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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Commission file number 0-4604
CINCINNATI FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 31-0746871
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6200 S. Gilmore Road, Fairfield, Ohio 45014-5141
- --------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (513) 870-2000
Item 12. Results of Operations and Financial Condition. On October 28, 2003,
Cincinnati Financial Corporation issued a news release announcing its financial
results for the third quarter and nine months ended September 30, 2003. The news
release is furnished as Exhibit 99.1 hereto and is incorporated herein by
reference.
The information furnished in this report shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities of that Section, nor shall such information
be deemed incorporated by reference in any filing under the Securities Act of
1933, as amended.
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
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Kenneth W. Stecher
Chief Financial Officer, Senior Vice President,
Secretary and Treasurer
(Principal Accounting Officer)
October 28, 2003
Exhibits:
Exhibit 99.1 News release dated October 28, 2003, containing financial results
of Cincinnati Financial Corporation for the third quarter and nine months ended
September 30, 2003.
Exhibit 99.1
Cincinnati Financial Corporation Reports Third-Quarter Results
* Third-Quarter Net Income Reached $104 Million, or 64 Cents Per Share,
Compared With $72 Million, or 44 Cents
* Third-Quarter 2003 Results Included $23 Million Pretax Recovery From
Negotiated Settlement
* Catastrophe Losses Totaled 17 Cents in This Year's Third Quarter Versus
2 Cents Last Year
* Results Remain on Track for Record Full-Year Earnings
CINCINNATI, Oct. 28 /PRNewswire-FirstCall/ -- Cincinnati Financial
Corporation (Nasdaq: CINF) today reported third-quarter 2003 net income of
$104 million, or 64 cents per diluted share, compared with $72 million, or 44
cents per share, in the third quarter of 2002. Net income per share included
net realized investment gains of 6 cents in third quarter 2003 versus net
realized investment losses of 7 cents in the comparable 2002 period. As the
result of a settlement negotiated with a vendor, third-quarter 2003 pretax
results included the recovery of $23 million of the $39 million one-time,
pretax charge incurred in the third quarter of 2000 to write off previously
capitalized software development costs.
Revenues from pretax investment income, the primary source of profits,
rose 3.3 percent to $117 million. Total third-quarter revenues advanced $105
million, or 14.4 percent, to $836 million.
Financial Highlights
(Dollars in millions,
except share data) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Income Statement Data
Net income $104 $72 $245 $182
Negotiated settlement-
software cost recovery 15 - 15 -
Net income before recovery* $89 $72 $230 $182
Net realized investment gains
and losses 10 (11) (29) (22)
Operating income before
recovery* $79 $83 $259 $204
Per Share Data (diluted)
Net income $0.64 $0.44 $1.51 $1.11
Negotiated settlement-
software cost recovery 0.09 - 0.09 -
Net income before recovery* $0.55 $0.44 $1.42 $1.11
Net realized investment
gains and losses 0.06 (0.07) (0.18) (0.14)
Operating income before
recovery* $0.49 $0.51 $1.60 $1.25
Cash dividend declared 0.2500 0.2225 0.7500 0.6675
Book value - - 35.94 34.14
Average shares
outstanding 161,888,855 163,222,154 161,726,204 163,491,420
* Measures used in this release that are not based on Generally Accepted
Accounting Principles (non-GAAP) are defined and reconciled to the most
directly comparable GAAP measures and operating measures in the
attached Definitions of Non-GAAP Information and Reconciliation to
Comparable GAAP Measures. Net income before the recovery is calculated
by excluding the recovery in the third quarter of 2003 of $23 million
pretax ($15 million or 9 cents per share after tax) from net income.
Operating income is calculated by excluding net realized investment
gains and losses from net income. Management uses operating income to
evaluate underlying performance for a number of reasons. First,
quarterly fluctuations in net realized investment gains and losses are
unrelated to trends in the company's insurance business. Second, net
realized investment gains and losses can include gains related to the
sale of investments made at management's discretion. Third, operating
income is a measure commonly used by investors to evaluate insurance
companies. This measure also is described as net income before realized
investment gains and losses.
Chairman and Chief Executive Officer John J. Schiff, Jr., CPCU, commented,
"We are on track for record full-year 2003 revenue and income and the best
property casualty profitability we have recorded in more than 10 years. Third-
quarter operating income before the recovery reached 49 cents compared with 51
cents a year earlier, with near-record catastrophe losses reducing after-tax
earnings by 17 cents versus 2 cents a year ago and with higher property
casualty agency profit-based commissions. Overall, our property casualty
operations are solid, and that is what we seek to achieve."
Third-quarter catastrophe losses, net of reinsurance, were $41 million,
slightly above the company's preliminary estimate, contributing 6.1 percentage
points to the combined ratio. For the third quarter of 2002, catastrophe
losses were $5 million, contributing just 0.8 percentage points to the
combined ratio.
"Catastrophe losses for the quarter included $15 million related to
Hurricane Isabel, which affected policyholders in Maryland, New York, North
Carolina, Pennsylvania, Virginia and West Virginia in September, and $15
million related to storms in July. The remainder primarily was related to
newly reported claims from earlier events, including $12 million from the
April 2003 hail storm in Ohio and Kentucky," Schiff said. "Although
catastrophe losses reduce short-term profitability, our claims response
reinforces the long-term value the Cincinnati name delivers to policyholders.
Our goal is always to respond to claims promptly, fairly and personally."
Nine-month Results
For the nine months ended September 30, 2003, net income rose 34.3 percent
to $245 million, or $1.51 per share. Operating income before the recovery rose
26.6 percent to $259 million, or $1.60 per share.
Total revenues advanced $221 million to $2.342 billion, up 10.4 percent
over the first nine months of last year. Revenues from pretax investment
income reached $347 million, up 4.8 percent from $331 million in last year's
first nine months.
Year-to-date catastrophe losses, net of reinsurance, were $90 million,
contributing 4.6 percentage points to the combined ratio and reducing after-
tax earnings by 36 cents per share. In the first nine months of 2002,
catastrophe losses were $66 million, contributing 3.8 percentage points to the
combined ratio and reducing after-tax earnings by 26 cents.
"Property casualty underwriting profits before the recovery reached $42
million for the first nine months versus a loss of $25 million last year.
Premium growth and improved non-catastrophe underwriting profitability served
to more than offset the higher catastrophe losses," Schiff said. "The
selective, case-by-case approach we are taking as we compete for new business
and work with our agents to renew existing accounts has led to steady results
all year. Despite a higher catastrophe loss ratio, the GAAP combined ratio
before the recovery improved to 97.9 percent for the first nine months of 2003
compared with 101.4 percent for the year-earlier period."
Property Casualty Insurance Operations
(Dollars in millions - GAAP) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Income Statement Data
Earned premiums $678 $610 $1,963 $1,751
Loss and loss expenses
excluding catastrophe
losses 443 422 1,293 1,235
Catastrophe losses 41 5 90 66
Expenses 171 167 515 475
Underwriting profit (loss) $23 $16 $65 $(25)
Underwriting profit (loss)
before recovery* $ - $16 $42 $(25)
Ratio Data
Loss and loss expenses
excluding catastrophe
losses 65.3% 69.2% 65.8% 70.5%
Catastrophe losses 6.1 0.8 4.6 3.8
Expenses 25.2 27.4 26.3 27.1
Combined Ratio 96.6% 97.4% 96.7% 101.4%
Combined Ratio before
recovery* 100.0% 97.4% 97.9% 101.4%
* Values that exclude the recovery are described in the note on Page 1
and discussed in the attached Definitions of Non-GAAP Information and
Reconciliation to Comparable GAAP Measures.
For the quarter, statutory net written premiums of the property casualty
insurance affiliates-The Cincinnati Insurance Company, The Cincinnati
Indemnity Company and The Cincinnati Casualty Company-rose 13.4 percent to
$723 million compared with $637 million last year. Total new business written
directly by the company's agents was $88 million, up 1 percent over last
year's third quarter, as growth in new commercial lines business offset a
decline in new personal lines business.
On a GAAP basis, the third-quarter combined ratio before the recovery was
100.0 percent, or 93.9 percent excluding catastrophe losses, compared with the
2002 third-quarter combined ratio of 97.4 percent, or 96.6 percent excluding
catastrophes.
Schiff noted, "These strong results included quarterly contingent
commission expense almost equal to the level of the first six months of this
year following our normal nine-month review of agency profitability. We rely
on our agents as frontline underwriters who know the businesses and
individuals in their communities; many agencies can look forward to benefiting
from the hard work they have put into this effort over the past several years.
Total contingent commissions for 2003 now are expected to be approximately
twice last year's level because of recent strong results."
Commercial Lines
(Dollars in millions - GAAP) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Income Statement Data
Earned premiums $488 $440 $1,410 $1,255
Loss and loss expenses
excluding catastrophe
losses 310 290 895 855
Catastrophe losses 10 6 28 34
Expenses 129 122 377 341
Underwriting profit (loss) $39 $22 $110 $25
Underwriting profit (loss)
before recovery* $24 $22 $95 $25
Ratio Data
Loss and loss expenses
excluding catastrophe
losses 63.4% 65.8% 63.4% 68.2%
Catastrophe losses 2.0 1.3 2.0 2.7
Expenses 26.7 27.8 26.8 27.1
Combined Ratio 92.1% 94.9% 92.2% 98.0%
Combined Ratio before
recovery* 95.0% 94.9% 93.2% 98.0%
* Values that exclude the recovery are described in the note on Page 1
and discussed in the attached Definitions of Non-GAAP Information and
Reconciliation to Comparable GAAP Measures.
Net written premiums for commercial lines of insurance rose 14.9 percent
to $507 million, accounting for 70.1 percent of the company's total third-
quarter property casualty premiums. New commercial business increased 6.2
percent over last year's record level to $72 million for the quarter. The GAAP
combined ratio before the recovery was 95.0 percent compared with 94.9 percent
in last year's third quarter. Excluding catastrophe losses, the ratio before
the recovery was 93.0 percent compared with 93.6 percent in last year's third
quarter.
Schiff noted, "Competition in the commercial lines marketplace,
particularly for the better accounts, is mounting. In this market, we are
experiencing our best results - both in terms of growth and profitability -
for commercial package programs. Premiums in these areas continue to grow at
double-digit rates, we are winning our share of new business and profitability
remains strong. We are benefiting from substantially higher average premium
per policy as we move through the third year of our commercial lines re-
underwriting program and continue to be highly selective about the risks we
write."
Schiff said, "As one would anticipate, the higher accrual for profit-based
commissions had the most significant impact on commercial lines, where our
results have been particularly strong. Our agents know they can rely on us to
be a stable market for their best business, which in turn is allowing us to
generate excellent profitability for commercial lines and reward agents for
their role in that success."
Personal Lines
(Dollars in millions - GAAP) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Income Statement Data
Earned premiums $190 $170 $553 $496
Loss and loss expenses
excluding catastrophe
losses 133 132 398 380
Catastrophe losses 31 (1) 62 32
Expenses 42 45 138 134
Underwriting profit (loss) $(16) $(6) $(45) $(50)
Underwriting profit (loss)
before recovery* $(24) $(6) $(53) $(50)
Ratio Data
Loss and loss expenses
excluding catastrophe
losses 70.0% 78.1% 71.9% 76.5%
Catastrophe losses 16.6 (0.6) 11.2 6.6
Expenses 21.8 26.5 25.1 27.0
Combined Ratio 108.4% 104.0% 108.2% 110.1%
Combined Ratio before
recovery* 112.7% 104.0% 109.7% 110.1%
* Values that exclude the recovery are described in the note on Page 1
and discussed in the attached Definitions of Non-GAAP Information and
Reconciliation to Comparable GAAP Measures.
Net written premiums for the personal lines segment increased 10.2 percent
to $216 million. New personal lines business declined 16.6 percent to $16
million for the third quarter. On a GAAP basis, the third-quarter combined
ratio before the recovery was 112.7 percent versus 104.0 percent in 2002.
Excluding catastrophes, the ratio before the recovery was 96.1 percent
compared with 104.6 percent in last year's third quarter.
Schiff commented, "Across the board in personal lines, our premium growth
is being driven by higher rates and coverage pricing. As we work with our
agents to ensure quality underwriting and careful risk selection, we are not
surprised to see lower levels of new business.
"The personal auto line had an excellent third quarter, bringing the
year-to-date loss and loss expense ratio to 69.0 percent compared with 73.1
percent for the first nine months of last year. The improvement resulted from
the re-underwriting program that was initiated in this coverage area several
years ago, combined with the benefit of rate increases in the 5 percent to
8 percent range this year.
"For the first nine months of this year, the homeowner loss and loss
expense ratio rose to 110.4 percent, including 31.6 percentage points from
catastrophe losses, from 103.0 percent, including 18.7 percentage points, in
the same period last year. Average renewal rate increases for our three-year
policies are in the range of 25 percent with additional double-digit rate
increases approved in our larger states for the coming months. Changes in
terms and conditions continue to take effect as policies renew over the three-
year homeowner policy period. While it will take time for all of these efforts
to work through our homeowner business, we are solidly on track to restore
homeowner profitability," Schiff said.
Life Insurance Operations
(In millions) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Earned premiums $23 $22 $68 $63
Investment income 22 22 67 63
Other income 1 0 2 0
Total revenues excluding
realized investment gains
and losses $46 $44 $137 $126
Policyholder benefits 22 21 66 60
Expenses 13 14 36 39
Total benefits and expenses $35 $35 $102 $99
Income before income tax
and realized investment
gains and losses $11 $9 $35 $27
Federal tax 3 4 12 9
Income before realized
investment gains and losses $8 $5 $23 $18
The Cincinnati Life Insurance Company's third-quarter income before
realized investment gains and losses increased 67.3 percent to $8 million,
compared with $5 million in the comparable 2002 period. Including realized net
capital gains and losses, net income was $8 million in 2003 versus $2 million
in 2002. Net earned premiums rose 8.5 percent to $23 million compared with $22
million last year.
Cincinnati Life President David H. Popplewell, FALU, LLIF, commented, "Net
written life premiums were $75 million in the first nine months of 2003
compared with $104 million last year when we wrote a single-pay bank-owned
life insurance policy that contributed $33 million to life premiums. Through
September 30, 2003, submitted ordinary life applications rose 6.2 percent
compared with last year. This increase reflects a positive response to our
products and services, and we continue to work on maintaining a competitive
advantage for our agents. In 2004, we will expand our portfolio with a new
long-term guaranteed universal life insurance product and an improvement to
our existing term life insurance product."
Investment Operations
(In millions, pretax) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Investment income,
net of expenses $117 $113 $347 $331
Realized investment
gains and losses:
Valuation of embedded
derivatives (SFAS No. 133) $9 $(10) $9 $(8)
Other-than-temporary
impairment charges (8) (8) (77) (38)
Realized investment
gains and losses on
security sales 14 2 24 12
Total realized
investment
gains and losses $15 $(16) $(44) $(34)
Consolidated pretax investment income rose 3.3 percent for the third
quarter and 4.8 percent for the nine months, benefiting from dividend
increases announced over the last year by companies in the equity portfolio.
As of September 30, 2003, 22 of the 48 equity holdings in the portfolio have
announced dividend increases that total $13 million on an annualized basis.
Vice President Kenneth S. Miller, CLU, ChFC, commented, "Total realized
investment gains were $15 million in the third quarter, as the market
sustained its overall recovery and fewer securities were impaired. Offsetting
the $8 million in impairments were $9 million in gains that arose from
fluctuations in the market values of options embedded in convertible
securities and $14 million in net gains from the sale of securities."
Miller added, "Strong cash flow has led to substantial new investment this
year. The $127 million used for new investments in the third quarter brought
the net year-to-date total to $442 million. We are continuing to increase the
quality of the bond portfolio, as rated by Standard & Poor's and Moody's, with
year-to-date purchases of U.S. Agency paper and high-quality municipal bonds
of $425 million. Another $138 million, including $71 million in the third
quarter, has been invested in common stock in 2003, in line with our
historical allocation."
Balance Sheet
(Dollars in millions) Third Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Balance Sheet Data
Total assets - - $14,958 $13,684
Invested assets - - 11,774 11,041
Shareholders' equity - - 5,766 5,517
Ratio Data
Return on equity, annualized 7.1% 4.9% 5.7% 4.2%
Return on equity, annualized,
based on comprehensive
income (4.2) (40.6) 7.8 (8.1)
At September 30, 2003, total assets rose to a record $14.958 billion, up
$836 million from year-end. Shareholders' equity reached $5.766 billion, up
$168 million from year-end 2002. Accumulated other comprehensive income
totaled $3.731 billion, up $88 million from year-end 2002. Book value was
$35.94, up $1.29 from year-end 2002.
During the third quarter, the company repurchased 91,600 shares of
Cincinnati Financial common stock at a total cost of $4 million or $39.13 per
share. Approximately 5.4 million shares remain authorized by the board of
directors for repurchase.
Anticipating Strong Full-Year Performance
Schiff noted that the overall strong performance of the third quarter
builds on trends already established.
"Since the beginning of 2002, we have been seeing the hard work of our
agents and associates pay off," he said. "Our results confirm our conviction
in the value of carefully assessing and pricing risks, of knowing the
communities we serve and of standing by those communities in their times of
need.
"Just as important, we have full confidence in our future," Schiff added.
"We continue to believe our target for a full-year 2003 GAAP combined ratio of
96.8 percent before the recovery remains within reach, assuming catastrophe
losses contribute less than 1 percentage point to the fourth-quarter combined
ratio, and that our strategies will lead to further improvement.
"Financial strength, investment strength and agency strength have combined
to create a legacy of consistency for Cincinnati Financial, consistency that
was seen again in our third-quarter and nine-month results," Schiff concluded.
"We expect to continue that legacy over the long term."
For additional information or to register for this afternoon's conference
call, please visit www.cinfin.com.
Cincinnati Financial Corporation offers property and casualty insurance,
its main business, through The Cincinnati Insurance Company, The Cincinnati
Indemnity Company and The Cincinnati Casualty Company. The Cincinnati Life
Insurance Company markets life, disability income and long-term care insurance
and annuities. CFC Investment Company supports the insurance subsidiaries and
their independent agent representatives through commercial leasing and
financing activities. CinFin Capital Management Company provides asset
management services to institutions, corporations and high net worth
individuals.
This is a "Safe Harbor" statement under the Private Securities Litigation
Reform Act of 1995. Certain forward-looking statements contained herein
involve potential risks and uncertainties. The company's future results could
differ materially from those discussed. Factors that could cause or contribute
to such differences include, but are not limited to: unusually high levels of
catastrophe losses due to changes in weather patterns or other causes;
increased frequency and/or severity of claims; environmental events or
changes; insurance regulatory actions, legislation or court decisions that
increase expenses or place the company at a disadvantage in the marketplace;
adverse outcomes from litigation or administrative proceedings; recession or
other economic conditions resulting in lower demand for insurance products;
sustained decline in overall stock market values negatively affecting the
company's equity portfolio, in particular a sustained decline in market value
of Fifth Third Bancorp shares; events that lead to a significant decline in
the market value of a particular security and impairment of the asset; delays
in the development, implementation and benefits of technology enhancements;
and decreased ability to generate growth in investment income.
Further, the company's insurance businesses are subject to the effects of
changing social, economic and regulatory environments. Public and regulatory
initiatives have included efforts to adversely influence and restrict premium
rates, restrict the ability to cancel policies, impose underwriting standards
and expand overall regulation. The company also is subject to public and
regulatory initiatives that can affect the market value for its common stock,
such as recent measures impacting corporate financial reporting and
governance. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
Cincinnati Financial Corporation
Consolidated Balance Sheets
(Dollars in millions except share data) September 30, December 31,
2003 2002
(unaudited)
Assets
Investments
Fixed maturities, at fair value
(amortized cost: 2003-$3,521;
2002-$3,220) $3,762 $3,305
Equity securities, at fair value
(cost: 2003-$2,445; 2002-$2,375) 7,941 7,884
Other invested assets 71 68
Cash 220 112
Investment income receivable 92 98
Finance receivable 37 33
Premiums receivable 1,081 956
Reinsurance receivable 612 590
Prepaid reinsurance premiums 16 47
Deferred policy acquisition costs 386 343
Property and equipment, net,
for company use (accumulated depreciation:
2003-$172; 2002-$155) 121 128
Other assets 153 131
Separate accounts 466 427
Total assets $14,958 $14,122
Liabilities
Insurance reserves
Losses and loss expense $3,416 $3,176
Life policy reserves 1,005 917
Unearned premiums 1,459 1,319
Other liabilities 470 345
Deferred income tax 1,773 1,737
Notes payable 183 183
6.9% senior debenture due 2028 420 420
Separate accounts 466 427
Total liabilities 9,192 8,524
Shareholders' equity
Common stock, par value-$2 per share;
authorized 200 million shares;
issued: 2003-176 million shares,
2002-176 million shares 352 352
Paid-in capital 304 300
Retained earnings 1,897 1,772
Accumulated other comprehensive
income-unrealized gains on investments
and derivatives 3,731 3,643
Treasury stock at cost (2003-16 million
shares, 2002-14 million shares) (518) (469)
Total shareholders' equity 5,766 5,598
Total liabilities and shareholders'
equity $14,958 $14,122
Cincinnati Financial Corporation
Consolidated Statements of Income
(unaudited)
(In millions except per share data) Nine Months Ending September 30,
2003 2002
Revenues
Earned premiums
Property casualty $1,963 $1,749
Life 68 63
Investment income, net of expenses 347 331
Realized investment gains and losses (44) (34)
Other income 8 12
Total revenues 2,342 2,121
Benefits and expenses
Insurance losses and policyholder benefits 1,447 1,360
Commissions 402 345
Other operating expenses 142 150
Taxes, licenses and fees 48 51
Increase in deferred policy
acquisition costs (42) (32)
Interest expense 25 26
Other expenses 10 6
Total benefits and expenses 2,032 1,906
Income before income taxes 310 215
Provision (benefit) for income taxes
Current 75 44
Deferred (10) (11)
Total provision (benefit) for income taxes 65 33
Net income $245 $182
Per common share
Net income - basic $1.52 $1.12
Net income - diluted $1.51 $1.11
Since 1996, Cincinnati Financial has disclosed the estimated impact of
stock options on net income and earnings per share in a Note to the Financial
Statements. During the third quarter of 2003, net income would have been
reduced by less than 2 cents per share if option expense, calculated using the
Black-Scholes and modified prospective transition methodologies, was included
as an expense.
Cincinnati Financial Corporation
Definitions of Non-GAAP Information and
Reconciliation to Comparable GAAP Measures
Cincinnati Financial Corporation prepares its public financial statements
in conformity with accounting principles generally accepted in the United
States of America. Statutory data is prepared in accordance with statutory
accounting rules as defined by the National Association of Insurance
Commissioners' Accounting Practices and Procedures Manual and therefore is not
reconciled to GAAP data. Management believes that investor understanding of
Cincinnati Financial Corporation's performance is enhanced by disclosure of
certain non-GAAP and non-statutory financial measures:
Operating income: Operating income is calculated by excluding net realized
investment gains and losses from net income. Management utilizes operating
income to evaluate underlying performance for a number of reasons. First,
quarterly fluctuations in net realized investment gains and losses are
unrelated to trends in the company's insurance business. Second, net realized
investment gains and losses can include gains related to the sale of
investments made at management's discretion. Third, operating income is a
measure commonly used by investors to evaluate insurance companies. This
measure also is described as net income before realized investment gains and
losses.
Catastrophe losses: Due to the nature of catastrophic events, the
frequency and cost of catastrophe occurrences are unpredictable. Although
management anticipates an average level of catastrophe losses, to aid in
assessing the underlying performance of the business, management evaluates
trends in the company's overall performance and property casualty underwriting
profitability excluding the fluctuating impact of catastrophe losses.
Statutory accounting rules: For public reporting, insurance companies
prepare financial statements in accordance with GAAP. However, certain data
also must be calculated according to statutory accounting rules as defined in
the National Association of Insurance Commissioners' (NAIC) Accounting
Practices and Procedures Manual, which may be, and has been, modified by
various state insurance departments. Statutory data is publicly available and
used by various organizations to calculate aggregate industry data, study
industry trends and make comparisons between various insurance companies.
Written premium: Under statutory accounting rules, written premium is the
amount recorded for policies issued and recognized on an annualized basis at
the effective date of the policy. Management analyzes trends in written
premium to assess business efforts. Earned premium, used in both statutory and
GAAP accounting, is calculated ratably over the policy term. The difference
between written and earned premium is unearned premium.
Written premium adjustment - statutory-basis only: In 2002, the company
refined its estimation process for matching written and earned premiums to
policy effective dates, which added $117 million to 2002 written premiums. To
better assess ongoing business trends, management excludes this adjustment
when evaluating trends in written premiums and statutory ratios that make use
of written premiums.
Underwriting profit: Underwriting profit for property casualty insurance
represents premiums earned minus loss and loss expenses and other insurance-
related expenses.
Reserve reallocation: Management monitors claim activity on an ongoing
basis and appropriately modifies amounts added to loss reserves via incurred
but not yet reported (IBNR) reserve additions and loss expenses. Based on
prior-year loss development and changes in ultimate incurred loss ratios, the
company reallocates reserves between business lines and accident years to
reflect evolving trends. To better assess current-year performance, management
monitors accident-year business line loss and loss expenses data excluding
prior-year reserve reallocations.
One-time charges or adjustments: Management analyzes results excluding the
impact of one-time items.
* As the result of a settlement negotiated with a vendor, third-quarter
2003 pretax results include the recovery of $23 million of the
$39 million one-time, pretax charge incurred in the third quarter of
2000.
* In 2000, the company recorded a one-time charge of $39 million,
pre-tax, to impair previously capitalized costs related to the
development of software to process property casualty policies.
* In 2000, the company earned $5 million in interest in the first quarter
from a $303 million single-premium bank-owned life insurance (BOLI)
policy booked at the end of 1999 that was segregated as a Separate
Account effective April 1, 2000. Investment income and realized capital
gains and losses from separate accounts generally accrue directly to
the contract holder and, therefore, are not included in the company's
consolidated financials.
* In 1993, results included a credit related to the method of accounting
for income taxes to conform with Statement of Accounting Financial
Standards No. 109 and a charge related to the effect of 1993 increases
in income tax rates on deferred taxes recorded for various prior-year
items.
Codification: Adoption of Codification of Statutory Accounting Principles
was required for Ohio-based insurance companies effective January 1, 2001. The
adoption of Codification changed the manner in which the company recognized
written premiums. As a result, 2001 statutory written premiums included $402
million to account for unbooked premiums related to policies with effective
dates prior to January 1, 2001. To better assess ongoing business trends,
management excludes this $402 million when evaluating written premiums and
statutory ratios that make use of written premiums.
Life insurance gross written premiums: In analyzing life insurance company
gross written premiums, management excludes three larger, single-pay life
insurance policies (BOLIs) to focus on the trend in premiums written through
the agency distribution channel.
Cincinnati Financial Corporation and Subsidiaries
Quarterly Net Income
(In millions except
per share data)
9/30/2003 6/30/2003 3/31/2003 12/31/2002
Net income $104 $84 $57 $56
One-time item 15
Net income before one-time item $89 $84 $57 $56
Net realized investment
gains and losses 10 1 (40) (40)
Operating income before
one-time item $79 $83 $97 $96
Catastrophe losses (27) (30) (2) (14)
Operating income before
catastrophe losses and
one-time item $106 $113 $99 $110
Diluted per share data
Net income $0.64 $0.52 $0.35 $0.35
One-time item 0.09
Net income before one-time item $0.55 $0.52 $0.35 $0.35
Net realized investment
gains and losses 0.06 0.01 (0.25) (0.24)
Operating income before
one-time item $0.49 $0.51 $0.60 $0.59
Catastrophe losses (0.17) (0.19) (0.01) (0.08)
Operating income before
catastrophe losses and
one-time item $0.66 $0.70 $0.61 $0.67
9/30/2002 6/30/2002 3/31/2002
Net income $72 $35 $75
One-time item
Net income before one-time item $72 $35 $75
Net realized investment
gains and losses (11) (6) (5)
Operating income before
one-time item $83 $41 $80
Catastrophe losses (3) (31) (9)
Operating income before
catastrophe losses and
one-time item $86 $72 $89
Diluted per share data
Net income $0.44 $0.21 $0.46
One-time item
Net income before one-time item $0.44 $0.21 $0.46
Net realized investment
gains and losses (0.07) (0.04) (0.03)
Operating income before
one-time item $0.51 $0.25 $0.49
Catastrophe losses (0.02) (0.19) (0.06)
Operating income before
catastrophe losses and
one-time item $0.53 $0.44 $0.55
Six months ended Nine months ended
6/30/2003 6/30/2002 9/30/2003 9/30/2002
Net income $141 $110 $245 $182
One-time item 15
Net income before one-time item $141 $110 $230 $182
Net realized investment
gains and losses (39) (12) (29) (22)
Operating income before
one-time item $180 $122 $259 $204
Catastrophe losses (32) (40) (59) (43)
Operating income before
catastrophe losses and
one-time item $212 $162 $318 $247
Diluted per share data
Net income $0.87 $0.67 $1.51 $1.11
One-time item 0.09
Net income before one-time item $0.87 $0.67 $1.42 $1.11
Net realized investment
gains and losses (0.24) (0.07) (0.18) (0.14)
Operating income before
one-time item $1.11 $0.74 $1.60 $1.25
Catastrophe losses (0.20) (0.24) (0.36) (0.26)
Operating income before
catastrophe losses and
one-time item $1.31 $0.98 $1.96 $1.51
Twelve months ended
12/31/2002
Net income $238
One-time item
Net income before one-time item $238
Net realized investment
gains and losses (62)
Operating income before
one-time item $300
Catastrophe losses (57)
Operating income before
catastrophe losses and
one-time item $357
Diluted per share data
Net income $1.46
One-time item
Net income before one-time item $1.46
Net realized investment
gains and losses (0.38)
Operating income before
one-time item $1.84
Catastrophe losses (0.35)
Operating income before
catastrophe losses and
one-time item $2.19
Dollar amounts shown are rounded to millions; certain amounts may not add
due to rounding. Ratios are calculated based on whole dollar amounts. The
sum of quarterly amounts may not equal the full year as each is computed
independently.
Cincinnati Insurance Group
Quarterly Property Casualty Data - Consolidated
(Dollars in millions)
9/30/2003 6/30/2003 3/31/2003 12/31/2002
Premiums
Adjusted written premiums
(statutory) $714 $707 $669 $612
Written premium adjustment -
statutory only 9 19 18 117
Reported written premiums
(statutory)* $723 $726 $687 $729
Unearned premiums (45) (72) (56) (87)
Earned premiums $678 $654 $631 $642
Statutory combined ratio
Reported statutory combined
ratio* 96.3% 98.4% 92.8% 93.4%
Written premium adjustment -
statutory only NM NM NM 4.7
One-time item 3.1
Adjusted statutory combined
ratio 99.4% 98.4% 92.8% 98.1%
Catastrophe losses (6.1) (7.1) (0.4) (3.3)
Adjusted statutory combined
ratio excluding catastrophe
losses 93.3% 91.3% 92.4% 94.8%
Reported commission expense
ratio* 18.5% 17.0% 16.4% 14.5%
Written premium adjustment -
statutory only NM NM NM 2.8
One-time item 0 0 0 0
Adjusted commission expense
ratio 18.5% 17.0% 16.4% 17.3%
Reported other expense ratio* 6.5% 8.2% 10.0% 9.8%
Written premium adjustment -
statutory only NM NM NM 1.9
One-time item 3.1 0 0 0
Adjusted other expense ratio 9.6% 8.2% 10.0% 11.7%
Reported statutory expense ratio* 25.0% 25.2% 26.4% 24.3%
Written premium adjustment -
statutory only NM NM NM 4.7
One-time item 3.1 0 0 0
Adjusted statutory expense ratio 28.1% 25.2% 26.4% 29.0%
GAAP combined ratio 96.6% 98.4% 95.1% 95.0%
9/30/2002 6/30/2002 3/31/2002
Premiums
Adjusted written premiums
(statutory) $637 $626 $621
Written premium adjustment -
statutory only 0 0 0
Reported written premiums
(statutory)* $637 $626 $621
Unearned premiums (27) (46) (60)
Earned premiums $610 $580 $561
Statutory combined ratio
Reported statutory combined
ratio* 97.4% 107.2% 96.3%
Written premium adjustment -
statutory only 0.0 0.0 0.0
One-time item
Adjusted statutory combined
ratio 97.4% 107.2% 96.3%
Catastrophe losses (0.8) (8.1) (2.6)
Adjusted statutory combined ratio
excluding catastrophe losses 96.6% 99.1% 93.7%
Reported commission expense
ratio* 17.5% 16.1% 15.5%
Written premium adjustment -
statutory only 0.0 0.0 0.0
One-time item 0 0 0
Adjusted commission expense
ratio 17.5% 16.1% 15.5%
Reported other expense ratio* 9.9% 9.2% 9.6%
Written premium adjustment -
statutory only 0.0 0.0 0.0
One-time item 0 0 0
Adjusted other expense ratio 9.9% 9.2% 9.6%
Reported statutory expense ratio* 27.4% 25.3% 25.1%
Written premium adjustment -
statutory only 0.0 0.0 0.0
One-time item 0 0 0
Adjusted statutory expense ratio 27.4% 25.3% 25.1%
GAAP combined ratio 97.4% 108.1% 98.8%
Six months ended Nine months ended
6/30/2003 6/30/2002 9/30/2003 9/30/2002
Premiums
Adjusted written premiums
(statutory) $1,376 $1,247 $2,090 $1,884
Written premium adjustment -
statutory only 37 0 46 0
Reported written premiums
(statutory)* $1,413 $1,247 $2,136 $1,884
Unearned premiums (127) (106) (173) (133)
Earned premiums $1,286 $1,141 $1,963 $1,751
Statutory combined ratio
Reported statutory combined
ratio* 95.7% 101.9% 96.0% 100.3%
Written premium adjustment -
statutory only NM 0.0 NM 0.0
One-time item 1.1
Adjusted statutory combined
ratio 95.7% 101.9% 97.1% 100.3%
Catastrophe losses (3.8) (5.4) (4.6) (3.8)
Adjusted statutory combined
ratio excluding catastrophe
losses 91.9% 96.5% 92.4% 96.5%
Reported commission expense
ratio* 16.7% 15.8% 17.3% 16.4%
Written premium adjustment -
statutory only NM 0.0 NM 0.0
One-time item 0 0 0 0
Adjusted commission expense
ratio 16.7% 15.8% 17.3% 16.4%
Reported other expense ratio* 9.0% 9.5% 8.1% 9.6%
Written premium adjustment -
statutory only NM 0.0 NM 0.0
One-time item 0 0 1.1 0
Adjusted other expense ratio 9.0% 9.5% 9.2% 9.6%
Reported statutory expense ratio* 25.7% 25.3% 25.5% 26.0%
Written premium adjustment -
statutory only NM 0.0 NM 0.0
One-time item 0 0 1.1 0
Adjusted statutory expense ratio 25.7% 25.3% 26.6% 26.0%
GAAP combined ratio 96.8% 103.6% 96.7% 101.4%
Twelve months ended
12/31/2002
Premiums
Adjusted written premiums
(statutory) $2,496
Written premium adjustment -
statutory only 117
Reported written premiums
(statutory)* $2,613
Unearned premiums (220)
Earned premiums $2,393
Statutory combined ratio
Reported statutory combined
ratio* 98.4%
Written premium adjustment -
statutory only 1.2
One-time item
Adjusted statutory combined
ratio 99.6%
Catastrophe losses (3.6)
Adjusted statutory combined
ratio excluding catastrophe
losses 96.0%
Reported commission expense
ratio* 15.9%
Written premium adjustment -
statutory only 0.8
One-time item 0
Adjusted commission expense
ratio 16.7%
Reported other expense ratio* 9.6%
Written premium adjustment -
statutory only 0.4
One-time item 0
Adjusted other expense ratio 10.0%
Reported statutory expense ratio* 25.5%
Written premium adjustment -
statutory only 1.2
One-time item 0
Adjusted statutory expense ratio 26.7%
GAAP combined ratio 99.7%
Dollar amounts shown are rounded to millions; certain amounts may not add
due to rounding. Ratios are calculated based on whole dollar amounts. The
sum of quarterly amounts may not equal the full year as each is computed
independently.
NM - Not meaningful
* Statutory data prepared in accordance with statutory accounting rules
as defined by the National Association of Insurance Commissioners and
filed with the appropriate regulatory bodies.
Cincinnati Insurance Group
Quarterly Property Casualty Data - Commercial Lines
Quarters ended
(Dollars in millions)
9/30/2003 6/30/2003 3/31/2003 12/31/2002
Premiums
Adjusted written premiums
(statutory) $499 $496 $506 $443
Written premium adjustment -
statutory only 8 12 18 109
Reported written premiums
(statutory)* $507 $507 $526 $552
Unearned premiums (19) (37) (74) (84)
Earned premiums $488 $470 $452 $468
Statutory combined ratio
Reported statutory combined
ratio* 91.9% 91.9% 90.3% 91.9%
Written premium adjustment -
statutory only NM NM NM 5.8
One-time item 2.9 0 0 0
Adjusted statutory
combined ratio 94.7% 91.9% 90.3% 97.7%
Catastrophe losses (2.0) (2.9) (1.0) (1.3)
Adjusted statutory combined
ratio excluding
catastrophe losses 92.7% 89.0% 89.3% 96.4%
GAAP combined ratio (commercial
lines) 92.1% 91.4% 93.2% 91.7%
9/30/2002 6/30/2002 3/31/2002
Premiums
Adjusted written premiums
(statutory) $441 $438 $474
Written premium adjustment -
statutory only 0 0 0
Reported written premiums
(statutory)* $441 $438 $474
Unearned premiums (1) (23) (74)
Earned premiums $440 $415 $400
Statutory combined ratio
Reported statutory combined
ratio* 94.7% 102.3% 93.2%
Written premium adjustment -
statutory only 0 0 0
One-time item 0 0 0
Adjusted statutory combined ratio 94.7% 102.3% 93.2%
Catastrophe losses (1.3) (5.6) (1.2)
Adjusted statutory combined
ratio excluding
catastrophe losses 93.4% 96.7% 92.0%
GAAP combined ratio (commercial
lines) 94.9% 103.3% 95.8%
Six months ended Nine months ended
6/30/2003 6/30/2002 9/30/2003 9/30/2002
Premiums
Adjusted written premiums
(statutory) $1,003 $912 $1,502 $1,353
Written premium adjustment -
statutory only 30 0 38 0
Reported written premiums
(statutory)* $1,033 $912 $1,540 $1,353
Unearned premiums (111) (97) (130) (98)
Earned premiums $922 $815 $1,410 $1,255
Statutory combined ratio
Reported statutory
combined ratio* 91.1% 97.8% 91.4% 96.6%
Written premium adjustment -
statutory only NM 0 NM 0
One-time item 0 0 0.9 0
Adjusted statutory
combined ratio 91.1% 97.8% 92.3% 96.6%
Catastrophe losses (2.0) (3.4) (2.0) (2.7)
Adjusted statutory combined
ratio excluding
catastrophe losses 89.1% 94.4% 90.3% 93.9%
GAAP combined ratio
(commercial lines) 92.3% 99.6% 92.2% 98.0%
Twelve months ended
12/31/2002
Premiums
Adjusted written premiums
(statutory) $1,796
Written premium adjustment -
statutory only 109
Reported written premiums
(statutory)* $1,905
Unearned premiums (182)
Earned premiums $1,723
Statutory combined ratio
Reported statutory combined
ratio* 95.3%
Written premium adjustment -
statutory only 1.5
One-time item 0
Adjusted statutory combined
ratio 96.8%
Catastrophe losses (2.3)
Adjusted statutory combined
ratio excluding
catastrophe losses 94.5%
GAAP combined ratio
(commercial lines) 96.3%
Dollar amounts shown are rounded to millions; certain amounts may not
add due to rounding. Ratios are calculated based on whole dollar
amounts. The sum of quarterly amounts may not equal the full year as
each is computed independently.
NM - Not meaningful
* Statutory data prepared in accordance with statutory accounting
rules as defined by the National Association of Insurance
Commissioners and filed with the appropriate regulatory bodies.
Cincinnati Insurance Group
Quarterly Property Casualty Data - Personal Lines
(Dollars in millions)
Quarters ended
9/30/2003 6/30/2003 3/31/2003 12/31/2002
Premiums
Adjusted written premiums
(statutory) $215 $212 $161 $169
Written premium adjustment --
statutory only 1 7 0 8
Reported written premiums
(statutory)* $216 $219 $161 $177
Unearned premiums (26) (35) 18 (3)
Earned premiums $190 $184 $179 $174
Statutory combined ratio
Reported statutory
combined ratio* 108.1% 115.2% 99.5% 97.9%
Written premium adjustment --
statutory only NM NM NM 1.3
One-time item 3.8 0 0 0
Adjusted statutory
combined ratio 111.9% 115.2% 99.5% 99.2%
Catastrophe losses (16.6) (17.8) 1.3 (8.6)
Adjusted statutory
combined ratio excluding
catastrophe losses 95.3% 97.4% 100.8% 90.6%
GAAP combined ratio (personal
lines) 108.4% 116.1% 99.9% 98.8%
9/30/2002 6/30/2002 3/31/2002
Premiums
Adjusted written premiums
(statutory) $196 $188 $147
Written premium adjustment --
statutory only 0 0 0
Reported written premiums
(statutory)* $196 $188 $147
Unearned premiums (26) (23) 14
Earned premiums $170 $165 $161
Statutory combined ratio
Reported statutory
combined ratio* 104.5% 119.8% 104.9%
Written premium adjustment --
statutory only 0 0 0
One-time item 0 0 0
Adjusted statutory combined ratio 104.5% 119.8% 104.9%
Catastrophe losses 0.6 (14.5) (6.0)
Adjusted statutory combined
ratio excluding catastrophe losses 105.1% 105.3% 98.9%
GAAP combined ratio (personal
lines) 104.0% 120.2% 106.3%
(Dollars in millions) Six months ended Nine months ended
6/30/2003 9/30/2002 6/30/2002 9/30/2003
Premiums
Adjusted written premiums
(statutory) $373 $335 $588 $531
Written premium adjustment --
statutory only 7 0 8 0
Reported written premiums
(statutory)* $380 $335 $596 $531
Unearned premiums (16) (9) (43) (35)
Earned premiums $364 $326 $553 $496
Statutory combined ratio
Reported statutory
combined ratio* 107.2% 112.2% 107.5% 109.6%
Written premium adjustment --
statutory only NM 0 NM 0
One-time item 0 0 1.4 0
Adjusted statutory
combined ratio 107.2% 112.2% 108.9% 109.6%
Catastrophe losses (8.4) (10.3) (11.2) (6.6)
Adjusted statutory combined
ratio excluding
catastrophe losses 98.8% 101.9% 97.7% 103.0%
GAAP combined ratio
(personal lines) 108.1% 113.3% 108.2% 110.1%
(Dollars in millions) Twelve months ended
12/31/2002
Premiums
Adjusted written premiums
(statutory) $700
Written premium adjustment --
statutory only 8
Reported written premiums
(statutory)* $708
Unearned premiums (38)
Earned premiums $670
Statutory combined ratio
Reported statutory combined
ratio* 106.5%
Written premium adjustment --
statutory only 0.3
One-time item 0
Adjusted statutory combined
ratio 106.8%
Catastrophe losses (7.1)
Adjusted statutory combined
ratio excluding
catastrophe losses 99.7%
GAAP combined ratio (personal
lines) 107.2%
Dollar amounts shown are rounded to millions; certain amounts may not
add due to rounding. Ratios are calculated based on whole dollar amounts.
The sum of quarterly amounts may not equal the full year as each is
computed independently.
NM - Not meaningful
* Statutory data prepared in accordance with statutory accounting
rules as defined by the National Association of Insurance Commissioners
and filed with the appropriate regulatory bodies.
SOURCE Cincinnati Financial Corporation
-0- 10/28/2003
/CONTACT: Investor - Heather J. Wietzel, +1-513-603-5236, Media - Joan O.
Shevchik, +1-513-603-5323, both of Cincinnati Financial Corporation/
/Web site: http://www.cinfin.com /
(CINF)
CO: Cincinnati Financial Corporation
ST: Ohio
IN: FIN INS
SU: ERN CCA MAV ERP
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