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Cincinnati Financial Reports Fourth-Quarter and Full-Year 2013 Results

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CINCINNATI, Feb. 5, 2014 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:

  • Fourth-quarter 2013 net income of $122 million, or 74 cents per share, compared with $192 million, or $1.17 per share, in the fourth quarter of 2012.
  • Full-year 2013 net income of $517 million, or $3.12 per share, up 23 percent from $421 million, or $2.57, in 2012. Operating income of $463 million, or $2.80 per share, up 18 percent from $393 million, or $2.40 per share.
  • $70 million decrease in fourth-quarter 2013 net income reflected the after-tax net effect of two primary items: $65 million decrease in the contribution from property casualty underwriting - primarily due to less benefit from favorable prior accident year reserve development – and a $6 million decrease from net realized investment gains.
  • $37.21 book value per share at December 31, 2013, up 11.1 percent from December 31, 2012.
  • 16.1 percent value creation ratio for full-year 2013, compared with 12.6 percent for 2012.

(Logo: http://photos.prnewswire.com/prnh/20110824/CL57087LOGO )

 

Financial Highlights


(In millions except per share data)

Three months ended December 31,

Twelve months ended December 31,



2013


2012


% Change


2013


2012


% Change

Revenue Data













   Earned premiums


$

1,025



$

917



12


$

3,902



$

3,522



11

   Investment income, pretax


137



136



1


529



531



0

   Total revenues


1,172



1,070



10


4,531



4,111



10

Income Statement Data













   Net income


$

122



$

192



(36)


$

517



$

421



23

   Net realized investment gains and losses


3



9



(67)


54



28



93

   Operating income*


$

119



$

183



(35)


$

463



$

393



18

Per Share Data (diluted)













   Net income


$

0.74



$

1.17



(37)


$

3.12



$

2.57



21

   Net realized investment gains and losses


0.02



0.06



(67)


0.32



0.17



88

   Operating income*


$

0.72



$

1.11



(35)


$

2.80



$

2.40



17














   Book value








$

37.21



$

33.48



11

   Cash dividend declared


$

0.42



$

0.4075



3


$

1.655



$

1.62



2

   Weighted average shares outstanding


165.7



164.2



1


165.4



163.7



1



*

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

**   

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

 

Insurance Operations Fourth-Quarter Highlights

  • 93.9 percent fourth-quarter 2013 property casualty combined ratio, up from 81.9 percent for fourth-quarter 2012. Full-year 2013 property casualty combined ratio at 93.8%, with a 12 percent increase in net written premiums.
  • 8 percent increase in fourth-quarter net written premiums, reflecting higher pricing and growth initiatives.
  • $128 million fourth-quarter 2013 property casualty new business written premiums. Agencies appointed since the beginning of 2012 contributed $15 million or 12 percent to total fourth-quarter new business written premiums.
  • 6 cents per share contribution from life insurance operating income to fourth-quarter results, up 1 cent from 2012.

Investment and Balance Sheet Highlights

  • 1 percent or $1 million rise in fourth-quarter 2013 pretax investment income, including a 3 percent increase in stock portfolio dividends.
  • 8 percent full-year rise in fair value of invested assets plus cash at December 31, 2013, including a 28 percent increase for the stock portfolio and a 1 percent increase for the bond portfolio.
  • $1.532 billion parent company cash and marketable securities at year-end 2013, up 33 percent from a year ago.

Achieving Planned Results     
Steven J. Johnston, president and chief executive officer, commented: "Steady growth and improved core underwriting profitability of our insurance business contributed to full-year operating income of $463 million, our best result since 2007. Consolidated direct written premiums passed the $4.3 billion mark, on a pace to reach $5 billion by the end of 2015.

"Our long-term investment approach again produced satisfactory results. Pretax investment income rose to $137 million for the quarter, up slightly from last year's fourth quarter when we benefited from dividend acceleration."

Focusing on Underwriting Profitability
"Our ongoing initiatives to improve property casualty underwriting gained momentum in 2013, assisted by lower-than-average catastrophe losses. Our fourth-quarter and full-year combined ratios both came in at below 94 percent, a healthy result. While we continue to follow our consistent and prudent reserving approach, this quarter didn't have the benefit we had in last year's fourth quarter from high favorable development of reserves. Core underwriting improved substantially, as indicated by 4.0 percentage points of ratio improvement for full-year 2013 loss and loss expenses before catastrophe losses and reserve development for prior accident years.

"Double-digit growth of renewal premiums led the way to strong net written premium growth in 2013, and our agents provided another record year of new business. We successfully maintained commercial lines price increases averaging in the mid-single-digit range in the fourth-quarter and throughout 2013. Use of data analytics and modeling continue to increase our pricing precision and our confidence that we know the appropriate price for each piece of business when competing for accounts. We also have an advantage in our three-year commercial package policy, which reduces administrative burdens for agents and policyholders and supports stable commercial lines pricing.

"Our personal lines operation continues to make progress, producing a satisfactory 96.8 percent 2013 combined ratio. We are seeing benefits roll on from ongoing initiatives to increase our agency representation, geographic diversification and rate adequacy. Personal lines earned premiums in our smaller premium volume states, including several we've targeted for growth due to less catastrophe exposure, in aggregate rose 17 percent for the year, compared with a 6 percent increase in our four highest volume states."

Maintaining Our Momentum
"The positive results we're seeing now reflect diligent execution of deliberate growth and profitability strategies, and we expect further benefits to accrue over time.

"Looking out to the future, we have invested in associates with specialized knowledge in loss control and claims management, launching a robust program of property inspections. This effort benefits policyholders by identifying opportunities to prevent losses, while also identifying risk characteristics that increase the accuracy of our pricing matrix. We are ramping up inspections and internal expertise again in 2014.

"Using the same proven approach that improved results in our workers' compensation and property lines of business in 2012 and 2013, multi-departmental task forces are taking a deep dive into areas where there is room to realize additional benefits. These initiatives have a long runway, and we believe they'll strengthen our future performance."

Confidence in the Future
"Our $13.5 billion investment portfolio, with over 30 percent in stocks, is also well positioned to perform over the long term. In 2013, the portfolio's fair value rose 8 percent, with pretax unrealized gains rising 25 percent to $2.3 billion. Our value creation ratio of 16.1 percent outpaced our target range of averaging 10 to 13 percent over any five-year period. Working together, we are executing on our plans to deliver a great insurance experience to agents and policyholders and to deliver solid rewards for our shareholders, such as the 11 percent rise in book value during 2013 to $37.21 and dividend payments that have increased annually for 53 consecutive years."

 

Insurance Operations Highlights

Consolidated Property Casualty Insurance Operations


(In millions)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


% Change


2013


2012


% Change

Earned premiums


$

960



$

869



10


$

3,713



$

3,344



11

Fee revenues


1



2



(50)


4



6



(33)

   Total revenues


961



871



10


3,717



3,350



11














Loss and loss expenses


601



433



39


2,301



2,137



8

Underwriting expenses


300



278



8


1,183



1,076



10

   Underwriting profit


$

60



$

160



(63)


$

233



$

137



70














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Loss and loss expenses


62.6

%


49.9

%


12.7


61.9

%


63.9

%


(2.0)

   Underwriting expenses


31.3



32.0



(0.7)


31.9



32.2



(0.3)

      Combined ratio


93.9

%


81.9

%


12.0


93.8

%


96.1

%


(2.3)




















% Change






% Change

Agency renewal written premiums


$

854



$

771



11


$

3,493



$

3,138



11

Agency new business written premiums


128



132



(3)


543



501



8

Other written premiums


(74)



(66)



(12)


(143)



(157)



9

   Net written premiums


$

908



$

837



8


$

3,893



$

3,482



12














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Current accident year before catastrophe losses


59.9

%


59.0

%


0.9


60.6

%


64.6

%


(4.0)

   Current accident year catastrophe losses


3.5



3.4



0.1


5.4



11.1



(5.7)

   Prior accident years before catastrophe losses


(0.5)



(12.5)



12.0


(3.3)



(10.7)



7.4

   Prior accident years catastrophe losses


(0.3)



0.0



(0.3)


(0.8)



(1.1)



0.3

      Loss and loss expense ratio


62.6

%


49.9

%


12.7


61.9

%


63.9

%


(2.0)














Current accident year combined ratio before













catastrophe losses


91.2

%


91.0

%


0.2


92.5

%


96.8

%


(4.3)














 

  • 8 percent and 12 percent growth in fourth-quarter and full-year 2013 property casualty net written premiums. Full‑year renewal written premiums increase of 11 percent reflects higher pricing and premium growth initiatives.
  • $42 million increase to a record high $543 million in 2013 new business written by agencies. $31 million of the increase was from standard market property casualty new business produced by agencies appointed since the beginning of 2012 and $7 million from appointments before that, in addition to $4 million from excess and surplus lines.
  • 1,450 agency relationships in 1,823 reporting locations marketing standard market property casualty insurance products at December 31, 2013, compared with 1,408 agency relationships in 1,758 reporting locations at year‑end 2012. During 2013, 96 new agency appointments were made.
  • 12.0 percentage-point rise in fourth-quarter 2013 combined ratio, reflecting an 11.5 point difference between estimates of incurred but not reported (IBNR) losses and loss expenses for the two time periods.
  • 2.3 percentage-point full-year combined ratio improvement. Benefits from natural catastrophe losses that were 5.4 points lower, better pricing and other underwriting and loss cost management efforts were partially offset by a 4.7 percentage-point increase from higher estimates of IBNR for noncatastrophe losses and loss expenses.
  • 4.0 percentage-point improvement, to 60.6 percent, for full-year ratio of 2013 accident year losses and loss expenses before catastrophes.
  • 0.8 and 4.1 percentage-point fourth-quarter and full-year 2013 benefit from favorable prior accident year reserve development of $8 million and $148 million, compared with 12.5 points and 11.8 points from $109 million and $396 million of development for the same periods of 2012. The lower fourth-quarter and full-year favorable reserve development was primarily due to higher estimates of IBNR losses and loss expenses in longer-tail lines of business.
  • Slightly lower fourth-quarter and full-year underwriting expense ratios, largely reflecting expense management efforts and higher earned premiums. 

 

Commercial Lines Insurance Operations


(In millions)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


% Change


2013


2012


% Change

Earned premiums


$

680



$

618



10


$

2,636



$

2,383



11

Fee revenues


1



2



(50)


3



4



(25)

   Total revenues


681



620



10


2,639



2,387



11














Loss and loss expenses


411



307



34


1,596



1,420



12

Underwriting expenses


219



206



6


857



786



9

   Underwriting profit


$

51



$

107



(52)


$

186



$

181



3














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Loss and loss expenses


60.4

%


49.7

%


10.7


60.5

%


59.5

%


1.0

   Underwriting expenses


32.3



33.2



(0.9)


32.5



33.0



(0.5)

      Combined ratio


92.7

%


82.9

%


9.8


93.0

%


92.5

%


0.5




















% Change






% Change

Agency renewal written premiums


$

606



$

549



10


$

2,471



$

2,229



11

Agency new business written premiums


92



96



(4)


391



352



11

Other written premiums


(63)



(57)



(11)


(102)



(122)



16

   Net written premiums


$

635



$

588



8


$

2,760



$

2,459



12














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Current accident year before catastrophe losses


58.8

%


59.1

%


(0.3)


59.8

%


62.9

%


(3.1)

   Current accident year catastrophe losses


2.3



3.0



(0.7)


4.3



8.9



(4.6)

   Prior accident years before catastrophe losses


(0.1)



(12.5)



12.4


(3.0)



(11.6)



8.6

   Prior accident years catastrophe losses


(0.6)



0.1



(0.7)


(0.6)



(0.7)



0.1

      Loss and loss expense ratio


60.4

%


49.7

%


10.7


60.5

%


59.5

%


1.0














Current accident year combined ratio before













catastrophe losses


91.1

%


92.3

%


(1.2)


92.3

%


95.9

%


(3.6)














 

  • 8 percent and 12 percent growth in fourth-quarter and full-year 2013 commercial lines net written premiums, primarily due to higher renewal written premiums that reflect higher pricing and the effect of premium growth initiatives.
  • $57 million and $242 million increase in fourth-quarter and full-year renewal written premiums, reflecting fourth‑quarter and full-year 2013 commercial lines pricing changes that increased on average in a mid-single-digit range in addition to rising insured exposures.
  • $39 million rise in full-year new business written by agencies, reflecting recent-year growth initiatives, with double‑digit growth in 17 of the 39 states where we offer standard market commercial lines policies.
  • 9.8 percentage-point rise in fourth-quarter 2013 combined ratio, reflecting an 8.5 point increase from higher estimates of IBNR losses and loss expenses.
  • 0.5 percentage-point rise in full-year combined ratio, as a 4.5 point improvement from lower natural catastrophe losses was offset by a 6.4 point increase from higher estimates of IBNR for noncatastrophe losses and loss expenses.
  • 3.1 percentage-point improvement, to 59.8 percent, for full-year ratio of 2013 accident year losses and loss expenses before catastrophes. Better pricing and ongoing effects from other recent-year claims and loss control initiatives drove the improvement.
  • 0.7 and 3.6 percentage-point fourth-quarter and full-year 2013 benefit from favorable prior accident year reserve development of $5 million and $96 million, compared with 12.4 points and 12.3 points from $76 million and $292 million of development for the same periods of 2012.

 

Personal Lines Insurance Operations


(In millions)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


% Change


2013


2012


% Change

Earned premiums


$

249



$

226



10


$

961



$

868



11

Fee revenues






nm


1



2



(50)

   Total revenues


249



226



10


962



870



11














Loss and loss expenses


177



116



53


639



652



(2)

Underwriting expenses


72



64



13


290



261



11

   Underwriting profit (loss)


$

0



$

46



nm


$

33



$

(43)



nm














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Loss and loss expenses


71.4

%


51.5

%


19.9


66.6

%


75.2

%


(8.6)

   Underwriting expenses


28.9



28.5



0.4


30.2



30.1



0.1

      Combined ratio


100.3

%


80.0

%


20.3


96.8

%


105.3

%


(8.5)




















% Change






% Change

Agency renewal written premiums


$

224



$

203



10


$

928



$

836



11

Agency new business written premiums


24



27



(11)


110



111



(1)

Other written premiums


(9)



(8)



(13)


(33)



(29)



(14)

   Net written premiums


$

239



$

222



8


$

1,005



$

918



9














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Current accident year before catastrophe losses


62.6

%


59.4

%


3.2


61.9

%


68.2

%


(6.3)

   Current accident year catastrophe losses


7.4



4.6



2.8


8.8



18.4



(9.6)

   Prior accident years before catastrophe losses


1.1



(12.3)



13.4


(3.0)



(8.9)



5.9

   Prior accident years catastrophe losses


0.3



(0.2)



0.5


(1.1)



(2.5)



1.4

      Loss and loss expense ratio


71.4

%


51.5

%


19.9


66.6

%


75.2

%


(8.6)














Current accident year combined ratio before













catastrophe losses


91.5

%


87.9

%


3.6


92.1

%


98.3

%


(6.2)














 

  • 8 percent and 9 percent growth in fourth-quarter and full-year 2013 personal lines net written premiums, driven by increases in renewal written premiums.
  • 6 percent increase in full-year 2013 earned premiums in aggregate from our four highest volume states where we offer personal lines policies, while rising 17 percent for all other states in aggregate as we progress toward geographic diversification.
  • 1 percent reduction in full-year 2013 new business written premium, declining as expected due to underwriting actions such as expanded use of higher deductibles and actual cash value loss settlement for older roofs. 
  • 20.3 percentage-point rise in fourth-quarter 2013 combined ratio, reflecting a 19.0 point increase from higher estimates of IBNR losses and loss expenses.
  • 8.5 percentage-point full-year combined ratio improvement, including 8.2 points from lower natural catastrophe losses.
  • 6.3 percentage-point improvement, to 61.9 percent, for full-year ratio of 2013 accident year losses and loss expenses before catastrophes, reflecting better pricing and ongoing effects from other recent-year initiatives, in addition to a 2.1 point reduction in the ratio for new losses of $250,000 or more per claim.
  • 1.4 percentage-point fourth-quarter unfavorable effect from prior accident year reserve development of $3 million, driven by loss expenses, compared with 12.5 points from $29 million of favorable development for the fourth quarter of 2012. 4.1 percentage-point full-year 2013 benefit from favorable development of $39 million, compared with 11.4 points from $99 million of development for 2012, as 2013 ratios were higher for both IBNR and case‑basis experience for individual claims. 

 

Excess and Surplus Lines Insurance Operations


(In millions)


Three months ended December 31,


Twelve months ended December 31,


2013


2012


% Change


2013


2012


% Change

Earned premiums


$

31



$

25



24


$

116



$

93



25














Loss and loss expenses


13



10



30


66



65



2

Underwriting expenses


9



8



13


36



29



24

   Underwriting profit (loss)


$

9



$

7



29


$

14



$

(1)



nm














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Loss and loss expenses


41.0

%


38.2

%


2.8


56.7

%


69.4

%


(12.7)

   Underwriting expenses


29.4



33.3



(3.9)


31.1



31.6



(0.5)

      Combined ratio


70.4

%


71.5

%


(1.1)


87.8

%


101.0

%


(13.2)




















% Change






% Change

Agency renewal written premiums


$

24



$

19



26


$

94



$

73



29

Agency new business written premiums


12



9



33


42



38



11

Other written premiums


(2)



(1)



(100)


(8)



(6)



(33)

   Net written premiums


$

34



$

27



26


$

128



$

105



22














Ratios as a percent of earned premiums:






Pt. Change






Pt. Change

   Current accident year before catastrophe losses


62.6

%


52.3

%


10.3


67.1

%


72.8

%


(5.7)

   Current accident year catastrophe losses


(1.9)



1.4



(3.3)


0.7



2.1



(1.4)

   Prior accident years before catastrophe losses


(19.9)



(15.3)



(4.6)


(11.2)



(5.6)



(5.6)

   Prior accident years catastrophe losses


0.2



(0.2)



0.4


0.1



0.1



0.0

      Loss and loss expense ratio


41.0

%


38.2

%


2.8


56.7

%


69.4

%


(12.7)














Current accident year combined ratio before













catastrophe losses


92.0

%


85.6

%


6.4


98.2

%


104.4

%


(6.2)














 

  • 26 percent and 22 percent growth in fourth-quarter and full-year 2013 excess and surplus lines net written premiums, largely due to the opportunity to renew many accounts for the first time. Also contributing to growth were average full-year renewal price increases in a high-single-digit range.
  • 11 percent increase in full-year 2013 new business written premiums, reflecting the benefit of additional excess and surplus lines field marketing representatives.
  • 13.2 percentage-point combined ratio improvement for full-year 2013, largely due to lower current accident year losses and loss expenses before catastrophe losses and a larger benefit from favorable prior accident year reserve development.
  • 5.7 percentage-point improvement, to 67.1 percent, for full-year ratio of 2013 accident year losses and loss expenses before catastrophes, including a 3.3 point reduction in the 2013 ratio for new losses of $250,000 or more per claim.

 

Life Insurance Operations


(In millions)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


% Change


2013


2012


% Change

Term life insurance


$

30



$

29



3


$

122



$

115



6

Universal life insurance


27



12



125


35



34



3

Other life insurance, annuity, and disability income

products


8



7



14


32



29



10

   Earned premiums


65



48



35


189



178



6

Investment income, net of expenses


36



35



3


140



138



1

Other income


1





nm


4



1



300

   Total revenues, excluding realized investment gains

   and losses


102



83



23


333



317



5

Contract holders' benefits


63



49



29


204



185



10

Operating expenses incurred


24



20



20


60



79



(24)

   Total benefits and expenses


87



69



26


264



264



0

Net income before income tax and realized

investment gains and losses


15



14



7


69



53



30

Income tax


6



5



20


25



19



32

Net income before realized investment gains

and losses


$

9



$

9



0


$

44



$

34



29














 

  • $11 million or 6 percent increase in full-year 2013 earned premiums, including a 6 percent increase for term life insurance, our largest life insurance product line. Fourth-quarter 2013 universal life insurance premiums rose due to unlocking of actuarial assumptions that increased the amortization of unearned front-end loads, with a corresponding increase to operating expenses as less expenses were deferred to future periods.
  • $11 million decline to $38 million in full-year 2013 fixed annuity deposits received, slowing as planned. Cincinnati Life does not offer variable or indexed products.
  • $10 million increase in full-year 2013 profit, primarily due to more favorable mortality experience and lower operating expenses as first-quarter 2012 included an actuarial adjustment that decreased reinsurance-related expenses deferred to future periods.
  • $24 million or 3 percent full-year 2013 decline to $833 million in GAAP shareholders' equity for The Cincinnati Life Insurance Company, reflecting a decrease in fair value of the fixed-maturity portfolio due to a rise in interest rates.

 

Investment Operations Highlights


(In millions)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


% Change


2013


2012


% Change

Total investment income, net of expenses, pretax


$

137



$

136



1


$

529



$

531



0

Investment interest credited to contract holders


(20)



(20)



0


(80)



(82)



2

Realized investment gains and losses summary:













   Realized investment gains and losses


4



14



(71)


82



74



11

   Change in fair value of securities with embedded

   derivatives


2





nm


3



1



200

   Other-than-temporary impairment charges




(1)



100


(2)



(33)



94

      Total realized investment gains and losses


6



13



(54)


83



42



98

Investment operations profit


$

123



$

129



(5)


$

532



$

491



8














Investment income:













   Interest


$

104



$

103



1


$

413



$

420



(2)

   Dividends


35



34



3


122



115



6

   Other


1





nm


3



3



0

   Investment expenses


(3)



(1)



(200)


(9)



(7)



29

      Total investment income, net of expenses, pretax


137



136



1


529



531



0

      Income taxes


(33)



(33)



0


(128)



(129)



1

      Total investment income, net of expenses, after-tax


$

104



$

103



1


$

401



$

402



0














      Effective tax rate


23.9

%


23.7

%




24.1

%


24.2

%
















      Average invested assets plus cash and cash 

      equivalents


$

13,290



$

12,108





$

12,833



$

11,847

















      Average yield pretax


4.12

%


4.49

%




4.12

%


4.48

%



      Average yield after-tax


3.13



3.40





3.12



3.39




   Effective fixed-maturity tax rate


27.2



26.9





27.1



26.9

















   Average fixed-maturity at amortized cost


$

8,595



$

8,228





$

8,455



$

8,153

















   Average fixed-maturity yield pretax


4.84

%


5.01

%




4.88

%


5.15

%



   Average fixed-maturity yield after-tax


3.52



3.66





3.56



3.77

















 

  • 1 percent rise in fourth-quarter 2013 investment income, as continued dividend growth was accompanied by modest interest income growth. 4.12 percent fourth-quarter 2013 pretax average yield matched third-quarter 2013. 
  • $460 million or 25 percent full-year 2013 net increase in pretax unrealized investment portfolio gains, including an $849 million increase for the equity portfolio. $76 million of pretax net realized gains were from investment portfolio security sales or called bonds during 2013, including $64 million from the equity portfolio.

 

Balance Sheet Highlights


(In millions except per share data)


At December 31,


At December 31,



2013


2012

Balance sheet data:





   Invested assets


$

13,564



$

12,534


   Total assets


17,662



16,548


   Short-term debt


104



104


   Long-term debt


790



790


   Shareholders' equity


6,070



5,453


   Book value per share


37.21



33.48


   Debt-to-total-capital ratio


12.8

%


14.1

%

 

  • $13.997 billion in consolidated cash and invested assets at December 31, 2013, up 7 percent from $13.021 billion at year-end 2012.
  • 1 million shares repurchased during the fourth quarter of 2013, at an average cost of $52.13.
  • $9.169 billion bond portfolio at December 31, 2013, with an average rating of A2/A. Fair value increased $131 million or 1 percent during the fourth quarter of 2013.
  • $4.327 billion equity portfolio was 31.9 percent of invested assets, including $1.854 billion in pretax net unrealized gains at December 31, 2013. $343 million or 9 percent fourth-quarter 2013 growth in fair value.
  • $4.326 billion of statutory surplus for the property casualty insurance group at December 31, 2013, up $412 million from $3.914 billion at year-end 2012, after declaring $375 million in dividends to the parent company. The ratio of net written premiums to property casualty statutory surplus for the 12 months ended December 31, 2013, was 0.9-to-1, unchanged from year-end 2012.
  • Value creation ratio of 16.1 percent for full-year 2013 included 8.5 percent from net income before net realized investment gains and 6.4 percent from investment portfolio realized gains and changes in unrealized gains.

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

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







Mailing Address:

Street Address:



P.O. Box 145496

6200 South Gilmore Road



Cincinnati, Ohio 45250-5496

Fairfield, Ohio 45014-5141





Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2012 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 26.

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

Further, the company's insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

* * *

 

Cincinnati Financial Corporation
Condensed Consolidated Balance Sheets (unaudited)


(In millions except per share data)


December 31,


December 31,



2013


2012

ASSETS





   Investments





      Fixed maturities, at fair value (amortized cost: 2013—$8,688; 2012—$8,222)


$

9,169



$

9,093


      Equity securities, at fair value (cost: 2013—$2,473; 2012—$2,369)


4,327



3,373


      Other invested assets


68



68


         Total investments


13,564



12,534


   Cash and cash equivalents


433



487


   Investment income receivable


121



115


   Finance receivable


85



75


   Premiums receivable


1,346



1,214


   Reinsurance recoverable


547



615


   Prepaid reinsurance premiums


26



26


   Deferred policy acquisition costs


565



470


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

      2013—$420; 2012—$397)


210



217


   Other assets


73



61


   Separate accounts


692



734


      Total assets


$

17,662



$

16,548


LIABILITIES





   Insurance reserves





      Loss and loss expense reserves


$

4,311



$

4,230


      Life policy and investment contract reserves


2,390



2,295


   Unearned premiums


1,976



1,792


   Other liabilities


611



660


   Deferred income tax


673



453


   Note payable


104



104


   Long-term debt and capital lease obligations


835



827


   Separate accounts


692



734


      Total liabilities


11,592



11,095







SHAREHOLDERS' EQUITY





   Common stock, par value—$2 per share; (authorized: 2013 and 2012—500 million shares;

   issued and outstanding: 2013—198 million shares, 2012—197 million shares)


397



394


Paid-in capital


1,191



1,134


Retained earnings


4,268



4,021


Accumulated other comprehensive income


1,504



1,129


Treasury stock at cost (2013—35 million shares and 2012—34 million shares)


(1,290)



(1,225)


Total shareholders' equity


6,070



5,453


Total liabilities and shareholders' equity


$

17,662



$

16,548















 

Cincinnati Financial Corporation
Condensed Consolidated Statements of Income (unaudited)


(In millions except per share data)

Three months ended December 31,


Twelve months ended December 31,


2013


2012


2013


2012

REVENUES








   Earned premiums

$

1,025



$

917



$

3,902



$

3,522


   Investment income, net of expenses

137



136



529



531


   Realized investment gains and losses, net

6



13



83



42


   Fee revenues

2



3



8



7


   Other revenues

2



1



9



9


      Total revenues

1,172



1,070



4,531



4,111










BENEFITS AND EXPENSES








   Insurance losses and policyholder benefits

664



482



2,505



2,322


   Underwriting, acquisition and insurance expenses

324



298



1,243



1,155


   Interest expense

14



13



54



54


   Other operating expenses

3



4



15



14


      Total benefits and expenses

1,005



797



3,817



3,545










INCOME BEFORE INCOME TAXES

167



273



714



566










PROVISION FOR INCOME TAXES








   Current

41



59



178



119


   Deferred

4



22



19



26


      Total provision for income taxes

45



81



197



145










NET INCOME

$

122



$

192



$

517



$

421










PER COMMON SHARE:








   Net income—basic

$

0.75



$

1.18



$

3.16



$

2.59


   Net income—diluted

0.74



1.17



3.12



2.57



 

Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
(See attached tables for 2013 reconciliations; prior-period reconciliations available at cinfin.com/investors.)

Cincinnati Financial Corporation prepares its public financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual, and therefore is not reconciled to GAAP data.

Management uses certain non-GAAP and non-statutory financial measures to evaluate its primary business areas – property casualty insurance, life insurance and investments. Management uses these measures when analyzing both GAAP and non-GAAP measures to improve its understanding of trends in the underlying business and to help avoid incorrect or misleading assumptions and conclusions about the success or failure of company strategies. Management adjustments to GAAP measures generally: apply to non-recurring events that are unrelated to business performance and distort short-term results; involve values that fluctuate based on events outside of management's control; or relate to accounting refinements that affect comparability between periods, creating a need to analyze data on the same basis.

  • Operating income: Operating income is calculated by excluding net realized investment gains and losses (defined as realized investment gains and losses after applicable federal and state income taxes) from net income. Management evaluates operating income to measure the success of pricing, rate and underwriting strategies. While realized investment gains (or losses) are integral to the company's insurance operations over the long term, the determination to realize investment gains or losses in any period may be subject to management's discretion and is independent of the insurance underwriting process. Also, under applicable GAAP accounting requirements, gains and losses can be recognized from certain changes in market values of securities without actual realization. Management believes that the level of realized investment gains or losses for any particular period, while it may be material, may not fully indicate the performance of ongoing underlying business operations in that period.
    For these reasons, many investors and shareholders consider operating income to be one of the more meaningful measures for evaluating insurance company performance. Equity analysts who report on the insurance industry and the company generally focus on this metric in their analyses. The company presents operating income so that all investors have what management believes to be a useful supplement to GAAP information.
  • Value creation ratio: This is a measure of shareholder value creation that management believes captures the contribution of the company's insurance operations, the success of its investment strategy and the importance placed on paying cash dividends to shareholders. The value creation ratio measure is made up of two primary components: (1) rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. Management believes this non-GAAP measure is a useful supplement to GAAP information, providing a meaningful measure of long-term progress in creating shareholder value. It is intended to be all-inclusive regarding changes in book value per share, and uses originally reported book value per share in cases where book value per share has been adjusted, such as adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.
  • Statutory accounting rules: For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, insurers also must calculate certain data according to statutory accounting rules as defined in the NAIC's Accounting Practices and Procedures Manual, which may be, and has been, modified by various state insurance departments. Statutory data is publicly available, and various organizations use it to calculate aggregate industry data, study industry trends and compare insurance companies.
  • Written premium: Under statutory accounting rules, property casualty written premium is the amount recorded for policies issued and recognized on an annualized basis at the effective date of the policy. Management analyzes trends in written premium to assess business efforts. Earned premium, used in both statutory and GAAP accounting, is calculated ratably over the policy term. The difference between written and earned premium is unearned premium.

 

Cincinnati Financial Corporation

Balance Sheet Reconciliation


(Per share data)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


2013


2012

Book value change per share:









   Book value as originally reported December 31, 2011








$

31.16


   Cumulative effect of a change in accounting for deferred









   policy acquisition costs, net of tax








(0.13)


   Book value as adjusted December 31, 2011








$

31.03











Value creation per share data:









   End of period book value - as originally reported


$

37.21



$

33.48



$

37.21



$

33.48


   Less beginning of period book value - as originally reported


35.51



32.95



33.48



31.16


   Change in book value - as originally reported


1.70



0.53



3.73



2.32


   Dividend declared to shareholders


0.42



0.4075



1.655



1.62


   Total contribution to value creation ratio


$

2.12



$

0.9375



$

5.385



$

3.94











Contribution to value creation ratio:









From change in book value*


4.8

%


1.6

%


11.1

%


7.4

%

From dividends declared to shareholders**

1.2



1.2



5.0



5.2


Value creation ratio


6.0

%


2.8

%


16.1

%


12.6

%










*    Change in book value divided by the beginning of period book value as originally reported



**   Dividend declared to shareholders divided by beginning of period book value as originally reported



 

Net Income Reconciliation


(In millions except per share data)


Three months ended December 31,


Twelve months ended December 31,



2013


2012


2013


2012

   Net income


$

122



$

192



$

517



$

421


   Net realized investment gains and losses


3



9



54



28


   Operating income


119



183



463



393


   Less catastrophe losses


(20)



(19)



(112)



(217)


   Operating income before catastrophe losses


$

139



$

202



$

575



$

610











Diluted per share data:









   Net income


$

0.74



$

1.17



$

3.12



$

2.57


   Net realized investment gains and losses


0.02



0.06



0.32



0.17


   Operating income


0.72



1.11



2.80



2.40


   Less catastrophe losses


(0.12)



(0.12)



(0.67)



(1.33)


   Operating income before catastrophe losses


$

0.84



$

1.23



$

3.47



$

3.73











 

Cincinnati Financial Corporation

Property Casualty Operations Reconciliation


(In millions)


Three months ended December 31, 2013



Consolidated



Commercial



Personal



E&S


Premiums:













   Written premiums


$

908




$

635




$

239




$

34



   Unearned premiums change


52




45




10




(3)



   Earned premiums


$

960




$

680




$

249




$

31
















Statutory ratios:













   Statutory combined ratio


95.4

%



94.4

%



101.5

%



70.9

%


   Contribution from catastrophe losses


3.2




1.7




7.7




(1.7)



   Statutory combined ratio excluding catastrophe losses


92.2

%



92.7

%



93.8

%



72.6

%















   Commission expense ratio


19.5

%



19.1

%



19.5

%



25.9

%


   Other expense ratio


13.3




14.9




10.6




4.0



   Statutory expense ratio


32.8

%



34.0

%



30.1

%



29.9

%















GAAP ratio:













   GAAP combined ratio


93.9

%



92.7

%



100.3

%



70.4

%


   Contribution from catastrophe losses


3.2




1.7




7.7




(1.7)



   Prior accident years before catastrophe losses


(0.5)




(0.1)




1.1




(19.9)



   GAAP combined ratio excluding catastrophe losses and    prior













   years reserve development


91.2

%



91.1

%



91.5

%



92.0

%















(In millions)

Twelve months ended December 31, 2013


Consolidated

Commercial



Personal

E&S

Premiums:













   Written premiums


$

3,893




$

2,760




$

1,005




$

128



   Unearned premiums change


(180)




(124)




(44)




(12)



   Earned premiums


$

3,713




$

2,636




$

961




$

116
















Statutory ratios:













   Statutory combined ratio


92.7

%



91.8

%



96.3

%



87.8

%


   Contribution from catastrophe losses


4.6




3.7




7.7




0.8



   Statutory combined ratio excluding catastrophe losses


88.1

%



88.1

%



88.6

%



87.0

%















   Commission expense ratio


18.6

%



17.8

%



19.7

%



26.3

%


   Other expense ratio


12.2




13.5




10.0




4.8



   Statutory expense ratio


30.8

%



31.3

%



29.7

%



31.1

%















GAAP ratio:













   GAAP combined ratio


93.8

%



93.0

%



96.8

%



87.8

%


   Contribution from catastrophe losses


4.6




3.7




7.7




0.8



   Prior accident years before catastrophe losses


(3.3)




(3.0)




(3.0)




(11.2)



   GAAP combined ratio excluding catastrophe losses and prior













   years reserve development


92.5

%



92.3

%



92.1

%



98.2

%















 

 

SOURCE Cincinnati Financial Corporation



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