Cincinnati Financial Reports Third-Quarter 2011 Results

CINCINNATI, Oct. 27, 2011 /PRNewswire/ -- Cincinnati Financial Corporation (Nasdaq: CINF) today reported:

• $19 million, or 12 cents per share, of net income for the third quarter of 2011 compared with $156 million, or 95 cents net income per share, in the 2010 third quarter.
• Operating income* of $20 million, or 13 cents per share, compared with operating income of $56 million, or 34 cents.
• $137 million decrease in third-quarter 2011 net income driven by the after-tax effects of a $101 million decrease in net realized investment gains and a $34 million decrease in the contribution from property casualty underwriting operations. That contribution reflected previously announced third-quarter natural catastrophe losses totaling $60 million after taxes, up $42 million compared with the same period of 2010.
• $29.54 book value per share at September 30, 2011, down approximately 5 percent from June 30, 2011, and down 4 percent from December 31, 2010.
• Negative 0.5 percent value creation ratio for the first nine months of 2011, compared with 9.4 percent for the 2010 period.

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Insurance Operations Third-Quarter Highlights

• 110.6 percent third-quarter 2011 property casualty combined ratio, up from 103.9 percent from one year ago.
• 7 percent growth in property casualty net written premiums, up in all three of our property casualty segments.
• $115 million third-quarter 2011 property casualty new business written premiums, up 6 percent or $6 million, driven by a $10 million increase from agencies appointed since the beginning of 2010.
• 4 cents per share contribution from life insurance to third-quarter operating income, matching the year-ago amount.

Investment and Balance Sheet Highlights

• 2 percent third-quarter 2011 growth in pre-tax investment income reflecting higher interest income from a larger base of bond investments, partially offset by depressed yields in the bond market.  
• Less than 1 percent nine-month rise in fair value of invested assets at September 30, 2011, including third-quarter 2011 bond portfolio growth of 2 percent.
• $978 million parent company cash and marketable securities at September 30, 2011.
• $30 million third-quarter 2011 share repurchases at an average price of $26.03 per share.

* 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 Generally Accepted Accounting Principles.

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

Returning to Quarterly Operating Profit

Steven J. Johnston, president and chief executive officer, commented, "Cincinnati Financial's operating income edged back into positive territory for the third quarter, dampened by catastrophe losses above our historical average third-quarter level but well below the unprecedented second-quarter 2011 level. We believe operating income is a good barometer of a property casualty insurer's performance for a specific period, as it excludes realized capital gains and losses that are timed at our discretion and do not correlate with our underlying business performance in that period. Third-quarter comparisons of our 2011 and 2010 revenues and net income are skewed by the small capital loss realized this year versus the unusually high capital gains we harvested in last year's third quarter, when we chose to sell a single large investment holding after its successful initial public offering.

Driving Straight through the Storm

"At the nine-month mark, our bottom-line financial results are very disappointing. Yet we remain optimistic about the course we are setting for future periods. Operationally, we count many successes that should have positive impacts on future performance. While this year's storms have raised our activity and expense levels, we have satisfied policyholders by meeting the highest service standards in hard-hit areas such as Tuscaloosa, Joplin, Dayton and several eastern states battered by Hurricane Irene. We have supported long-term shareholder value by maintaining consistency in our reserve practices, capital management and dividend policies. And we have strengthened our independent agents' advantages by focusing on strategic initiatives to drive efficiency and profitable growth.  

"At 7 percent for the quarter and 4 percent for the nine months, our net written premium growth is all the more satisfying because premiums rose during both periods for total property casualty operations and also for each of the three property casualty segments. We continued to write new business at a good pace, including meaningful contributions from new agencies appointed in 2010 and 2011 to represent The Cincinnati Insurance Companies in new and established states. At the same time, we are careful to decline new business opportunities we consider to be underpriced.

"Renewal pricing continued to improve in our personal lines and excess and surplus lines segments. Average renewal pricing also turned slightly positive in our largest segment, commercial lines, as our recently expanded use of pricing analytics tools continue to drive targeted pricing improvements. Our agents and underwriters are enthusiastic about their increased ability, using these tools, to help align pricing decisions with risk quality and assure rate adequacy. We expect our data-driven, positive pricing trends to continue, regardless of any support that might come from changes in the competitive insurance marketplace.

"Initiatives to selectively expand our agency force and our commercial product portfolio are solidly on track. Most of our business lines are already profitable, including our largest commercial line of business, commercial casualty. Notable progress on initiatives to improve profitability in our more challenging lines of business supports our optimism. Our workers' compensation loss ratio continued to improve in the third quarter, counter to the industry trend. While we still have a long road to travel, we have come a good distance by improving pricing accuracy, implementing direct reporting of claims, improving our medical cost containment processes and capabilities, and adding specialized field claims and loss control associates to serve workers' compensation policyholders.

"A second challenge area, homeowners insurance, suffered this quarter and through nine months from catastrophes and non-catastrophe weather losses. We expect future benefits from current efforts to increase packaging of homeowner policies with auto policies, spread our catastrophe exposure, further refine our rate segmentation and implement targeted increases to achieve rate adequacy.

"Our excess and surplus lines operation, in its fourth year of operation, is another area of focus. Leveraging strong agency relationships to selectively write new business in a highly competitive market, this segment grew overall premiums and achieved a small underwriting profit for the third quarter and nine months. The third-quarter loss ratio improved significantly, even without the benefit from favorable reserve development.

Managing Portfolio Risk and Reward

"The 1 percent increase in nine-month pre-tax investment income was a satisfying result given the current low interest environment. Our equity investing strategy helped boost income, with the equity portfolio producing increased dividend income. With second- and third-quarter catastrophe claim payouts reducing new money available to invest, we caution that investment income growth will certainly be harder to achieve in the coming quarters.

"While the fair value of our total invested assets was slightly increased in 2011 through September 30, pre-tax unrealized gains in our equity portfolio were down 37 percent to $477 million on that date. Our equity portfolio is diversified by sector and issue; however, broad market drops or spikes can affect it. We have a substantial capital cushion and a buy-and-hold investment philosophy, and we monitor market variability to assure that we are balancing the risk and reward of equity investing within established tolerances. At September 30, our diversified bond portfolio, with its generally-laddered maturity profile, provided 132 percent coverage for our insurance liabilities.

"Our book value lost only 4 percent of its year-end 2010 value at September 30 of this year, although equity markets are under pressure and 2011 is on track to have double the catastrophe losses of any previous year in our 60-year history. We believe we are in position to restore and add to that value over the coming quarters, as we drive further progress on operational initiatives that have us headed in the right direction."

• $55 million or 7 percent increase in third-quarter 2011 property casualty net written premiums and nine-month growth of 4 percent. Solid growth for renewal and new business premiums was partially offset by ceded premiums to reinstate property catastrophe reinsurance coverage, $4 million for third quarter and $42 million for nine months.
• $6 million increase to $115 million third-quarter new business written by agencies, largely from recent-year growth initiatives, including $10 million of the increase from agencies appointed since the beginning of 2010.
• 1,298 agency relationships in 1,619 reporting locations marketing our standard market property casualty insurance products at September 30, 2011, compared with 1,245 agency relationships in 1,544 reporting locations at year-end 2010. One hundred-and-one new agencies were appointed during the first nine months of 2011.
• 6.7 and 12.1 percentage-point rise in the third-quarter and first-nine-months combined ratios primarily due to 8.2 and 12.4 point increases in natural catastrophe losses.
• 2.0 percentage-point rise over full-year 2010, to 75.6 percent, for nine-month 2011 ratio of accident year losses and loss expenses before catastrophes. Loss ratio improvements from better pricing were offset by the 1.4 point effect of reinsurance reinstatement ceded premiums and 1.3 points from higher new large losses, plus higher weather-related losses not part of an industry-designated catastrophe event.
• 8.8 percentage points third-quarter 2011 benefit from favorable prior accident year reserve development of $68 million, compared with 8.2 percent or $60 million for third-quarter 2010. 9.8 percent nine-month 2011 ratio was within the range of 2010's nine-month ratio of 7.9 percent and full-year of 10.3 percent.
• 0.8 and 0.9 percentage-point decline in the third-quarter and nine-month underwriting expense ratios, reflecting prudent expense management and higher earned premiums.  

The following table shows incurred catastrophe losses for 2011 and 2010.

• $36 million or 7 percent increase in third-quarter 2011 commercial lines net written premiums, reflecting growth in both renewal and new business written premiums. 3 percent increase in nine-month net written premiums also driven by renewal and new business premium growth, with a larger offsetting effect from second-quarter ceded premiums to reinstate property catastrophe reinsurance.
• $28 million and $45 million increases in third quarter and nine-month renewal written premiums largely reflected the effects of slowly improving economic conditions on insured exposure levels. Third-quarter 2011 commercial lines pricing changes on average were slightly positive, improved from a slightly negative level during the second quarter.  
• $7 million increase to $81 million in new business written premiums, rising in both newer and established states.
• 4.5 and 9.5 percentage-point rise in the third-quarter and nine-month combined ratios primarily due to 7.5 and 9.7 point increases in natural catastrophe losses.
• 1.2 percentage-point rise over full year 2010, to 75.7 percent, for nine-month 2011 ratio of accident year losses and loss expenses before catastrophes. Loss ratio improvements from better pricing were offset by the 1.1-point effect of reinsurance reinstatement ceded premiums and 1.9 points from higher new large losses, plus higher weather-related losses not part of an industry-designated catastrophe event.

• $14 million or 7 percent growth in third-quarter 2011 personal lines net written premiums and nine-month growth of 7 percent, as increases in renewal and new business written premiums for both periods more than offset $3 million and $18 million of ceded premiums for the three- and nine-month periods to reinstate property catastrophe reinsurance.
• 16.3 and 22.8 percentage-point rise in the third-quarter and nine-month combined ratios primarily due to 10.8- and 20.7- point increases in weather-related catastrophe losses plus lower earned premiums from reinstatement premiums.
• 4.8 percentage-point rise over full year 2010, to 75.2 percent, for nine-month 2011 ratio of accident year losses and loss expenses before catastrophes. Loss ratio improvements from better pricing were offset by the 2.4-point effect of reinsurance reinstatement ceded premiums and higher weather-related losses not part of an industry-designated catastrophe event, including 2.8 points alone from $16 million increase in homeowner wind, hail and lightning losses.
• 3.9 percentage-point improvement in the nine-month underwriting expense ratio was primarily due to higher first-quarter 2010 expenses from provisions for commitments and contingent liabilities.

• $5 million or 29 percent growth in third-quarter 2011 excess and surplus lines net written premiums and nine-month growth of 42 percent, largely driven by the opportunity to renew many accounts for the first time and average renewal price increases in a low- to mid-single-digit range.
• 10 percent decrease and 4 percent increase in new business written premiums for the third quarter and first nine months of 2011, reflecting careful underwriting in an increasingly competitive market.
• 36.2 and 32.4 percentage-point combined ratio improvements for third quarter and first nine months of 2011, primarily due to improved current accident year loss and loss expense ratios and net favorable reserve development on prior accident years.