all of our insurance operations (direct method):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Premiums collected |
|
$ |
788 |
|
|
$ |
802 |
|
|
$ |
2,328 |
|
|
$ |
2,379 |
|
Loss and loss expenses paid |
|
|
(497 |
) |
|
|
(575 |
) |
|
|
(1,530 |
) |
|
|
(1,547 |
) |
Commissions and other underwriting expenses paid |
|
|
(246 |
) |
|
|
(245 |
) |
|
|
(799 |
) |
|
|
(818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance subsidiary cash flow from underwriting |
|
|
45 |
|
|
|
(18 |
) |
|
|
(1 |
) |
|
|
14 |
|
Investment income received |
|
|
122 |
|
|
|
126 |
|
|
|
329 |
|
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance operating cash flow |
|
$ |
167 |
|
|
$ |
108 |
|
|
$ |
328 |
|
|
$ |
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 44
Historically, cash receipts from property casualty and life insurance premiums, along
with investment income, have been more than sufficient to pay claims, operating expenses
and dividends to the parent company. While first-year life insurance expenses normally
exceed first-year premiums, subsequent premiums are used to generate investment income
until the time the policy benefits are paid.
Collected premiums are down $51 million for the first nine months of 2009, similar to the
decline in net written premiums, and are the primary reason that cash flow from
underwriting decreased. We discuss our future obligations for claims payments in our 2008
Annual Report on Form 10-K, Item 7, Obligations, Page 74, and our future obligations for
underwriting expenses in our 2008 Annual Report on Form 10-K, Item 7, Other Commitments,
Page 73.
Capital Resources
At September 30, 2009, our total debt-to-capital ratio improved to 15.3 percent, with
$790 million in long-term debt and $49 million in borrowings on our short-term lines of
credit. Based on our present capital requirements, we do not anticipate a material increase
in debt levels during 2009. As a result, we believe that changes in our debt-to-capital
ratio will continue to be largely a function of the contribution of unrealized investment
gains or losses to shareholders equity.
We provide details of our three long-term notes in our 2008 Annual Report on Form 10-K,
Item 8, Note 8, Senior Debt, Page 109. None of the notes are encumbered by rating triggers.
Our debt ratings are described in Progress Toward Long-Term Value Creation, Page 25.
On August 31, 2009, we renewed our $75 million unsecured line of credit with PNC Bank, N.A.
It is a committed line of credit that may be used for general corporate purposes until
expiration on August 29, 2010. We also have a second unsecured revolving line of credit for
$150 million administered by The Huntington National Bank as discussed in our 2008 Annual
Report on Form 10-K, Item 7, Short-term Debt, Page 72.
Off-balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed
off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are
reasonably likely to have a current or future material effect on the companys financial
condition, results of operation, liquidity, capital expenditures or capital resources.
Similarly, the company holds no fair-value contracts for which a lack of marketplace
quotations would necessitate the use of fair-value techniques.
Uses of Liquidity
Our parent company and insurance subsidiary have contractual obligations and other
commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
Contractual Obligations
In our 2008 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 73, we
estimated our future contractual obligations as of December 31, 2008. There have been no
material changes to our estimates of future contractual obligations.
Other Commitments
In addition to our contractual obligations, we have other operational commitments.
|
|
Commissions Commissions paid were $463 million in the first nine months of 2009.
Commission payments generally track with written premiums. |
|
|
Other underwriting expenses Many of our underwriting expenses are not contractual
obligations, but reflect the ongoing expenses of our business. Non-commission
underwriting expenses paid were $336 million in the first nine months of 2009. |
|
|
In addition to contractual obligations for hardware and software, we anticipate
capitalizing $27 million in spending for key technology initiatives in 2009.
Capitalized development costs related to key technology initiatives were $20 million
in the first nine months of 2009. These activities are conducted at our discretion,
and we have no material contractual obligations for activities planned as part of
these projects. |
Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting,
investment and other corporate activities in fixed-maturity and equity securities on an
ongoing basis to help achieve our portfolio objectives. See Progress Toward Long-Term Value
Creation, Page 23, for a discussion of current refinements to our investment strategies
that reflect our risk management activities. We discuss certain portfolio attributes in
Item 3, Quantitative and Qualitative Disclosures about Market Risk, Page 49.
Cincinnati Financial 3Q09 10-Q 45
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In August
2009, the board of directors increased the regular quarterly cash dividend from 39 cents
per share to 39.5 cents per share for an indicated annual rate of $1.58 per share. During
the first nine months of 2009, $186 million was used for cash dividends to shareholders.
Property Casualty Insurance Reserves
For the business lines in the commercial and personal lines insurance segments, the
following tables show the breakout of gross reserves among case, IBNR and loss expense
reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our
2008 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense
Reserves, Page 41.
The rise in total gross reserves primarily was due to higher IBNR reserves for workers
compensation and homeowner lines of business.
Commercial Lines Insurance Segment Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves |
|
|
Loss |
|
|
Total |
|
|
|
|
|
|
Case |
|
|
IBNR |
|
|
expense |
|
|
gross |
|
|
Percent |
|
(In millions) |
|
reserves |
|
|
reserves |
|
|
reserves |
|
|
reserves |
|
|
of total |
|
|
At September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty |
|
$ |
1,070 |
|
|
$ |
297 |
|
|
$ |
536 |
|
|
$ |
1,903 |
|
|
|
50.8 |
% |
Commercial property |
|
|
118 |
|
|
|
20 |
|
|
|
32 |
|
|
|
170 |
|
|
|
4.5 |
|
Commercial auto |
|
|
265 |
|
|
|
50 |
|
|
|
66 |
|
|
|
381 |
|
|
|
10.2 |
|
Workers compensation |
|
|
439 |
|
|
|
442 |
|
|
|
138 |
|
|
|
1,019 |
|
|
|
27.2 |
|
Specialty packages |
|
|
70 |
|
|
|
10 |
|
|
|
11 |
|
|
|
91 |
|
|
|
2.4 |
|
Surety and executive risk |
|
|
127 |
|
|
|
(1 |
) |
|
|
49 |
|
|
|
175 |
|
|
|
4.7 |
|
Machinery and equipment |
|
|
5 |
|
|
|
3 |
|
|
|
1 |
|
|
|
9 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,094 |
|
|
$ |
821 |
|
|
$ |
833 |
|
|
$ |
3,748 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty |
|
$ |
1,046 |
|
|
$ |
327 |
|
|
$ |
527 |
|
|
$ |
1,900 |
|
|
|
52.0 |
% |
Commercial property |
|
|
135 |
|
|
|
7 |
|
|
|
32 |
|
|
|
174 |
|
|
|
4.8 |
|
Commercial auto |
|
|
276 |
|
|
|
48 |
|
|
|
65 |
|
|
|
389 |
|
|
|
10.6 |
|
Workers compensation |
|
|
445 |
|
|
|
353 |
|
|
|
126 |
|
|
|
924 |
|
|
|
25.3 |
|
Specialty packages |
|
|
74 |
|
|
|
1 |
|
|
|
10 |
|
|
|
85 |
|
|
|
2.3 |
|
Surety and executive risk |
|
|
129 |
|
|
|
(4 |
) |
|
|
50 |
|
|
|
175 |
|
|
|
4.8 |
|
Machinery and equipment |
|
|
3 |
|
|
|
3 |
|
|
|
1 |
|
|
|
7 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,108 |
|
|
$ |
735 |
|
|
$ |
811 |
|
|
$ |
3,654 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines Insurance Segment Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves |
|
|
Loss |
|
|
Total |
|
|
|
|
|
|
Case |
|
|
IBNR |
|
|
expense |
|
|
gross |
|
|
Percent |
|
(In millions) |
|
reserves |
|
|
reserves |
|
|
reserves |
|
|
reserves |
|
|
of total |
|
|
At September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto |
|
$ |
129 |
|
|
$ |
(2 |
) |
|
$ |
28 |
|
|
$ |
155 |
|
|
|
40.3 |
% |
Homeowners |
|
|
75 |
|
|
|
37 |
|
|
|
18 |
|
|
|
130 |
|
|
|
33.5 |
|
Other personal |
|
|
41 |
|
|
|
50 |
|
|
|
10 |
|
|
|
101 |
|
|
|
26.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
245 |
|
|
$ |
85 |
|
|
$ |
56 |
|
|
$ |
386 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto |
|
$ |
141 |
|
|
$ |
(3 |
) |
|
$ |
28 |
|
|
$ |
166 |
|
|
|
43.5 |
% |
Homeowners |
|
|
67 |
|
|
|
17 |
|
|
|
15 |
|
|
|
99 |
|
|
|
26.0 |
|
Other personal |
|
|
53 |
|
|
|
52 |
|
|
|
11 |
|
|
|
116 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
261 |
|
|
$ |
66 |
|
|
$ |
54 |
|
|
$ |
381 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance Reserves
Gross life policy reserves were $1.698 billion at September 30, 2009, compared with $1.551
billion at year-end 2008, reflecting continued growth in fixed annuities and life insurance
policies in force. We discuss our life insurance reserving practices in our 2008 Annual
Report on Form 10-K, Item 7, Life Insurance Policy Reserves, Page 44.
Cincinnati Financial 3Q09 10-Q 46
Other Matters
Significant Accounting Policies
Our significant accounting policies are discussed in our 2008 Annual Report on Form 10-K,
Item 8, Note 1, Summary Of Significant Accounting Policies, Page 98, and updated in Note 1,
Accounting Policies, beginning on Page 7.
In conjunction with those discussions, in the Managements Discussion and Analysis in the
2008 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to
develop reported amounts related to the most significant policies. Management discussed the
development and selection of those accounting estimates with the audit committee of the
board of directors.
As updated in Note 1, Accounting Policies, beginning on Page 7, our invested asset
impairment policy now states that fixed maturities the company 1) intends to sell or 2)
more likely than not will be required to sell before recovery of its amortized cost basis
are deemed to be other-than-temporarily impaired. The book value of any such securities is
reduced to fair value as the new cost basis, and a realized loss is recorded in the quarter
in which it is recognized. When these two criteria are not met, and the company believes
that full collection of interest and/or principal is not likely, the company determines the
net present value of future cash flows, using the effective interest rate implicit in the
security at the date of acquisition as the discount rate, and compares that amount to the
amortized cost and fair value of the security. The difference between the net present value
of the cash flows and the amortized cost of the security is considered a credit loss and
recognized as a realized loss in the quarter in which it occurred. The difference between
fair value and the net present value of the cash flows of the security, the non-credit
loss, is recognized in other comprehensive income as an unrealized loss.
Fair Value Measurements
Valuation of Financial Instruments
Valuation of financial instruments, primarily securities held in our investment portfolio,
is a critical component of our interim financial statement preparation. Fair Value
Measurements and Disclosures, ASC 820-10, defines fair value as the exit price or the
amount that would be 1) received to sell an asset or 2) paid to transfer a liability in an
orderly transaction between marketplace participants at the measurement date. When
determining an exit price, we must, whenever possible, rely upon observable market data.
Prior to the adoption of ASC 820-10, we considered various factors such as liquidity and
volatility but primarily obtained pricing from various external services, including broker
quotes.
The fair value measurement and disclosure exit price notion requires our valuation also to
consider what a marketplace participant would pay to buy an asset or receive to assume a
liability. Therefore, while we can consider pricing data from outside services, we
ultimately determine whether the data or inputs used by these outside services are
observable or unobservable.
In accordance with ASC 820-10, we have categorized our financial instruments, based on the
priority of the inputs to the valuation technique, into a three-level fair value hierarchy.
The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). If the inputs used to measure the financial instruments fall within different
levels of the hierarchy, the categorization is based on the lowest level that is
significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the Consolidated Balance Sheets are
categorized based on the inputs to the valuation techniques as described in Item 1, Note 3,
Fair Value Measurements, Page 13.
Cincinnati Financial 3Q09 10-Q 47
Level 1 and Level 2 Valuation Techniques
Over 99 percent of the $10.349 billion of securities in our investment portfolio measured
at fair value are classified as Level 1 or Level 2. Financial assets that fall within Level
1 and Level 2 are priced according to observable data from identical or similar securities
that have traded in the marketplace. Also within Level 2 are securities that are valued by
outside services or brokers where we have evaluated the pricing methodology and determined
that the inputs are observable.
Included in the Level 2 hierarchy is a small portfolio of collateralized mortgage
obligations that represented less than 1 percent of the fair value of our investment
portfolio at September 30, 2009. We obtained the CMOs as part of the termination of our
securities lending program during 2008. The CMOs were an investment made by one of the
short-duration funds, which subsequently dissolved and distributed the assets to its
investors. When we terminated the securities lending program, we chose to retain the CMOs
rather than sell them at what we felt were distressed prices in an illiquid market.
Level 3 Valuation Techniques
Financial assets that fall within the Level 3 hierarchy are valued based upon unobservable
market inputs, normally because they are not actively traded on a public market. Level 3
corporate fixed-maturity securities include certain private placements, small issues,
general corporate bonds and medium-term notes. Level 3 state, municipal and political
subdivisions fixed-maturity securities include various thinly traded municipal bonds. Level
3 common equities include private equity securities. Level 3 preferred equities include
private and thinly traded preferred securities.
Pricing for each Level 3 security is based upon inputs that are market driven, including
third-party reviews provided to the issuer or broker quotes. However, we placed in the
Level 3 hierarchy securities for which we were unable to obtain the pricing methodology or
we could not consider the price provided as binding. Pricing for securities classified as
Level 3 could not be corroborated by similar securities priced using observable inputs.
Management ultimately determined the pricing for each Level 3 security that we considered
to be the best exit price valuation. As of September 30, 2009, total Level 3 assets were
less than 1 percent of our investment portfolio measured at fair value, which was
relatively stable throughout 2008 and the first half of 2009. Broker quotes are obtained
for thinly traded securities that subsequently fall within the Level 3 hierarchy. We
obtained two non-binding quotes from brokers and, after evaluating, our investment
professionals typically selected the more conservative price for fair value.
Cincinnati Financial 3Q09 10-Q 48
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Our greatest exposure to market risk is through our investment portfolio. Market risk is
the potential for a decrease in securities value resulting from broad yet uncontrollable
forces such as: inflation, economic growth or recession, interest rates, world political
conditions or other widespread unpredictable events. It is comprised of many individual
risks that, when combined, create a macroeconomic impact.
Our view of potential risks and our sensitivity to such risks is discussed in our 2008
Annual Report on Form 10-K, Item 7a, Quantitative and Qualitative Disclosures about Market
Risk, Page 85.
The fair value of our investment portfolio was $10.349 billion at September 30, 2009,
compared with $8.807 billion at year-end 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 |
|
|
At December 31, 2008 |
|
(In millions) |
|
Book value |
|
|
% of BV |
|
|
Fair value |
|
|
% of FV |
|
|
Book value |
|
|
% of BV |
|
|
Fair value |
|
|
% of FV |
|
|
Taxable fixed maturities |
|
$ |
4,381 |
|
|
|
47.4 |
% |
|
$ |
4,583 |
|
|
|
44.3 |
% |
|
$ |
3,354 |
|
|
|
40.8 |
% |
|
$ |
3,094 |
|
|
|
35.1 |
% |
Tax-exempt fixed maturities |
|
|
2,893 |
|
|
|
31.2 |
|
|
|
3,085 |
|
|
|
29.8 |
|
|
|
2,704 |
|
|
|
32.9 |
|
|
|
2,733 |
|
|
|
31.0 |
|
Common equities |
|
|
1,897 |
|
|
|
20.5 |
|
|
|
2,577 |
|
|
|
24.9 |
|
|
|
1,889 |
|
|
|
23.0 |
|
|
|
2,721 |
|
|
|
30.9 |
|
Preferred equities |
|
|
75 |
|
|
|
0.8 |
|
|
|
92 |
|
|
|
0.9 |
|
|
|
188 |
|
|
|
2.3 |
|
|
|
175 |
|
|
|
2.0 |
|
Short-term investments |
|
|
12 |
|
|
|
0.1 |
|
|
|
12 |
|
|
|
0.1 |
|
|
|
84 |
|
|
|
1.0 |
|
|
|
84 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,258 |
|
|
|
100.0 |
% |
|
$ |
10,349 |
|
|
|
100.0 |
% |
|
$ |
8,219 |
|
|
|
100.0 |
% |
|
$ |
8,807 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Our consolidated portfolio contains $95 million of assets for which values are based on
prices or valuation techniques that require management judgment (Level 3 assets). We obtain
at least two outside valuations for these assets and generally use the more conservative
calculation. These investments include private placements, small issues and various thinly
traded securities.
As of September 30, 2009, total Level 3 assets were less than 1 percent of investment
portfolio assets measured at fair value compared with 1.6 percent at December 31, 2008. See
Item 1, Note 3, Fair Value Measurements, Page 13, for additional discussion of our
valuation techniques.
In addition, Other invested assets included $40 million of life policy loans and liens, $22
million of venture capital fund investments, $11 million of private equity investments and
$6 million of investment in real estate, as of September 30, 2009.
Fixed-Maturity Investments
By maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce overall
risk. We invest new money in the bond market on a continuous basis, targeting what we
believe to be optimal risk-adjusted after-tax yields. Risk, in this context, includes
interest rate, call, reinvestment rate, credit and liquidity risk. We do not make a
concerted effort to alter duration on a portfolio basis in response to anticipated
movements in interest rates. By continuously investing in the bond market, we build a
broad, diversified portfolio that we believe mitigates the impact of adverse economic
factors.
The strong rallies in the municipal and corporate bond markets this year, primarily driven
by credit spread tightening, have significantly improved the valuations in our bond
portfolio. As a result, our bond portfolio was at 105.4 percent of its book value at
September 30, 2009, as compared to 96.2 percent at December 31, 2008.
Credit ratings as of September 30, 2009, compared with December 31, 2008, for the
fixed-maturity and short-term portfolios were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 |
|
|
At December 31, 2008 |
|
|
|
Fair |
|
|
Percent |
|
|
Fair |
|
|
Percent |
|
(In millions) |
|
value |
|
|
to total |
|
|
value |
|
|
to total |
|
|
Moodys Ratings and Standard & Poors Ratings combined |
|
|
|
|
|
|
|
|
Aaa, Aa, A, AAA, AA, A |
|
$ |
4,908 |
|
|
|
63.9 |
% |
|
$ |
4,149 |
|
|
|
70.2 |
% |
Baa, BBB |
|
|
2,181 |
|
|
|
28.4 |
|
|
|
1,258 |
|
|
|
21.3 |
|
Ba, BB |
|
|
261 |
|
|
|
3.4 |
|
|
|
240 |
|
|
|
4.1 |
|
B, B |
|
|
49 |
|
|
|
0.6 |
|
|
|
46 |
|
|
|
0.8 |
|
Caa, CCC |
|
|
38 |
|
|
|
0.5 |
|
|
|
7 |
|
|
|
0.1 |
|
Ca, CC |
|
|
11 |
|
|
|
0.1 |
|
|
|
3 |
|
|
|
0.1 |
|
C, C |
|
|
|
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
Non-rated |
|
|
232 |
|
|
|
3.1 |
|
|
|
208 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,680 |
|
|
|
100.0 |
% |
|
$ |
5,911 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The slight shift in the portfolio ratings during the first nine months of 2009 was
primarily the result of considerably more purchase activity in the corporate bond portfolio
and less emphasis on adding new municipal securities. The effect of acquisitions and
dispositions, including redemptions exercised by securities issuers, resulted in a net
reduction of over $100 million in government-sponsored enterprises that
Cincinnati Financial 3Q09 10-Q 49
were AAA rated,
diluting the bond portfolios ratings. In the table above, Moodys ratings and Standard &
Poors ratings are combined into single equivalent levels. In situations where ratings
differed, the higher of the two is used.
Attributes of the fixed-maturity portfolio include:
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
At December 31, |
|
|
2009 |
|
2008 |
|
Weighted average yield-to-book value |
|
|
5.9 |
% |
|
|
5.6 |
% |
Weighted average maturity |
|
7.6 |
yrs |
|
8.2 |
yrs |
Effective duration |
|
5.4 |
yrs |
|
5.4 |
yrs |
We discuss maturities of our fixed-maturity portfolio in our 2008 Annual Report on Form
10-K, Item 8, Note 2, Investments, Page 104.
Taxable Fixed Maturities
Our taxable fixed-maturity portfolio (at fair value) includes:
|
|
$303 million in U.S. agency paper that is rated Aaa/AAA by Moodys and Standard &
Poors, respectively. |
|
|
|
$3.850 billion in investment-grade corporate bonds that have a Moodys rating at or
above Baa3 or a Standard & Poors rating at or above BBB-. |
|
|
|
$313 million in high-yield corporate bonds that have a Moodys rating below Baa3
and a Standard & Poors rating below BBB-. |
|
|
|
$117 million in convertible bonds and redeemable preferred stocks. |
Our strategy typically is to buy and hold fixed-maturity investments to maturity, but we
monitor credit profiles and market value movements when determining holding periods for
individual securities.
The largest non-financial sectors in our investment-grade corporate bond portfolio, based
on fair value at September 30, 2009, are energy and utilities,
representing 12.5 percent
and 11.2 percent, respectively, compared with 9.8 percent and 11.6 percent at year-end
2008. The financial-related sectors of banking, brokerage, finance/investment and insurance
represented 24.9 percent of fair value of our investment-grade corporate bond portfolio at
September 30, 2009, compared with 30.7 percent at year-end 2008. We believe our weighting
in financial-related sectors is below the average for the corporate bond market as a whole.
Tax-Exempt Fixed Maturities
We traditionally have purchased municipal bonds focusing on general obligation and
essential services bonds, such as sewer, water or others. While no single municipal issuer
accounted for more than 0.6 percent of the tax-exempt municipal bond portfolio at September
30, 2009, there are higher concentrations within individual states. Holdings in our two
most concentrated states, Texas and Indiana, accounted for 31.8 percent of the municipal
bond portfolio at September 30, 2009, compared with 35.0 percent at year-end 2008.
We have continued to purchase municipal bonds because of their excellent after-tax yields.
At September 30, 2009, bonds representing $2.362 billion, or 76.6 percent, of the fair
value of our municipal portfolio were insured with an average rating of Aaa. Because of our
emphasis on general obligation and essential services bonds, 98.1 percent of the insured
municipal bonds have an underlying rating of at least A3 or A-.
Interest Rate Sensitivity Analysis
Because of our strong surplus, long-term investment horizon and ability to hold most
fixed-maturity investments until maturity, we believe the company is adequately positioned
if interest rates were to rise. Management continues to explore ways to mitigate that risk.
Although the market values of our existing holdings may suffer, a higher rate environment
would provide the opportunity to invest cash flow in higher-yielding securities, while
reducing the likelihood of untimely redemptions of currently callable securities. While
higher interest rates would be expected to continue to increase the number of
fixed-maturity holdings trading below 100 percent of book value, we believe lower
fixed-maturity security values due solely to interest rate changes would not signal a
decline in credit quality.
Our dynamic financial planning model uses analytical tools to assess market risks. As part
of this model, the effective duration of the fixed-maturity portfolio is continually
monitored by our investment department to evaluate the theoretical impact of interest rate
movements.
Cincinnati Financial 3Q09 10-Q 50
The table below summarizes the effect of hypothetical changes in interest rates on the
fixed-maturity portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of |
|
Effective duration |
|
|
fixed maturity |
|
100 basis point |
|
100 basis point |
(In millions) |
|
portfolio |
|
spread decrease |
|
spread increase |
|
At September 30, 2009
|
|
$ |
7,668 |
|
|
$ |
8,081 |
|
|
$ |
7,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
5,827 |
|
|
|
6,141 |
|
|
|
5,514 |
|
The effective duration of the fixed-maturity portfolio is currently 5.4 years, unchanged
from year-end 2008. A 100 basis point movement in interest rates would result in an
approximately 5.4 percent change in the fair value of the fixed-maturity portfolio.
Generally speaking, the higher a bond is rated, the more directly correlated movements in
its fair value will be to changes in the general level of interest rates, exclusive of call
features. The fair values of average- to lower-rated corporate bonds are additionally
influenced by the expansion or contraction of credit spreads.
In the dynamic financial planning model, the selected interest rate change of 100 basis
points represents our view of a shift in rates that is quite possible over a one-year
period. The rates modeled should not be considered a prediction of future events as
interest rates may be much more volatile in the future. The analysis is not intended to
provide a precise forecast of the effect of changes in rates on our results or financial
condition, nor does it take into account any actions that we might take to reduce exposure
to such risks.
Short-Term Investments
Our short-term investments consist primarily of commercial paper, demand notes or bonds
purchased within one year of maturity. We make short-term investments primarily with funds
to be used to make upcoming cash payments, such as taxes. At September 30, 2009, we had $12
million of short-term investments compared with $84 million at year-end 2008.
Equity Investments
Our common stock investments generally are securities of companies with strong indications
of paying and growing their dividends. Other criteria we evaluate include increasing sales
and earnings, proven management and a favorable outlook. We believe our equity investment
style is an appropriate long-term strategy. While our long-term financial position would be
affected by prolonged changes in the market valuation of our investments, we believe our
strong surplus position and cash flow provide a cushion against short-term fluctuations in
valuation. Continued payment of cash dividends by the issuers of the common equities we
hold can provide a floor to their valuation. A $100 million unrealized change in the value
of the common stocks owned at period end would cause a change of $65 million, or
approximately 40 cents per share, in our shareholders equity.
At September 30, 2009, three holdings had a fair value equal to or greater than 5 percent
of our publicly-traded common stock portfolio compared with four similar holdings at
year-end 2008. Wyeth is our largest single common stock investment, comprising 8.5 percent
of the publicly traded common stock portfolio and 2.1 percent of the investment portfolio.
Other common stocks with a fair value greater than 5 percent of our publicly-traded common
stock portfolio include Procter & Gamble and Johnson & Johnson (NYSE:JNJ).
Common Stock Portfolio Industry Sector Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Publicly Traded Common Stock Portfolio |
|
|
At September 30, 2009 |
|
At December 31, 2008 |
|
|
Cincinnati |
|
S&P 500 Industry |
|
Cincinnati |
|
S&P 500 Industry |
|
|
Financial |
|
Weightings |
|
Financial |
|
Weightings |
|
Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
|
|
24.6 |
% |
|
|
13.1 |
% |
|
|
21.6 |
% |
|
|
14.8 |
% |
Consumer staples |
|
|
14.8 |
|
|
|
11.5 |
|
|
|
19.8 |
|
|
|
12.8 |
|
Energy |
|
|
10.6 |
|
|
|
11.7 |
|
|
|
16.8 |
|
|
|
13.3 |
|
Consumer discretionary |
|
|
9.1 |
|
|
|
9.2 |
|
|
|
6.6 |
|
|
|
8.4 |
|
Information technology |
|
|
9.0 |
|
|
|
18.7 |
|
|
|
4.2 |
|
|
|
15.3 |
|
Industrials |
|
|
8.9 |
|
|
|
10.2 |
|
|
|
6.1 |
|
|
|
11.1 |
|
Financial |
|
|
7.8 |
|
|
|
15.2 |
|
|
|
12.4 |
|
|
|
13.3 |
|
Utilities |
|
|
7.5 |
|
|
|
3.7 |
|
|
|
9.3 |
|
|
|
4.2 |
|
Materials |
|
|
4.5 |
|
|
|
3.5 |
|
|
|
1.9 |
|
|
|
3.0 |
|
Telecomm services |
|
|
3.2 |
|
|
|
3.2 |
|
|
|
1.3 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial 3Q09 10-Q 51
Unrealized Investment Gains and Losses
At September 30, 2009, unrealized investment gains before taxes for the consolidated
investment portfolio totaled $1.224 billion and unrealized investment losses amounted to
$133 million. The April 1, 2009, adoption of ASC 320, as disclosed in Item 1, Note 1,
Accounting Policies on Pages 7-8, increased unrealized losses by $163 million for
previously impaired fixed-maturity securities.
Unrealized Investment Gains
The unrealized investment gains at September 30, 2009, largely were due to a long-term net
gain position of $680 million for our common stock portfolio. Contributing 10 percent or
more of that net gain position were three publicly traded holdings totaling $391 million in
gains: Wyeth, Procter & Gamble, and ExxonMobil.
Unrealized Investment Losses Potential Other-than-temporary Impairments
We expect the number of securities trading below book value to fluctuate as interest rates
rise or fall and credit spreads expand or contract due to prevailing economic conditions.
Further, book values for some securities are revised through impairment charges recognized
in prior periods.
During the third quarter of 2009, a total of 13 securities, primarily fixed-maturity
securities, were written down as other-than-temporarily impaired. The other-than-temporary
impairments resulted in pretax, non-cash charges of $11 million and $113 million for the
three-month and nine-month periods ended September 30, 2009. During the same periods of
2008, we impaired securities resulting in $121 million and $400 million of
other-than-temporary impairment charges.
At September 30, 2009, 278 of the 2,470 securities we owned were trading below book value
compared with 944 of the 2,223 securities we owned at year-end 2008. The 278 holdings
trading below book value at September 30, 2009, represented 13.6 percent of fair value of
invested assets and $133 million in unrealized losses.
|
|
198 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 198 securities was $1.090 billion at September
30, 2009, and they accounted for $49 million in unrealized losses. |
|
|
|
62 of these holdings were trading between 70 percent and 90 percent of book value
at September 30, 2009. The fair value of these holdings was $305 million, and they
accounted for $72 million in unrealized losses. These securities, which are being
closely monitored, have been affected by a combination of factors including the
distress in the mortgage market, slumping real estate valuations, the effects of the
recession and the effects of higher interest rates on longer duration instruments. The
majority of these are fixed income securities in the financial and real estate
sectors. |
|
|
|
18 securities were trading below 70 percent of book value at September 30, 2009,
and none are equity securities. The fair value of those holdings was $21 million, and
they accounted for $12 million in unrealized losses. The majority of these are in the
financial and real estate sectors. |
Cincinnati Financial 3Q09 10-Q 52
The table below reviews fair values and unrealized losses by investment category and by the
overall duration of the securities continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(In millions) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
At September 30, |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
$ |
7 |
|
|
$ |
1 |
|
|
$ |
32 |
|
|
$ |
2 |
|
|
$ |
39 |
|
|
$ |
3 |
|
Government-sponsored enterprises |
|
|
116 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
1 |
|
Short-term investments |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
10 |
|
|
|
5 |
|
|
|
16 |
|
|
|
5 |
|
|
|
26 |
|
|
|
10 |
|
Corporate bonds |
|
|
321 |
|
|
|
35 |
|
|
|
399 |
|
|
|
21 |
|
|
|
720 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
455 |
|
|
|
42 |
|
|
|
447 |
|
|
|
28 |
|
|
|
902 |
|
|
|
70 |
|
Equity securities |
|
|
145 |
|
|
|
7 |
|
|
|
368 |
|
|
|
56 |
|
|
|
513 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
600 |
|
|
$ |
49 |
|
|
$ |
815 |
|
|
$ |
84 |
|
|
$ |
1,415 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions |
|
$ |
592 |
|
|
$ |
26 |
|
|
$ |
94 |
|
|
$ |
5 |
|
|
$ |
686 |
|
|
$ |
31 |
|
Convertibles and bonds with warrants attached |
|
|
195 |
|
|
|
15 |
|
|
|
38 |
|
|
|
5 |
|
|
|
233 |
|
|
|
20 |
|
Government-sponsored enterprises |
|
|
141 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
141 |
|
|
|
2 |
|
All other corporate bonds and short-term
investments |
|
|
1,367 |
|
|
|
215 |
|
|
|
254 |
|
|
|
68 |
|
|
|
1,621 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,295 |
|
|
|
258 |
|
|
|
386 |
|
|
|
78 |
|
|
|
2,681 |
|
|
|
336 |
|
Equity securities |
|
|
820 |
|
|
|
219 |
|
|
|
79 |
|
|
|
41 |
|
|
|
899 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,115 |
|
|
$ |
477 |
|
|
$ |
465 |
|
|
$ |
119 |
|
|
$ |
3,580 |
|
|
$ |
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the quarter ended September 30, 2009, we impaired 13 securities. At September 30,
2009, 135 fixed-maturity investments with a total unrealized loss of $28 million had been
in an unrealized loss position for 12 months or more. Of that total, six fixed-maturity
securities with a fair value of $4 million were trading under 70 percent of book value and
accounted for $2 million in unrealized losses; 18 fixed maturity securities with a fair
value of $48 million were trading from 70 percent to less than 90 percent of book value and
accounted for $10 million in unrealized losses; and 111 fixed maturity securities with a
fair value of $395 million were trading from 90 percent to less than 100 percent of book
value and accounted for $16 million in unrealized losses.
No equity securities were in an unrealized loss position for 12 months or more at September
30, 2009, and trading under 70 percent of book value. Eleven equity securities were in an
unrealized loss position for 12 months or more, of which six equity securities with a fair
value of $136 million were trading from 70 percent to less than 90 percent of book value
and accounted for $38 million in unrealized losses; five equity securities with a fair
value of $232 million were trading between 90 percent to less than 100 percent of book
value and accounted for $18 million in unrealized losses. As of September 30, 2009,
applying our invested asset impairment policy, we determined that unrealized losses on
equity securities, including the 11 described above, were not OTTI.
Cincinnati Financial 3Q09 10-Q 53
As described on Page 51, Equity Investments, our long-term equity investment philosophy
emphasizes companies with strong indications of paying and growing dividends. Combined with
our strong surplus and cash flow, this provides us with the ability to hold these
investments through what we believe to be slightly longer recovery periods occasioned by
the recession and historic levels of market volatility. When determining OTTI charges for
our equity portfolio, our invested asset impairment policy considers qualitative and
quantitative factors, including facts and circumstances specific to individual securities,
asset classes, the financial condition of the issuer, changes in dividend payment, the
length of time fair value had been less than book value, the severity of the decline in
fair value below book value, the volatility of the security and our ability and intent to
hold each position until its forecasted recovery.
Eleven equity securities in an unrealized loss position for 12 months or more as of
September 30, 2009, accounted for unrealized losses of $56 million. Four preferred stocks
accounted for $4.7 million in unrealized losses, of which three were trading between 70 and
90 percent of book value. Our expected recovery period for these four preferred stocks
ranges from four to six quarters from September 30, 2009. Preferred stocks have been
adversely affected by government intervention in the takeover of Fannie Mae and Freddie
Mac, but should recover as the credit environment continues to improve with the continued
effect of government stimulus.
The remaining seven equity securities in an unrealized loss position for 12 months or more
as of September 30, 2009, were common stocks accounting for $51.8 million in unrealized
losses. Three common stocks trading between 70 and 90 percent of book value accounted for
$34.1 million in unrealized losses. During the six months ended September 30, 2009, the
fair value of these three common stocks increased between 6 percent and 25 percent,
demonstrating a strong pace of recovery. Our expected recovery period for these three
common stocks is three quarters from September 30, 2009.
All of these equity securities continue to pay their dividends. These securities appear to
have weathered the historic levels of market volatility of the past year and have now
resumed valuations where full cost recovery could be expected in the near term, although
ordinary market fluctuations could affect valuations at any measurement period.
During 2008, we impaired 126 securities. At December 31, 2008, 142 fixed maturity
investments with a total unrealized loss of $78 million had been in an unrealized loss
position for 12 months or more. Of that total, no fixed maturity investments were trading
below 70 percent of book value. Six equity investments with a total unrealized loss of $41
million had been in an unrealized loss position for 12 months or more as of December 31,
2008. Two of these equity investments were trading below 70 percent of book value.
Cincinnati Financial 3Q09 10-Q 54
The following table summarizes the investment portfolio by severity of decline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Number |
|
|
Book |
|
|
Fair |
|
|
unrealized |
|
|
investment |
|
(In millions) |
|
of issues |
|
|
value |
|
|
value |
|
|
gain/loss |
|
|
income |
|
|
At September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
17 |
|
|
$ |
31 |
|
|
$ |
19 |
|
|
$ |
(12 |
) |
|
$ |
2 |
|
Trading at 70% to less than 100% of book value |
|
|
221 |
|
|
|
899 |
|
|
|
844 |
|
|
|
(55 |
) |
|
|
41 |
|
Trading at 100% and above of book value |
|
|
822 |
|
|
|
3,451 |
|
|
|
3,720 |
|
|
|
269 |
|
|
|
148 |
|
Securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,060 |
|
|
|
4,381 |
|
|
|
4,583 |
|
|
|
202 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Trading at 70% to less than 100% of book value |
|
|
23 |
|
|
|
39 |
|
|
|
36 |
|
|
|
(3 |
) |
|
|
1 |
|
Trading at 100% and above of book value |
|
|
1,303 |
|
|
|
2,852 |
|
|
|
3,047 |
|
|
|
195 |
|
|
|
92 |
|
Securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,327 |
|
|
|
2,893 |
|
|
|
3,085 |
|
|
|
192 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading at 70% to less than 100% of book value |
|
|
9 |
|
|
|
547 |
|
|
|
488 |
|
|
|
(59 |
) |
|
|
13 |
|
Trading at 100% and above of book value |
|
|
43 |
|
|
|
1,350 |
|
|
|
2,089 |
|
|
|
739 |
|
|
|
49 |
|
Securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
52 |
|
|
|
1,897 |
|
|
|
2,577 |
|
|
|
680 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading at 70% to less than 100% of book value |
|
|
5 |
|
|
|
29 |
|
|
|
25 |
|
|
|
(4 |
) |
|
|
1 |
|
Trading at 100% and above of book value |
|
|
20 |
|
|
|
46 |
|
|
|
67 |
|
|
|
21 |
|
|
|
4 |
|
Securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
25 |
|
|
|
75 |
|
|
|
92 |
|
|
|
17 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading at 70% to less than 100% of book value |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Trading at 100% and above of book value |
|
|
4 |
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6 |
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
18 |
|
|
|
33 |
|
|
|
21 |
|
|
|
(12 |
) |
|
|
2 |
|
Trading at 70% to less than 100% of book value |
|
|
260 |
|
|
|
1,516 |
|
|
|
1,395 |
|
|
|
(121 |
) |
|
|
56 |
|
Trading at 100% and above of book value |
|
|
2,192 |
|
|
|
7,709 |
|
|
|
8,933 |
|
|
|
1,224 |
|
|
|
293 |
|
Investment income on securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,470 |
|
|
$ |
9,258 |
|
|
$ |
10,349 |
|
|
$ |
1,091 |
|
|
$ |
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading below 70% of book value |
|
|
83 |
|
|
$ |
528 |
|
|
$ |
322 |
|
|
$ |
(206 |
) |
|
$ |
25 |
|
Trading at 70% to less than 100% of book value |
|
|
861 |
|
|
|
3,648 |
|
|
|
3,258 |
|
|
|
(390 |
) |
|
|
176 |
|
Trading at 100% and above of book value |
|
|
1,279 |
|
|
|
4,043 |
|
|
|
5,227 |
|
|
|
1,184 |
|
|
|
290 |
|
Investment income on securities sold in current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,223 |
|
|
$ |
8,219 |
|
|
$ |
8,807 |
|
|
$ |
588 |
|
|
$ |
530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See our 2008 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset
Impairment, Page 45, as updated in Item 1, Note 1, Accounting Policies, Page 7 for the
adoption of ASC 320.
Cincinnati Financial 3Q09 10-Q 55
|
|
|
Item 4. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures The company maintains disclosure
controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (Exchange Act)).
Any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. The companys management,
with the participation of the companys chief executive officer and chief financial
officer, has evaluated the effectiveness of the design and operation of the companys
disclosure controls and procedures as of September 30, 2009. Based upon that evaluation,
the companys chief executive officer and chief financial officer concluded that the design
and operation of the companys disclosure controls and procedures provided reasonable
assurance that the disclosure controls and procedures are effective to ensure:
|
|
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. |
Changes in Internal Control over Financial Reporting During the three and nine months
ended September 30, 2009, there were no changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Part II Other Information
|
|
|
Item 1. |
|
Legal Proceedings |
Neither the company nor any of our subsidiaries is involved in any litigation believed to
be material other than ordinary, routine litigation incidental to the nature of its
business.
Our risk factors have not changed materially since they were described in our 2008 Annual
Report on Form 10-K filed February 27, 2009.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
We did not sell any of our shares that were not registered under the Securities Act during
the first nine months of 2009. The board of directors has authorized share repurchases
since 1996. We discuss the board authorization in our 2008 Annual Report on Form 10-K,
Item 7, Liquidity and Capital Resources, Parent Company Liquidity, Page 70. The board gives
management discretion to purchase shares at reasonable prices in light of circumstances at
the time of purchase, subject to SEC regulations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of shares |
|
Maximum number of |
|
|
Total number |
|
Average |
|
purchased as part of |
|
shares that may yet be |
|
|
of shares |
|
price paid |
|
publicly announced |
|
purchased under the |
2009 |
|
purchased |
|
per share |
|
plans or programs |
|
plans or programs |
|
January |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
8,543,608 |
|
February |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,543,608 |
|
March |
|
|
3,174 |
|
|
|
22.69 |
|
|
|
3,174 |
|
|
|
8,540,434 |
|
April |
|
|
1,303 |
|
|
|
26.71 |
|
|
|
1,303 |
|
|
|
8,539,131 |
|
May |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,539,131 |
|
June |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,539,131 |
|
July |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,539,131 |
|
August |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,539,131 |
|
September |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,539,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
4,477 |
|
|
|
23.86 |
|
|
|
4,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 24, 2007, the board of directors expanded the existing repurchase authorization
to approximately 13 million shares. The prior repurchase program for 10 million shares was
announced in 2005, replacing a program that had been in effect since 1999. No repurchase
program has expired during the period covered by the above table. All of the publicly
announced plan repurchases in the table above were made under the expansion announced in
October 2007 of our 2005 program. Neither the 2005 nor 1999 program had an expiration date,
but no further repurchases will occur under the 1999 program.
Cincinnati Financial 3Q09 10-Q 56
|
|
|
Item 3. |
|
Defaults upon Senior Securities |
We have not defaulted on any interest or principal payment, and no arrearage in the payment
of dividends has occurred.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
None.
|
|
|
Item 5. |
|
Other Information |
None.
Cincinnati Financial 3Q09 10-Q 57
|
|
|
Exhibit No. |
|
Exhibit Description |
3.1A
|
|
Amended Articles of Incorporation of Cincinnati Financial Corporation
(incorporated by reference to the companys 1999 Annual Report on Form
10-K dated March 23, 2000) (File No. 000-04604) |
|
|
|
3.1B
|
|
Amendment to Article Fourth of Amended Articles of Incorporation of
Cincinnati Financial Corporation (incorporated by reference to Exhibit
3(i) filed with the companys Current Report on Form 8-K dated
July 15, 2005) |
|
|
|
3.2
|
|
Regulations of Cincinnati Financial Corporation (incorporated by
reference to the companys Definitive Proxy Statement dated March 2,
1992, Exhibit 2) (File No. 000-04604) |
|
|
|
10.1
|
|
Credit Agreement by and among Cincinnati Financial Corporation, CFC
Investment Company, and PNC Bank, National Association, dated August
31, 2009 (which supersedes that certain Offer and Acceptance of terms
to renew $75 million unsecured line of credit with PNC Bank, National
Association, effective June 30, 2009, that was filed with and
described in the companys Current Report on Form 8-K dated July 7,
2009). |
|
|
|
10.2
|
|
Swap Agreement by and among Cincinnati Financial Corporation, CFC
Investment Company and PNC Bank, National Association, dated August
31, 2009. |
|
|
|
11
|
|
Statement re: Computation of per share earnings for the three and nine
months ended September 30, 2009, contained in Exhibit 11 of this
report, Page 60 |
|
|
|
31A
|
|
Certification pursuant to Section 302 of the Sarbanes Oxley Act of
2002 Chief Executive Officer |
|
|
|
31B
|
|
Certification pursuant to Section 302 of the Sarbanes Oxley Act of
2002 Chief Financial Officer |
|
|
|
32
|
|
Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
Cincinnati Financial 3Q09 10-Q 58
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CINCINNATI
FINANCIAL CORPORATION
Date: October 29, 2009
|
|
|
/S/ Eric N. Mathews |
|
|
Eric N. Mathews, CPCU, AIAF |
|
|
Vice President, Assistant Secretary and Assistant Treasurer |
(Principal Accounting Officer) |
|
|
Cincinnati Financial 3Q09 10-Q 59
EX-10.1
Exhibit 10.1
August 31, 2009
Cincinnati Financial Corporation
CFC Investment Company
6200 South Gilmore Road
Fairfield, OH 45014-5141
Attention: Steven J. Johnston
|
|
|
Re: |
|
$75,000,000 Committed Line of Credit |
Dear Mr. Johnston:
We are pleased to inform you that PNC Bank, National Association (the Bank), has approved
your request for a committed line of credit to CINCINNATI FINANCIAL CORPORATION (CINF) and CFC
INVESTMENT COMPANY (CFC-I and, with CINF, each individually a Borrower and, collectively, the
Borrowers) as outlined in the following sections of this letter.
1. Facility and Use of Proceeds. This is a committed revolving line of credit under which
the Borrowers may request and the Bank, subject to the terms and conditions of this letter, will
make advances to the Borrowers from time to time until the Expiration Date, in an amount in the
aggregate at any time outstanding not to exceed $75,000,000 (the Line of Credit or the Loan).
The Expiration Date means August 29, 2010, or such later date as may be designated by the Bank by
written notice to the Borrowers. Advances under the Line of Credit will be used for working
capital or other general business purposes of the Borrowers.
2. Note. The obligation of the Borrowers to repay advances under the Line of Credit shall
be evidenced by a promissory note (the Note) in form and content satisfactory to the Bank. The
obligations of the Borrowers hereunder and under the Note shall be joint and several.
This letter (the Letter Agreement), the Note and the other agreements and documents executed
and/or delivered pursuant hereto, as each may be amended, modified, extended or renewed from time
to time, will constitute the Loan Documents. Capitalized terms not defined herein (including
Exhibit A hereto) shall have the meaning ascribed to them in the Loan Documents.
3. Interest Rate. Interest on the unpaid balance of the Line of Credit advances will be
charged at the rates, and be payable on the dates and times, set forth in the Note.
4. Repayment. Subject to the terms and conditions of this Letter Agreement, the Borrowers
may borrow, repay and reborrow under the Line of Credit until the Expiration Date, on which date
the outstanding principal balance and any accrued but unpaid interest shall be due and payable.
Interest will be due and payable as set forth in the Note, and will be computed on the basis of a
year of 360 days and paid on the actual number of days that principal is outstanding.
5. Covenants. Unless compliance is waived in writing by the Bank, until payment in full of
the Loan and termination of the commitment for the Line of Credit:
Cincinnati Financial Corporation
CFC Investment Company
August 31, 2009
Page 2
(a) Each Borrower will promptly submit to the Bank such information as the Bank may reasonably
request relating to such Borrowers affairs (including but not limited to annual financial
statements for such Borrower).
(b) Neither Borrower will make or permit any change in its form of organization, the nature of
its business as carried on as of the date of this Letter Agreement or, in the case of CFC-I, its
equity ownership.
(c) The Borrowers will notify the Bank in writing of the occurrence of any Event of Default or
Unmatured Default.
(d) The Borrowers will comply with the financial and other covenants included in Exhibit A
hereto.
6. Representations and Warranties. To induce the Bank to extend the Loan and upon the
making of each advance to the Borrowers under the Line of Credit, the Borrowers represent and
warrant as follows:
(a) CINFs latest consolidated financial statements provided to the Bank are true, complete
and accurate in all material respects and fairly present the financial condition, assets and
liabilities, whether accrued, absolute, contingent or otherwise, and the results of CINFs
operations on a consolidated basis for the period specified therein. CINFs financial statements
have been prepared in accordance with Agreement Accounting Principles consistently applied from
period to period subject, in the case of interim statements, to normal year-end adjustments. Since
the date of the latest financial statements provided to the Bank, neither Borrower has suffered any
damage, destruction or loss which has materially adversely affected its business, assets,
operations, financial condition or results of operations.
(b) There are no actions, suits, proceedings or governmental investigations pending or, to the
knowledge of the Borrowers, threatened against either Borrower which could result in a material
adverse change in its business, assets, operations, financial condition or results of operations
and there is no basis known to either Borrower or its officers, directors or shareholders for any
such action, suit, proceedings or investigation.
(c) Each Borrower has filed all returns and reports that are required to be filed by it in
connection with any federal, state or local tax, duty or charge levied, assessed or imposed upon
such Borrower or its property, including unemployment, social security and similar taxes and all of
such taxes have been either paid or adequate reserve or other provision has been made therefor,
except for any failure to do so which could not reasonably be expected to cause a Material Adverse
Effect.
(d) Each Borrower is duly organized, validly existing and in good standing under the laws of
the state of its incorporation and has the power and authority to own and operate its assets and to
conduct its business as now or proposed to be carried on, and is duly qualified, licensed and in
good standing to do business in all jurisdictions where its ownership of property or the nature of
its business requires such qualification or licensing, except for any failure to
Cincinnati Financial Corporation
CFC Investment Company
August 31, 2009
Page 3
comply with any of the foregoing which could not reasonably be expected to cause a Material
Adverse Effect.
(e) Each Borrower has full power and authority to enter into the transactions provided for in
this Letter Agreement and has been duly authorized to do so by all necessary and appropriate action
and when executed and delivered by such Borrower, this Letter Agreement and the other Loan
Documents will constitute the legal, valid and binding obligations of such Borrower, enforceable
against such Borrower in accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors rights generally and
general principles of equity.
(f) There does not exist any default or violation by either Borrower of or under any of the
terms, conditions or obligations of: (i) its organizational documents; (ii) any indenture,
mortgage, deed of trust, franchise, permit, contract, agreement, or other instrument to which it is
a party or by which it is bound; or (iii) any law, regulation, ruling, order, injunction, decree,
condition or other requirement applicable to or imposed upon such Borrower by any law or by any
governmental authority, court or agency, except for any failure to comply with any of the foregoing
which could not reasonably be expected to cause a Material Adverse Effect.
(g) The obligations of the Borrowers under this Letter Agreement rank on a pari passu basis
with all other senior Indebtedness of the Borrowers.
7. Fees. Beginning on October 1, 2009 and continuing on the first day of each January,
April, July and October thereafter and on the Expiration Date, the Borrowers shall pay an unused
commitment fee to the Bank, in arrears, at a rate per annum equal to one-quarter of one percent
(0.25%) on the average daily balance of the Line of Credit which is undisbursed during the
preceding quarter (or portion thereof in the case of any payment due on the Expiration Date). The
unused commitment fee shall be computed on the basis of a year of 360 days and paid on the actual
number of days elapsed.
8. Expenses. The Borrowers will reimburse the Bank for the Banks out-of-pocket expenses
incurred or to be incurred at any time in conducting UCC, title and other public record searches,
and in filing and recording documents, if any, in the public records. The Borrowers shall also
reimburse the Bank for the Banks expenses (including the reasonable fees and expenses of the
Banks outside and in-house counsel) in documenting and closing this transaction, in connection
with any amendments, modifications or renewals of the Loan, and in connection with the collection
of all of the Borrowers Obligations to the Bank, including but not limited to enforcement actions
relating to the Loan.
9. Other Conditions to Advances. From the initial advance under the Line of Credit, the
Borrowers shall repay in full all amounts due and owing under that certain Amended and Restated
Discretionary Line of Credit Note dated May 1, 2006 from the Borrowers to the Bank, following which
repayment, the related discretionary line of credit shall be cancelled and such Note marked
cancelled and returned to the Borrowers.
Cincinnati Financial Corporation
CFC Investment Company
August 31, 2009
Page 4
10. Additional Provisions. Before the first advance under the Loan, the Borrowers shall
execute and deliver to the Bank the Note, and the other required Loan Documents and such other
instruments and documents as the Bank may reasonably request, such as certified resolutions,
incumbency certificates, opinions of counsel or other evidence of authority. The Bank will not be
obligated to make any advance under the Line of Credit if any Event of Default or Unmatured Default
shall have occurred and be continuing.
Prior to execution of the final Loan Documents, the Bank may terminate this Letter Agreement
if a material adverse change occurs with respect to either Borrower or any other person or entity
connected in any way with the Loan, or if the Borrowers fail to comply with any of the terms and
conditions of this Letter Agreement, or if the Bank reasonably determines that any of the
conditions cannot be met.
This Letter Agreement is governed by the laws of State of Ohio. No modification, amendment or
waiver of any of the terms of this Letter Agreement, nor any consent to any departure by the
Borrowers therefrom, will be effective unless made in a writing signed by the party to be charged,
and then such waiver or consent shall be effective only in the specific instance and for the
purpose for which given. When accepted, this Letter Agreement and the other Loan Documents will
constitute the entire agreement between the Bank and the Borrowers concerning the Loan, and shall
replace all prior understandings, statements, negotiations and written materials relating to the
Loan.
The Bank will not be responsible for any damages, consequential, incidental, special, punitive
or otherwise, that may be incurred or alleged by any person or entity, including the Borrowers, as
a result of this Letter Agreement, the other Loan Documents, the transactions contemplated hereby
or thereby, or the use of proceeds of the Loan.
EACH BORROWER AND THE BANK IRREVOCABLY WAIVE ANY AND ALL RIGHTS THEY MAY HAVE TO A TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE ARISING OUT OF THIS LETTER AGREEMENT, THE
OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED IN ANY OF SUCH DOCUMENTS AND ACKNOWLEDGE
THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
If and when a loan closing occurs, this Letter Agreement (as the same may be amended from time
to time) shall survive the closing and will serve as our loan agreement throughout the term of the
Loan.
To accept these terms, please sign the enclosed copy of this Letter Agreement as set forth
below and the Loan Documents and return them to the Bank no later than August 31, 2009, or this
Letter Agreement may be terminated at the Banks option without liability or further obligation of
the Bank.
|
|
|
|
|
|
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION
|
|
|
By: |
/S/ Joseph C. Richardson
|
|
|
|
Joseph C. Richardson |
|
|
|
Senior Vice President |
|
|
ACCEPTANCE
With the intent to be legally bound hereby, the above terms and conditions are hereby agreed
to and accepted as of this 31st day of
August, 2009.
|
|
|
|
|
|
BORROWERS:
CINCINNATI FINANCIAL CORPORATION
|
|
|
By: |
/S/ Steven J. Johnston
|
|
|
Name: |
Steven J. Johnston |
|
|
Title: |
Chief Financial Officer |
|
|
|
CFC INVESTMENT COMPANY
|
|
|
By: |
/S/ Steven J. Johnston
|
|
|
Name: |
Steven J. Johnston |
|
|
Title: |
Chief Financial Officer |
|
|
EXHIBIT A
TO LETTER AGREEMENT
DATED AUGUST 31, 2009
A. FINANCIAL REPORTING COVENANTS:
(1) The Borrowers will deliver to the Bank:
(a) Within forty-five (45) days each Fiscal Quarter-end, consolidated and consolidating
unaudited financial statements of CINF prepared in accordance with Agreement Accounting Principles,
including a balance sheet and statements of income and surplus, certified by the chief financial
officer of CINF as fairly representing CINFs consolidated financial condition as of the end of and
for such period.
(b) Within one hundred twenty (120) days of the end of each Fiscal Year, consolidated and
consolidating audited financial statements of CINF prepared on the accrual basis in accordance with
Agreement Accounting Principles containing a balance sheet, statements of income and surplus,
statements of source and use of funds and reconciliation of capital accounts, along with the
unqualified opinion of independent public accountants satisfactory to the Bank in its reasonable
discretion, that such financial statements comply with Agreement Accounting Principles and fairly
and accurately represent the financial condition of CINF and its Subsidiaries. Such financial
statements shall be accompanied by copies of any management letters to CINF from such accountants.
(c) Accompanying the deliverables required by Sections 1(a) and 1(b), unaudited quarterly and
annual financial statements of CFC-I prepared in accordance with Agreement Accounting Principles,
including a balance sheet and statements of income and surplus, certified by the chief financial
officer of CFC-I as fairly representing CFC-Is consolidated financial condition as of the end of
and for such period.
(d) Promptly upon their becoming available, a copy of each annual statutory filing required to
be made by The Cincinnati Insurance Company and The Cincinnati Life Insurance Company, each a
direct or indirect wholly-owned subsidiary of CINF, to any state regulatory agency.
(e) Promptly upon their becoming available, a copy of each financial statement, report, notice
or proxy statement sent by either Borrower to stockholders generally and of each regular report and
any registration statement or prospectus, filed by either Borrower with the Securities and Exchange
Commission or any other United States federal or state securities exchange, securities trading
system or with any United States national stock exchange and one copy of each periodic report filed
by either Borrower with any other similar regulatory authority, in all cases without duplication;
provided, however, that the Borrowers shall not be obliged to provide to the Bank
routine reports which are required to be provided to any of the above-listed entities concerning
the management of employee benefit plans, including, without limitation, stock purchases or the
exercise of stock options made under any such employee benefit plan.
B. FINANCIAL COVENANTS:
(1) Minimum Consolidated Net Worth. CINF will maintain at all times a Consolidated
Net Worth of at least the sum of:
(a) $5,446,400,000, plus
(b) the sum of 50% of Consolidated Net Income for each Fiscal Quarter ending after December
31, 2006 (but only to the extent that, in the case of any such Fiscal Quarter, Consolidated Net
Income for such Fiscal Quarter is at least $1.00).
Minimum Consolidated Net Worth shall be calculated net of unrealized gains or losses in CINFs
or any of its Subsidiaries portfolio of debt and equity investments.
(2) Maximum Consolidated Leverage Ratio. CINF and its Subsidiaries shall have, at the
end of each Fiscal Quarter, a Consolidated Leverage Ratio as of the last day of such Fiscal Quarter
and for the 12-month period then ended of not more than 0.20 to 1.0.
As used herein:
Affiliate of any Person means any other Person directly or indirectly controlling,
controlled by or under common control with such Person. A Person shall be deemed to control
another Person if the controlling Person owns 20% or more of any class of voting securities (or
other ownership interests) of the controlled Person or possesses, directly or indirectly, the power
to direct or cause the direction of the management or policies of the controlled Person, whether
through ownership of stock or other ownership interests, by contract or otherwise.
Agreement Accounting Principles means generally accepted accounting principles, applied in a
manner consistent with that used in preparing the financial statements referred to in Section 6(a)
of this Letter Agreement.
Capitalized Lease of a Person means any lease of Property by such Person as lessee which
would be capitalized on a balance sheet of such Person prepared in accordance with Agreement
Accounting Principles.
Capitalized Lease Obligations of a Person means the amount of the obligations of such Person
under Capitalized Leases which would be shown as a liability on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
Consolidated Funded Indebtedness means at any time (a) the aggregate dollar amount of
Indebtedness of CINF and its Subsidiaries which has actually been funded and is outstanding,
whether or not such amount is due or payable, at such time, and (b) all reimbursement obligations
under outstanding letters of credit which (i) may be presented, or (ii) have been presented and
have not yet been paid; all calculated for CINF and its Subsidiaries on a consolidated basis as of
such time.
Consolidated Indebtedness means at any time the Indebtedness of CINF and its Subsidiaries
calculated on a consolidated basis as of such time.
Consolidated Leverage Ratio shall mean the ratio of Consolidated Funded Indebtedness to the
sum of Consolidated Indebtedness and shareholders equity reflected on the financial statements
provided pursuant to Section A of Exhibit A to this Letter Agreement.
Consolidated Net Income means, for any period, the consolidated net income (or loss) of CINF
and its Subsidiaries for such period determined in accordance with Agreement Accounting Principles;
provided, that there shall be excluded (i) the income (or loss) of any Affiliate of CINF or
other Person (other than a Subsidiary of CINF) in which any Person (other than CINF or any of its
Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other
distributions actually paid to CINF or any of its Subsidiaries by such Affiliate or other Person
during such period; and (ii) the income (or loss) of any Person accrued prior to the date it
becomes a Subsidiary of CINF or is merged into or consolidated with CINF or any of its Subsidiaries
or that Persons assets are acquired by CINF or any of its Subsidiaries.
Consolidated Net Worth means, as of the date of any determination thereof, the amount of the
shareholders equity of CINF and its Subsidiaries as would be shown on the consolidated balance
sheet of CINF and its Subsidiaries determined on a consolidated basis in accordance with Agreement
Accounting Principles.
Fiscal Quarter means any of the quarterly accounting periods of the Borrowers ending on
March 31, June 30, September 30, and December 31 of each year.
Fiscal Year means any of the annual accounting periods of the Borrowers ending on December
31 of each year.
Indebtedness of a Person means such Persons (i) obligations for borrowed money, (ii)
obligations representing the deferred purchase price of Property or services (other than accounts
payable and accrued expenses arising in the ordinary course of such Persons business payable on
terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens against,
or payable out of the proceeds or production from, Property now or hereafter owned or acquired by
such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v)
obligations of such Person to purchase securities or other Property arising out of or in connection
with the sale of the same or substantially similar securities or Property, (vi) Capitalized Lease
Obligations, and (vii) any other obligation for borrowed money which in accordance with Agreement
Accounting Principles would be shown as a liability on the consolidated balance sheet of such
Person.
Lien means any lien (statutory or other), mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention agreement).
Material Adverse Effect means a material adverse effect on (i) the business, property,
condition (financial or otherwise) or results of operations of CINF and its Subsidiaries
taken as a whole, (ii) the inability of either Borrower to perform its obligations under the
Loan Documents to which it is a party, or (iii) the validity or enforceability of any of the Loan
Documents or the rights or remedies of the Bank thereunder.
Person means any natural person, corporation, firm, joint venture, partnership, limited
liability company, association, enterprise, trust or other entity or organization, or any
government or political subdivision or any agency, department or instrumentality thereof.
Property of a Person means any and all property, whether real, personal, tangible,
intangible, or mixed, of such Person, or other assets owned or leased.
Subsidiary of a Person means (i) any corporation more than fifty percent (50%) of the
outstanding securities having ordinary voting power of which shall at the time be owned or
controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such
Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization more than fifty percent (50%) of the
ownership interests having ordinary voting power of which shall at the time be so owned or
controlled. Unless otherwise expressly provided, all references herein to a Subsidiary means a
Subsidiary of either Borrower.
Unmatured Default means an act, condition or event which, with the passage of time, the
giving of notice or both could reasonably be expected to become an Event of Default.
All of the above financial covenants shall be computed and determined in accordance with
Agreement Accounting Principles applied on a consistent basis (subject to normal year-end
adjustments).
C. NEGATIVE COVENANTS:
(1) Neither Borrower will (a) liquidate, or dissolve, or merge or consolidate with any person,
firm, corporation or other entity; provided, however, that a Borrower may merge or
consolidate with (i) the other Borrower or (ii) another wholly-owned Subsidiary of CINF so long as
such Borrower is the surviving entity, or (b) sell, lease, transfer or otherwise dispose of (i) any
of such Borrowers Subsidiaries or (ii) all or any substantial part of its property or assets,
whether now owned or hereafter acquired.
(2) Neither Borrower will, nor will it permit any of its Subsidiaries to, make any Acquisition
other than a Permitted Acquisition. For purposes of this Section, Acquisition means any
transaction, or series of transactions, consummated on or after the date of this Letter Agreement,
by which either Borrower or any of its Subsidiaries (a) acquires any going business or all or
substantially all of the assets of any firm, corporation or limited liability company or division
thereof, whether through the purchase of assets, merger or otherwise or (b) directly or indirectly
acquires (in one transaction or as the most recent transaction in a series of transactions) at
least a majority (in number of votes) of the securities of a corporation which have ordinary voting
power for the election of directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage of voting power) of the outstanding
ownership interests of a partnership or limited liability company; and Permitted
Acquisition means any Acquisition made by either Borrower or any of its Subsidiaries provided
that: (a) as of the date of such Acquisition, no Event of Default shall have occurred and be
continuing or would result from such Acquisition or from the incurrence of any Indebtedness in
connection with such Acquisition; (b) prior to the date of such Acquisition, such Acquisition shall
have been approved by the board of directors of the Person making such Acquisition and, if
applicable, the shareholders of the Person whose stock or assets are being acquired in connection
with such Acquisition and no claim or challenge has been asserted or threatened by any shareholder
or director of such Person which could reasonably be expected to have a material adverse effect on
such Acquisition or a Material Adverse Effect; (c) as of the date of any such Acquisition, all
approvals required in connection with such Acquisition shall have been obtained; and (d) any such
Acquisition is an Acquisition of assets or capital stock or other equity interests of a Person
engaged in any line of business being conducted by either Borrower or any of its Subsidiaries at
the time of such Acquisition.
(3) Neither Borrower will make or have outstanding any loans or advances to or otherwise
extend credit to any person, firm, corporation or other entity, except in the ordinary course of
business.
(4) Neither Borrower will grant any Lien on its Property to secure Indebtedness (other than
Liens upon Property securing loans to such Borrower for the purchase price of such Property, in
each case securing amounts which do not exceed the purchase price of the Property subject to such
Liens) (each such Lien, a Non-Bank Lien) unless such Borrower concurrently grants to the Bank a
similar first priority Lien, in form and substance satisfactory to the Bank, over the same
Property, which Lien shall rank on a pari passu basis with such Non-Bank Lien and be subject to
documentation, including appropriate intercreditor agreements, satisfactory in form and substance
to the Bank, except for any or all of the following Liens:
(a) Liens for taxes, assessments or governmental charges or levies on its Property if the same
shall not at the time be delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings for which adequate reserves shall have been
set aside on its books.
(b) Liens imposed by law, such as carriers, warehousemens and mechanics liens, landlords
liens, and other similar liens arising in the ordinary course of business which secure payment of
obligations not more than sixty (60) days past due or which are being contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set aside on its books.
(c) Liens arising out of pledges or deposits under workers compensation laws, unemployment
insurance, old age pensions, or other social security retirement benefits or similar legislation.
(d) Utility easements, building restrictions and such other encumbrances or charges against
real property as are of a nature generally existing with respect to properties of a similar
character and which do not in any material way affect the marketability of the same or interfere
with the use thereof in the business of CINF or its Subsidiaries.
(e) Liens existing on the date hereof and extensions, renewals and replacements thereof,
provided that such extension, renewal or replacement Lien shall be limited to the property or asset
covered by the Lien extended, renewed or replaced and that the obligations secured by any such
extension, renewal or replacement Lien shall be in an amount not in excess of the amount or the
obligation secured by the Lien so extended, renewed or replaced.
EX-10.2
Exhibit 10.2
August 24, 2009
Cincinnati Financial Corporation
221 East Fourth Street
Cincinnati, OH 45202
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Attn:
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Eric Matthews |
Phone:
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(513) 870-2638 |
Email:
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eric_mathews@cinfin.com |
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From:
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Sean McMurray |
Phone:
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(412) 762-7765 |
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Subject: |
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Reference #: 014c001_10033 Confirmation of Swap
Transaction dated as of August 24, 2009, between
Cincinnati Financial Corporation and PNC Bank, National
Association. |
Dear Mr. Johnston:
The purpose of this letter agreement is to confirm the terms and conditions of the rate swap
transaction (the Transaction) entered into between Cincinnati Financial Corporation
(COUNTERPARTY) and PNC Bank, National Association (PNC) on the Trade Date specified below. By
signing below, COUNTERPARTY acknowledges that it has consented to receive this Confirmation via
electronic mail.
1. |
|
The definitions and provisions contained in the 2006 ISDA Definitions (as published by the
International Swaps and Derivatives Association, Inc.) and any addenda or revisions thereto,
are incorporated into this Confirmation. In the event of any inconsistency between those
definitions and provisions and this Confirmation, this Confirmation will govern. |
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2. |
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This Confirmation constitutes a Confirmation as referred to in, and supplements, forms part
of and is subject to, that certain ISDA Master Agreement and related Schedule between
COUNTERPARTY and PNC, dated as of April 10, 2001 (as amended, modified, renewed or restated
from time to time, the ISDA Master Agreement). All provisions contained in or incorporated
by reference in such ISDA Master Agreement shall govern this Confirmation, except as modified
expressly below. In the event of any inconsistency between the provisions of such ISDA
Master Agreement and this Confirmation, this Confirmation will govern for purposes of the
Transaction. |
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3. |
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Each party represents to the other party that: |
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(a) |
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It is acting for its own account as principal, and it has made its own
independent decisions to enter into the Transaction and as to whether the Transaction
is appropriate or proper for it based upon its own judgment and upon advice from such
advisers as it has deemed necessary to permit it to evaluate the merits and risks of
the Transaction. It is not relying on any communication (written or oral) of the other
party as investment advice or as a recommendation to enter into the Transaction; it
being understood that information and explanations related to the terms and conditions
of the Transaction shall not be considered investment advice or a recommendation to
enter into the Transaction. No communication (written or oral) received from the other
party shall be deemed to be an assurance or guarantee as to the expected results of the
Transaction. |
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(b) |
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It is capable of assessing the merits of and understanding (on its own behalf
or through independent professional advice), and understands and accepts, the terms,
conditions and risks of the Transaction. It is also capable of assuming, and assumes,
the risks of the Transaction. |
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(c) |
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The other party is not acting as a fiduciary for or an adviser to it in respect
of the Transaction. |
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(d) |
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It has entered into the Transaction in connection with a line of its business
and for purposes of hedging and not for the purpose of speculation. |
Cincinnati Financial Corporation
August 24, 2009
Page 2
4. |
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The terms of the Transaction to which this Confirmation relates are as follows: |
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Type of Transaction:
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Rate Swap Transaction |
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Notional Amount:
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USD 49,000,000.00 |
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Trade Date:
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August 24, 2009 |
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Effective Date:
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August 29, 2009 |
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Termination Date:
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August 29, 2012. |
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Fixed Amounts: |
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Fixed Rate Payer:
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COUNTERPARTY |
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Fixed Rate Payer
Payment Dates:
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The 29th day of each November, February, May and August (last
calendar day in February), commencing on November 29, 2009 and ending on the
Termination Date, subject to adjustment in accordance with the Modified Following
Business Day Convention. |
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Fixed Rate:
|
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2.245% |
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Fixed Rate Day
Count Fraction:
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Actual / 360 |
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Business Days:
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New York |
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Floating Amounts: |
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Floating Rate Payer:
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PNC |
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Floating Rate Payer
Payment Dates:
|
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The 29th day of each November, February, May and August (last
calendar day in February), commencing on November 29, 2009 and ending on the
Termination Date, subject to adjustment in accordance with the Modified Following
Business Day Convention. |
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Floating Rate for
Initial Calculation
Period:
|
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To be Determined |
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Reset Dates:
|
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The 29th day of each November, February, May and August
(last calendar day in February), commencing on August 29, 2009 and ending on May 29,
2012, subject to adjustment in accordance with the Modified Following Business Day
Convention. |
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|
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|
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Floating Rate Option:
|
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USD-LIBOR-BBA-Bloomberg; provided, however, that the
reference to London Banking Days that appears in the 4th line of the
definition of USD-LIBOR-BBA-Bloomberg is replaced with New York Banking Days
(which for purposes of the Transaction means any day other than a Saturday or Sunday |
Cincinnati Financial Corporation
August 24, 2009
Page 3
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or a legal holiday on which commercial banks are authorized or
required by law to be closed for business in New York, New York) . |
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Designated Maturity:
|
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Three (3) Months |
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Spread:
|
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0 % |
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Floating Rate Day
Count Fraction:
|
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Actual / 360 |
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Business Days:
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New York |
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Compounding:
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Not Applicable |
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Additional Provisions: |
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Additional Termination
Event:
|
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The following event shall constitute an Additional Termination Event under the Master
Agreement (and in such event, COUNTERPARTY shall be the sole Affected Party): that
certain Credit Agreement, dated no later than August 31, 2009, between COUNTERPARTY and
PNC (as amended, modified, supplemented, renewed or restated at any time from time to
time): (a) matures or expires prior to the Termination Date, or (b) is terminated or
cancelled prior to the Termination Date by any party for any reason. |
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General Terms: |
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Calculation Agent:
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PNC |
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Jury Waiver:
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EACH PARTY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS CONFIRMATION OR THE TRANSACTION EVIDENCED HEREBY. |
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Governing Law:
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The Transaction shall be governed by and construed in accordance with the
laws of the State of New York, without reference to the choice of law doctrine. |
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Execution in
Counterparts:
|
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This Confirmation may be executed in counterparts, each of which shall be an
original and both of which when taken together shall constitute the same agreement.
Transmission by facsimile, e-mail or other form of electronic transmission of an
executed counterpart of this Confirmation shall be deemed to constitute due and
sufficient delivery of such counterpart. |
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Electronic Records
and Signatures:
|
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It is agreed by the parties that the use of electronic signatures
and the keeping of records in electronic form be granted the same legal effect,
validity and enforceability as a signature affixed by hand or the use of a paper-based
record keeping system (as the case may be) to the extent and as provided for in any
applicable law. |
Cincinnati Financial Corporation
August 24, 2009
Page 4
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Payment Instructions: |
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Payments to PNC shall be made in immediately available funds to: |
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Bank:
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PNC Bank, Pittsburgh |
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ABA #:
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043-000-096 |
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Account #: |
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Account of:
Attn.:
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Investment Operations
Derivative Products |
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Payments to COUNTERPARTY shall be made in immediately available funds
to: |
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Bank:
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Fifth Third Bank |
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ABA #:
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042-000-314 |
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Account #: |
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Account of:
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Cincinnati Financial |
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PAYMENT ADVICE NOTIFICATION SHALL BE DELIVERED VIA
E-MAIL TO THE FOLLOWING ADDRESS: |
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E-Mail Address: eric_mathews@cinfin.com |
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Please confirm that the foregoing correctly sets forth the terms of our agreement concerning
the Transaction by signing this Confirmation where indicated below and returning a signed
copy to Milen Stanoev either by fax (at (412)768-2466), or by overnight delivery (c/o PNC
Bank, National Association, One PNC Plaza 9th Floor, 249 Fifth Avenue,
Pittsburgh, PA 15222, Attn: Milen Stanoev), or by e-mail to: deriv_confirms@pnc.com,
provided that you wish to return your signed copy by e-mail, please first contact
your derivatives marketer. |
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Please retain a signed copy of this Confirmation for your records. Should you have any
questions, please call Milen Stanoev at (412) 762-4746. |
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Yours Sincerely, |
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Accepted and agreed as of the date first above written: |
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PNC BANK, NATIONAL ASSOCIATION |
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CINCINNATI FINANCIAL CORPORATION |
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By:
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/S/ Steven J. Johnston |
|
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Name:
|
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Steven J. Johnston |
|
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Title:
|
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Chief Financial Officer |
|
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exv11
Exhibit 11
Statements Re: Computation of Per Share Earnings
|
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|
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Three months ended September 30, |
|
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Nine months ended September 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incomebasic and diluted |
|
$ |
171 |
|
|
$ |
247 |
|
|
$ |
187 |
|
|
$ |
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
162,627,624 |
|
|
|
164,146,095 |
|
|
|
162,556,962 |
|
|
|
163,404,320 |
|
Effect of stock based awards |
|
|
273,772 |
|
|
|
96,090 |
|
|
|
237,805 |
|
|
|
429,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares |
|
|
162,901,396 |
|
|
|
164,242,185 |
|
|
|
162,794,767 |
|
|
|
163,834,163 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.05 |
|
|
$ |
1.51 |
|
|
$ |
1.15 |
|
|
$ |
1.64 |
|
Diluted |
|
|
1.05 |
|
|
|
1.50 |
|
|
|
1.15 |
|
|
|
1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Number of anti-dilutive stock based awards |
|
|
9,913,628 |
|
|
|
9,263,059 |
|
|
|
9,913,628 |
|
|
|
6,528,470 |
|
Exercise price of anti-dilutive stock based awards |
|
$ |
25.08-45.26 |
|
|
$ |
25.08-45.26 |
|
|
$ |
25.08-45.26 |
|
|
$ |
25.08-45.26 |
|
Certain stock-based compensation awards were not included in the computation of diluted
earnings per share for the three- and nine-month periods ended September 30, 2009 and 2008,
since inclusion of these awards would have anti-dilutive effects.
Cincinnati Financial 3Q09 10-Q
exv31wa
Exhibit 31a
Certification Pursuant To Section 302 of
The Sarbanes Oxley Act of 2002
I, Kenneth W. Stecher, certify that:
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: October 29, 2009
|
|
|
/S/ Kenneth W. Stecher |
|
|
|
|
|
President and Chief Executive Officer |
|
|
Cincinnati Financial 3Q09 10-Q
exv31wb
Exhibit 31b
Certification Pursuant To Section 302 of
The Sarbanes Oxley Act of 2002
I, Steven J. Johnston, certify that:
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: October 29, 2009 |
|
|
|
/S/ Steven J. Johnston |
|
|
Steven J. Johnston, FCAS, MAAA, CFA |
|
|
Chief Financial Officer, Senior Vice President, Secretary and Treasurer |
Cincinnati Financial 3Q09 10-Q
exv32
Exhibit 32
Certification Pursuant To Section 906 of
The Sarbanes Oxley Act of 2002
The certification set forth below is being submitted in connection with this report on Form
10-Q for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act
and Section 1350 of Chapter 63 of Title 18 of the United States Code.
Kenneth W. Stecher, the chief executive officer, and Steven J. Johnston, the chief
financial officer, of Cincinnati Financial Corporation each certifies that, to the best of
his knowledge:
1. |
|
the report fully complies with the requirements of Section 13(a) or 15(d) of the
Exchange Act; 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: October 29, 2009
|
|
|
/S/ Kenneth W. Stecher |
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
/S/ Steven J. Johnston |
|
|
Steven J. Johnston, FCAS, MAAA, CFA
|
|
|
Chief Financial Officer, Senior Vice President, Secretary and Treasurer |
Cincinnati Financial 3Q09 10-Q