Unassociated Document
United
States Securities and Exchange Commission
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For
the fiscal year ended December 31, 2009.
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the
transition period from _____________________ to
_____________________.
Commission
file number 0-4604
Cincinnati
Financial Corporation
(Exact
name of registrant as specified in its charter)
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Ohio
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31-0746871
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|
(State
of incorporation)
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|
(I.R.S.
Employer Identification No.)
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6200 S.
Gilmore Road
Fairfield,
Ohio 45014-5141
(Address
of principal executive offices) (Zip Code)
(513)
870-2000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
$2.00
par, common stock
(Title of
Class)
6.125%
Senior Notes due 2034
(Title of
Class)
6.9%
Senior Debentures due 2028
(Title of
Class)
6.92%
Senior Debentures due 2028
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 if Regulation S-T(§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer,” “accelerated filer" and
smaller reporting company in Rule
12b-2 of the Exchange Act.
(Check
one): Large accelerated filer þ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of voting stock held by nonaffiliates of the Registrant
was $3,277,671,038 as of June 30, 2009.
As of February
22, 2010, there were 162,926,458 shares of common stock
outstanding.
Document Incorporated by
Reference
Portions
of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual
Meeting of Shareholders to be held on May 1, 2010, are incorporated by
reference into Part III of this Form 10-K.
Part
I
Cincinnati
Financial Corporation – Introduction
We are an
Ohio corporation formed in 1968. Our lead subsidiary, The Cincinnati Insurance
Company, was founded in 1950. Our main business is property casualty insurance
marketed through independent insurance agents in 37 states. Our headquarters is
in Fairfield, Ohio. At year-end 2009, we employed 4,170 associates,
with 2,965 headquarters associates providing support to 1,205 field
associates.
At
year-end 2009, Cincinnati Financial Corporation owned 100 percent of three
subsidiaries: The Cincinnati Insurance Company, CSU Producer Resources Inc., and
CFC Investment Company. In addition, the parent company has an investment
portfolio, owns the headquarters property and is responsible for corporate
borrowings and shareholder dividends.
The
Cincinnati Insurance Company owns 100 percent of our four additional
insurance subsidiaries. Our standard market property casualty insurance group
includes two of those subsidiaries – The Cincinnati Casualty Company and The
Cincinnati Indemnity Company. This group writes a broad range of business,
homeowner and auto policies. Other subsidiaries of The Cincinnati Insurance
Company include The Cincinnati Life Insurance Company, which provides life
insurance, disability income policies and annuities, and The Cincinnati
Specialty Underwriters Insurance Company, which began offering excess and
surplus lines insurance products in January 2008.
The two
non-insurance subsidiaries of Cincinnati Financial are CSU Producer Resources,
which offers insurance brokerage services to our independent agencies so their
clients can access our excess and surplus lines insurance products; and CFC
Investment Company, which offers commercial leasing and financing services to
our agents, their clients and other customers.
Our
filings with the Securities and Exchange Commission are available, free of
charge, on our Web site, www.cinfin.com/investors, as
soon as possible after they have been filed with the SEC. These filings include
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934. In the following
pages we reference various Web sites. These Web sites, including our own, are
not incorporated by reference in this Annual Report on Form 10-K.
Periodically,
we refer to estimated industry data so that we can give information about our
performance versus the overall insurance industry. Unless otherwise noted, the
industry data is prepared by A.M. Best Co., a leading insurance
industry statistical, analytical and insurer financial strength and credit
rating organization. Information from A.M. Best is presented on a statutory
basis. When we provide our results on a comparable statutory basis, we label it
as such; all other company data is presented in accordance with accounting
principles generally accepted in the United States of America
(GAAP).
Our
Business and Our Strategy
Introduction
The
Cincinnati Insurance Company was founded 60 years ago by four independent
insurance agents. They established the mission that continues to guide all of
the companies in the Cincinnati Financial family – to grow profitably and
enhance the ability of local independent insurance agents to deliver quality
financial protection to the people and businesses they serve by:
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providing
market stability through financial
strength
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producing
competitive, up-to-date products and
services
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·
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developing
associates committed to superior
service
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A select
group of agencies in 37 states actively markets our property casualty insurance
within their communities. Standard market commercial lines policies
are marketed in all of those states, while personal lines policies are
marketed in 29 of those states. Excess and surplus lines policies are available
in 36 of those states. Within this select group, we also seek to become the life
insurance carrier of choice and to help agents and their clients – our
policyholders – by offering leasing and financing services.
Three
competitive advantages distinguish our company, positioning us to build
shareholder value and overall long-term success:
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Commitment
to our network of professional independent insurance agencies and to their
continued success
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·
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Financial
strength that lets us be a consistent market for our agents’ business,
supporting stability
and confidence
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·
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Operating
structure that supports local decision making, showcasing our claims
excellence and allowing us to balance growth with underwriting
discipline
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Independent
Insurance Agency Marketplace
The U.S.
property casualty insurance industry is a highly competitive marketplace with
over 2,000 stock and mutual companies operating independently or in groups. No
single company or group dominates across all product lines and states.
Standard market insurance companies (carriers) can market a broad array of
products nationally or:
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choose
to sell a limited product line or only one type of insurance (monoline
carrier)
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·
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target
a certain segment of the market (for example, personal
insurance)
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·
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focus
on one or more states or regions (regional
carrier)
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Standard
market property casualty insurers generally offer insurance products through one
or more distribution channels:
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·
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independent
agents, who represent multiple
carriers
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·
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captive
agents, who represent one carrier exclusively,
or
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·
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direct
marketing to consumers
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For the
most part, we compete with standard market insurance companies that market
through independent insurance agents. Agencies marketing our commercial lines
products typically represent six to 12 standard market insurance carriers for
commercial lines products, including both national and regional carriers, some
of which may be mutual companies. Our agencies typically represent four to six
standard personal lines carriers, and we also compete with carriers that market
personal lines products through captive agents and direct writers. Distribution
though independent insurance agents or brokers represents nearly 60 percent of
overall U.S. property casualty insurance premiums and approximately 80 percent
of commercial property casualty insurance premiums, according to studies by the
Independent Insurance Agents and Brokers of America.
We are
committed exclusively to the independent agency channel. The independent
agencies that we choose to market our standard lines insurance products share
our philosophies. They do business person to person; offer broad, value-added
services; maintain sound balance sheets; and manage their agencies
professionally. We develop our relationships with agencies that are active in
their local communities, providing important knowledge of local market trends,
opportunities and challenges.
In
addition to the standard market for property casualty insurance, the excess and
surplus lines market exists due to a regulatory distinction. Generally, excess
and surplus lines insurance carriers provide insurance that is unavailable in
the standard market due to market conditions or due to characteristics of the
insured person or organization that are caused by nature, the insured's claim
history or the characteristics of their business. Insurers operating in the
excess and surplus lines market generally market business through excess and
surplus lines insurance brokers, whether they are small specialty insurers or
specialized divisions of larger insurance organizations.
We opened
our own excess and surplus lines insurance brokerage firm so that we could offer
excess and surplus lines products exclusively to the independent agents who
market our other property casualty insurance products. We also market life
insurance products through the agencies that market our property casualty
products, and through other independent agencies that represent The Cincinnati
Life Insurance Company without also representing our other
subsidiaries.
At
year-end 2009, our 1,180 property casualty agency relationships were marketing
our standard market insurance products out of 1,463 reporting locations. An
increasing number of agencies have multiple, separately identifiable locations,
reflecting their growth and consolidation of ownership within the independent
agency marketplace. The number of reporting agency locations indicates our
agents’ regional scope and the extent of our presence within our 37 active
states. At year-end 2008, our 1,133 agency relationships had 1,387
reporting locations. At year-end 2007, our 1,092 agency relationships had
1,327 reporting locations.
On
average, we have an 11.1 percent share of the property casualty insurance
purchased through our reporting agency locations. Our share is 16.7 percent in
reporting agency locations that have represented us for more than 10 years;
5.9 percent in agencies that have represented us for five to 10 years;
3.9 percent in agencies that have represented us for one to five years; and
0.6 percent in agencies that have represented us for less than one
year.
Our
largest single agency relationship accounted for approximately 1.2 percent
of our total property casualty earned premiums in 2009. No aggregate locations
under a single ownership structure accounted for more than 2.2 percent of
our earned premiums in 2009.
Financial
Strength
We
believe that our financial strength and strong surplus position, reflected in
our insurer financial strength ratings, are clear, competitive advantages in the
segments of the insurance marketplace that we serve. This strength supports the
consistent, predictable performance that our policyholders, agents, associates
and shareholders have always expected and received, helping us withstand
significant challenges.
While the
prospect exists for short-term financial performance volatility due to our
exposures to potential catastrophes or significant capital market losses, the
ratings agencies consistently have asserted that we have built appropriate
financial strength and flexibility to manage that volatility. We remain
committed to strategies that emphasize being a consistent, stable market for our
agents’ business over short-term benefits that might accrue by quick,
opportunistic reaction to changes in market conditions.
At
year-end 2009 and 2008, risk-based capital (RBC) for our standard and excess and
surplus lines property casualty operations and life operations was very strong,
far exceeding regulatory requirements.
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·
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We
ended 2009 with a 0.8-to-1 ratio of property casualty premiums to surplus,
a key measure of property casualty insurance company capacity. Our ratio
gives us the flexibility to diversify risk by expanding our operations
into new geographies and product areas. The estimated industry average
ratio also was 0.8 to 1 for 2009. The lower the ratio, the
greater capacity an insurer has for
growth.
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·
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We
ended 2009 with a 16.3 percent ratio of life statutory adjusted risk-based
surplus to liabilities, a key measure of life insurance company capital
strength. The estimated industry average ratio was 10.0 percent for
2009. A higher ratio indicates an insurer’s stronger security for
policyholders and capacity to support
business growth.
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At December 31,
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(Dollars
in
millions) Statutory
Information |
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2009
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2008
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Standard
market property casualty insurance subsidiary
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Statutory
surplus
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$ |
3,648 |
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$ |
3,360 |
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Risk-based
capital (RBC)
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3,664 |
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3,389 |
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Authorized
control level risk-based capital
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437 |
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407 |
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Ratio
of risk-based capital to authorized control level risk-based
capital
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8.4 |
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8.3 |
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Written
premium to surplus ratio
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0.8 |
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0.9 |
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Life
insurance subsidiary
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Statutory
surplus
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$ |
300 |
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$ |
290 |
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Risk-based
capital (RBC)
|
|
|
316 |
|
|
|
290 |
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Authorized
control level risk-based capital
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|
|
40 |
|
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37 |
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Ratio
of risk-based capital to authorized control level risk-based
capital
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7.9 |
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7.8 |
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Total
liabilities excluding separate account business
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1,960 |
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1,640 |
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Life
statutory risk-based adjusted surplus to liabilities ratio
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16.3
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17.7
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Excess
and surplus insurance subsidiary
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Statutory
surplus
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$ |
168 |
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$ |
174 |
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Risk-based
capital (RBC)
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168 |
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|
|
174 |
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Authorized
control level risk-based capital
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8 |
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4 |
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Ratio
of risk-based capital to authorized control level risk-based
capital
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21.4 |
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39.7 |
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Written
premium to surplus ratio
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0.2 |
|
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0.1 |
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The
consolidated property casualty insurance group’s ratio of investments in common
stock to statutory surplus was 58.4 percent at year-end 2009 compared with
53.4 percent at year-end 2008. The life insurance company’s ratio was 32.2
percent compared with 39.2 percent a year ago.
Cincinnati
Financial Corporation’s senior debt is rated by four independent ratings firms.
In addition, the ratings firms award our property casualty and life operations
insurer financial strength ratings based on their quantitative and qualitative
analyses. These ratings assess an insurer’s ability to meet financial
obligations to policyholders and do not necessarily address all of the matters
that may be important to shareholders. Ratings may be subject to revision or
withdrawal at any time by the rating agency, and each rating should be evaluated
independently of any other rating.
All of
our insurance subsidiaries continue to be highly rated. During 2009, Fitch
Ratings lowered our ratings as described below. No other ratings agency actions
occurred during 2009.
As of
February 26, 2010, our credit and financial strength ratings were:
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Insurance
Financial Strength Ratings
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Rating
Agency
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Parent
Company
Senior Debt
Rating
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Standard Market Property
Casualty
Insurance
Subsidiaries
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Life
Insurance
Subsidiary
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Excess
and Surplus
Insurance
Subsidiary
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Status
(date)
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Rating Tier
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Rating Tier
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Rating Tier
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A.
M. Best Co.
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a
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A+
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Superior
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2
of 16
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A
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Excellent
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3
of 16
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A
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Excellent
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3
of 16
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Stable
outlook (2/18/10)
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Fitch
Ratings
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BBB+
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A+
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Strong
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5
of 21
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A+
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Strong
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5
of 21
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-
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-
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-
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Stable
outlook (8/6/09)
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Moody's
Investors Service
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A3
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A1
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Good
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5
of 21
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-
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-
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-
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-
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-
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-
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Stable
outlook (9/25/08)
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Standard
& Poor's
Ratings
Services
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BBB+
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A+
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Strong
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5
of 21
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A+
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Strong
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5
of 21
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-
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-
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-
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Negative
outlook
(06/30/08)
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On August
6, 2009, Fitch Ratings lowered our ratings and changed the rating outlook to
stable. Our parent company senior debt rating was lowered from A- to BBB+ and
our standard market property casualty subsidiaries’ insurance and life insurance
subsidiary financial strength ratings were lowered from AA- to A+. Fitch said
the rating action was primarily driven by our unfavorable property casualty
underwriting performance during 2008 and the first half of 2009. Fitch said it
viewed favorably our steps taken with our investment portfolio. Fitch also noted
our strong capitalization and low operating leverage. No other ratings
agency actions occurred during 2009.
On
February 18, 2010, A.M. Best affirmed our ratings that it had assigned in
December 2008, continuing its stable outlook. A.M. Best cited our superior
risk-adjusted capitalization, strong five-year average operating performance,
historically redundant reserves and successful distribution within our targeted
regional markets. A.M. Best noted that common stock leverage was approximately
50 percent of statutory surplus at year-end 2009, a concern offset by our
conservative underwriting and reserving philosophies, with loss reserves more
than fully covered by a highly rated, diversified bond portfolio.
Our debt
ratings are discussed in Item 7, Liquidity and Capital Resources, Additional
Sources of Liquidity, Page 69.
Operating
Structure
We offer
our broad array of insurance products through the independent agency channel. We
recognize that locally based independent agencies have relationships in their
communities and local marketplace intelligence that can lead to policyholder
satisfaction, loyalty and profitable business. We seek to be a consistent and
predictable property casualty carrier that agencies can rely on to serve their
clients. For our standard market business, field and headquarters underwriters
make risk-specific decisions about both new business and renewals.
In our 10
highest volume states for consolidated property casualty premiums, 933 reporting
agency locations wrote 68.1 percent of our 2009 consolidated property
casualty earned premium volume compared with 910 locations and 68.7 percent
in 2008.
Property
Casualty Insurance Earned Premiums by State
(Dollars in millions)
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Earned
premiums
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% of total
earned
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Agency
locations
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Average
premium per
location
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Year
ended December 31, 2009
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Ohio
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$ |
611 |
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21.0
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% |
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224 |
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$ |
2.7 |
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Illinois
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|
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253 |
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8.7 |
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119 |
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2.1 |
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Indiana
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|
201 |
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6.9 |
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|
104 |
|
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1.9 |
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Pennsylvania
|
|
|
174 |
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6.0 |
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|
82 |
|
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2.1 |
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Georgia
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148 |
|
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5.1 |
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|
71 |
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2.1 |
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North
Carolina
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|
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138 |
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4.8 |
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|
75 |
|
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1.8 |
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Michigan
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|
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129 |
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4.4 |
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|
|
109 |
|
|
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1.2 |
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Virginia
|
|
|
121 |
|
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4.2 |
|
|
|
60 |
|
|
|
2.0 |
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Wisconsin
|
|
|
103 |
|
|
|
3.5 |
|
|
|
49 |
|
|
|
2.1 |
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Kentucky
|
|
|
100 |
|
|
|
3.5 |
|
|
|
40 |
|
|
|
2.5 |
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
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Ohio
|
|
$ |
630 |
|
|
|
20.9
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% |
|
|
219 |
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|
$ |
2.9 |
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Illinois
|
|
|
270 |
|
|
|
9.0 |
|
|
|
119 |
|
|
|
2.3 |
|
Indiana
|
|
|
205 |
|
|
|
6.8 |
|
|
|
104 |
|
|
|
2.0 |
|
Pennsylvania
|
|
|
183 |
|
|
|
6.1 |
|
|
|
80 |
|
|
|
2.3 |
|
Georgia
|
|
|
150 |
|
|
|
5.0 |
|
|
|
68 |
|
|
|
2.2 |
|
North
Carolina
|
|
|
150 |
|
|
|
5.0 |
|
|
|
73 |
|
|
|
2.1 |
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Michigan
|
|
|
135 |
|
|
|
4.5 |
|
|
|
101 |
|
|
|
1.3 |
|
Virginia
|
|
|
131 |
|
|
|
4.4 |
|
|
|
58 |
|
|
|
2.3 |
|
Wisconsin
|
|
|
108 |
|
|
|
3.6 |
|
|
|
48 |
|
|
|
2.3 |
|
Tennessee
|
|
|
102 |
|
|
|
3.4 |
|
|
|
40 |
|
|
|
2.6 |
|
Field
Focus
We rely
on our field associates to provide service and be accountable to our agencies
for decisions we make at the local level. These associates live in the
communities our agents serve, working from offices in their homes and providing
24/7 availability to our agents. Headquarters associates also provide agencies
with underwriting, accounting and technology assistance and training. Company
executives, headquarters underwriters and special teams regularly travel to
visit agencies, strengthening the personal relationships we have with these
organizations. Agents have opportunities for direct, personal conversations with
our senior management team, and headquarters associates have opportunities to
refresh their knowledge of marketplace conditions and field
activities.
The field
team is coordinated by field marketing representatives responsible for
underwriting new commercial lines business. They are joined by field
representatives specializing in claims, loss control, personal lines, machinery
and equipment, bond, premium audit, life insurance and leasing. The field team
provides many services for agencies and policyholders; for example, our field
loss control representatives and others specializing in machinery and equipment
risks perform inspections and recommend specific actions to improve the safety
of the policyholder’s operations and the quality of the agent’s
account.
Agents
work with us to carefully select risks and assure pricing adequacy. They
appreciate the time our associates invest in creating solutions for their
clients while protecting profitability, whether that means working on an
individual case or customizing policy terms and conditions that preserve
flexibility, choice and other sales advantages. We seek to develop long-term
relationships by understanding the unique needs of their clients, who are also
our policyholders.
We also
are responsive to agent needs for well designed property casualty products. Our
commercial lines products are structured to allow flexible combinations of
property and liability coverages in a single package with a single expiration
date and several payment options. This approach brings policyholders
convenience, discounts and a reduced risk of coverage gaps or disputes. At the
same time, it increases account retention and saves time and expense for the
agency and our company.
We seek
to employ technology solutions and business process improvements
that:
|
·
|
allow
our field and headquarters associates to collaborate with each other and
with agencies more efficiently
|
|
·
|
provide
our agencies the ability to access our systems and client data to process
business transactions from their
offices
|
|
·
|
allow
policyholders to directly access pertinent policy information online in
order to further improve efficiency for our
agencies
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automate
our internal processes so our associates can spend more time serving
agents and policyholders, and
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reduce
duplicated effort, introducing more efficient processes that reduce
company and agency costs.
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Agencies
access our systems and other electronic services via their agency management
systems or CinciLink®, our
secure agency-only Web site. CinciLink provides an array of Web-based services
and content that makes doing business with us easier, such as commercial and
personal lines rating and processing systems, policy loss information, sales and
marketing materials, educational courses about our products and services,
accounting services, and electronic libraries for property and casualty coverage
forms and state rating manuals.
Superior
Claims Service
Our
claims philosophy reflects our belief that we will prosper as a company by
responding to claims person to person, paying covered claims promptly,
preventing false claims from unfairly adding to overall premiums and building
financial strength to meet future obligations.
Our 771
locally based field claims representatives work from their homes, assigned to
specific agencies. They respond personally to policyholders and claimants,
typically within 24 hours of receiving an agency’s claim report. We believe we
have a competitive advantage because of the person-to-person approach and the
resulting high level of service that our field claims representatives provide.
We also help our agencies provide prompt service to policyholders by giving
agencies authority to immediately pay most first-party claims under standard
market policies up to $2,500. We believe this same local approach to handling
claims is a competitive advantage for our agents providing excess and surplus
lines coverage in their communities. Handling of these claims includes guidance
from headquarters-based excess and surplus lines claims managers.
Our
property casualty claims operation uses CMS, our claims management system, to
streamline processes and achieve operational efficiencies. CMS allows field and
headquarters claims associates to collaborate on reported claims through a
virtual claim file. Our field claims representatives use tablet computers to
view and enter information into CMS from any location, including an insured’s
home or agent’s office, and to print claim checks using portable printers.
Agencies can also access selected CMS information such as activity notes on open
claims.
Catastrophe
response teams are comprised of volunteers from our experienced field claims
staff, and we give them the tools and authority they need to do their jobs. In
times of widespread loss, our field claims representatives confidently and
quickly resolve claims, often writing checks on the same day they inspect the
loss. CMS introduced new efficiencies that are especially evident during
catastrophes. Electronic claim files allow for fast initial contact of
policyholders and easy sharing of information and data by rotating storm teams,
headquarters and local field claims representatives. When hurricanes or other
weather events are predicted, we can choose to have catastrophe response team
members travel to strategic locations near the expected impact area. They are in
position to quickly get to the affected area, set up temporary offices and start
calling on policyholders.
Our
claims associates work to control costs where appropriate. They use vendor
resources that provide negotiated pricing to our insureds and claimants. Our
field claims representatives also are educated continuously on new techniques
and repair trends. They can leverage their local knowledge and experience with
area body shops, which helps them negotiate the right price with any facility
the policyholder chooses.
We staff
a Special Investigations Unit (SIU) with former law enforcement and claims
professionals whose qualifications make them uniquely suited to gathering facts
to uncover potential fraud. While we believe our job is to pay what is due under
each policy contract, we also want to prevent false claims from unfairly
increasing overall premiums. Our SIU also operates a computer forensic lab,
using sophisticated software to recover data and mitigate the cost of
computer-related claims for business interruption and loss of
records.
Loss
and Loss Expense Reserves
When
claims are made by or against policyholders, any amounts that our property
casualty operations pay or expect to pay for covered claims are losses. The
costs we incur in investigating, resolving and processing these claims are loss
expenses. Our consolidated financial statements include property casualty loss
and loss expense reserves that estimate the costs of not-yet-paid claims
incurred through December 31 of each year. The reserves include estimates for
claims that have been reported to us plus our estimates for claims that have
been incurred but not yet reported (IBNR), along with our estimate for loss
expenses associated with processing and settling those claims. We develop the
various estimates based on individual claim evaluations and statistical
projections. We reduce the loss reserves by an estimate for the amount of
salvage and subrogation we expect to recover. We encourage you to review several
sections of the Management’s Discussion and Analysis where we discuss our loss
reserves in greater depth. In Item 7, Critical Accounting Estimates, Property
Casualty Insurance Loss and Loss Expense Reserves, Page 38, we discuss our
process for analyzing potential losses and establishing reserves. In Item 7,
Property Casualty Loss and Loss Expense Obligations and Reserves, Page 71, and
Life Insurance Policyholder Obligations and Reserves, Page 78, we review reserve
levels, including 10-year development of our property casualty
loss reserves.
Insurance
Products
We
actively market property casualty insurance in 37 states through a select group
of independent insurance agencies. Our standard market commercial lines products
are marketed in all of those states while our standard market personal lines
products are marketed in 29. We discuss our commercial lines and personal lines
insurance operations and products in Commercial Lines Property Casualty
Insurance Segment, Page 12, and Personal Lines Property Casualty Insurance
Segment, Page 15. At year-end 2009, CSU Producer Resources marketed our
excess and surplus lines products to agencies in 36 states that represent
Cincinnati Insurance.
The
Cincinnati Specialty Underwriters Insurance Company began excess and surplus
lines insurance operations in January 2008. We structured this operation to
exclusively serve the needs of the independent agencies that currently market
our standard market insurance policies. When all or a portion of a current or
potential client’s insurance program requires excess and surplus lines
coverages, those agencies can write the whole account with Cincinnati, gaining
benefits not often found in the broader excess and surplus lines market.
Agencies have access to The Cincinnati Specialty Underwriters Insurance
Company’s product line through CSU Producer Resources Inc., the wholly owned
insurance brokerage subsidiary of parent-company Cincinnati Financial
Corporation.
Cincinnati
Specialty Underwriters and CSU Producer Resources employ a Web-based policy
administration system to quote, bind, issue and deliver policies electronically
to agents. This system also provides integration to existing document management
and data management systems, allowing for straight-through processing of
policies and billing.
We also
support the independent agencies affiliated with our property casualty
operations in their programs to sell life insurance. The products offered by our
life insurance subsidiary round out and protect accounts and improve account
persistency. At the same time, our life operation increases diversification of
revenue and profitability sources for both the agency and our
company.
Our
property casualty agencies make up the main distribution system for our life
insurance products. To help build scale, we also develop life business from
other independent life insurance agencies in geographic markets underserved
through our property casualty agencies. We are careful to solicit business from
these other agencies in a manner that does not compete with the life insurance
marketing and sales efforts of our property casualty agencies. Our life
insurance operation emphasizes up-to-date products, responsive underwriting,
high quality service and competitive pricing.
Other
Services to Agencies
We
complement the insurance operations by providing products and services that help
attract and retain high-quality independent insurance agencies. When we appoint
agencies, we look for organizations with knowledgeable, professional staffs. In
turn, we make an exceptionally strong commitment to assist them in keeping their
knowledge up to date and educating new people they bring on board as they grow.
Numerous activities fulfill this commitment at our headquarters, in regional and
agency locations and online.
Except
travel-related expenses for classes held at our headquarters, most programs are
offered at no cost to our agencies. While that approach may be extraordinary in
our industry today, the result is quality service for our policyholders and
increased success for our independent agencies.
In
addition to broad education and training support, we make non-insurance
financial services available through CFC Investment Company. CFC Investment
Company offers equipment and vehicle leases and loans for independent insurance
agencies, their commercial clients and other businesses. It also provides
commercial real estate loans to help agencies operate and expand their
businesses. We believe that providing these services enhances agency
relationships with the company and their clients, increasing loyalty while
diversifying the agency’s revenues.
Strategic
Initiatives
Management
has identified strategies that can position us for long-term success. The board
of directors and management believe that execution of our strategic plan will
create significant value for shareholders over time. We broadly group these
strategies into three areas of focus – managing capital effectively, improving
insurance profitability and driving premium growth – correlating with the
primary ways we measure our progress toward our long-term financial objectives.
Our strategies are intended to position us to compete successfully in the
markets we have targeted while seeking to optimize the balance of risk and
returns. We believe successful implementation of the initiatives that support
our strategies will help us better serve our agent customers, reduce volatility
in our financial results and achieve our long-term objectives despite
shorter-term effects of difficult economic, market or pricing cycles. We
describe our expectations for the results of these initiatives in Item 7,
Executive Summary of the Management’s Discussion and Analysis,
Page 34.
Manage
Capital Effectively
Our first
strategy is a continuing focus on managing capital effectively. This strategy
serves as a foundation supporting other strategies focused on profitably growing
our insurance business, with the overall objective of building capital for the
long-term benefit of shareholders. Implementation of the initiatives below that
support our capital management strategy is intended to preserve our capital
while maintaining appropriate liquidity. A strong capital position provides the
capacity to support premium growth and liquidity provides for our investment in
the people and infrastructure needed to implement our other strategic
initiatives. Our strong capital and liquidity also provide financial flexibility
for shareholder dividends or other capital management actions.
The
primary capital management initiatives are:
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Maintain
a diversified investment portfolio by reviewing and applying
diversification parameters and tolerances – We discuss our portfolio
strategies in greater depth in Investments Segment, Page
18.
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High-quality
fixed-maturity portfolio that exceeds total insurance reserves – At
year-end 2009, the average rating of the $7.855 billion fixed maturity
portfolio was A2/A. The risk of potential decline of capital due to lower
bond values during periods of increasing interest rates is managed in part
through a generally laddered maturity schedule for this portfolio, as
approximately 28 percent will mature in the next five years. The portfolio
value exceeded total insurance reserve liability by 32.6 percent. In
addition, we have assets in the form of receivables from reinsurers, most
with A.M. Best insurer financial strength ratings of A or better. These
assets directly related to insurance reserves, offsetting over 10 percent
of that liability.
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Diversified
equity portfolio that has no concentrated positions in single stocks or
industries – At year-end 2009, no single security accounted for more
than 5.8 percent of our portfolio of publicly traded common stocks, and no
single sector accounted for more than 18.0 percent. Because of the
strength of our fixed-maturity portfolio, we have the opportunity to
invest for potential capital appreciation by purchasing equity securities.
We seek to achieve a total return on the equity portfolio over any
five-year period that exceeds that of the Standard & Poor’s 500 Index
while taking similar or less risk.
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Parent
company liquidity that increases our flexibility through all periods to
maintain our cash dividend and to continue to invest in and expand
our insurance operations – At year-end 2009, we held
$1.040 billion of our cash and invested assets at the parent company
level, of which $683 million, or 65.7 percent, was invested in
common stocks, and $54 million, or 5.2 percent, was cash or
cash equivalents.
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Develop
a comprehensive, enterprise-level catastrophe management program –
Weather-related catastrophe losses for our property casualty business can
significantly affect capital and cause earnings volatility. Key objectives
of a comprehensive program include identifying an overall tolerance for
catastrophe risk as well as regional guidelines that work with our
underwriting and reinsurance efforts. An important element of this
initiative continues to be obtaining reinsurance from highly rated
reinsurers to mitigate underwriting risk and to support our ability to
hold investments until maturity. See Item 7, 2010 Reinsurance Programs,
Page 79, for additional details on these
programs.
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Minimize
reliance on debt as a source of capital, maintaining the ratio of
debt-to-total capital below 20 percent – This target is higher than
we had identified prior to 2008 because total capital declined in 2008
although debt levels were essentially unchanged. At year-end 2009, this
ratio was 15.0 percent compared with 16.7 percent at year-end 2008
and 12.7 percent at year-end 2007. Our long-term debt consists of three
non-convertible, non-callable debentures, two due in 2028 and one
in 2034.
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Identify
tolerances for other operational risks and calibrate management decisions
accordingly – Among the areas of focus during 2009 was exposure to risks
related to disaster recovery and business continuity. We completed a
conversion to a new information technology back-up data center and
continued work to address the risks associated with a concentration of
support operations at our headquarters location. Our enterprise risk
management efforts also include evaluating emerging risks such as
potential changes in regulation at both the state and federal levels and
the potential effects of increased inflation on assets and
liabilities.
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We
measure the overall success of our strategy to effectively manage capital
primarily by growing investment income and by achieving over any five-year
period a total return on our equity investment portfolio that exceeds the
Standard & Poor’s 500’s return. Investment income grew at a compound annual
rate of 0.3 percent over the five years ended December 31, 2009. It grew during
2005 through 2007, then declined during 2008 and 2009 when we experienced a
dramatic reduction in dividends from financial services companies held in our
equity portfolio, a risk we addressed aggressively during 2008 and early 2009.
Over the five years ended December 31, 2009, our compound annual equity
portfolio return was negative 5.8 percent compared with a compound annual total
return of 0.4 percent for the S&P 500 Index. Our equity portfolio
underperformed the market for the five-year period primarily because of the
decline in the market value of Fifth Third Bancorp (NASDAQ: FITB), our largest
holding for most of the period. We have not owned any shares of Fifth Third
common stock since early 2009.
We also
monitor other measures. One of the most significant is our ratio of property
casualty net written premiums to statutory surplus, which was 0.8-to-1 at
year-end 2009 compared with 0.9-to-1 at year-end 2008 and 0.7-to-1 at year-end
2007. This ratio is a common measure of operating leverage used in the property
casualty industry; the lower the ratio the more capacity a company has for
premium growth. The estimated property casualty industry net written premium to
statutory surplus ratio also was 0.8-to-1 at year-end 2009, 0.9-to-1 at year-end
2008 and 0.8-to-1 at year-end 2007.
Our
second means of verifying our capital preservation strategy is our financial
strength ratings as discussed in Our Business and Our Strategy, Page 1. All of
our insurance subsidiaries continue to be highly rated. A third means is
measurement of our risk-based capital ratios, which currently indicate that our
insurance subsidiaries are operating with a level of capital far exceeding
regulatory requirements.
Improve
Insurance Profitability
Our
second strategy is to improve insurance profitability. Implementation of the
operational initiatives below is intended to improve pricing capabilities for
our property casualty business and improve our efficiency. Improved pricing
helps us manage profit margins and greater efficiency helps control costs,
together improving overall profitability. These initiatives also seek to help
the agencies that represent us to grow profitably by allowing them to serve
clients faster and manage expenses better. The primary initiatives to improve
insurance profitability are:
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Improve
underwriting expertise – While most of our lines of business have
maintained underwriting profitability, we must continue to improve our
capabilities in risk selection and pricing. For the lines of business that
are underperforming or that involve larger or more complex risks, we take
a comprehensive approach – with collaborative expertise among associates
from underwriting, claims, loss control, marketing, actuarial services and
premium audit – to work toward restoring underwriting profitability.
Specific initiatives that are key to improving profitability are
summarized below.
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Improve
pricing capabilities in each line of business – Predictive modeling tools
that better align individual insurance policy pricing to risk attributes
and claims practices are already in use for our homeowner and workers’
compensation lines of business. We are developing predictive models for
all major lines of commercial insurance and for our personal auto line of
business. Predictive modeling tools increase pricing precision so we can
more effectively evaluate and appropriately price insured risks, improving
our ability to compete for the most desirable business within our
agencies. Use of our predictive modeling tool for workers’ compensation
began in 2009 and is anticipated to meaningfully improve the loss
ratio for this line of business over time. During 2009 we began using an
enhanced version of predictive modeling for our homeowner line of
business, helping to further improve our rate and credit structures for
attracting and retaining more accounts with the best prospects of
long-term profitability. Our efforts to better match insured risks with
appropriate policy pricing are expected to improve overall underwriting
profitability for our property casualty
business.
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Improving
our business data, supporting accurate underwriting, pricing and decisions
– Over the next several years, we will deploy a full data management
program, including a data warehouse for our property casualty and life
insurance operations that will provide enhanced granularity of pricing
data. This is a phased, long-term project that is currently in
progress.
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Improve
expense management to make the best use of our resources – During 2009, we
have invested in technology and workflow improvements that will help us
improve efficiency and grow our business, when insurance market conditions
improve, without proportional increases in expenses. Through careful
allocation of staff, we have added associates in areas of strategic
significance while realizing efficiencies in other areas, resulting in a
slight reduction in the overall number of associates during 2009. We
continue to work toward improving efficiency through efforts such as
studies of transactional workflows and development of an energy efficiency
plan for our headquarters
buildings.
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Develop
and deploy technology plans – Technology continues to be key for improving
efficiencies and streamlining processes for our agencies, allowing us to
win an increasing share of their most profitable business. We will
continue to integrate solutions across business lines to make it easier
for agents to do business with us and to maximize product cross-serving
while reducing duplication of effort. Our technology initiatives serve to
enhance our tradition of local decision making based on the local
knowledge and risk selection expertise we derive from our agents and from
having a large network of field representatives who live and work in our
agents’ communities. Ongoing technology development contributes to
improved profitability by enhancing internal efficiency and the
organization of business data used for underwriting and pricing.
Technology development and deployment will reflect our vision of the
services that our agents will need in the short and long terms. These
technology solutions will be prioritized to optimize their delivery.
Progress during 2009 and future plans for major technology
initiatives are highlighted below.
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Commercial
lines policy administration system – In the fourth quarter of 2009, we
deployed a new system called e-CLAS®
CPP for commercial package and auto coverages to all of our appointed
agencies in 11 states. Those states produce approximately 55 percent of
our commercial premium volume. We plan to deploy the system to as many as
19 additional states in 2010. The new system includes real-time quoting
and policy issuance, direct bill capabilities with several payment plans,
and interface capabilities to transfer selected policy data from agency
management systems. We believe the new system will further improve our
position among the go-to carriers for our agencies, having a positive
impact on future growth of profitable commercial lines
business.
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Personal
lines policy administration system – During 2009, we developed the next
version of this system, Diamond 5.x, and moved our personal lines policy
processing system to this next generation platform in early 2010. The
Web-based system supports agency efficiency through pre-filling of
selected policy data and easy-to-use screens. We continue to focus on
making it easier for our agents to do business with us, which we
believe will significantly benefit our objective of writing their highest
quality accounts with superior profit
margins.
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We
measure the overall success of our strategy to improve insurance profitability
primarily through our GAAP combined ratio, which we believe can be
consistently below 100 percent over any five-year period.
In
addition, we expect these initiatives to contribute to our rank as the No. 1 or
No. 2 carrier based on premium volume in agencies that have represented us for
at least five years. In 2009, we again earned that rank in more than 75 percent
of the agencies that have represented Cincinnati Insurance for more than
five years, based on 2008 premiums. We are working to increase the
percentage of agencies where we have achieved that rank.
Drive
Premium Growth
Our third
strategy is to drive premium growth. Implementation of the operational
initiatives below is intended to expand our geographic footprint and diversify
our premium sources to obtain profitable growth without significant
infrastructure expense. Diversified growth may also reduce our catastrophe
exposure risk and temper negative changes that may occur in the economic,
judicial or regulatory environments in the territories we serve.
The
primary initiatives to drive premium growth are:
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New
agency appointments in 2010 – We continue to appoint new agencies in our
current operating territories, adding 87 in 2009. Our objective is to
appoint additional points of distribution, focusing on markets where our
market share is less than 1 percent while also considering economic and
catastrophe risk factors. In 2010, we are targeting 65 appointments
of independent agencies writing an aggregate $1 billion in property
casualty premiums annually with all carriers they
represent.
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In
measuring progress toward achieving this initiative, we include appointment of
new agency relationships with Cincinnati. For those that we believe will produce
a meaningful amount of new business premiums, we also include appointment
of agencies that merge with a Cincinnati agency and new branch offices opened by
existing Cincinnati agencies. We made 87, 76 and 66 new appointments in
2009, 2008 and 2007, respectively. Of these new appointments,
65, 52 and 50, respectively, were new relationships. These new
appointments and other changes in agency structures led to a net increase in
reporting agency locations of 76 in 2009, 60 in 2008 and 38 in 2007. We seek to
build a close, long-term relationship with each agency we appoint. We carefully
evaluate the marketing reach of each new appointment to ensure the territory can
support both current and new agencies.
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Earn
a larger share of business with currently appointed agents – We will
continue to execute on growth initiatives from prior years and will focus
on the key components of agent satisfaction based on factors agents find
most important. This will include measurements to identify key factors and
gauge progress in our performance for delivering
satisfaction.
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Deploy
new products and service enhancements that address agents’ needs – In
addition to meeting the needs of our agents and their clients, new product
development will target markets with above-average profitability to reduce
market-cycle volatility. This initiative will expand beyond the specialty
package options currently offered through our commercial lines operation,
with a focus on identifying promising classes of business and increasing
our product advantages and product
support.
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New
states – With our entry into Colorado and Wyoming during 2009 and Texas in
late 2008, Cincinnati Insurance now is actively marketing our policies in
37 states, expanding our opportunities beyond the Midwest and South. We
now have a growing presence in the western states — opening New Mexico and
eastern Washington in 2007, Utah in 2000, Idaho in 1999 and Montana in
1998. We entered Arizona in 1971. While we continually study the
regulatory and competitive environment in other states where we could
decide to actively market our property casualty products, we have not
announced specifics regarding entry into new
states.
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We
generally are able to earn a 10 percent share of an agency’s business within 10
years of its appointment. We also help our agents grow their business by
attracting more clients in their communities through the unique style of service
we offer. In New Mexico and eastern Washington, we’ve appointed 13 agencies
since early 2007 that currently write about $260 million annually with all
the carriers they represent. During 2009, our written premiums with agencies in
these two new states totaled almost 5 percent of that total agency annual
premium volume. In Texas, where we made 20 agency appointments through the year,
those agencies wrote over $10 million of Cincinnati Insurance premiums in
2009. By mid 2010, we expect to have appointed Texas agencies that currently
write a total of about $750 million in premiums annually with all carriers
they represent, an indication of strong potential for future premium
growth.
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Excess
& Surplus lines insurance – Another source of premium growth is our
excess and surplus lines operation with products available in 37 states.
We entered this market in 2008 to better serve agents of The Cincinnati
Insurance Companies®,
initially offering general liability coverage. Today, those agents write
about $2.5 billion annually of surplus lines business with other carriers.
We plan to earn a profitable share by bringing Cincinnati-style service to
agents and policyholders. In late 2008, we expanded product offerings
beyond the general liability, adding property and professional liability
lines of businesses. In late 2009, we began offering excess casualty
coverage. During 2009, net written premiums were $39 million compared
with $14 million in 2008, our initial year for excess and surplus
lines operations.
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Personal
lines – We continue to position our personal lines business for profitable
future growth as pricing refinements and improved ease of use expand our
agents’ opportunities to market Cincinnati’s policy advantages to their
more quality-conscious clientele. Enhancement of our tiered rating during
2009 helped to further improve our rate and credit structures to attract
and retain more accounts with the best prospects of long-term
profitability. Personal lines rate changes made in 2008 and 2009 plus
expansion of our personal lines operation into new states drove strong new
business, which increased by 80.6 percent for the year
2009.
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We
continue to see the effects of executing on our potential to market personal
lines insurance through agencies that already represent us for commercial lines.
In early 2009, we began marketing personal lines in two additional states,
bringing the total of states where we market personal lines to 29. In seven
states where we began writing personal lines business or significantly expanded
our product offerings and automation capabilities in 2008 or 2009, our agencies
write approximately $650 million in personal lines premiums annually with
all carriers they represent. This initiative produced an increase of $13
million in 2009 new business premiums.
We
measure the overall success of this strategy to drive premium growth primarily
through changes in net written premiums, which we believe can grow faster than
the industry average over any five-year period. For 2009, our property casualty
net written premiums declined by 3.3 percent, comparing favorably with the
estimated 4.2 percent decline for the industry.
Our
Segments
Consolidated
financial results primarily reflect the results of our four reporting segments.
These segments are defined based on financial information we use to evaluate
performance and to determine the allocation of assets.
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Commercial
lines property casualty insurance
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Personal
lines property casualty insurance
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We also
evaluate results for our consolidated property casualty operations, which is the
total of our commercial lines, personal lines and excess and surplus lines
results.
Revenues,
income before income taxes and identifiable assets for each segment are shown in
a table in Item 8, Note 18 of the Consolidated Financial Statements,
Page 115. Some of that information also is discussed in this section of
this report, where we explain the business operations of each segment.
The financial performance of each segment is discussed in the Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which begins on Page 34.
Commercial
Lines Property Casualty Insurance Segment
The
commercial lines property casualty insurance segment contributed net earned
premiums of $2.199 billion to total revenues, or 56.3 percent of that
total, and reported a loss before income taxes of $35 million in 2009.
Commercial lines net earned premiums declined 5.1 percent and 3.9 percent in
2009 and 2008 after growing 0.4 percent in 2007.
Approximately
95 percent of our commercial lines premiums are written to provide accounts with
coverages from more than one of our business lines. As a result, we believe that
our commercial lines business is best measured and evaluated on a segment basis.
However, we provide line of business data to summarize growth and profitability
trends separately for our business lines. The seven commercial business lines
are:
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Commercial
casualty – Commercial casualty insurance provides coverage to businesses
against third-party liability from accidents occurring on their premises
or arising out of their operations, including liability coverage for
injuries sustained from products sold as well as coverage for professional
services, such as dentistry. Specialized casualty policies may include
liability coverage for employment practices liability (EPLI), which
protects businesses against claims by employees that their legal rights as
employees of the company have been violated, and other acts or failures to
act under specified circumstances as well as excess insurance and umbrella
liability, including personal umbrella liability written as an endorsement
to commercial umbrella coverages. The commercial casualty business line
includes liability coverage written on both a discounted and
non-discounted basis as part of commercial package
policies.
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Commercial
property – Commercial property insurance provides coverage for loss or
damage to buildings, inventory and equipment caused by covered causes of
loss such as fire, wind, hail, water, theft and vandalism, as well as
business interruption resulting from a covered loss. Commercial property
also includes crime insurance, which provides coverage for losses such as
embezzlement or misappropriation of funds by an employee, among others;
and inland marine insurance, which provides coverage for a variety of
mobile equipment, such as contractor’s equipment, builder’s risk, cargo
and electronic data processing equipment. Various property coverages can
be written as stand-alone policies or can be added to a package policy.
The commercial property business line includes property coverage
written on both a non-discounted and discounted basis as part of
commercial package policies.
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Commercial
auto – Commercial auto coverages protect businesses against liability to
others for both bodily injury and property damage, medical payments to
insureds and occupants of their vehicles, physical damage to an insured’s
own vehicle from collision and various other perils, and damages caused by
uninsured motorists.
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Workers’
compensation – Workers’ compensation coverage protects employers against
specified benefits payable under state or federal law for workplace
injuries to employees. We write workers’ compensation coverage in all of
our active states except North Dakota, Ohio and Washington, where coverage
is provided solely by the state instead of by private
insurers.
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Specialty
packages – Specialty packages include coverages for property, liability
and business interruption tailored to meet the needs of specific industry
classes, such as artisan
contractors,
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dentists,
garage operators, financial institutions, metalworkers, printers, religious
institutions, or smaller, main street businesses. Businessowners policies, which
combine property, liability and business interruption coverages for small
businesses, are included in specialty packages.
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Surety
and executive risk – This business line
includes:
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|
o
|
Contract
and commercial surety bonds, which guarantee a payment or reimbursement
for financial losses resulting from dishonesty, failure to perform and
other acts.
|
|
o
|
Fidelity
bonds, which cover losses that policyholders incur as a result of
fraudulent acts by specified individuals or dishonest acts by
employees.
|
|
o
|
Director
and officer liability insurance, which covers liability for actual or
alleged errors in judgment, breaches of duty or other wrongful acts
related to activities of for-profit or nonprofit organizations. Our
director and officer liability policy can optionally include EPLI
coverage.
|
|
·
|
Machinery
and equipment – Specialized machinery and equipment coverage can provide
protection for loss or damage to boilers and machinery, including
production and computer equipment, from sudden and accidental mechanical
breakdown, steam explosion or artificially generated
electrical current.
|
Our
emphasis is on products that agents can market to small- to mid-size businesses
in their communities. Of our 1,463 reporting agency locations, nine market
only our surety and executive risk products and five market only our
personal lines products. The remaining 1,449 locations, located in
all states in which we actively market, offer some or all of our standard
market commercial insurance products.
In 2009,
our 10 highest volume commercial lines states generated 65.3 percent of our
earned premiums compared with 65.9 percent in the prior year as we
continued efforts to geographically diversify our property casualty risks.
Earned premiums in the 10 highest volume states decreased 5.2 percent in
2009 and decreased 4.8 percent in the remaining 27 states. The number of
reporting agency locations in our 10 highest volume states increased to 933 in
2009 from 905 in 2008.
Commercial
Lines Earned Premiums by State
(Dollars in millions)
|
|
Earned
premiums
|
|
|
% of total
earned
|
|
|
Agency
locations
|
|
|
Average
premium per
location
|
|
Year
ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
$ |
364 |
|
|
|
16.3
|
% |
|
|
223 |
|
|
$ |
1.6 |
|
Illinois
|
|
|
205 |
|
|
|
9.2 |
|
|
|
117 |
|
|
|
1.8 |
|
Pennsylvania
|
|
|
158 |
|
|
|
7.1 |
|
|
|
82 |
|
|
|
1.9 |
|
Indiana
|
|
|
143 |
|
|
|
6.4 |
|
|
|
103 |
|
|
|
1.4 |
|
North
Carolina
|
|
|
128 |
|
|
|
5.8 |
|
|
|
74 |
|
|
|
1.7 |
|
Michigan
|
|
|
103 |
|
|
|
4.6 |
|
|
|
108 |
|
|
|
1.0 |
|
Virginia
|
|
|
102 |
|
|
|
4.6 |
|
|
|
60 |
|
|
|
1.7 |
|
Georgia
|
|
|
87 |
|
|
|
3.9 |
|
|
|
71 |
|
|
|
1.2 |
|
Wisconsin
|
|
|
84 |
|
|
|
3.8 |
|
|
|
49 |
|
|
|
1.7 |
|
Iowa
|
|
|
79 |
|
|
|
3.6 |
|
|
|
46 |
|
|
|
1.7 |
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
$ |
377 |
|
|
|
16.2
|
% |
|
|
218 |
|
|
$ |
1.7 |
|
Illinois
|
|
|
222 |
|
|
|
9.5 |
|
|
|
118 |
|
|
|
1.9 |
|
Pennsylvania
|
|
|
166 |
|
|
|
7.1 |
|
|
|
80 |
|
|
|
2.1 |
|
Indiana
|
|
|
148 |
|
|
|
6.4 |
|
|
|
103 |
|
|
|
1.4 |
|
North
Carolina
|
|
|
143 |
|
|
|
6.2 |
|
|
|
73 |
|
|
|
2.0 |
|
Virginia
|
|
|
111 |
|
|
|
4.8 |
|
|
|
58 |
|
|
|
1.9 |
|
Michigan
|
|
|
107 |
|
|
|
4.6 |
|
|
|
99 |
|
|
|
1.1 |
|
Georgia
|
|
|
89 |
|
|
|
3.8 |
|
|
|
68 |
|
|
|
1.3 |
|
Wisconsin
|
|
|
88 |
|
|
|
3.8 |
|
|
|
48 |
|
|
|
1.8 |
|
Tennessee
|
|
|
82 |
|
|
|
3.5 |
|
|
|
40 |
|
|
|
2.1 |
|
For new
commercial lines business, case-by-case underwriting and pricing is coordinated
by our locally based field marketing representatives. Our agents and our field
marketing, claims, loss control, premium audit, bond and machinery and equipment
representatives get to know the people and businesses in their communities and
can make informed decisions about each risk. These field marketing
representatives also are responsible for selecting new independent agencies,
coordinating field teams of specialized company representatives and promoting
all of the company's products within the agencies they serve.
Commercial
lines policy renewals are managed by headquarters underwriters who are assigned
to specific agencies and consult with local field staff as needed. As part of
our team approach, the headquarters underwriter also helps oversee agency growth
and profitability. They are responsible for formal issuance of all new business
and renewal policies as well as policy endorsements. Further, the headquarters
underwriters provide day-to-day customer service to agencies and marketing
representatives by offering product training, answering
underwriting questions, helping to determine underwriting eligibility and
assisting with the mechanics of premium determination.
Our
commercial lines packages are typically offered on a three-year policy term for
most insurance coverages, a key competitive advantage. In our experience,
multi-year packages appeal to the quality-conscious insurance buyers who we
believe are typical clients of our independent agents. Customized insurance
programs on a three-year term complement the long-term relationships these
policyholders typically have with their agents and with the company. By reducing
annual administrative efforts, multi-year policies lower expenses for our
company and for our agents. The commitment we make to policyholders encourages
long-term relationships and reduces their need to annually re-evaluate their
insurance carrier or agency. We believe that the advantages of three-year
policies in terms of improved policyholder convenience, increased account
retention and reduced administrative costs outweigh the potential disadvantage
of these policies, even in periods of rising rates.
Although
we offer three-year policy terms, premiums for some coverages within those
policies are adjustable at anniversary for the next annual period, and policies
may be canceled at any time at the discretion of the policyholder. Contract
terms often provide that rates for property, general liability, inland marine
and crime coverages, as well as policy terms and conditions, are fixed for the
term of the policy. The general liability exposure basis may be audited
annually. Commercial auto, workers’ compensation, professional liability and
most umbrella liability coverages within multi-year packages are rated at each
of the policy's annual anniversaries for the next one-year period. The annual
pricing could incorporate rate changes approved by state insurance regulatory
authorities between the date the policy was written and its annual anniversary
date, as well as changes in risk exposures and premium credits or debits
relating to loss experience and other underwriting judgment factors. We
estimate that approximately 75 percent of 2009 commercial premiums were
subject to annual rating or were written on a one-year policy term.
Staying
abreast of evolving market conditions is a critical function, accomplished in
both an informal and a formal manner. Informally, our field marketing
representatives and underwriters are in constant receipt of market intelligence
from the agencies with which they work. Formally, our commercial lines product
management group and field marketing associates conduct periodic surveys to
obtain competitive intelligence. This market information helps identify the top
competitors by line of business or specialty program and also identifies our
market strengths and weaknesses. The analysis encompasses pricing, breadth of
coverage and underwriting/eligibility issues.
In
addition to reviewing our competitive position, our product management group and
our underwriting audit group review compliance with our underwriting standards
as well as the pricing adequacy of our commercial insurance programs and
coverages. Further, our research and development group analyzes opportunities
and develops new products, new coverage options and improvements to existing
insurance products.
At
year-end 2009, we supported our commercial lines operations with a variety of
technology tools. e-CLAS for commercial package business was rolled out to 11
states by year end 2009 with an additional 19 states planned for 2010. This
system allows our agencies to quote and print commercial package policies in
their offices, increasing their ease of doing business with us. The e-CLAS
platform also makes use of our real-time agency interface, CinciBridge®,
which allows the automated movement of key underwriting data from an
agency’s management system to e-CLAS. This reduces agents’ data entry and allows
seamless quoting, rating, and issuance capability. WinCPP® is our
commercial lines premium quoting system. WinCPP is available in all of our
agency locations where we actively market commercial lines insurance
and provides quoting capabilities for nearly 100 percent of our
new and renewal commercial lines business. WinCPP also works with
CinciBridge.
Many
small business accounts written as Businessowners Policies (BOP) and Dentist’s
Package Policies (DBOP) are eligible to be issued at our agency locations
through our e-CLAS system as well. e-CLAS provides full policy lifecycle
transactions, including quoting, issuance, policy changes, renewal processing
and policy printing, at the agency location. These features make it easy and
efficient for our agencies to issue and service these policies. At year-end
2009, e-CLAS for BOP and DBOP was in use in 30 states representing
98 percent of our premiums for these products, which are included in the
specialty packages commercial line of business. e-CLAS also uses CinciBridge to
provide real-time data transfer with agency management systems.
We have
been streamlining internal processes and achieving operational efficiencies in
our headquarters commercial lines operations through deployment of iView™, a
policy imaging and workflow system. This system provides online access to
electronic copies of policy files, enabling our underwriters to respond to agent
requests and inquiries more quickly and efficiently. iView also automates
internal workflows through electronic routing of underwriting and processing
work tasks. At year-end 2009, more than 99 percent of in-force non-workers’
compensation commercial lines policy files were administered and stored
electronically in iView. In 2010, we plan to add our workers’ compensation
policies to i-View.
Personal
Lines Property Casualty Insurance Segment
The
personal lines property casualty insurance segment contributed net earned
premiums of $685 million to total revenues, or 17.6 percent of the total,
and reported a loss before income taxes of $81 million in 2009. Personal
lines net earned premiums declined 0.6 percent in 2009, 3.4 percent in 2008 and
6.3 percent in 2007.
We prefer
to write personal lines coverage in accounts that include both auto and
homeowner coverages as well as coverages that are part of our other personal
business line. As a result, we believe that our personal lines business is best
measured and evaluated on a segment basis. However, we provide line of business
data to summarize growth and profitability trends separately for three
business lines:
|
·
|
Personal
auto – This business line includes personal auto coverages that protect
against liability to others for both bodily injury and property damage,
medical payments to insureds and occupants of their vehicle, physical
damage to an insured’s own vehicle from collision and various other
perils, and damages caused by uninsured motorists. In addition, many
states require policies to provide first-party personal injury protection,
frequently referred to as no-fault
coverage.
|
|
·
|
Homeowners
– This business line includes homeowner coverages that protect against
losses to dwellings and contents from a wide variety of perils, as well as
liability arising out of personal activities both on and off the covered
premises. The company also offers coverage for condominium unit owners and
renters.
|
|
·
|
Other
personal lines – This includes the variety of other types of insurance
products we offer to individuals such as dwelling fire, inland marine,
personal umbrella liability and watercraft
coverages.
|
At
year-end, we marketed personal lines insurance products through 1,059 of our
1,463 reporting agency locations in 29 of the 37 states in which we offer
standard market commercial lines insurance. As discussed in Strategic
Initiatives, Page 8, introducing personal lines to these agencies is one of
the ways we intend to grow profitably in the next several years. The number of
reporting agency locations in our 10 highest volume states increased more
than 5 percent to 660 in 2009 from 627 in 2008.
In 2009,
our 10 highest volume personal lines states generated 84.1 percent of our earned
premiums compared with 85.1 percent in the prior year. Earned premiums in the
10 highest volume states declined 1.7 percent in 2009 while
increasing 5.9 percent in the remaining states.
Personal
Lines Earned Premiums by State
(Dollars in millions)
|
|
Earned
premiums
|
|
|
% of total
earned
|
|
|
Agency
locations
|
|
|
Average
premium per
location
|
|
Year
ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
$ |
248 |
|
|
|
36.1
|
% |
|
|
202 |
|
|
$ |
1.2 |
|
Georgia
|
|
|
61 |
|
|
|
8.9 |
|
|
|
63 |
|
|
|
1.0 |
|
Indiana
|
|
|
57 |
|
|
|
8.4 |
|
|
|
79 |
|
|
|
0.7 |
|
Illinois
|
|
|
48 |
|
|
|
7.1 |
|
|
|
84 |
|
|
|
0.6 |
|
Alabama
|
|
|
41 |
|
|
|
5.9 |
|
|
|
36 |
|
|
|
1.1 |
|
Kentucky
|
|
|
36 |
|
|
|
5.3 |
|
|
|
35 |
|
|
|
1.0 |
|
Michigan
|
|
|
26 |
|
|
|
3.8 |
|
|
|
80 |
|
|
|
0.3 |
|
Tennessee
|
|
|
20 |
|
|
|
2.9 |
|
|
|
36 |
|
|
|
0.6 |
|
Florida
|
|
|
20 |
|
|
|
2.9 |
|
|
|
10 |
|
|
|
2.0 |
|
Virginia
|
|
|
19 |
|
|
|
2.8 |
|
|
|
35 |
|
|
|
0.5 |
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
$ |
253 |
|
|
|
36.8
|
% |
|
|
199 |
|
|
$ |
1.3 |
|
Georgia
|
|
|
61 |
|
|
|
8.9 |
|
|
|
60 |
|
|
|
1.0 |
|
Indiana
|
|
|
57 |
|
|
|
8.3 |
|
|
|
76 |
|
|
|
0.8 |
|
Illinois
|
|
|
48 |
|
|
|
7.0 |
|
|
|
84 |
|
|
|
0.6 |
|
Alabama
|
|
|
41 |
|
|
|
5.9 |
|
|
|
37 |
|
|
|
1.1 |
|
Kentucky
|
|
|
34 |
|
|
|
5.0 |
|
|
|
36 |
|
|
|
0.9 |
|
Michigan
|
|
|
28 |
|
|
|
4.0 |
|
|
|
70 |
|
|
|
0.4 |
|
Florida
|
|
|
24 |
|
|
|
3.4 |
|
|
|
10 |
|
|
|
2.4 |
|
Virginia
|
|
|
20 |
|
|
|
2.9 |
|
|
|
25 |
|
|
|
0.8 |
|
Wisconsin
|
|
|
20 |
|
|
|
2.9 |
|
|
|
30 |
|
|
|
0.7 |
|
New and
renewal personal lines business reflects our risk-specific underwriting
philosophy. Each agency selects personal lines business primarily from within
the geographic territory that it serves, based on the agent’s knowledge of the
risks in those communities or familiarity with the policyholder. Personal lines
activities are supported by headquarters associates assigned to individual
agencies. We now have seven full-time personal lines marketing
representatives, who have underwriting authority and visit agencies on a regular
basis. They reinforce the advantages of our personal lines products and offer
training in the use of our processing system.
Competitive
advantages of our personal lines operation include broad coverage forms,
flexible underwriting, superior claims service, generous credit structure and
customizable endorsements for both the personal auto and homeowner policies. Our
personal lines products are processed through Diamond, our real-time personal
lines policy processing system that supports and allows once-and-done
processing. Diamond incorporates features frequently requested by our agencies
such as direct bill and monthly payment plans, local and headquarters policy
printing options, data transfer to and from popular agency management systems
and real-time integration with third-party data such as insurance scores, motor
vehicle reports and address verification. The new web-based version of Diamond
that was released to our agents in the first quarter of 2010 provides
significant improvements, including more user-friendly screens and workflow plus
other features such as a pre-fill option to reduce key strokes for improved
efficiency.
In 2006,
we introduced PL-efiles, a policy imaging system, to our personal lines
operations. The transition was completed in 2009 and replaces paper format
with electronic copies of policy documents. PL-efiles complements the Diamond
system by giving personal lines underwriters and support staff online access to
policy documents and data, enabling them to respond to agent requests and
inquiries quickly and efficiently. The underlying technology is updated and
permits us to offer access to policy documents directly to policyholders in
2010. We intend to focus on nonrevenue bearing services that allow our agencies
to concentrate on more important services and sales. In early 2009 the
convenience of paying premiums online or over the phone was introduced to our
directly-billed personal lines policyholders.
Life
Insurance Segment
The life
insurance segment contributed $143 million of net earned premiums,
representing 3.7 percent of total revenues, and $2 million of income before
income taxes in 2009. Life insurance segment profitability is discussed in
detail in Item 7, Life Insurance Results of Operations, Page 62.
Life insurance net earned premiums grew 13.0 percent in 2009,
0.8 percent in 2008 and 9.0 percent in 2007.
The
Cincinnati Life Insurance Company supports our agency-centered business model.
Cincinnati Life helps meet the needs of our agencies, including increasing and
diversifying agency revenues. We primarily focus on life products that
produce revenue growth through a steady stream of premium payments.
By diversifying revenue and profitability for both the agency and our
company, this strategy enhances the already strong relationship built by the
combination of the property casualty and life companies.
Cincinnati
Life seeks to become the life insurance carrier of choice for the independent
agencies that work with our property casualty operations. We emphasize
up-to-date products, responsive underwriting and high quality service as well as
competitive commissions. At year-end 2009, almost 85 percent of our
1,463 property casualty reporting agency locations offered Cincinnati
Life’s products to their clients. We also develop life business from
approximately 500 other independent life insurance agencies. We are careful to
solicit business from these other agencies in a manner that does not conflict
with or compete with the marketing and sales efforts of our property casualty
agencies.
When
marketing through our property casualty agencies, we have specific competitive
advantages:
|
·
|
Because
our property casualty operations are held in high regard, property
casualty agency management is predisposed to consider selling our life
products.
|
|
·
|
Marketing
efforts for both our property casualty and life insurance businesses are
directed by our field marketing department, which assures consistency of
communication and operations. Life field marketing representatives are
available to meet face-to-face with agency personnel and their clients as
well.
|
|
·
|
The
resources of our life headquarters underwriters and other associates are
available to the agents and field team to assist in the placement of
business. Fewer and fewer of our competitors provide direct, personal
support between the agent and the insurance
carrier.
|
We
continue to emphasize the cross-serving opportunities of our life insurance,
including term and worksite products, for the property casualty agency’s
personal and commercial accounts. In both the property casualty and independent
life agency distribution systems, we enjoy the advantages of offering
competitive, up-to-date products, providing close personal attention in
combination with financial strength and stability.
|
·
|
We
primarily offer products addressing the needs of businesses with key
person and buy-sell coverages. We offer personal and commercial clients of
our agencies quality, personal life insurance
coverage.
|
|
·
|
Term
insurance is our largest life insurance product line. We continue to
introduce new term products with features our agents indicate are
important, such as a return of premium benefit, and we have restructured
our underwriting classifications to better meet the needs of their
clients.
|
Because
of our strong capital position, we can offer a competitive product portfolio
including guaranteed products, giving our agents a marketing edge. Our life
insurance company maintains strong insurer financial strength ratings: A.M. Best
– A (Excellent), Fitch – A+ (Strong) and Standard & Poor's –
A+ (Strong), as discussed in Financial Strength, Page 3. Our life insurance
company has chosen not to establish a Moody’s rating.
Life
Insurance Business Lines
Four
lines of business – term insurance, universal life insurance, worksite products
and whole life insurance – account for approximately 96.4 percent of the
life insurance segment’s revenues:
|
·
|
Term
insurance – policies under which a death benefit is payable only if the
insured dies during a specific period of time. For policies without a
return of premium provision, no benefit is payable if the insured person
survives to the end of the term. For policies in-force with a return of
premium provision, a benefit equal to the sum of all paid premiums is
payable if the insured person survives to the end of the term. While
premiums are fixed, they must be paid as scheduled. The policies are fully
underwritten.
|
|
·
|
Universal
life insurance – long-duration life insurance policies. Contract premiums
are neither fixed nor guaranteed; however, the contract does specify a
minimum interest crediting rate and a maximum cost of insurance charge and
expense charge. Premiums are not fixed and may be varied by the contract
owner. The cash values, available as a loan collateralized by the cash
surrender value, are not guaranteed and depend on the amount and timing of
actual premium payments and the amount of actual contract assessments. The
policies are fully underwritten.
|
|
·
|
Worksite
products – term insurance, whole life insurance, universal life and
disability insurance offered to employees through their employer. Premiums
are collected by the employer using payroll deduction. Polices are issued
using a simplified underwriting approach and on a guaranteed issue basis.
Worksite insurance products provide our property casualty agency force
with excellent cross-serving opportunities for both commercial and
personal accounts. Agents report that offering worksite marketing to
employees of their commercial accounts provides a benefit to the employees
at no cost to the employer. Worksite marketing also connects agents with
new customers who may not have previously benefited from receiving the
services of a professional independent
insurance agent.
|
|
·
|
Whole
life insurance – policies that provide life insurance for the entire
lifetime of the insured; the death benefit is guaranteed never to decrease
and premiums are guaranteed never to increase. While premiums are
fixed, they must be paid as scheduled. These policies provide guaranteed
cash values that are available as loans collateralized by the cash
surrender value. The policies are
fully underwritten.
|
In
addition, Cincinnati Life markets:
|
·
|
Disability
income insurance provides monthly benefits to offset the loss of income
when the insured person is unable to work due to accident or
illness.
|
|
·
|
Deferred
annuities provide regular income payments that commence after the end of a
specified period or when the annuitant attains a specified age.
During the deferral period, any payments made under the contract
accumulate at the crediting rate declared by the company but not less than
a contract-specified guaranteed minimum interest rate. A deferred annuity
may be surrendered during the deferral period for a cash value equal
to the accumulated payments plus interest less the surrender charge, if
any.
|
|
·
|
Immediate
annuities provide some combination of regular income and lump sum payments
in exchange for a single premium. Immediate annuities also are written by
our life insurance segment and purchased by our property casualty
companies to settle casualty
claims.
|
Investment
Segment
Revenues
of the investment segment are primarily from net investment income and from
realized investment gains and losses from investment portfolios managed for the
holding company and each of the operating subsidiaries. After adding back $69
million in interest credited to contract holders of the life insurance segment,
the investment segment contributed $837 million, or 21.5 percent, of our total
revenues in 2009. After deducting $69 million in interest credited to
contract holders of the life insurance segment, the investment segment
contributed $768 million of income before income taxes.
In 2008,
our investment department adopted internal guidelines to place additional
parameters around our portfolio, with the approval of the investment committee
of the board of directors. These parameters address, among other issues, the
overall mix of the portfolio as well as security and sector concentrations. The
parameters came out of our risk management program, with the goal of more
specifically defining our risk tolerances, aligning our operating plan
accordingly and improving management’s ability to identify and respond to
changing conditions. Going forward, we will evaluate all of our fixed-maturity
and equity investments using our investment parameters, as
appropriate.
The fair
value of our investment portfolio was $10.562 billion and $8.807 billion at
year-end 2009 and 2008, respectively. The overall portfolio remained in an
unrealized gain position as gains harvested from equity rebalancing efforts were
more than offset by the strong performance of the bond portfolio.
The cash
we generate from insurance operations historically has been invested in three
broad categories of investments:
|
·
|
Fixed-maturity
investments – Includes taxable and tax-exempt bonds and redeemable
preferred stocks. During 2009 and 2008, purchases served to offset sales,
calls and market value declines.
|
|
·
|
Equity
investments – Includes common and nonredeemable preferred stocks. During
2009 and 2008, sales and fair value declines of equity securities more
than offset purchases and fair
value appreciation.
|
|
·
|
Short-term
investments – Primarily commercial
paper.
|
|
|
At
December 31, 2009
|
|
|
At
December 31, 2008
|
|
(In
millions)
|
|
Book
value
|
|
|
% of
BV
|
|
|
Fair
value
|
|
|
% of
FV
|
|
|
Book
value
|
|
|
% of
BV
|
|
|
Fair
value
|
|
|
% of
FV
|
|
Taxable
fixed maturities
|
|
$ |
4,644 |
|
|
|
48.6
|
% |
|
$ |
4,863 |
|
|
|
46.0
|
% |
|
$ |
3,354 |
|
|
|
40.8
|
% |
|
$ |
3,094 |
|
|
|
35.1
|
% |
Tax-exempt
fixed maturities
|
|
|
2,870 |
|
|
|
30.1 |
|
|
|
2,992 |
|
|
|
28.3 |
|
|
|
2,704 |
|
|
|
32.9 |
|
|
|
2,733 |
|
|
|
31.0 |
|
Common
equities
|
|
|
1,941 |
|
|
|
20.4 |
|
|
|
2,608 |
|
|
|
24.7 |
|
|
|
1,889 |
|
|
|
23.0 |
|
|
|
2,721 |
|
|
|
30.9 |
|
Preferred
equities
|
|
|
75 |
|
|
|
0.8 |
|
|
|
93 |
|
|
|
0.9 |
|
|
|
188 |
|
|
|
2.3 |
|
|
|
175 |
|
|
|
2.0 |
|
Short-term
investments
|
|
|
6 |
|
|
|
0.1 |
|
|
|
6 |
|
|
|
0.1 |
|
|
|
84 |
|
|
|
1.0 |
|
|
|
84 |
|
|
|
1.0 |
|
Total
|
|
$ |
9,536 |
|
|
|
100.0
|
% |
|
$ |
10,562 |
|
|
|
100.0
|
% |
|
$ |
8,219 |
|
|
|
100.0
|
% |
|
$ |
8,807 |
|
|
|
100.0
|
% |
We
actively determine the portion of new cash flow to be invested in fixed-maturity
and equity securities at the parent and insurance subsidiary levels. We consider
internal measures, as well as insurance department regulations and ratings
agency guidance. We monitor a variety of metrics, including after-tax yields,
the ratio of investments in common stocks to statutory surplus for the property
casualty and life insurance operations, and the parent company's ratio of
investment assets to total assets.
At
year-end 2009, less than 1 percent of the value of our investment portfolio was
made up of securities that do not actively trade on a public market and require
management’s judgment to develop pricing or valuation techniques (Level 3
assets). We generally obtain at least two outside valuations for these assets
and generally use the more conservative estimate. These investments include
private placements, small issues and various thinly traded securities. See Item
7, Fair Value Measurements, Page 43, and Item 8, Note 3 of the Consolidated
Financial Statements Page 103, for additional discussion of our
valuation techniques.
In
addition to securities held in our investment portfolio, at year-end 2009, other
invested assets included $40 million of life policy loans, $24 million of
venture capital fund investments, $6 million of investment in real estate and
$11 million of other invested assets.
Fixed-maturity
and Short-term Investments
By
maintaining a well diversified fixed-maturity portfolio, we attempt to manage
overall interest rate, reinvestment, credit and liquidity risk. We pursue a buy
and hold strategy and do not attempt to make large scale changes to the
portfolio in anticipation of rate movements. By investing new money on a regular
basis and analyzing risk-adjusted after-tax yields, we work to achieve a
laddering effect to our portfolio that may mitigate some of the effects of
adverse interest rate movements.
Fixed-maturity
and Short-term Portfolio Ratings
As of
year-end 2009, the portfolio was trading at 104.5 percent of its book value, up
from last year as credit spreads tightened considerably.
The
portfolio grew significantly in 2009 due to a large volume of purchases. These
purchases were most concentrated in the investment grade corporate bond market,
particularly in the Baa/BBB ratings range.
This
had the effect of increasing our year-end percentage of investment grade
bonds, those rated Baa/BBB or higher, by one percentage point to 92.5
percent. The majority of our non-rated securities are tax-exempt municipal
bonds from smaller municipalities that chose not to pursue a credit rating.
Credit ratings as of December 31 for the fixed-maturity and short-term portfolio
were:
|
|
At
December 31, 2009
|
|
|
At
December 31, 2008
|
|
(Dollars
in millions)
|
|
Fair
value
|
|
|
Percent
to
total
|
|
|
Fair
value
|
|
|
Percent
to
total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody's
Ratings and Standard & Poor's Ratings combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa,
Aa, A, AAA, AA, A
|
|
$ |
4,967 |
|
|
|
63.2 |
% |
|
$ |
4,149 |
|
|
|
70.2 |
% |
Baa,
BBB
|
|
|
2,302 |
|
|
|
29.3 |
|
|
|
1,258 |
|
|
|
21.3 |
|
Ba,
BB
|
|
|
279 |
|
|
|
3.5 |
|
|
|
240 |
|
|
|
4.1 |
|
B,
B
|
|
|
44 |
|
|
|
0.6 |
|
|
|
46 |
|
|
|
0.8 |
|
Caa,
CCC
|
|
|
29 |
|
|
|
0.4 |
|
|
|
7 |
|
|
|
0.1 |
|
Ca,
CC
|
|
|
3 |
|
|
|
0.0 |
|
|
|
3 |
|
|
|
0.1 |
|
C,
C
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
Non-rated
|
|
|
237 |
|
|
|
3.0 |
|
|
|
208 |
|
|
|
3.4 |
|
Total
|
|
$ |
7,861 |
|
|
|
100.0 |
% |
|
$ |
5,911 |
|
|
|
100.0 |
% |
We
discuss the maturity of our fixed-maturity portfolio in Item 8, Note 2 of the
Consolidated Financial Statements, Page 100. Attributes of the fixed-maturity
portfolio include:
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Weighted
average yield-to-book value
|
|
|
5.9 |
% |
|
|
5.6 |
% |
Weighted
average maturity
|
|
7.5
|
yrs |
|
8.2
|
yrs |
Effective
duration
|
|
5.3
|
yrs |
|
5.4
|
yrs |
Taxable
Fixed Maturities
Our
taxable fixed-maturity portfolio (at fair value) at year-end 2009
included:
|
·
|
$347
million in U.S. agency paper that is rated Aaa/AAA by Moody’s and Standard
& Poor’s, respectively.
|
|
·
|
$3.978
billion in investment-grade corporate bonds that have a Moody's rating at
or above Baa3 or a Standard & Poor's rating at or above
BBB-.
|
|
·
|
$309
million in high-yield corporate bonds that have a Moody's rating below
Baa3 or a Standard & Poor's rating below
BBB-.
|
|
·
|
$137
million in taxable municipal bonds that have an average rating of Aa3/AA
by Moody’s and Standard & Poor’s,
respectively.
|
|
·
|
$92
million in convertible bonds and redeemable preferred
stocks.
|
While our
strategy typically is to buy and hold fixed-maturity investments to maturity, we
monitor credit profiles and fair value movements when determining holding
periods for individual securities. With the exception of U.S. agency paper
(government-sponsored entities), no individual issuer's securities
accounted for more than 1.3 percent of the taxable fixed-maturity portfolio
at year-end 2009.
The
investment-grade corporate bond portfolio is most heavily concentrated in the
financial-related sectors, including banks, brokerage, finance and investment
and insurance companies. The financial sectors represented 25.3 percent of fair
value of this portfolio at year-end 2009, compared with 30.7 percent,
at year-end 2008. Although the financial-related sectors make up our
largest group of investment-grade corporate bonds, we believe our concentration
is below the average for the corporate bond market as a whole. Energy and
utilities are the only other sectors that exceed 10 percent of our
investment-grade corporate bond portfolio, at 11.9 and 10.4 percent of fair
value respectively at year end 2009.
Tax-exempt
Fixed Maturities
We
traditionally have purchased municipal bonds focusing on general obligation and
essential services, such as sewer, water or others. While no single municipal
issuer accounted for more than 0.6 percent of the tax-exempt municipal bond
portfolio at year-end 2009, there are higher concentrations within individual
states. Holdings in Texas and Indiana accounted for a total of 31.9 percent
of the municipal bond portfolio at year-end 2009.
At
year-end 2009, bonds representing $2.295 billion, or 76.7 percent, of the fair
value of our municipal portfolio were insured with an average rating of AAA.
Because of our emphasis on general obligation and essential services bonds, over
90 percent of the insured municipal bonds have an underlying rating of at least
A3 or A-.
Short-term
Investments
Our
short-term investments consist primarily of commercial paper, demand notes or
bonds purchased within one year of maturity. We make short-term investments
primarily with funds to be used to make upcoming cash payments, such as taxes.
At year-end 2009, we had $6 million of short-term investments compared with
$84 million at year-end 2008.
Equity
Investments
After
covering both our intermediate and long-range insurance obligations with
fixed-maturity investments, we historically used available cash flow to
invest in equity securities. Investment in equity securities has
played an important role in achieving our portfolio objectives and has
contributed to portfolio appreciation. We remain committed to our
long-term equity focus, which we believe is key to our company’s long-term
growth and stability.
At
December 31, 2009, two holdings had a fair value equal to or greater than 5
percent of our publicly-traded common stock portfolio compared with four similar
holdings at year-end 2008. Procter & Gamble (NYSE:PG) is our largest single
common stock investment, comprising 5.8 percent of the publicly traded common
stock portfolio and 1.4 percent of the investment portfolio. The other stock
with a fair value greater than 5 percent of our publicly-traded common stock
portfolio is Johnson & Johnson (NYSE:JNJ).
Common
Stocks
Our
common stock investments generally are dividend-paying securities that vary from
those with high current yield to others with lower yields but better growth
prospects. Other criteria we evaluate include increasing sales and earnings,
proven management and a favorable outlook. We believe our equity investment
style is an appropriate long-term strategy after we have purchased
fixed-maturity investments to cover our insurance reserves.
In
mid-2008, we began applying new investment guidelines that increased portfolio
diversification, reducing single issue and sector concentrations. Our year-end
2009 portfolio has been positioned for reduced volatility going forward. We view
our diversifying actions to be consistent with our view of prudent risk
management. We expect to continue to make changes to the portfolio, as
deemed appropriate.
Common
Stock Portfolio Industry Sector Distribution
|
|
Percent
of Publicly Traded Common Stock Portfolio
|
|
|
|
At
December 31, 2009
|
|
|
At
December 31, 2008
|
|
|
|
Cincinnati
Financial
|
|
|
S&P
500 Industry
Weightings
|
|
|
Cincinnati
Financial
|
|
|
S&P
500 Industry
Weightings
|
|
Sector:
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
18.0
|
% |
|
|
12.6
|
% |
|
|
21.6
|
% |
|
|
14.8
|
% |
Consumer
staples
|
|
|
15.5 |
|
|
|
11.4 |
|
|
|
19.8 |
|
|
|
12.8 |
|
Energy
|
|
|
11.0 |
|
|
|
11.5 |
|
|
|
16.8 |
|
|
|
13.3 |
|
Information
technology
|
|
|
11.0 |
|
|
|
19.8 |
|
|
|
4.2 |
|
|
|
15.3 |
|
Financial
|
|
|
10.2 |
|
|
|
14.4 |
|
|
|
12.4 |
|
|
|
13.3 |
|
Consumer
discretionary
|
|
|
9.6 |
|
|
|
9.6 |
|
|
|
6.6 |
|
|
|
8.4 |
|
Industrials
|
|
|
9.2 |
|
|
|
10.2 |
|
|
|
6.1 |
|
|
|
11.1 |
|
Utilities
|
|
|
6.7 |
|
|
|
3.7 |
|
|
|
9.3 |
|
|
|
4.2 |
|
Materials
|
|
|
5.1 |
|
|
|
3.6 |
|
|
|
1.9 |
|
|
|
3.0 |
|
Telecomm
services
|
|
|
3.7 |
|
|
|
3.2 |
|
|
|
1.3 |
|
|
|
3.8 |
|
Total
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
At
year-end 2009, 26.2 percent of our common stock holdings (measured by fair
value) were held at the parent company level. For the publicly-traded
common stock portfolio on a consolidated basis, no single issue accounted for
more than 5.8 percent at year-end 2009. Until June 2008, we had held
more than 10 percent of Fifth Third’s common stock for many years, and it
represented over 25 percent of our common stock holdings as recently as December
31, 2007.
Preferred
Stocks
We
evaluate preferred stocks in a manner similar to the evaluation we make for
fixed-maturity investments, seeking attractive relative yields. We generally
focus on investment-grade preferred stocks issued by companies that have a
strong history of paying common dividends, providing us with another layer of
protection. When possible, we seek out preferred stocks that offer a dividend
received deduction for income tax purposes. Events in the fall of 2008 and into
early 2009 led us to reevaluate the riskiness of all preferred securities,
particularly those of banking institutions. As a result, we downsized this
portfolio by $82 million of fair value to $93 million.
Additional
information regarding the composition of investments is included in Item 8, Note
2 of the Consolidated Financial Statements, Page 100.
Other
We report
as Other the other income of our standard market property casualty insurance
subsidiary, as well as non-investment operations of the parent company and its
subsidiary CFC Investment Company. Beginning 2008, we also included results
of our excess and surplus lines operations, The Cincinnati Specialty
Underwriters Insurance Company and CSU Producer Resources.
CFC
Investment Company
CFC
Investment Company offers commercial leasing and financing services to our
agents, their clients and other customers. As of year-end 2009,
CFC Investment Company had 2,286 accounts and $76 million in receivables,
compared with 2,197 accounts and $71 million in receivables at
year-end 2008.
Excess
and Surplus Lines Property Casualty Insurance
Agencies
have access to The Cincinnati Specialty Underwriters Insurance Company’s product
line through CSU Producer Resources, the wholly owned insurance brokerage
subsidiary of parent-company Cincinnati Financial Corporation. CSU Producer
Resources has binding authority on all classes of business written through CSU
and maintains appropriate agent and excess and surplus lines licenses to process
non-admitted business.
Agents
can submit risks to CSU Producer Resources, reflecting the mix of accounts
Cincinnati agencies currently write in their non-admitted excess and surplus
lines markets. CSU Producer Resources currently markets and underwrites
commercial general liability, property, excess liability and miscellaneous
errors and omissions coverages in 37 states.
Agency
producers have direct access through CSU Producer Resources to a group of our
underwriters who focus exclusively on excess and surplus lines business. Those
underwriters can tap into their agencies’ broader Cincinnati relationships to
bring their policyholders services such as experienced and responsive loss
control and claims handling. Our excess and surplus lines policy administration
system delivers electronic copies of policies to producers within minutes of
underwriting approval and policy issue. CSU Producer Resources gives extra
support to our producers by remitting excess and surplus lines taxes and
stamping fees and retaining admitted market affidavits,
where required.
Regulation
The
business of insurance primarily is regulated by state law. All of our insurance
company subsidiaries are domiciled in the State of Ohio, except The Cincinnati
Specialty Underwriters Insurance Company, which is domiciled in the State of
Delaware. Each insurance subsidiary is governed by the insurance laws and
regulations in its respective state of domicile. We also are subject to state
regulatory authorities of all states in which we write insurance. The state laws
and regulations that have the most significant effect on our insurance
operations and financial reporting are discussed below.
|
·
|
Insurance
Holding Company Regulation – We are regulated as an insurance holding
company system in the respective states of domicile of our standard market
property casualty company subsidiary and its surplus lines and life
insurance subsidiaries. These regulations require that we annually furnish
financial and other information about the operations of the individual
companies within the holding company system. All transactions within a
holding company affecting insurers must be fair and equitable. Notice to
the state insurance commissioner is required prior to the consummation of
transactions affecting the ownership or control of an insurer and prior to
certain material transactions between an insurer and any person or entity
in its holding company group. In addition, some of those transactions
cannot be consummated without the commissioner’s
prior approval.
|
|
·
|
Subsidiary
Dividends – The Cincinnati Insurance Company is 100 percent owned by
Cincinnati Financial Corporation. The dividend-paying capacity of The
Cincinnati Insurance Company and its 100 percent owned subsidiaries is
regulated by the laws of the applicable state of domicile. Under these
laws, our insurance subsidiaries must provide a 10-day advance
informational notice to the insurance commissioner for the domiciliary
state prior to payment of any dividend or distribution to its
shareholders. In all cases, ordinary dividends may be paid only from
earned surplus, which for the Ohio subsidiaries is the amount of
unassigned funds set forth in an insurance subsidiary’s most recent
statutory financial statement. For the Delaware subsidiary, it is the
amount of available and accumulated funds derived from the subsidiary’s
net operating profit of its business and realized capital
gains.
|
The
insurance company subsidiaries must give 30 days notice to and obtain prior
approval from the state insurance commissioner before the payment of an
extraordinary dividend as defined by the state’s insurance code. You can find
information about the dividends paid by our insurance subsidiary in 2009 in
Item 8, Note 9 of the Consolidated Financial Statements, Page
106.
|
·
|
Insurance
Operations – All of our insurance subsidiaries are subject to licensing
and supervision by departments of insurance in the states in which they do
business. The nature and extent of such regulations vary, but generally
have their source in statutes that delegate regulatory, supervisory and
administrative powers to state insurance departments. Such regulations,
supervision and administration of the insurance subsidiaries include,
among others, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents and brokers; the nature and
limitations on investments; deposits of securities for the benefit of
policyholders; regulation of policy forms and premium rates; policy
cancellations and non-renewals; periodic examination of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of
|
|
insurers
or for other purposes; requirements regarding reserves for unearned
premiums, losses and other matters; the nature of and limitations on
dividends to policyholders and shareholders; the nature and extent of
required participation in insurance guaranty funds; the involuntary
assumption of hard-to-place or high-risk insurance business, primarily
workers’ compensation insurance; and the collection, remittance and
reporting of certain taxes and
fees.
|
The
legislative and regulatory climate in Florida continues to create uncertainty
for the insurance industry. In February 2007, we adopted a marketing stance of
continuing to service existing accounts while writing no new business
relationships in Florida. This remained our stance through 2009, except in the
lines of directors and officers, surety, machinery and equipment and life
insurance, which we resumed writing in June 2007, subject to existing
guidelines. In 2009, we cautiously resumed writing additional commercial
lines new business, while working to more actively manage the associated
catastrophe risk, carefully underwriting new commercial submissions and
non-renewing commercial and personal lines policies that present the most risk
of loss because of their age, construction and geographic characteristics. In
2009, our property casualty written premiums from Florida agencies were 2.3
percent of net written premiums, compared with 2.9 percent in 2008.
On August
24, 2007, the company received administrative subpoenas from the Florida Office
of Insurance Regulation seeking documents and testimony concerning insurance for
residential risks located in Florida and communications with reinsurers, risk
modeling companies, rating agencies and insurance trade associations. We
produced documents to respond to the subpoenas. The Office of Insurance
Regulation canceled and has not rescheduled the hearing noticed in the subpoena
for October 18, 2007. Although inactive, these subpoenas remain outstanding as
of December 31, 2009. We continue to assess the changing insurance
environment in Florida and hope to resume writing our complete portfolio of
insurance products in the state as the market stabilizes.
|
·
|
Insurance
Guaranty Associations – Each state has insurance guaranty association laws
under which the associations may assess life and property casualty
insurers doing business in the state for certain obligations of insolvent
insurance companies to policyholders and claimants. Typically, states
assess each member insurer in an amount related to the insurer’s
proportionate share of business written by all member insurers in the
state. Our insurance companies received a savings of less than $2 million
from guaranty associations in 2009 and a charge of less than $1 million in
2008. We cannot predict the amount and timing of any future assessments or
refunds on our insurance subsidiaries under
these laws.
|
|
·
|
Shared
Market and Joint Underwriting Plans – State insurance regulation requires
insurers to participate in assigned risk plans, reinsurance facilities and
joint underwriting associations, which are mechanisms that generally
provide applicants with various basic insurance coverages when they are
not available in voluntary markets. Such mechanisms are most commonly
instituted for automobile and workers’ compensation insurance, but many
states also mandate participation in FAIR Plans or Windstorm Plans, which
provide basic property coverages. Participation is based upon the amount
of a company’s voluntary market share in a particular state for the
classes of insurance involved. Underwriting results related to these
organizations could be adverse to our
company.
|
|
·
|
Statutory
Accounting – 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
NAIC’s Accounting Practices and Procedures Manual (SAP). While not a
substitute for any GAAP measure of performance, statutory data frequently
is used by industry analysts and other recognized reporting sources to
facilitate comparisons of the performance of insurance
companies.
|
|
·
|
Insurance
Reserves – State insurance laws require that property casualty and life
insurers analyze the adequacy of reserves annually. Our appointed
actuaries must submit an opinion that reserves are adequate for policy
claims-paying obligations and related
expenses.
|
|
·
|
Risk-Based
Capital Requirements – The NAIC’s risk-based capital
(RBC) requirements for property casualty and life insurers serve as
an early warning tool for the NAIC and state regulators to identify
companies that may be undercapitalized and may merit further regulatory
action. The NAIC has a standard formula for annually assessing RBC. The
formula for calculating RBC for property casualty companies takes into
account asset and credit risks but places more emphasis on underwriting
factors for reserving and pricing. The formula for calculating RBC for
life insurance companies takes into account factors relating to insurance,
business, asset and interest rate
risks.
|
Although
the federal government and its regulatory agencies generally do not directly
regulate the business of insurance, federal initiatives can affect our business.
We do not expect to have any material effects on our expenditures, earnings or
competitive position as a result of compliance with any federal, state, or local
provisions enacted or regulated relating to the protection of the environment.
We currently do not have any material estimated capital expenditures for
environmental control facilities.
Our
business involves various risks and uncertainties that may affect achievement of
our business objectives. Many of the risks could have ramifications across our
organization. For example, while risks related to setting insurance rates and
establishing and adjusting loss reserves are insurance activities, errors in
these areas could have an impact on our investment activities, growth and
overall results.
The
following discussion should be viewed as a starting point for understanding the
significant risks we face. It is not a definitive summary of their potential
impacts or of our strategies to manage and control the risks. Please see Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Page 34, for a discussion of those strategies.
The risks
and uncertainties discussed below are not the only ones we face. There are
additional risks and uncertainties that we do not believe are material at this
time. There also may be risks and uncertainties of which we are not aware. If
any risks or uncertainties discussed here develop into actual events, they could
have a material adverse effect on our business, financial condition or results
of operations. In that case, the market price of our common stock could decline
materially.
Readers
should carefully consider this information together with the other information
we have provided in this report and in other reports and materials we file
periodically with the Securities and Exchange Commission as well as news
releases and other information we disseminate publicly.
We
rely exclusively on independent insurance agents to distribute our
products.
We market
our products through independent, non-exclusive insurance agents. These agents
are not obligated to promote our products and can and do sell our competitors’
products. We must offer insurance products that meet the needs of these agencies
and their clients. We need to maintain good relationships with the agencies that
market our products. If we do not, these agencies may market our competitors’
products instead of ours, which may lead to us having a less desirable mix of
business and could affect our results of operations.
Certain
events or conditions could diminish our agents’ desire to produce business for
us and the competitive advantage that our independent agencies
enjoy:
|
·
|
Downgrade
of the financial strength ratings of our insurance subsidiaries. We
believe our strong insurer financial strength ratings, in particular the
A+ (Superior) rating from A.M. Best for our standard market property
casualty insurance subsidiaries, are an important competitive advantage.
Ratings agencies could change or expand their requirements. If our
property casualty ratings were to be downgraded, our agents might find it
more difficult to market our products or might choose to emphasize the
products of other carriers. See Item 1, Our Business and Our
Strategy, Page 1, for additional discussion of our financial strength
ratings.
|
|
·
|
Concerns
that doing business with us is difficult or not profitable, perceptions
that our level of service is no longer a distinguishing characteristic in
the marketplace, or perceptions that our business practices are not
compatible with agents’ business models. These issues could occur if
agents or policyholders believe that we are no longer providing the
prompt, reliable personal service that has long been a distinguishing
characteristic of our insurance
operations.
|
|
·
|
Delays
in the development, implementation, performance and benefits of technology
projects and enhancements or independent agent perceptions that our
technology solutions are inadequate to match
their needs.
|
A
reduction in the number of independent agencies marketing our products, the
failure of agencies to successfully market our products, changes in the strategy
or operations of agencies or the choice of agencies to reduce their writings of
our products could affect our results of operations if we were unable to replace
them with agencies that produce adequate and profitable premiums.
Further,
policyholders may choose a competitor’s product rather than our own because of
real or perceived differences in price, terms and conditions, coverage or
service. If the quality of the independent agencies with which we do business
were to decline, that also might cause policyholders to purchase their insurance
through different agencies or channels. Consumers, especially in the personal
insurance segments, may increasingly choose to purchase insurance from
distribution channels other than independent insurance agents, such as
direct marketers.
We
could experience an unusually high level of losses due to catastrophic, pandemic
or terrorism events or risk concentrations.
In the
normal course of our business, we provide coverage against perils for which
estimates of losses are highly uncertain, in particular catastrophic and
terrorism events. Catastrophes can be caused by a number of events, including
hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe
winter weather and fires. Due to the nature of these events, we are unable to
predict precisely the frequency or potential cost of catastrophe occurrences.
The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the
event. Our ability
to
appropriately manage catastrophe risk depends partially on catastrophe models,
the accuracy of which may be affected by inaccurate or incomplete data, the
uncertainty of the frequency and severity of future events and the uncertain
impact of climate change.
The
geographic regions in which we market insurance are exposed to numerous natural
catastrophes, such as:
|
·
|
Hurricanes
in the gulf, eastern and southeastern coastal
regions.
|
|
·
|
Earthquakes
in the New Madrid fault zone, which lies within the central Mississippi
valley, extending from northeast Arkansas through southeast Missouri,
western Tennessee and western Kentucky to southern Illinois, southern
Indiana and parts of Ohio.
|
|
·
|
Tornado,
wind and hail in the Midwest, South, Southeast, Southwest and the
mid-Atlantic.
|
The
occurrence of terrorist attacks in the geographic areas we serve could result in
substantially higher claims under our insurance policies than we have
anticipated. While we do insure terrorism risk in all areas we serve, we have
identified our major terrorism exposure as general commercial risks in the
metropolitan Chicago area, small co-op utilities, small shopping malls and small
colleges throughout our 37 active states, and, because of the number of
associates located there, our Fairfield headquarters. Additionally, our life
insurance subsidiary could be adversely affected in the event of a terrorist
event or an epidemic such as the avian or swine flu, particularly if the
epidemic were to affect a broad range of the population beyond just the very
young or the very old. Our associate health plan is self-funded and could
similarly be affected.
Our
results of operations would be adversely affected if the level of losses we
experience over a period of time were to exceed our actuarially determined
expectations. In addition, our financial condition would be adversely affected
if we were required to sell securities prior to maturity or at unfavorable
prices to pay an unusually high level of loss and loss expenses. Securities
pricing might be even less favorable if a number of insurance companies needed
to sell securities during a short period of time because of unusually high
losses from catastrophic events.
Our
geographic concentration ties our performance to business, economic,
environmental and regulatory conditions in certain states. We market our
property casualty insurance products in 37 states, but our business is
concentrated in the Midwest and Southeast. We also have exposure in states where
we do not actively market insurance when clients of our independent agencies
have businesses or properties in multiple states.
The
Cincinnati Insurance Company also participates in three assumed reinsurance
treaties with two reinsurers that spread the risk of very high catastrophe
losses among many insurers. In 2009, the largest treaty had exposure of up to
$7 million of assumed losses in three layers, from $1.0 billion to $1.7
billion, from a single event under an assumed reinsurance treaty for Munich Re
Group.
In the
event of a severe catastrophic event or terrorist attack elsewhere in the world,
our insurance losses may be immaterial. However, the companies in which we
invest might be severely affected, which could affect our financial condition
and results of operations. Our reinsurers might experience significant losses,
potentially jeopardizing their ability to pay losses we cede to them. We also
may be exposed to state guaranty fund assessments if other carriers in a state
cannot meet their obligations to policyholders. A catastrophe or epidemic event
also could affect our operations by damaging our headquarters facility, injuring
associates and visitors at our Fairfield, Ohio, headquarters or disrupting our
associates’ ability to perform their assigned tasks.
Our
ability to achieve our performance objectives could be affected by changes in
the financial, credit and capital markets or the general economy.
We invest
premiums received from policyholders and other available cash to generate
investment income and capital appreciation, maintaining sufficient liquidity to
pay covered claims and operating expenses, service our debt obligations and pay
dividends.
Investment
income is an important component of our revenues and net income. The ability to
increase investment income and generate longer-term growth in book value is
affected by factors that are beyond our control, such as inflation, economic
growth, interest rates, world political conditions, changes in laws and
regulations, terrorism attacks or threats, adverse events affecting other
companies in our industry or the industries in which we invest, market events
leading to credit constriction and other widespread unpredictable events. These
events may adversely affect the economy generally and could cause our investment
income or the value of securities we own to decrease. A significant decline in
our investment income could have an adverse effect on our net income, and
thereby on our shareholders’ equity and our policyholders’ surplus. For more
detailed discussion of risks associated with our investments, please refer to
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page
82.
We issue
life contracts with guaranteed minimum returns, referred to as bank-owned life
insurance contracts (BOLIs). BOLI investment assets must meet certain criteria
established by the regulatory authorities in which jurisdiction the group
contract holder is subject. Therefore, sales of investments may be mandated to
maintain compliance with these regulations, possibly requiring gains or losses
to be recorded.
We could
experience losses if the assets in the accounts were less than liabilities at
the time of maturity or termination. We discuss other risks associated with our
separate account BOLIs in Item 7, Critical Accounting Estimates, Separate
Accounts, Page 45.
Deterioration
in the banking sector or in banks with which we have relationships could affect
our results of operations. Our ability to maintain or obtain short-term lines of
credit could be affected if the banks from which we obtain these lines are
purchased, fail or are otherwise negatively affected. We may lose premium if a
bank that owns appointed agencies were to change its strategies. We could
experience increased losses in our director and officer liability line of
business if claims were made against insured
financial institutions.
Our
investment performance also could suffer because of the types of investments,
industry groups and/or individual securities in which we choose to invest.
Market value changes related to these choices could cause a material change in
our financial condition or results of operations.
At
year-end 2009, common stock holdings made up 24.5 percent of our invested
assets. Adverse news or events affecting the global or U.S. economy or the
equity markets could affect our net income, book value and overall results as
well as our ability to pay our common stock dividend. See Item 7, Investments
Results of Operations, Page 64, and Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, Page 82, for discussion of our investment
activities.
Deteriorating
credit and market conditions could also impair our ability to access credit
markets and could affect existing or future lending arrangements.
Our
overall results could be affected if a significant portion of our commercial
lines policyholders, including those purchasing surety bonds, are adversely
affected by marked or prolonged economic downturns and events such as a downturn
in construction and related sectors, tightening credit markets and higher fuel
costs. Such events could make it more difficult for policyholders to finance new
projects, complete projects or expand their businesses, leading to lower
premiums from reduced payrolls and sales and lower purchases of equipment and
vehicles. These events could also cause claims, including surety claims, to
increase due to a policyholder’s inability to secure necessary financing to
complete projects or to collect on underlying lines of credit in the claims
process. Such economic downturns and events could have a greater impact in the
construction sector where we have a concentration of risks and in geographic
areas that are hardest hit by economic downturns.
Deteriorating
economic conditions could also increase the degree of credit risk associated
with amounts due from independent agents who collect premiums for payment to us
and could hamper our ability to recover amounts due from
reinsurers.
Our
ability to properly underwrite and price risks and increased competition could
adversely affect our results.
Our
financial condition, cash flow and results of operations depend on our ability
to underwrite and set rates accurately for a full spectrum of risks. We
establish our pricing based on assumptions about the level of losses that may
occur within classes of business, geographic regions and other
criteria.
To
properly price our products, we must collect and properly analyze data; the data
must be sufficient, reliable and accessible; we need to develop appropriate
rating methodologies and formulae; and we may need to identify and respond to
trends quickly. Inflation trends, especially outside of historical norms, may
make it more difficult to determine adequate pricing. If rates are not
accurate, we may not generate enough premiums to offset losses and expenses or
we may not be competitive in the marketplace.
Our
ability to set appropriate rates could be hampered if a state or states where we
write business refuses to allow rate increases that we believe are necessary to
cover the risks insured. At least one state requires us to purchase reinsurance
from a mandatory reinsurance fund. Such reinsurance funds can create a credit
risk for insurers if not adequately funded by the state and, in some cases, the
existence of a reinsurance fund could affect the prices charged for our
policies. The effect of these and similar arrangements could reduce our
profitability in any given period or limit our ability to grow our
business.
The
insurance industry is cyclical and intensely competitive. From time to time, the
insurance industry goes through prolonged periods of intense competition during
which it is more difficult to attract new business, retain existing
business and maintain profitability. Competition in our insurance business is
based on many factors, including:
|
·
|
Competitiveness
of premiums charged
|
|
·
|
Relationships
among carriers, agents, brokers and
policyholders
|
|
·
|
Underwriting
and pricing methodologies that allow insurers to identify and flexibly
price risks
|
|
·
|
Compensation
provided to agents
|
|
·
|
Underwriting
discipline
|
|
·
|
Terms
and conditions of insurance
coverage
|
|
·
|
Speed
at which products are brought to
market
|
|
·
|
Product
and marketing innovations, including
advertising
|
|
·
|
Technological
competence and innovation
|
|
·
|
Ability
to control expenses
|
|
·
|
Adequacy
of financial strength ratings by independent ratings agencies such as A.M.
Best
|
|
·
|
Quality
of services provided to agents and
policyholders
|
|
·
|
Claims
satisfaction and reputation
|
If our
pricing were incorrect or we were unable to compete effectively because of one
or more of these factors, our premium writings could decline and our results of
operations and financial condition could be materially
adversely affected.
Please
see the discussion of our Commercial Lines, Personal Lines and Life Insurance
Segments in Item 1, Page 12, Page 15 and Page 16, for a discussion of our
competitive position in the insurance marketplace.
Our
loss reserves, our largest liability, are based on estimates and could be
inadequate to cover our actual losses.
Our
consolidated financial statements are prepared using GAAP. These principles
require us to make estimates and assumptions that affect the amounts reported in
the Consolidated Financial Statements and accompanying Notes. Actual results
could differ materially from those estimates. For a discussion of the
significant accounting policies we use to prepare our financial statements and
the material implications of uncertainties associated with the methods,
assumptions and estimates underlying our critical accounting policies, please
refer to Item 8, Note 1 of the Consolidated Financial Statements,
Page 94, and Item 7, Critical Accounting Estimates, Property Casualty
Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves,
Page 38 and Page 42.
Our most
critical accounting estimate is loss reserves. Loss reserves are the amounts we
expect to pay for covered claims and expenses we incur to settle those claims.
The loss reserves we establish in our financial statements represent an estimate
of amounts needed to pay and administer claims arising from insured events that
have already occurred, including events that have not yet been reported to us.
Loss reserves are estimates and are inherently uncertain; they do not and
cannot represent an exact measure of liability. Inflationary scenarios,
especially scenarios outside of historical norms, may make it more
difficult to estimate loss reserves. Accordingly, our loss reserves for past
periods could prove to be inadequate to cover our actual losses and related
expenses. Any changes in these estimates are reflected in our results of
operations during the period in which the changes are made. An increase
in our loss reserves would decrease earnings, while a decrease in our loss
reserves would increase earnings.
The
estimation process for unpaid loss and loss expense obligations involves
uncertainty by its very nature. We continually review the estimates and adjust
the reserves as facts about individual claims develop, additional losses are
reported and new information becomes known. Adjustments due to loss development
on prior periods are reflected in the calendar year in which they are
identified. The process used to determine our loss reserves is discussed in
Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and
Loss Expense Reserves and Life Insurance Policy Reserves, Page 38 and Page
42.
Unforeseen
losses, the type and magnitude of which we cannot predict, may emerge in the
future. These additional losses could arise from changes in the legal
environment, laws and regulations, climate change, catastrophic events,
increases in loss severity or frequency, or other causes. Such future losses
could be substantial.
Our
ability to obtain or collect on our reinsurance protection could affect our
business, financial condition, results of operations and cash
flows.
We buy
property casualty and life reinsurance coverage to mitigate the liquidity risk
of an unexpected rise in claims severity or frequency from catastrophic events
or a single large loss. The availability, amount and cost of reinsurance depend
on market conditions and may vary significantly. If we were unable to obtain
reinsurance on acceptable terms and in appropriate amounts, our business and
financial condition could be adversely affected.
In
addition, we are subject to credit risk with respect to our reinsurers. Although
we purchase reinsurance to manage our risks and exposures to losses, this
reinsurance does not discharge our direct obligations under the policies we
write. We would remain liable to our policyholders even if we were unable to
recover what we believe we are entitled to receive under our reinsurance
contracts. Reinsurers might refuse or fail to pay losses that we cede to them,
or they might delay payment. For long-tail claims, the creditworthiness of our
reinsurers may change before we can recover amounts to which we are entitled. A
reinsurer’s insolvency, inability or unwillingness to make payments under the
terms of its reinsurance agreement with our insurance subsidiaries could have a
material adverse effect on our financial position, results of operations and
cash flows.
We
participated in USAIG, a joint underwriting association of individual insurance
companies that collectively functions as a worldwide insurance market for all
types of aviation and aerospace accounts. Our participation was terminated after
policy year 2002. At year-end 2009, 31 percent, or $212 million, of
our total reinsurance receivables were related to USAIG, primarily for events of
September 11, 2001, offset by $221 million of amounts ceded to other pool
participants and reinsurers. If the pool participants and reinsurers were unable
to fulfill their financial obligations and all security collateral that supports
the participants’ obligations became worthless, we could be liable for an
additional pool liability of $288 million and our financial position and
results of operations could be materially affected. Currently all pool
participants and reinsurers are financially solvent.
Please
see Item 7, 2010 Reinsurance Programs, Page 79, for a discussion of our
reinsurance treaties.
Our
business depends on the uninterrupted operation of our facilities, systems and
business functions.
Our
business depends on our associates’ ability to perform necessary business
functions, such as processing new and renewal policies and claims. We
increasingly rely on technology and systems to accomplish these business
functions in an efficient and uninterrupted fashion. Our inability to access our
headquarters facilities or a failure of technology, telecommunications or other
systems could significantly impair our ability to perform such functions on a
timely basis or affect the accuracy of transactions. If sustained or repeated,
such a business interruption or system failure could result in a deterioration
of our ability to write and process new and renewal business, serve our agents
and policyholders, pay claims in a timely manner, collect receivables or perform
other necessary business functions. If our disaster recovery and business
continuity plans did not sufficiently consider, address or reverse the
circumstances of an interruption or failure, this could result in a materially
adverse effect on our operating results and financial condition. This risk is
exacerbated because approximately 70 percent of our associates work at our
Fairfield, Ohio, headquarters.
The
effects of changes in industry practices and regulations on our business are
uncertain.
As
industry practices and legal, judicial, legislative, regulatory, political,
social and other environmental conditions change, unexpected and unintended
issues related to insurance pricing, claims and coverage, may emerge. These
issues may adversely affect our business by impeding our ability to obtain
adequate rates for covered risks, extending coverage beyond our underwriting
intent or by increasing the number or size of claims. In some instances,
unforeseeable emerging and latent claim and coverage issues may not become
apparent until some time after we have issued the insurance policies that could
be affected by the changes. As a result, the full extent of liability under our
insurance contracts may not be known for many years after a policy is
issued.
Further,
the National Association of Insurance Commissioners (NAIC), state insurance
regulators and state legislators continually re-examine existing laws and
regulations governing insurance companies and insurance holding companies,
specifically focusing on modifications to statutory accounting principles,
interpretations of existing laws, regulations relating to product forms and
pricing methodologies and the development of new laws and regulations that
affect a variety of financial and nonfinancial components of our business.
Any proposed or future legislation, regulation or NAIC initiatives, if adopted,
may be more restrictive on our ability to conduct business than current
regulatory requirements or may result in higher costs.
Federal
laws and regulations, including those that may be enacted in the wake of the
financial and credit crises, may have adverse affects on our business,
potentially including a change from a state-based system of regulation to a
system of federal regulation, the repeal of the McCarran Ferguson Act and/or the
establishment of an insurance office in Department of Treasury. While we do not
participate or intend to seek to participate in the Troubled Asset Relief
Program, the effect of it or any similar legislation on our industry,
particularly competition from insurers that do participate, and the economy in
general is uncertain.
The
effects of such changes could adversely affect our results of operations. Please
see Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and
Loss Expense Reserves and Life Insurance Policy Reserves, Page 38 and Page
42, for a discussion of our reserving practices.
Managing
technology initiatives and meeting new data security requirements are
significant challenges.
While
technology can streamline many business processes and ultimately reduce the cost
of operations, technology initiatives present short-term cost, implementation
and operational risks. In addition, we may have inaccurate expense projections,
implementation schedules or expectations regarding the effectiveness and user
acceptance of the end product. These issues could escalate over time. If we were
unable to find and retain employees with key technical knowledge, our ability to
develop and deploy key technology solutions could be hampered.
We
necessarily collect, use and hold data concerning individuals and businesses
with whom we have a relationship. Threats to data security rapidly emerge and
change, exposing us to rising costs and competing time constraints to secure our
data in accordance with customer expectations and statutory and regulatory
requirements. A breach of our security that results in unauthorized access to
our data could expose us to data loss, litigation, damages, fines and penalties,
significant increases in compliance costs and reputational damage.
Please
see Item 1, Strategic Initiatives, Page 8 for a discussion of our technology
initiatives.
Our
status as an insurance holding company with no direct operations could affect
our ability to pay dividends in the future.
Cincinnati
Financial Corporation is a holding company that transacts substantially all of
its business through its subsidiaries. Our primary assets are the stock in
our operating subsidiaries and our investments. Consequently, our cash flow
to pay cash dividends and interest on our long-term debt depends on dividends we
receive from our operating subsidiaries and income earned on investments held at
the parent-company level.
Dividends
paid to our parent company by our insurance subsidiary are restricted by the
insurance laws of Ohio, its domiciliary state. These laws establish minimum
solvency and liquidity thresholds and limits. Currently, the maximum dividend
that may be paid without prior regulatory approval is limited to the greater of
10 percent of statutory surplus or 100 percent of statutory net income for
the prior calendar year, up to the amount of statutory unassigned surplus as of
the end of the prior calendar year. Dividends exceeding these limitations may be
paid only with prior approval of the Ohio Department of Insurance. Consequently,
at times, we might not be able to receive dividends from our insurance
subsidiary, or we might not receive dividends in the amounts necessary to meet
our debt obligations or to pay dividends on our common stock without liquidating
securities. This could affect our financial position.
Please
see Item 1, Regulation, Page 21, and Item 8, Note 9 of the Consolidated
Financial Statements, Page 106, for discussion of insurance holding company
dividend regulations.
|
Item
1B.
|
Unresolved
Staff Comments
|
None
Cincinnati
Financial Corporation owns our headquarters building located on 100 acres of
land in Fairfield, Ohio. This building has approximately 1,508,200 total
square feet of available space. The property, including land, is carried in our
financial statements at $165 million as of December 31, 2009, and
is classified as land, building and equipment, net, for company use.
John J. & Thomas R. Schiff & Co. Inc.,
a related party, occupies approximately 6,750 square feet (less than
1 percent).
Cincinnati
Financial Corporation also owns the Fairfield Executive Center, which is located
on the northwest corner of our headquarters property. This four-story office
building has approximately 124,000 square feet of available space. The
property is carried in the financial statements at $6 million as of
December 31, 2009, and is classified as an other invested asset.
Unaffiliated tenants occupy approximately 8 percent. All unoccupied space
is currently available for lease.
The
Cincinnati Insurance Company owns a building used for business continuity, with
approximately 48,000 square feet of available space, located approximately
six miles from our headquarters. The property, including land, is carried
on our financial statements at $10 million as of
December 31, 2009, and is classified as land, building and
equipment, net, for company use.
|
Item
3.
|
Legal
Proceedings
|
Neither
the company nor any of our subsidiaries is involved in any material litigation
other than ordinary, routine litigation incidental to the nature of its
business.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
No
matters were submitted to a vote of security holders of Cincinnati Financial
during the fourth quarter of 2009.
Part
II
|
Item
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity
Securities
|
Cincinnati
Financial Corporation had approximately 13,000 shareholders of record and
approximately 36,000 beneficial shareholders as of
December 31, 2009. Many of our independent agent representatives and
most of the 4,170 associates of our subsidiaries own the company’s common stock.
We are unable to quantify those holdings because many are beneficially
held.
Our
common shares are traded under the symbol CINF on the Nasdaq Global Select
Market.
(Source:
Nasdaq Global Select Market)
|
|
2009
|
|
|
2008
|
|
Quarter:
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
High
|
|
$ |
29.66 |
|
|
$ |
26.94 |
|
|
$ |
26.31 |
|
|
$ |
26.89 |
|
|
$ |
39.71 |
|
|
$ |
39.97 |
|
|
$ |
33.60 |
|
|
$ |
31.71 |
|
Low
|
|
|
17.84 |
|
|
|
21.40 |
|
|
|
21.30 |
|
|
|
25.05 |
|
|
|
35.10 |
|
|
|
25.40 |
|
|
|
21.83 |
|
|
|
18.80 |
|
Period-end
close
|
|
|
22.87 |
|
|
|
22.35 |
|
|
|
25.99 |
|
|
|
26.24 |
|
|
|
38.04 |
|
|
|
25.40 |
|
|
|
28.44 |
|
|
|
29.07 |
|
Cash
dividends declared
|
|
|
0.39 |
|
|
|
0.39 |
|
|
|
0.395 |
|
|
|
0.395 |
|
|
|
0.39 |
|
|
|
0.39 |
|
|
|
0.39 |
|
|
|
0.39 |
|
We
discuss the factors that affect our ability to pay cash dividends and repurchase
shares in Item 7, Liquidity and Capital Resources, Page 68. One factor we
address is regulatory restrictions on the dividends our insurance subsidiary can
pay to the parent company, which also is discussed in Item 8, Note 9
of the Consolidated Financial Statements, Page 106.
The
following summarizes securities authorized for issuance under our equity
compensation plans as of December 31, 2009:
Plan
category
|
|
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights at
December
31, 2009
|
|
|
Weighted-average
exercise
price
of outstanding
options,
warrants and rights
|
|
|
Number
of securities remaining available
for
future issuance under equity
compensation
plan (excluding securities
reflected
in column (a)) at December 31,
2009
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
9,875,411 |
|
|
$ |
36.67 |
|
|
|
7,726,853 |
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
9,875,411 |
|
|
$ |
36.67 |
|
|
|
7,726,853 |
|
The
number of securities remaining available for future issuance includes: 7,354,695
shares available for issuance under the Cincinnati Financial Corporation 2006
Stock Compensation Plan, which can be issued as stock options, service-based, or
performance-based restricted stock units, stock appreciation rights or other
equity-based grants; 72,158 shares of stock options available for issuance under
the Cincinnati Financial Corporation Stock Option Plan VII and
300,000 shares available for issuance of share grants under the Director’s Stock
Plan of 2009, which was approved by shareholders during 2009. Additional
information about stock-based associate compensation granted under our equity
compensation plans is available in Item 8, Note 17 of the Consolidated Financial
Statements, Page 113.
Period
|
|
Total
number
of
shares
purchased
|
|
|
Average
price
paid
per
share
|
|
|
Total
number of shares
purchased
as part of
publicly
announced
plans
or programs
|
|
|
Maximum
number of
shares
that may yet be
purchased
under the
plans
or programs
|
|
January
1-31, 2009
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
9,048,574 |
|
February
1-28, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,048,574 |
|
March
1-31, 2009
|
|
|
3,174 |
|
|
|
22.69 |
|
|
|
3,174 |
|
|
|
9,045,400 |
|
April
1-30, 2009
|
|
|
1,303 |
|
|
|
26.71 |
|
|
|
1,303 |
|
|
|
9,044,097 |
|
May
1-31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
June
1-30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
July
1-31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
August
1-31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
September
1-30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
October
1-31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
November
1-30, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
December
1-31, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
9,044,097 |
|
Totals
|
|
|
4,477 |
|
|
|
23.86 |
|
|
|
4,477 |
|
|
|
|
|
We did
not sell any of our shares that were not registered under the Securities Act
during 2009. The board of directors has authorized share repurchases since
1996. Purchases are expected to be made generally
through
open market transactions. The board gives management discretion to
purchase shares at reasonable prices in light of circumstances at the time
of purchase, subject to SEC regulations.
On
October 24, 2007, the board of directors expanded the existing repurchase
authorization to approximately 13 million shares. The prior repurchase
program for 10 million shares was announced in 2005, replacing a program that
had been in effect since 1999. No repurchase program has expired during the
period covered by the above table. All of the publicly announced plan
repurchases in the table above were made under the expansion announced in
October 2007 of our 2005 program. Neither the 2005 nor 1999 program had an
expiration date, but no further repurchases will occur under the
1999 program.
Cumulative
Total Return
As
depicted in the graph below, the five–year total return on a $100 investment
made December 31, 2004, assuming the reinvestment of all dividends,
was a negative 23.3 percent for Cincinnati Financial Corporation’s common stock
compared with a negative 7.3 percent for the Standard & Poor’s Composite
1500 Property & Casualty Insurance Index and a 2.1 percent return for the
Standard & Poor’s 500 Index.
The
Standard & Poor’s Composite 1500 Property & Casualty Insurance Index
includes 25 companies: Allstate Corporation, American Physicians Capital,
Amerisafe Inc., Berkley (W R) Corporation, Chubb Corporation, Cincinnati
Financial Corporation, Employers Holdings Inc., Fidelity National Financial
Inc., First American Corporation, Hanover Insurance Group Inc.,
Infinity Property & Casualty Corporation, Mercury General Corporation,
Navigators Group Inc., Old Republic International Corporation, Proassurance
Corporation, Progressive Corporation, RLI Corporation, Safety Insurance Group
Inc., Selective Insurance Group Inc., Stewart Information Services, Tower Group
Inc., Travelers Companies Inc., United Fire & Casualty Company, XL
Capital Ltd. and Zenith National Insurance Corporation.
The
Standard & Poor’s 500 Index includes a representative sample of 500 leading
companies in a cross section of industries of the U.S. economy. Although this
index focuses on the large capitalization segment of the market, it is widely
viewed as a proxy for the total market.
Item
6. Selected
Financial Data
|
|
Years
ended December 31,
|
|
(In
millions except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Consolidated
Income Statement Data
|
|
|
|
Earned
premiums
|
|
$ |
3,054 |
|
|
$ |
3,136 |
|
|
$ |
3,250 |
|
|
$ |
3,278 |
|
Investment
income, net of expenses
|
|
|
501 |
|
|
|
537 |
|
|
|
608 |
|
|
|
570 |
|
Realized
investment gains and losses*
|
|
|
336 |
|
|
|
138 |
|
|
|
382 |
|
|
|
684 |
|
Total
revenues
|
|
|
3,903 |
|
|
|
3,824 |
|
|
|
4,259 |
|
|
|
4,550 |
|
Net
income
|
|
|
432 |
|
|
|
429 |
|
|
|
855 |
|
|
|
930 |
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.66 |
|
|
$ |
2.63 |
|
|
$ |
5.01 |
|
|
$ |
5.36 |
|
Diluted
|
|
|
2.65 |
|
|
|
2.62 |
|
|
|
4.97 |
|
|
|
5.30 |
|
Cash
dividends per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
|
1.57 |
|
|
|
1.56 |
|
|
|
1.42 |
|
|
|
1.34 |
|
Paid
|
|
|
1.565 |
|
|
|
1.525 |
|
|
|
1.40 |
|
|
|
1.31 |
|
Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average, diluted
|
|
|
163 |
|
|
|
163 |
|
|
|
172 |
|
|
|
175 |
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested
assets
|
|
$ |
10,643 |
|
|
$ |
8,890 |
|
|
$ |
12,261 |
|
|
$ |
13,759 |
|
Deferred
policy acquisition costs
|
|
|
481 |
|
|
|
509 |
|
|
|
461 |
|
|
|
453 |
|
Total
assets
|
|
|
14,440 |
|
|
|
13,369 |
|
|
|
16,637 |
|
|
|
17,222 |
|
Gross
loss and loss expense reserves
|
|
|
4,142 |
|
|
|
4,086 |
|
|
|
3,967 |
|
|
|
3,896 |
|
Life
policy reserves
|
|
|
1,783 |
|
|
|
1,551 |
|
|
|
1,478 |
|
|
|
1,409 |
|
Long-term
debt
|
|
|
790 |
|
|
|
791 |
|
|
|
791 |
|
|
|
791 |
|
Shareholders'
equity
|
|
|
4,760 |
|
|
|
4,182 |
|
|
|
5,929 |
|
|
|
6,808 |
|
Book
value per share
|
|
|
29.25 |
|
|
|
25.75 |
|
|
|
35.70 |
|
|
|
39.38 |
|
Value
creation ratio
|
|
|
19.7
|
% |
|
|
(23.5 |
)
% |
|
|
(5.7 |
)
% |
|
|
16.7
|
% |
Consolidated
Property Casualty Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,125 |
|
|
$ |
3,164 |
|
Unearned
premiums
|
|
|
1,507 |
|
|
|
1,542 |
|
|
|
1,562 |
|
|
|
1,576 |
|
Gross
loss and loss expense reserves
|
|
|
4,096 |
|
|
|
4,040 |
|
|
|
3,925 |
|
|
|
3,860 |
|
Investment
income, net of expenses
|
|
|
336 |
|
|
|
350 |
|
|
|
393 |
|
|
|
367 |
|
Loss
ratio
|
|
|
58.6
|
% |
|
|
57.7
|
% |
|
|
46.6
|
% |
|
|
51.9
|
% |
Loss
expense ratio
|
|
|
13.1 |
|
|
|
10.6 |
|
|
|
12.0 |
|
|
|
11.6 |
|
Underwriting
expense ratio
|
|
|
32.8 |
|
|
|
32.3 |
|
|
|
31.7 |
|
|
|
30.8 |
|
Combined
ratio
|
|
|
104.5
|
% |
|
|
100.6
|
% |
|
|
90.3
|
% |
|
|
94.3
|
% |
Per share
data adjusted to reflect all stock splits and dividends prior to December 31,
2009.
|
*
|
Realized
investment gains and losses are integral to our financial results over the
long term, but our substantial discretion in the timing of investment
sales may cause this value to fluctuate substantially. Also, applicable
accounting standards require us to recognize gains and losses from certain
changes in fair values of securities and embedded derivatives without
actual realization of those gains and losses. We discuss realized
investment gains for the past three years in Item 7, Investments Results
of Operations, Page 64.
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
|
$ |
3,164 |
|
|
$ |
3,020 |
|
|
$ |
2,748 |
|
|
$ |
2,478 |
|
|
$ |
2,152 |
|
|
$ |
1,907 |
|
|
$ |
1,732 |
|
|
526 |
|
|
|
492 |
|
|
|
465 |
|
|
|
445 |
|
|
|
421 |
|
|
|
415 |
|
|
|
387 |
|
|
61 |
|
|
|
91 |
|
|
|
(41 |
) |
|
|
(94 |
) |
|
|
(25 |
) |
|
|
(2 |
) |
|
|
0 |
|
|
3,767 |
|
|
|
3,614 |
|
|
|
3,181 |
|
|
|
2,843 |
|
|
|
2,561 |
|
|
|
2,331 |
|
|
|
2,128 |
|
|
602 |
|
|
|
584 |
|
|
|
374 |
|
|
|
238 |
|
|
|
193 |
|
|
|
118 |
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.44 |
|
|
$ |
3.30 |
|
|
$ |
2.11 |
|
|
$ |
1.33 |
|
|
$ |
1.10 |
|
|
$ |
0.67 |
|
|
$ |
1.40 |
|
|
3.40 |
|
|
|
3.28 |
|
|
|
2.10 |
|
|
|
1.32 |
|
|
|
1.07 |
|
|
|
0.67 |
|
|
|
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.205 |
|
|
|
1.04 |
|
|
|
0.90 |
|
|
|
0.81 |
|
|
|
0.76 |
|
|
|
0.69 |
|
|
|
0.62 |
|
|
1.162 |
|
|
|
1.02 |
|
|
|
0.89 |
|
|
|
0.80 |
|
|
|
0.74 |
|
|
|
0.67 |
|
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
178 |
|
|
|
178 |
|
|
|
180 |
|
|
|
179 |
|
|
|
181 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,702 |
|
|
$ |
12,677 |
|
|
$ |
12,485 |
|
|
$ |
11,226 |
|
|
$ |
11,534 |
|
|
$ |
11,276 |
|
|
$ |
10,156 |
|
|
429 |
|
|
|
400 |
|
|
|
372 |
|
|
|
343 |
|
|
|
286 |
|
|
|
259 |
|
|
|
226 |
|
|
16,003 |
|
|
|
16,107 |
|
|
|
15,509 |
|
|
|
14,122 |
|
|
|
13,964 |
|
|
|
13,274 |
|
|
|
11,795 |
|
|
3,661 |
|
|
|
3,549 |
|
|
|
3,415 |
|
|
|
3,176 |
|
|
|
2,887 |
|
|
|
2,473 |
|
|
|
2,154 |
|
|
1,343 |
|
|
|
1,194 |
|
|
|
1,025 |
|
|
|
917 |
|
|
|
724 |
|
|
|
641 |
|
|
|
885 |
|
|
791 |
|
|
|
791 |
|
|
|
420 |
|
|
|
420 |
|
|
|
426 |
|
|
|
449 |
|
|
|
456 |
|
|
6,086 |
|
|
|
6,249 |
|
|
|
6,204 |
|
|
|
5,598 |
|
|
|
5,998 |
|
|
|
5,995 |
|
|
|
5,421 |
|
|
34.88 |
|
|
|
35.60 |
|
|
|
35.10 |
|
|
|
31.43 |
|
|
|
33.62 |
|
|
|
33.80 |
|
|
|
30.35 |
|
|
1.4
|
% |
|
|
4.4
|
% |
|
|
14.5
|
% |
|
|
(4.1 |
)
% |
|
|
1.7
|
% |
|
|
13.6
|
% |
|
|
1.3
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,058 |
|
|
$ |
2,919 |
|
|
$ |
2,653 |
|
|
$ |
2,391 |
|
|
$ |
2,073 |
|
|
$ |
1,828 |
|
|
$ |
1,658 |
|
|
1,557 |
|
|
|
1,537 |
|
|
|
1,444 |
|
|
|
1,317 |
|
|
|
1,060 |
|
|
|
920 |
|
|
|
835 |
|
|
3,629 |
|
|
|
3,514 |
|
|
|
3,386 |
|
|
|
3,150 |
|
|
|
2,894 |
|
|
|
2,416 |
|
|
|
2,093 |
|
|
338 |
|
|
|
289 |
|
|
|
245 |
|
|
|
234 |
|
|
|
223 |
|
|
|
223 |
|
|
|
208 |
|
|
49.2
|
% |
|
|
49.8
|
% |
|
|
56.1
|
% |
|
|
61.5
|
% |
|
|
66.6
|
% |
|
|
71.1
|
% |
|
|
61.6
|
% |
|
10.0 |
|
|
|
10.3 |
|
|
|
11.6 |
|
|
|
11.4 |
|
|
|
10.1 |
|
|
|
11.3 |
|
|
|
10.0 |
|
|
30.0 |
|
|
|
29.7 |
|
|
|
27.0 |
|
|
|
26.8 |
|
|
|
28.2 |
|
|
|
30.4 |
|
|
|
28.6 |
|
|
89.2
|
% |
|
|
89.8
|
% |
|
|
94.7
|
% |
|
|
99.7
|
% |
|
|
104.9
|
% |
|
|
112.8
|
% |
|
|
100.2
|
% |
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
Introduction
The
purpose of Management’s Discussion and Analysis is to provide an understanding
of Cincinnati Financial Corporation’s consolidated results of operations and
financial condition. Our Management’s Discussion and Analysis should be read in
conjunction with Item 6, Selected Financial Data, Pages 32 and 33, and Item
8, Consolidated Financial Statements and related Notes, beginning on Page 87. We
present per share data on a diluted basis unless otherwise noted, adjusting
those amounts for all stock splits and stock dividends.
We begin
with an executive summary of our results of operations and outlook, as well as
details on critical accounting policies and estimates. Periodically, we
refer to estimated industry data so that we can give information on our
performance within the context of the overall insurance industry. Unless
otherwise noted, the industry data is prepared by A.M. Best, a leading
insurance industry statistical, analytical and financial strength rating
organization. Information from A.M. Best is presented on a statutory basis.
When we provide our results on a comparable statutory basis, we label it as
such; all other company data is presented in accordance with
accounting principles generally accepted in the United States of America
(GAAP).
Executive
Summary
Through
The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the
25 largest property casualty insurers in the nation, based on written
premium volume for approximately 2,000 U.S. stock and mutual insurer groups. We
market our insurance products through a select group of independent insurance
agencies in 37 states as discussed in Item 1, Our Business and Our
Strategy, Page 1.
Although
2009 and 2008 were difficult years for our economy, our industry and our
company, our long-term perspective lets us address the immediate challenges
while focusing on the major decisions that best position the company for success
through all market cycles. We believe that this forward-looking view has
consistently benefited our shareholders, agents, policyholders and
associates.
To
measure our progress, we have defined a measure of value creation that we
believe captures the contribution of our insurance operations, the success of
our investment strategy and the importance we place on paying cash
dividends to shareholders. We refer to this measure as our value creation ratio,
or VCR, and it is made up of two primary components: (1) our rate of growth
in book value per share plus (2) the ratio of dividends declared per
share to beginning book value per share. For the period 2010 through 2014,
an annual value creation ratio averaging 12 percent to 15 percent is our primary
performance target. Management believes this non-GAAP measure is a useful
supplement to GAAP information. With heightened economic and
market uncertainty since 2008, we believe the long-term nature of this
ratio is an appropriate way to measure our long-term progress in creating
shareholder value.
|
|
One
|
|
|
Three-year
|
|
|
Five-year
|
|
|
|
year
|
|
|
% average
|
|
|
% average
|
|
Value
creation ratio
|
|
|
|
|
|
|
|
|
|
as
of December 31, 2009
|
|
|
19.7 |
% |
|
|
(3.2 |
)
% |
|
|
1.7 |
% |
as
of December 31, 2008
|
|
|
(23.5 |
) |
|
|
(4.2 |
) |
|
|
(1.3 |
) |
as
of December 31, 2007
|
|
|
(5.7 |
) |
|
|
4.1 |
|
|
|
6.3 |
|
When
looking at our longer-term objectives, we see three performance
drivers:
|
·
|
Premium
growth – We believe over any five-year period our agency relationships and
initiatives can lead to a property casualty written premium growth
rate that exceeds the industry average. The compound annual growth
rate of our net written premiums was negative 0.6 percent over the
five-year period 2005 through 2009, equal to the negative 0.6 percent
estimated growth rate for the property casualty insurance
industry.
|
|
·
|
Combined
ratio – We believe our underwriting philosophy and initiatives can
generate a GAAP combined ratio over any five-year period that is
consistently below 100 percent. Our GAAP combined ratio has averaged
95.6 percent over the five-year period 2005 through 2009. Our
combined ratio was below 100 percent in each year during the period,
except 2008 and 2009, which averaged 102.5 percent, and which
averaged catastrophe losses that were 2.5 percentage points higher than
the average for the 10-year period prior to 2008. Performance as measured
by the combined ratio is discussed in Consolidated Property Casualty
Insurance Results of Operations, Page 46. Our statutory combined ratio
averaged 95.4 percent over the five-year period 2005 through
2009 compared with an estimated 98.9 percent for the property
casualty industry.
|
|
·
|
Investment
contribution - We believe our investment philosophy and initiatives can
drive investment income growth and lead to a total return on our equity
investment portfolio over a five-year period that exceeds the five-year
return of the Standard & Poor’s 500
Index.
|
|
o
|
Investment
income growth, on a before-tax basis, grew at a compound annual rate of
0.3 percent over the five-year period 2005 through 2009. It grew in
each year except 2008 and 2009, when we experienced a dramatic
reduction in dividend payouts by financial services companies held in our
equity portfolio, a risk we addressed aggressively during 2008, completing
that effort in early 2009.
|
|
o
|
Over
the five years ended December 31, 2009, our compound annual equity
portfolio return was a negative 5.8 percent compared with a compound
annual total return of 0.4 percent for the Index. Our equity portfolio
underperformed the market for the five-year period primarily because of
the decline in the market value of our previously large holdings in the
financial services sector. For the year 2009, our compound annual equity
portfolio return was 16.4 percent, compared with 26.5 percent for the
Index, as the broad market rally did not favor the higher quality,
dividend-paying stocks we prefer.
|
The board
of directors is committed to rewarding shareholders directly through cash
dividends and through authorizing share repurchases. The board also has
periodically declared stock dividends and splits. Through 2009, the company has
increased the indicated annual cash dividend rate for 49 consecutive years, a
record we believe is matched by only 11 other publicly traded companies. The
board regularly evaluates relevant factors in dividend-related decisions, and
the increase reflects confidence in our strong capital, liquidity and financial
flexibility, as well as progress through our initiatives to improve earnings
performance. We discuss our financial position in more detail in Liquidity and
Capital Resources, Page 68.
Strategic
Initiatives Highlights
Management
has worked to identify the strategies that can lead to long-term success, with
concurrence by the board of directors. Our strategies are intended to position
us to compete successfully in the markets we have targeted while appropriately
managing risk. We believe successful implementation of the initiatives that
support our strategies will help us better serve our agent customers, reduce
volatility in our financial results and weather difficult economic, market or
industry pricing cycles.
|
·
|
Manage
capital effectively – Continued focus on these initiatives is intended to
manage our capital and liquidity so that we can successfully grow our
insurance business. A strong capital position provides the capacity to
support premium growth and provides the liquidity to pay claims while
sustaining our investment in the people and infrastructure needed to
implement our other strategic
initiatives.
|
|
·
|
Improve
insurance profitability – Implementation of these operational initiatives
is intended to support profitable growth for the agencies that represent
us and for our company. These initiatives seek to enhance our underwriting
or pricing expertise and to provide more advanced technology to our
agents, allowing them to serve clients faster and manage expenses better.
Some initiatives also streamline our internal processes so we can devote
more resources to agent service.
|
|
·
|
Drive
premium growth – Implementation of these operational initiatives is
intended to expand our geographic footprint and diversify our premium
sources to obtain profitable growth without significant infrastructure
expense. Diversified growth also may reduce our catastrophe
exposure risk.
|
We
discuss each of these strategies, along with the metrics we use to assess their
progress, in Item 1, Strategic Initiatives, Page 8,
Factors
Influencing Our Future Performance
In 2009,
our value creation ratio result exceeded our target annual average of 12 percent
to 15 percent for the period 2010 through 2014, and in 2008, it was below our
target, as discussed in the review of our financial highlights below. For the
year 2010, we believe our value creation ratio may be below our long-term target
for several reasons.
|
·
|
The
strong rally in financial markets during 2009 had a highly favorable
impact on our 2009 value creation ratio, offsetting much of the
unfavorable impact of the sharp decline in financial markets during 2008.
That decline also was reflected in the value creation ratio. Should
financial markets decline during 2010, which could occur as part of
typical volatility patterns, the related component of our 2010 value
creation ratio could also register a weak or negative
result.
|
|
·
|
Lingering
effects of soft insurance market pricing are expected to affect growth
rates and earned premium levels into 2010 and perhaps later, depending on
when insurance market conditions improve. These conditions continue to
weaken loss ratios and hamper near-term profitability. Economic factors,
including inflation, may increase our claims and settlement expenses
related to medical care, litigation and
construction.
|
|
·
|
The
weak economy is expected to continue to affect policyholders by deflating
the valuation of their business and personal insurable assets. Until the
weak economy significantly strengthens, we do not expect to see
significant premium growth for the property casualty industry or our
commercial lines
|
segment,
which represented 75 percent of our 2009 property casualty net written premiums.
Property casualty written premium growth also may lag as our growth initiatives
need more time to reach their full contribution.
|
·
|
We
will incur the cost of continued investment in our business, including
technology, entry in new states and process initiatives to create
long-term value. In addition, we will not see the full advantage of many
of these investments for several
years.
|
|
·
|
Diversification
of the investment portfolio during 2008 and early 2009 included sales of
selected positions to lock in gains, reduce concentrations and increase
liquidity. Proceeds of sales were reinvested in both fixed income and in
equity securities with yields that we believe are likely to be more
secure, but which could result in slower growth of investment income. We
expect to continue making changes to the portfolio, as
appropriate.
|
Our view
of the value we can create over the next five years relies on two assumptions
about the external environment. First, we anticipate some firming of commercial
insurance pricing by the end of 2010. Second, we believe that the economy and
financial markets can resume a growth track by the end of 2010. If those
assumptions prove to be inaccurate, we may not be able to achieve our
performance targets even if we accomplish our strategic objectives.
Other
factors that could influence our ability to achieve our targets
include:
|
·
|
We
expect the insurance marketplace to remain competitive, which is likely to
cause carriers to pursue strategies that they believe could lead to
economies of scale, market share gains or the potential for an improved
competitive posture. Direct writers will continue to be a factor in the
personal insurance market.
|
|
·
|
We
expect the independent insurance agency system to remain strong and
viable, with continued agency consolidation, especially as agency margins
come under more pressure due to soft pricing and the difficult economic
environment. The soft commercial market that has extended into 2010
creates additional risk for agencies. We expect the soft market to
continue for much of 2010, particularly in non-catastrophe-event-prone
states and lines of business, absent a significant event or
events.
|
|
·
|
We
expect initiatives that make it easier for agents to do business with us
will continue to be a significant factor in agency relationships, with
technology being a major driver. Policyholders will increasingly demand
online services and access from agents or
carriers.
|
We
discuss in our Item 1A, Risk Factors, Page 23, many potential risks to our
business and our ability to achieve our qualitative and quantitative objectives.
These are real risks, but their probability of occurring may not be high. We
also believe that our risk management programs generally could mitigate their
potential effects, in the event they would occur. We continue to study emerging
risks, including climate change risk and its potential financial effects on our
results of operation and those we insure. These effects include deterioration in
credit quality of our municipal or corporate bond portfolios and increased
losses without sufficient corresponding increases in premiums. As with any risk,
we seek to identify the extent of the risk exposure and possible actions to
mitigate potential negative effects of risk, at an enterprise
level.
We have
formal risk management programs overseen by a senior officer and supported
by a team of representatives from business areas. The team makes
reports to our chairman, our president and chief executive officer and our
board of directors, as appropriate, on risk assessments, risk metrics and
risk plans. Our use of operational audits, strategic plans and departmental
business plans, as well as our culture of open communications and our
fundamental respect for our Code of Conduct, continue to help us manage risks on
an ongoing basis.
Below we
review highlights of our financial results for the past three years. Detailed
discussion of these topics appears in Results of Operations, Page 46, and
Liquidity and Capital Resources, Page 68.
Corporate
Financial Highlights
The value
creation ratio discussed in the Executive Summary, Page 34, was 19.7 percent in
2009, negative 23.5 percent in 2008 and negative 5.7 percent in 2007.
The book value per share growth component of the value creation ratio was 13.6
percent during 2009, largely reflecting improved valuation of our investment
portfolio in addition to earnings. In both 2008 and 2007, a decline in
unrealized gains on our investment portfolio was the most significant factor in
the decline in book value as discussed below. In 2009 and 2008, net income also
was significantly below the level of 2007.
Cash
dividends declared per share rose 0.6 percent in 2009, 9.9 percent in 2008 and
6.0 percent in 2007.
Balance
Sheet Data
|
|
At
December 31,
|
|
|
At
December 31,
|
|
(Dollars in millions except
share data)
|
|
2009
|
|
|
2008
|
|
Balance
sheet data
|
|
|
|
|
|
|
Invested
assets
|
|
$ |
10,643 |
|
|
$ |
8,890 |
|
Total
assets
|
|
|
14,440 |
|
|
|
13,369 |
|
Short-term
debt
|
|
|
49 |
|
|
|
49 |
|
Long-term
debt
|
|
|
790 |
|
|
|
791 |
|
Shareholders'
equity
|
|
|
4,760 |
|
|
|
4,182 |
|
Book
value per share
|
|
|
29.25 |
|
|
|
25.75 |
|
Debt-to-capital
ratio
|
|
|
15.0
|
% |
|
|
16.7
|
% |
Invested
assets increased significantly for the year 2009 primarily due to a strong rally
in the financial markets, reversing the trend of 2008 from lower fair values for
portfolio investments, largely due to economic factors. Entering 2009, the
portfolio was substantially more diversified and generally better positioned to
withstand short-term fluctuations compared with recent years. The downturn in
the economy during 2008 had a particularly adverse effect on our financial
sector equity holdings, which made up a significant portion of the portfolio
prior to mid-2008. We discuss our investment strategy in Item 1, Investments
Segment, Page 18, and results for the segment in Investment Results of
Operations, Page 64.
Our ratio
of debt to total capital (debt plus shareholders’ equity) decreased during 2009
after rising in 2008. The increase during 2008 was due to the effect on
shareholders’ equity from the declining value of our invested
assets.
Income
Statement and Per Share Data
|
|
Twelve
months ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars in millions except share
data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
3,054 |
|
|
$ |
3,136 |
|
|
$ |
3,250 |
|
|
|
(2.6 |
) |
|
|
(3.5 |
) |
Investment
income, net of expenses (pretax)
|
|
|
501 |
|
|
|
537 |
|
|
|
608 |
|
|
|
(6.8 |
) |
|
|
(11.6 |
) |
Realized
investment gains and losses (pretax)
|
|
|
336 |
|
|
|
138 |
|
|
|
382 |
|
|
|
144.5 |
|
|
|
(64.0 |
) |
Total
revenues
|
|
|
3,903 |
|
|
|
3,824 |
|
|
|
4,259 |
|
|
|
2.1 |
|
|
|
(10.2 |
) |
Net
income
|
|
|
432 |
|
|
|
429 |
|
|
|
855 |
|
|
|
0.7 |
|
|
|
(49.9 |
) |
Per
share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2.65 |
|
|
$ |
2.62 |
|
|
$ |
4.97 |
|
|
|
1.1 |
|
|
|
(47.3 |
) |
Cash
dividends declared
|
|
|
1.57 |
|
|
|
1.56 |
|
|
|
1.42 |
|
|
|
0.6 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
162,866,863 |
|
|
|
163,362,409 |
|
|
|
172,167,452 |
|
|
|
(0.3 |
) |
|
|
(5.1 |
) |
Net
income increased $3 million during 2009, reflecting the after-tax net effect of
three major contributing items: a $132 million increase from net realized
investment gains, partially offset by a $48 million decrease from investment
income and a $74 million decrease from property casualty underwriting results.
Net income declined in 2008 because of a decline in realized investment gains, a
first-ever decline in investment income and a lower aggregate contribution from
our insurance segments. A 2008 pension plan settlement reduced 2008 net
income by $17 million, or 11 cents per share. The transition from a defined
benefit pension plan reduced company risk while providing a company-sponsored
401(k) match to associates.
Weighted
average shares outstanding may fluctuate from period to period due to
repurchases of shares under board authorizations or issuance of shares when
associates exercise stock options. Weighted average shares outstanding on a
diluted basis declined by less than 1 million in 2009, after declining 9 million
in 2008 and 3 million in 2007.
As
discussed in Investment Results of Operation, Page 64, security sales led to
realized investment gains in all three years, although 2008 gains were tempered
by $510 million in other-than-temporary impairment charges. Realized investment
gains and losses are integral to our financial results over the long term. We
have substantial discretion in the timing of investment sales and, therefore,
the gains or losses that are recognized in any period. That discretion generally
is independent of the insurance underwriting process. Also, applicable
accounting standards require us to recognize gains and losses from certain
changes in fair values of securities and for securities with embedded
derivatives without actual realization of those gains and losses.
Lower
income from common stock dividends led to a 6.8 percent decline in pretax net
investment income in 2009, improving on an 11.6 percent decline for 2008, which
was the first decline for this measure in company history. The primary reason
for the decline was dividend reductions by common and preferred holdings,
including reductions during the year on positions subsequently sold or
reduced.
Contribution
from Insurance Operations
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Consolidated
property casualty highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,117 |
|
|
|
(3.3 |
) |
|
|
(3.4 |
) |
Earned
premiums
|
|
|
2,911 |
|
|
|
3,010 |
|
|
|
3,125 |
|
|
|
(3.3 |
) |
|
|
(3.7 |
) |
Underwriting
(loss) profit
|
|
|
(131 |
) |
|
|
(17 |
) |
|
|
304 |
|
|
nm
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
GAAP
combined ratio
|
|
|
104.5
|
% |
|
|
100.6
|
% |
|
|
90.3
|
% |
|
|
3.9 |
|
|
|
10.3 |
|
Statutory
combined ratio
|
|
|
104.4 |
|
|
|
100.4 |
|
|
|
90.3 |
|
|
|
4.0 |
|
|
|
10.1 |
|
Written
premium to statutory surplus
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
The
decline in property casualty written premium growth reflected the competitive
and market factors discussed in Item 1, Commercial Lines and Personal Lines
Property Casualty Insurance Segment, Page 12 and Page 15.
In both
2009 and 2008, our property casualty insurance operations reported an
underwriting loss after achieving record profitability in 2007. We measure
property casualty underwriting profitability primarily by the combined ratio.
Our combined ratio measures the percentage of each earned premium dollar spent
on claims plus all expenses related to our property casualty operations. A
lower ratio indicates more favorable results and better underlying performance.
In 2009, 2008 and 2007, favorable development on reserves for claims that
occurred in prior accident years helped offset incurred loss and loss expenses.
Reserve development is discussed further in Property Casualty Loss and Loss
Expense Obligations and Reserves, Pages 71 through 72. Catastrophe losses
fluctuated dramatically over the three-year period, with higher than
average contributions to the combined ratio of 5.7 and 6.8 percentage points in
2009 and 2008, respectively, following an unusually low 0.8 points in 2007.
Our 10-year historical annual average contribution of catastrophe losses to the
combined ratio was 4.2 percentage points as of December 31, 2009. The
pension plan settlement increased the 2008 combined ratio by
0.8 percentage points.
During
2009, our excess and surplus lines operations contributed $39 million to net
written premiums and $27 million to earned premiums. We began excess and surplus
lines operations in 2008, and performance is consistent with expectations,
including a modest underwriting loss primarily due to start-up expenses related
to technology for processing business.
Our life
insurance segment continued to provide a consistent source of profit. We discuss
results for the segment in Life Insurance Results of Operations, Page 62.
Investment income and realized investment gains from the life insurance
investment portfolio are included in Investments segment results.
Critical
Accounting Estimates
Cincinnati
Financial Corporation’s financial statements are prepared using GAAP. These
principles require management to make estimates and assumptions that affect the
amounts reported in the Consolidated Financial Statements and accompanying
Notes. Actual results could differ materially from those estimates.
The
significant accounting policies used in the preparation of the financial
statements are discussed in Item 8, Note 1 of the Consolidated
Financial Statements, Page 94. In conjunction with that discussion, material
implications of uncertainties associated with the methods, assumptions and
estimates underlying the company’s critical accounting policies are discussed
below. The audit committee of the board of directors reviews the annual
financial statements with management and the independent registered public
accounting firm. These discussions cover the quality of earnings, review of
reserves and accruals, reconsideration of the suitability of accounting
principles, review of highly judgmental areas including critical accounting
policies, audit adjustments and such other inquiries as may
be appropriate.
Property
Casualty Insurance Loss And Loss Expense Reserves
We
establish loss and loss expense reserves for our property casualty insurance
business as balance sheet liabilities. These reserves account for unpaid loss
and loss expenses as of a financial statement date. Unpaid loss and loss
expenses are the estimated amounts necessary to pay for and settle all
outstanding insured claims, including incurred but not reported (IBNR) claims,
as of that date.
For some
lines of business that we write, a considerable and uncertain amount of time can
elapse between the occurrence, reporting and payment of insured claims. The
amount we will actually have to pay for such claims also can be highly
uncertain. This uncertainty, together with the size of our reserves, makes the
loss and loss expense reserves our most significant estimate. Gross loss and
loss expense reserves were $4.096 billion at year-end 2009 compared with
$4.040 billion at year-end 2008.
How
Reserves Are Established
Our field
claims representatives establish case reserves when claims are reported to the
company to provide for our unpaid loss and loss expense obligation associated
with individual claims. Experienced
headquarters
claims supervisors review individual case reserves greater than $35,000 that
were established by field claims representatives. Headquarters claims managers
also review case reserves greater than $100,000.
Our
claims representatives base their case reserve estimates primarily upon
case-by-case evaluations that consider:
|
·
|
circumstances
surrounding each claim
|
|
·
|
policy
provisions pertaining to each claim
|
|
·
|
potential
for subrogation or salvage
recoverable
|
|
·
|
general
insurance reserving practices
|
Case
reserves of all sizes are subject to review on a 90-day cycle, or more
frequently if new information about a loss becomes available. As part of the
review process, we monitor industry trends, cost trends, relevant court cases,
legislative activity and other current events in an effort to ascertain new or
additional loss exposures.
We also
establish incurred but not reported (IBNR) reserves to provide for all unpaid
loss and loss expenses not accounted for by case reserves:
|
·
|
For
weather events designated as catastrophes, we calculate IBNR reserves
directly as a result of an estimated IBNR claim count and an estimated
average claim amount for each event. Our claims department management
coordinates the assessment of these events and prepares the related IBNR
reserve estimates. Such an assessment involves a comprehensive analysis of
the nature of the storm, of policyholder exposures within the affected
geographic area and of available claims intelligence. Depending on the
nature of the event, available claims intelligence could include surveys
of field claims associates within the affected geographic area, feedback
from a catastrophe claims team sent into the area, as well as data on
claims reported as of the financial statement date. We generally use the
catastrophe definition provided by Property Claims Service, a division of
Insurance Services Office (ISO). PCS defines a catastrophe as an
event that causes countrywide damage of $25 million or more in
insured property losses and affects a significant number of policyholders
and insureds.
|
|
·
|
For
asbestos and environmental claims, we calculate IBNR reserves by deriving
an actuarially based estimate of total unpaid loss and loss expenses. We
then reduce the estimate by total case reserves. We discuss the
reserve analysis that applies to asbestos and environmental reserves in
Asbestos and Environmental Reserves, Page
74.
|
|
·
|
For
all other claims and events, IBNR reserves are calculated as the
difference between an actuarial estimate of the ultimate cost of total
loss and loss expenses incurred reduced by the sum of total loss and loss
expense payments and total case reserves estimated for individual claims.
We discuss below the development of actuarially based estimates of the
ultimate cost of total loss and loss expenses
incurred.
|
Our
actuarial staff applies significant judgment in selecting models and estimating
model parameters when preparing reserve analyses. In addition, unpaid loss
and loss expenses are inherently uncertain as to timing and amount.
Uncertainties relating to model appropriateness, parameter estimates and actual
loss and loss expense amounts are referred to as model, parameter and process
uncertainty, respectively. Our management and actuarial staff control for these
uncertainties in the reserving process in a variety of ways.
Our
actuarial staff bases its IBNR reserve estimates for these losses primarily on
the indications of methods and models that analyze accident year data. Accident
year is the year in which an insured claim, loss, or loss expense occurred. The
specific methods and models that our actuaries have used for the past several
years are:
|
·
|
paid
and reported loss development
methods
|
|
·
|
paid
and reported loss Bornhuetter-Ferguson
methods
|
|
·
|
individual
and multiple probabilistic trend family
models
|
Our
actuarial staff uses diagnostics provided by stochastic reserving software to
evaluate the appropriateness of the models and methods listed above. The
software’s diagnostics have indicated that the appropriateness of these models
and methods for estimating IBNR reserves for our lines of business tends to
depend on a line's tail. Tail refers to the time interval between a typical
claim's occurrence and its settlement. For our long-tail lines such as workers’
compensation and commercial casualty, models from the probabilistic trend family
tend to provide superior fits and to validate well compared with models
underlying the loss development and Bornhuetter-Ferguson methods. The loss
development and Bornhuetter-Ferguson methods, particularly the reported loss
variations, tend to produce the more appropriate IBNR reserve estimates for our
short-tail lines such as homeowner and commercial property. For our mid-tail
lines such as personal and commercial auto liability, all models and methods
provide useful insights.
Our
actuarial staff also devotes significant time and effort to the estimation of
model and method parameters. The loss development and Bornhuetter-Ferguson
methods require the estimation of numerous loss development factors. The
Bornhuetter-Ferguson methods also involve the estimation of numerous ultimate
loss ratios by accident year. Models from the probabilistic trend family require
the estimation of development trends, calendar year inflation trends and
exposure levels. Consequently, our actuarial staff monitors a number of trends
and measures to gain key business insights necessary for exercising appropriate
judgment when estimating the parameters mentioned.
These
trends and measures include:
|
·
|
company
and industry pricing
|
|
·
|
company
and industry exposure
|
|
·
|
company
and industry loss frequency and
severity
|
|
·
|
past
large loss events such as
hurricanes
|
|
·
|
company
and industry premium
|
|
·
|
company
in-force policy count
|
These
trends and measures also support the estimation of ultimate accident year loss
ratios needed for applying the Bornhuetter-Ferguson methods and for
assessing the reasonability of all IBNR reserve estimates computed. Our
actuarial staff reviews these trends and measures quarterly, updating parameters
derived from them as necessary.
Quarterly,
our actuarial staff summarizes its reserve analysis by preparing an actuarial
best estimate and a range of reasonable IBNR reserves intended to reflect the
uncertainty of the estimate. An inter-departmental committee that includes our
actuarial management team reviews the results of each quarterly reserve
analysis. The committee establishes management’s best estimate of IBNR reserves,
which is the amount that is included in each period’s financial statements. In
addition to the information provided by actuarial staff, the committee also
considers factors such as the following:
|
·
|
large
loss activity and trends in large
losses
|
|
·
|
general
economic trends such as inflation
|
|
·
|
trends
in litigiousness and legal expenses
|
|
·
|
product
and underwriting changes
|
|
·
|
changes
in claims practices
|
The
determination of management's best estimate, like the preparation of the reserve
analysis that supports it, involves considerable judgment. Changes in reserving
data or the trends and factors that influence reserving data may signal
fundamental shifts or may simply reflect single-period anomalies. Even if a
change reflects a fundamental shift, the full extent of the change may not
become evident until years later. Moreover, since our methods and models do not
explicitly relate many of the factors we consider directly to reserve levels, we
typically cannot quantify the precise impact of such factors on the adequacy of
reserves prospectively or retrospectively.
Due to
the uncertainties described above, our ultimate loss experience could prove
better or worse than our carried reserves reflect. To the extent that reserves
are inadequate and increased, the amount of the increase is a charge in the
period that the deficiency is recognized, raising our loss and loss expense
ratio and reducing earnings. To the extent that reserves are redundant and
released, the amount of the release is a credit in the period that the
redundancy is recognized, reducing our loss and loss expense ratio and
increasing earnings.
Key
Assumptions - Loss Reserving
Our
actuarial staff makes a number of key assumptions when using their methods and
models to derive IBNR reserve estimates. Appropriate reliance on these key
assumptions essentially entails determinations of the likelihood that
statistically significant patterns in historical data may extend into the
future. The four most significant of the key assumptions used by our actuarial
staff and approved by management are:
|
·
|
Emergence
of loss and allocated loss expenses on an accident year basis. Historical
paid loss, reported loss and paid allocated loss expense data for the
business lines we analyze contain patterns that reflect how unpaid
losses, unreported losses and unpaid allocated loss expenses as of a
financial statement date will emerge in the future on an accident year
basis. Unless our actuarial staff or management identifies reasons or
factors that invalidate the extension of historical patterns into
the future, these patterns can be used to make projections necessary
for estimating IBNR reserves. Our actuaries significantly rely on
this assumption in the application of all methods and models
mentioned above.
|
|
·
|
Calendar
year inflation. For long-tail and mid-tail business lines, calendar year
inflation trends for future paid losses and paid allocated loss
expenses will not vary significantly from a stable, long-term average. Our
actuaries base reserve estimates derived from probabilistic trend family
models on this assumption.
|
|
·
|
Exposure
levels. Historical earned premiums, when adjusted to reflect common levels
of product pricing and loss cost inflation, can serve as a proxy for
historical exposures. Our actuaries require this assumption to estimate
expected loss ratios and expected allocated loss expense ratios used by
the Bornhuetter-Ferguson reserving methods. They also use this assumption
to establish exposure levels for recent accident years, characterized by
“green” or immature data, when working with probabilistic trend family
models.
|
|
·
|
Claims
having atypical emergence patterns. Characteristics of certain subsets of
claims, such as high frequency, high severity, or mass tort claims, have
the potential to distort patterns contained in historical paid loss,
reported loss and paid allocated loss expense data. When testing indicates
this to be the case for a particular subset of claims, our actuaries
segregate these claims from the data and analyze them separately. Subsets
of claims that could fall into this category include hurricane claims,
individual large claims and asbestos and environmental
claims.
|
These key
assumptions have not changed since 2005, when our actuarial staff began using
probabilistic trend family models to estimate IBNR reserves.
Paid
losses, reported losses and paid allocated loss expenses are subject to random
as well as systematic influences. As a result, actual paid losses, reported
losses and paid allocated loss expenses are virtually certain to differ from
projections. Such differences are consistent with what specific models for our
business lines predict and with the related patterns in the historical data used
to develop these models. As a result, management does not closely monitor
statistically insignificant differences between actual and projected
data.
Reserve
Estimate Variability
Management
believes that the standard error of a reserve estimate, a measure of the
estimate's variability, provides the most appropriate measure of the estimate's
sensitivity. The reserves we establish depend on the models we use and the
related parameters we estimate in the course of conducting reserve analyses.
However, the actual amount required to settle all outstanding insured claims,
including IBNR claims, as of a financial statement date depends on stochastic,
or random, elements as well as the systematic elements captured by our models
and estimated model parameters. For the lines of business we write, process
uncertainty – the inherent variability of loss and loss expense payments –
typically contributes more to the imprecision of a reserve estimate than
parameter uncertainty.
Consequently,
a sensitivity measure that ignores process uncertainty would provide an
incomplete picture of the reserve estimate's sensitivity. Since a reserve
estimate's standard error accounts for both process and parameter
uncertainty, it reflects the estimate's full sensitivity to a range of
reasonably likely scenarios.
The table
below provides standard errors and reserve ranges for lines of business that
account for just over 90 percent of our 2009 loss and loss expense reserves
as well as the potential effects on our net income, assuming a 35 percent
federal tax rate. Standard errors and reserve ranges for assorted groupings of
these lines of business cannot be computed by simply adding the standard errors
and reserve ranges of the component lines of business, since such an approach
would ignore the effects of product diversification. See Range of Reasonable
Reserves, Page 72, for more details on our total reserve range. While the table
reflects our assessment of the most likely range within which each line's actual
unpaid loss and loss expenses may fall, one or more lines' actual unpaid loss
and loss expenses could nonetheless fall outside of the indicated
ranges.
|
|
Net
loss and loss expense range of reserves
|
|
|
|
|
|
|
Carried
|
|
|
Low
|
|
|
High
|
|
|
Standard
|
|
|
Net
income
|
|
(In
millions) |
|
reserves
|
|
|
point
|
|
|
point
|
|
|
error
|
|
|
effect
|
|
At
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,661 |
|
|
$ |
3,459 |
|
|
$ |
3,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
casualty
|
|
$ |
1,605 |
|
|
$ |
1,459 |
|
|
$ |
1,691 |
|
|
$ |
116 |
|
|
$ |
75 |
|
Commercial
property
|
|
|
115 |
|
|
|
93 |
|
|
|
136 |
|
|
|
21 |
|
|
|
14 |
|
Commercial
auto
|
|
|
374 |
|
|
|
355 |
|
|
|
393 |
|
|
|
19 |
|
|
|
12 |
|
Workers'
compensation
|
|
|
975 |
|
|
|
887 |
|
|
|
1,035 |
|
|
|
74 |
|
|
|
48 |
|
Personal
auto
|
|
|
154 |
|
|
|
146 |
|
|
|
161 |
|
|
|
8 |
|
|
|
5 |
|
Homeowners
|
|
|
89 |
|
|
|
80 |
|
|
|
98 |
|
|
|
9 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,498 |
|
|
$ |
3,256 |
|
|
$ |
3,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
casualty
|
|
$ |
1,559 |
|
|
$ |
1,280 |
|
|
$ |
1,595 |
|
|
$ |
158 |
|
|
$ |
103 |
|
Commercial
property
|
|
|
137 |
|
|
|
123 |
|
|
|
160 |
|
|
|
19 |
|
|
|
12 |
|
Commercial
auto
|
|
|
385 |
|
|
|
367 |
|
|
|
401 |
|
|
|
17 |
|
|
|
11 |
|
Workers'
compensation
|
|
|
842 |
|
|
|
854 |
|
|
|
943 |
|
|
|
45 |
|
|
|
29 |
|
Personal
auto
|
|
|
165 |
|
|
|
153 |
|
|
|
170 |
|
|
|
8 |
|
|
|
5 |
|
Homeowners
|
|
|
82 |
|
|
|
74 |
|
|
|
90 |
|
|
|
8 |
|
|
|
5 |
|
If actual
unpaid loss and loss expenses fall within these ranges, our cash flow and fixed
maturity investments should provide sufficient liquidity to make the subsequent
payments. To date, our cash flow has covered our loss and loss expense payments,
and we have never had to sell investments to make these payments. If this were
to become necessary, however, our fixed maturity investments should provide us
with ample liquidity. At year-end 2009, consolidated fixed maturity investments
exceeded total insurance reserves (including life policy reserves) by more than
$1.930 billion.
Life
Insurance Policy Reserves
We
establish the reserves for traditional life insurance policies based on expected
expenses, mortality, morbidity, withdrawal rates and investment yields,
including a provision for uncertainty. Once these assumptions are established,
they generally are maintained throughout the lives of the contracts. We use both
our own experience and industry experience adjusted for historical trends in
arriving at our assumptions for expected mortality, morbidity and withdrawal
rates. We use our own experience and historical trends for setting our
assumptions for expected expenses. We base our assumptions for expected
investment income on our own experience adjusted for current economic
conditions.
We
establish reserves for our universal life, deferred annuity and investment
contracts equal to the cumulative account balances, which include premium
deposits plus credited interest less charges and withdrawals. Some of our
universal life insurance policies contain no-lapse guarantee provisions. For
these policies, we establish a reserve in addition to the account balance based
on expected no-lapse guarantee benefits and expected policy
assessments.
Asset
Impairment
Our
fixed-maturity and equity investment portfolios are our largest assets. The
company’s asset impairment committee continually monitors the holdings in these
portfolios and all other assets for signs of other-than-temporary or permanent
impairment. The committee monitors significant decreases in the fair value of
invested assets, changes in legal factors or in the business climate, an
accumulation of costs in excess of the amount originally expected to acquire or
construct an asset, uncollectability of all receivable assets, or other factors
such as bankruptcy, deterioration of creditworthiness, failure to pay interest
or dividends or signs indicating that the carrying amount may not be
recoverable.
The
application of our impairment policy resulted in other-than-temporary impairment
charges that reduced our income before income taxes by $131 million in 2009,
$510 million in 2008 and $16 million in 2007. Impairment charges are recorded
for other-than-temporary declines in value, if, in the asset impairment
committee’s judgment, there is little expectation that the value may be recouped
within a designated recovery period. Other than-temporary impairment losses
represent non-cash charges to income and are reported as realized
investment losses.
Our
portfolio managers monitor their assigned portfolios. If a security is trading
below book value, the portfolio managers undertake additional reviews. Such
declines often occur in conjunction with events taking place in the overall
economy and market, combined with events specific to the industry or operations
of the issuing organization. Management reviews quantitative measurements such
as a declining trend in fair value, the extent of the fair value decline and the
length of time the value of the security has been depressed, as well as
qualitative measures such as pending events, credit ratings and issuer
liquidity. We are even more proactive when these declines in valuation are
greater than might be anticipated when viewed in the context of overall economic
and market conditions. We provide information
about valuation
of our invested assets in Item 8, Note 2 of the Consolidated Financial
Statements, Page 100.
All
securities valued below 100 percent of book value are reported to the asset
impairment committee for evaluation. Securities valued between 95 percent and
100 percent of book value are reviewed but not monitored separately by the
committee. These assets generally are at this value because of interest
rate-driven factors.
When
evaluating for other-than-temporary impairments, the committee considers the
company’s intent and ability to retain a security for a period adequate to
recover its cost. Because of the company's financial strength, management may
not impair certain securities even when they are trading below book
value.
When
determining OTTI charges for our fixed-maturity portfolio, management places
significant emphasis on whether issuers of debt are current on contractual
payments and whether future contractual amounts are likely to be paid. Our fixed
maturity invested asset impairment policy states that OTTI is considered to have
occurred (1) if we intend to sell the impaired fixed maturity security; (2) if
it is more likely than not we will be required to sell the fixed maturity
security before recovery of its amortized cost basis; or (3) the present value
of the expected cash flows is not sufficient to recover the entire amortized
cost basis. If we intend to sell or it is more likely than not we will be
required to sell, the book value of any such securities is reduced to fair value
as the new cost basis, and a realized loss is recorded in the quarter in which
it is recognized. When we believe that full collection of interest and/or
principal is not likely, we determine the net present value of future cash flows
by using the effective interest rate implicit in the security at the date of
acquisition as the discount rate and compare that amount to the amortized cost
and fair value of the security. The difference between the net present value of
the expected future cash flows and amortized cost of the security is considered
a credit loss and recognized as a realized loss in the quarter in which it
occurred. The difference between the fair value and the net present value of the
cash flows of the security, the non-credit loss, is recognized in other
comprehensive income as an unrealized loss.
When
determining OTTI charges for our equity portfolio, our invested asset impairment
policy considers qualitative and quantitative factors, including facts and
circumstances specific to individual securities, asset classes, the financial
condition of the issuer, changes in dividend payment, the length of time fair
value had been less than book value, the severity of the decline in fair value
below book value, the volatility of the security and our ability and intent to
hold each position until its forecasted recovery.
For each
of our equity securities in an unrealized loss position at December 31, 2009, we
applied the objective quantitative and qualitative criteria of our invested
asset impairment policy for OTTI. Our long-term equity investment philosophy,
emphasizing companies with strong indications of paying and growing dividends,
combined with our strong surplus, liquidity and cash flow, provide us the
ability to hold these investments through what we believe to be slightly longer
recovery periods occasioned by the recession and historic levels of market
volatility. We review the expected recovery period by individual security. Based
on the individual qualitative and quantitative factors, as discussed above, we
evaluate and determine an expected recovery period for each security. A change
in the condition of a security can warrant impairment before the expected
recovery period. If the security has not recovered cost within the expected
recovery period, the security is impaired.
Securities
that have previously been impaired are evaluated based on their adjusted book
value and written down further, if deemed appropriate. We provide detailed
information about securities trading in a continuous loss position at year-end
2009 in Item 7A, Application of Asset Impairment Policy, Page 85.
An other-than-temporary decline in the fair value of a security is
recognized in net income as a realized investment loss.
Securities
considered to have a temporary decline would be expected to recover their book
value, which may be at maturity. Under the same accounting treatment as fair
value gains, temporary declines (changes in the fair value of these securities)
are reflected in shareholders’ equity on our balance sheet in accumulated other
comprehensive income, net of tax, and have no impact on net income.
Fair
Value Measurements
Valuation
of Financial Instruments
Valuation
of financial instruments, primarily securities held in our investment portfolio,
is a critical component of our year-end financial statement preparation. Fair
Value Measurements and Disclosures, ASC 820-10, defines fair value as the
exit price or the amount that would be (1) received to sell an asset or
(2) paid to transfer a liability in an orderly transaction between
marketplace participants at the measurement date. When determining an exit
price, we must, whenever possible, rely upon observable market data. Prior to
the adoption of ASC 820-10, we considered various factors such as liquidity and
volatility but primarily obtained pricing from various external services,
including broker quotes.
The fair
value measurement and disclosure exit price notion requires our valuation also
to consider what a marketplace participant would pay to buy an asset or receive
to assume a liability. Therefore, while we can
consider
pricing data from outside services, we ultimately determine whether the data or
inputs used by these outside services are observable or
unobservable.
In
accordance with ASC 820-10, we have categorized our financial instruments, based
on the priority of the inputs to the valuation technique, into a three-level
fair value hierarchy. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). If the inputs used to
measure the financial instruments fall within different levels of the hierarchy,
the categorization is based on the lowest level that is significant to the fair
value measurement of the instrument.
Financial
assets and liabilities recorded on the Consolidated Balance Sheets are
categorized based on the inputs to the valuation techniques as described in Item
8, Note 3, Fair Value Measurements, Page 103.
Level
1 and Level 2 Valuation Techniques
Over 99
percent of the $10.562 billion of securities in our investment portfolio
measured at fair value are classified as Level 1 or Level 2. Financial
assets that fall within Level 1 and Level 2 are priced according to observable
data from identical or similar securities that have traded in the marketplace.
Also within Level 2 are securities that are valued by outside services or
brokers where we have evaluated the pricing methodology and determined that the
inputs are observable.
Included
in the Level 2 hierarchy is a small portfolio of collateralized mortgage
obligations (CMOs) that represented less than 1 percent of the fair value of our
investment portfolio at December 31, 2009. We obtained the CMOs as part of the
termination of our securities lending program during 2008.
Level
3 Valuation Techniques
Financial
assets that fall within the Level 3 hierarchy are valued based upon unobservable
market inputs, normally because they are not actively traded on a public market.
Level 3 corporate fixed-maturity securities include certain private placements,
small issues, general corporate bonds and medium-term notes.
Level 3 state, municipal and political subdivisions fixed-maturity
securities include various thinly traded municipal bonds. Level 3 common
equities include private equity securities. Level 3 preferred equities include
private and thinly traded preferred securities.
Pricing
for each Level 3 security is based upon inputs that are market driven, including
third-party reviews provided to the issuer or broker quotes. However, we placed
in the Level 3 hierarchy securities for which we were unable to obtain the
pricing methodology or we could not consider the price provided as binding.
Pricing for securities classified as Level 3 could not be corroborated by
similar securities priced using observable inputs.
Management
ultimately determined the pricing for each Level 3 security that we considered
to be the best exit price valuation. As of December 31, 2009, total Level 3
assets were less than 1 percent of our investment portfolio measured at fair
value. Broker quotes are obtained for thinly traded securities that subsequently
fall within the Level 3 hierarchy. We obtained two non-binding quotes
from brokers and, after evaluating, our investment professionals typically
selected the lower quote as the fair value.
Employee
Benefit Pension Plan
We have a
defined benefit pension plan which was modified during 2008; refer to Item 8,
Note 13 of the Consolidated Financial Statements, Page 109, for additional
information. Contributions and pension costs are developed from annual actuarial
valuations. These valuations involve key assumptions including discount rates
and expected return on plan assets, which are updated annually. Any adjustments
to these assumptions are based on considerations of current market conditions.
Therefore, changes in the related pension costs or credits may occur in the
future due to changes in assumptions.
Key
assumptions used in developing the 2009 net pension obligation were a 6.10
percent discount rate and rates of compensation increases ranging from 4.00
percent to 6.00 percent. Key assumptions used in developing the 2009 net pension
expense were a 6.00 percent discount rate, an 8.00 percent expected return on
plan assets and rates of compensation increases ranging from 4.00 percent to
6.00 percent. See Note 13, Page 109 for additional information
on assumptions.
In 2009,
the net pension expense was $11 million. In 2010, we expect the net pension
expense to be $12 million.
Holding
all other assumptions constant, a 0.5 percentage-point change in the discount
rate would affect our 2010 income before income taxes by $1 million.
Likewise, a 0.5 percentage point change in the expected return on plan assets
would affect our 2010 income before income taxes by $1 million.
The fair
value of the plan assets was $42 million less than the accumulated benefit
obligation at year-end 2009 and $52 million less at year-end 2008. The fair
value of the plan assets was $77 million less than the projected plan benefit
obligation at year-end 2009 and $88 million less at year-end 2008. Market
conditions and interest rates significantly affect future assets and liabilities
of the pension plan. In 2010, we expect to contribute approximately
$25 million to our qualified plan.
Deferred
Acquisition Costs
We
establish a deferred asset for costs that vary with, and are primarily related
to, acquiring property casualty and life insurance business. These costs are
principally agent commissions, premium taxes and certain underwriting costs,
which are deferred and amortized into net income as premiums are earned.
Deferred acquisition costs track with the change in premiums. Underlying
assumptions are updated periodically to reflect actual experience. Changes in
the amounts or timing of estimated future profits could result in adjustments to
the accumulated amortization of these costs.
For
property casualty policies, deferred acquisition costs are amortized over the
terms of the policies. We assess recoverability of deferred acquisition costs at
the segment level, consistent with the ways we acquire service, manage and
measure profitability. Our standard market insurance operations consist of two
segments, commercial lines and personal lines. We also have deferred acquisition
costs in our excess and surplus lines operation, which is reported in Other. For
life policies, acquisition costs are amortized into income either over the
premium-paying period of the policies or the life of the policy, depending on
the policy type. We analyze our acquisition cost assumptions periodically to
reflect actual experience; we evaluate our deferred acquisition cost for
recoverability; and we regularly conduct reviews for potential premium
deficiencies or loss recognition.
Contingent
Commission Accrual
Another
significant estimate relates to our accrual for property casualty contingent
(profit-sharing) commissions. We base the contingent commission accrual estimate
on property casualty underwriting results and on supplemental information.
Contingent commissions are paid to agencies using a formula that takes into
account agency profitability, premium volume and other factors, such as prompt
monthly payment of amounts due to the company. Due to the complexity of the
calculation and the variety of factors that can affect contingent commissions
for an individual agency, the amount accrued can differ from the actual
contingent commissions paid. The contingent commission accrual of
$81 million in 2009 contributed 2.8 percentage points to the
property casualty combined ratio. If contingent commissions paid were to vary
from that amount by 5 percent, it would affect 2010 net income by $3
million (after tax), or 2 cents per share, and the combined ratio by
approximately 0.1 percentage points.
Separate
Accounts
We issue
life contracts referred to as bank-owned life insurance policies (BOLI). Based
on the specific contract provisions, the assets and liabilities for some BOLIs
are legally segregated and recorded as assets and liabilities of the separate
accounts. Other BOLIs are included in the general account. For separate account
BOLIs, minimum investment returns and account values are guaranteed by the
company and also include death benefits to beneficiaries of the contract
holders.
Separate
account assets are carried at fair value. Separate account liabilities primarily
represent the contract holders' claims to the related assets and are carried at
an amount equal to the contract holders’ account value. Generally, investment
income and realized investment gains and losses of the separate accounts accrue
directly to the contract holders and, therefore, are not included in our
Consolidated Statements of Income. However, each separate account contract
includes a negotiated realized gain and loss sharing arrangement with the
company. This share is transferred from the separate account to our general
account and is recognized as revenue or expense. In the event that the asset
value of contract holders’ accounts is projected below the value guaranteed by
the company, a liability is established through a charge to our
earnings.
For our
most significant separate account, written in 1999, realized gains and losses
are retained in the separate account and are deferred and amortized to the
contract holder over a five-year period, subject to certain limitations. Upon
termination or maturity of this separate account contract, any unamortized
deferred gains and/or losses will revert to the general account. In the event
this separate account holder were to exchange the contract for the policy of
another carrier in 2010, the account holder would not pay a surrender charge.
The surrender charge is zero in 2010 and beyond.
At year-end
2009, net unamortized realized losses amounted to $7 million. In accordance
with this separate account agreement, the investment assets must meet certain
criteria established by the regulatory authorities to whose jurisdiction the
group contract holder is subject. Therefore, sales of investments may be
mandated to maintain compliance with these regulations, possibly requiring gains
or losses to be recorded and charged to the general account. Potentially, losses
could be material; however, unrealized losses are approximately $6 million
before tax in the separate account portfolio, which had a book value of
$541 million at year-end 2009.
Recent
Accounting Pronouncements
Information
about recent accounting pronouncements is provided in Item 8, Note 1 of the
Consolidated Financial Statements, Page 94. We have determined that recent
accounting pronouncements have not had nor are they expected to have any
material impact on our consolidated financial statements.
Results
Of Operations
Consolidated
financial results primarily reflect the results of our four reporting segments.
These segments are defined based on financial information we use to evaluate
performance and to determine the allocation of assets.
|
·
|
Commercial
lines property casualty insurance
|
|
·
|
Personal
lines property casualty insurance
|
We report
as Other the non-investment operations of the parent company and its non-insurer
subsidiaries, CFC Investment Company and CSU Producers Resources Inc. We
also report as Other the results of The Cincinnati Specialty Underwriters
Insurance Company, as well as other income of our standard market property
casualty insurance subsidiary.
We
measure profit or loss for our commercial lines and personal lines property
casualty and life insurance segments based upon underwriting results (profit or
loss), which represent net earned premium less loss and loss expenses and
underwriting expenses on a pretax basis. We also frequently evaluate results for
our consolidated property casualty insurance operations, which is the total of
our commercial, personal plus our excess and surplus insurance results.
Underwriting results and segment pretax operating income are not substitutes for
net income determined in accordance with GAAP.
For our
consolidated property casualty insurance operations as well as the insurance
segments, statutory accounting data and ratios are key performance indicators
that we use to assess business trends and to make comparisons to industry
results, since GAAP-based industry data generally is not as readily
available.
Investments
held by the parent company and the investment portfolios for the insurance
subsidiaries are managed and reported as the investments segment, separate from
the underwriting businesses. Net investment income and net realized investment
gains and losses for our investment portfolios are discussed in the Investment
Results of Operations.
The
calculations of segment data are described in more detail in Item 8, Note 18 of
the Consolidated Financial Statements, Page 115. The following sections review
results of operations for each of the four segments. Commercial Lines Insurance
Results of Operations begins on Page 49, Personal Lines Insurance Results of
Operations begins on Page 57, Life Insurance Results of Operations begins
on Page 62, and Investment Results of Operations begins on Page 64. We begin
with an overview of our consolidated property casualty operations, which is the
total of our commercial lines, personal lines plus excess and surplus lines
results.
Consolidated
Property Casualty Insurance Results Of Operations
In
addition to the factors discussed in Commercial Lines and Personal Lines
Insurance Results of Operations, Page 49 and Page 57, overall growth and
profitability for our consolidated property casualty insurance operations were
affected by a number of common factors. The table below summarizes results of
operations for our property casualty operations.
Our 2009
and 2008 combined ratios before catastrophe losses and reserve development on
prior accident years were substantially higher than 2007 primarily due to lower
pricing prompted by soft market conditions and also due to normal loss cost
inflation. During 2008, we also experienced a higher level of larger commercial
lines losses and the impact of a pension plan settlement cost. The pension plan
settlement increased the 2008 combined ratio by 0.8 percentage points. We
have taken actions to manage expenses, increasing spending in some areas
such as technology to pursue long-term benefits and decreasing in other
areas of our operation. However, lower pricing continues to put upward pressure
on the underwriting expense ratio. This is consistent with industry trends as
A.M. Best estimates that the industry’s 2009 statutory underwriting expense
ratio increased by 1.4 percentage points compared with the year
2006 level.
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,125 |
|
|
|
(3.3 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
2,102 |
|
|
|
2,174 |
|
|
|
2,030 |
|
|
|
(3.3 |
) |
|
|
7.1 |
|
Current
accident year catastrophe losses
|
|
|
172 |
|
|
|
205 |
|
|
|
47 |
|
|
|
(16.2 |
) |
|
|
341.2 |
|
Prior
accident years before catastrophe losses
|
|
|
(181 |
) |
|
|
(321 |
) |
|
|
(224 |
) |
|
|
43.8 |
|
|
|
(43.5 |
) |
Prior
accident year catastrophe losses
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
(21 |
) |
|
|
(259.0 |
) |
|
|
90.4 |
|
Total
loss and loss expenses
|
|
|
2,086 |
|
|
|
2,056 |
|
|
|
1,832 |
|
|
|
1.4 |
|
|
|
12.2 |
|
Underwriting
expenses
|
|
|
956 |
|
|
|
971 |
|
|
|
989 |
|
|
|
(1.5 |
) |
|
|
(1.8 |
) |
Underwriting
(loss) profit
|
|
$ |
(131 |
) |
|
$ |
(17 |
) |
|
$ |
304 |
|
|
nm
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Current
accident year before catastrophe losses
|
|
|
72.2
|
% |
|
|
72.2
|
% |
|
|
64.9
|
% |
|
|
0.0 |
|
|
|
7.3 |
|
Current
accident year catastrophe losses
|
|
|
5.9 |
|
|
|
6.8 |
|
|
|
1.4 |
|
|
|
(0.9 |
) |
|
|
5.4 |
|
Prior
accident years before catastrophe losses
|
|
|
(6.2 |
) |
|
|
(10.7 |
) |
|
|
(7.1 |
) |
|
|
4.5 |
|
|
|
(3.6 |
) |
Prior
accident year catastrophe losses
|
|
|
(0.2 |
) |
|
|
0.0 |
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
0.6 |
|
Total
loss and loss expenses
|
|
|
71.7 |
|
|
|
68.3 |
|
|
|
58.6 |
|
|
|
3.4 |
|
|
|
9.7 |
|
Underwriting
expenses
|
|
|
32.8 |
|
|
|
32.3 |
|
|
|
31.7 |
|
|
|
0.5 |
|
|
|
0.6 |
|
Combined
ratio
|
|
|
104.5
|
% |
|
|
100.6
|
% |
|
|
90.3
|
% |
|
|
3.9 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio
|
|
|
104.5
|
% |
|
|
100.6
|
% |
|
|
90.3
|
% |
|
|
3.9 |
|
|
|
10.3 |
|
Contribution
from catastrophe losses and prior years reserve
development
|
|
|
(0.5 |
) |
|
|
(3.9 |
) |
|
|
(6.3 |
) |
|
|
3.4 |
|
|
|
2.4 |
|
Combined
ratio before catastrophe losses and prior years reserve
development
|
|
|
105.0
|
% |
|
|
104.5
|
% |
|
|
96.6
|
% |
|
|
0.5 |
|
|
|
7.9 |
|
Changes
in written and earned premiums over the past three years reflected growing price
competition partially offset by fairly stable policy retention rates of renewal
business and increases in new business. New business written directly by
agencies rose in both 2009 and 2008 after declining in 2007. The resurgence in
new business was largely due to the contribution of new agency appointments – in
both new and existing states of operation; the contribution of our excess and
surplus lines business; and more competitive personal lines pricing. Other
written premiums primarily include premiums ceded to our reinsurers as part of
our reinsurance program.
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Agency
renewal written premiums
|
|
$ |
2,665 |
|
|
$ |
2,828 |
|
|
$ |
2,960 |
|
|
|
(5.8 |
) |
|
|
(4.5 |
) |
Agency
new business written premiums
|
|
|
405 |
|
|
|
368 |
|
|
|
325 |
|
|
|
9.9 |
|
|
|
13.1 |
|
Other
written premiums
|
|
|
(159 |
) |
|
|
(186 |
) |
|
|
(168 |
) |
|
|
15.1 |
|
|
|
(10.3 |
) |
Net
written premiums
|
|
|
2,911 |
|
|
|
3,010 |
|
|
|
3,117 |
|
|
|
(3.3 |
) |
|
|
(3.4 |
) |
Unearned
premium change
|
|
|
0 |
|
|
|
0 |
|
|
|
8 |
|
|
nm
|
|
|
nm
|
|
Earned
premiums
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,125 |
|
|
|
(3.3 |
) |
|
|
(3.7 |
) |
Catastrophe
losses contributed 5.7 percentage points to the combined ratio in 2009, down
somewhat from the 2008 contribution of 6.8 percentage points, the highest
catastrophe loss ratio for our company since 1991. In 2007, catastrophe losses
added just 0.8 percentage points, the lowest ratio over the same period. Our
10-year historical annual average contribution of catastrophe losses to the
combined ratio was 4.2 percentage points as of December 31, 2009. The
following table shows catastrophe losses incurred, net of reinsurance, for
the past three years, as well as the effect of loss development on prior period
catastrophe reserves.
Hurricane
Ike, which reached the Gulf Coast on September 12, 2008, moved into the Midwest
on September 14, causing unusually high winds in Ohio, Indiana and
Kentucky. At December 31, 2009, our gross losses from Hurricane Ike were
estimated at $145 million, making it the single largest catastrophe in the
company’s history. Net of reinsurance, the loss was estimated at $59 million.
Virtually all of the losses reported by our policyholders occurred in the
Midwest.
Catastrophe
Losses Incurred
(In
millions, net of reinsurance)
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Personal
|
|
|
|
|
Dates
|
|
Cause of loss
|
|
Region
|
|
lines
|
|
|
lines
|
|
|
Total
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan.
26-28
|
|
Flood,
freezing, weight of ice, snow
|
|
South,
Midwest
|
|
$ |
5 |
|
|
$ |
14 |
|
|
$ |
19 |
|
Feb.
10-13
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
13 |
|
|
|
25 |
|
|
|
38 |
|
Feb.
18-19
|
|
Wind,
hail
|
|
South
|
|
|
1 |
|
|
|
8 |
|
|
|
9 |
|
Apr.
9-11
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
13 |
|
|
|
21 |
|
|
|
34 |
|
May
7-9
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
9 |
|
|
|
13 |
|
|
|
22 |
|
Jun.
2-6
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
3 |
|
|
|
4 |
|
|
|
7 |
|
Jun.
10-18
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
7 |
|
|
|
4 |
|
|
|
11 |
|
Sep.
18-22
|
|
Flood,
hail, wind
|
|
South
|
|
|
3 |
|
|
|
4 |
|
|
|
7 |
|
Other
2009 catastrophes
|
|
|
|
|
|
|
12 |
|
|
|
13 |
|
|
|
25 |
|
Development
on 2008 and prior catastrophes
|
|
|
|
|
(12 |
) |
|
|
5 |
|
|
|
(7 |
) |
Calendar
year incurred total
|
|
|
|
$ |
54 |
|
|
$ |
111 |
|
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan.
4-9
|
|
Wind,
hail, flood, freezing
|
|
South,
Midwest
|
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
6 |
|
Jan.
29-30
|
|
Wind,
hail
|
|
Midwest
|
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
Feb.
5-6
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
5 |
|
|
|
8 |
|
|
|
13 |
|
Mar.
14
|
|
Tornadoes,
wind, hail, flood
|
|
South
|
|
|
4 |
|
|
|
0 |
|
|
|
4 |
|
Mar.
15-16
|
|
Wind,
hail
|
|
South
|
|
|
2 |
|
|
|
8 |
|
|
|
10 |
|
Apr.
9-11
|
|
Wind,
hail, flood
|
|
South
|
|
|
17 |
|
|
|
2 |
|
|
|
19 |
|
May
1
|
|
Wind,
hail
|
|
South
|
|
|
5 |
|
|
|
1 |
|
|
|
6 |
|
May
10-12
|
|
Wind,
hail, flood
|
|
South,
Mid-Atlantic
|
|
|
3 |
|
|
|
4 |
|
|
|
7 |
|
May
22-26
|
|
Wind,
hail
|
|
Midwest
|
|
|
4 |
|
|
|
3 |
|
|
|
7 |
|
May
29- Jun 1
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
4 |
|
|
|
4 |
|
|
|
8 |
|
Jun.
2-4
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
6 |
|
|
|
4 |
|
|
|
10 |
|
Jun.
5-8
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
8 |
|
|
|
6 |
|
|
|
14 |
|
Jun.
11-12
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
10 |
|
|
|
4 |
|
|
|
14 |
|
Jun.
25
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
Jul.
19
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
Jul.
26
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
1 |
|
|
|
7 |
|
|
|
8 |
|
Sep.
12-14
|
|
Hurricane
Ike
|
|
South,
Midwest
|
|
|
22 |
|
|
|
36 |
|
|
|
58 |
|
Other
2008 catastrophes
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
Development
on 2007 and prior catastrophes
|
|
|
|
|
(3 |
) |
|
|
1 |
|
|
|
(2 |
) |
Calendar
year incurred total
|
|
|
|
$ |
103 |
|
|
$ |
100 |
|
|
$ |
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar.
1-2
|
|
Wind,
hail, flood
|
|
South
|
|
$ |
6 |
|
|
$ |
2 |
|
|
$ |
8 |
|
Jun.
7-9
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
4 |
|
|
|
5 |
|
|
|
9 |
|
Sep.
20-21
|
|
Wind,
hail, flood
|
|
Midwest
|
|
|
2 |
|
|
|
4 |
|
|
|
6 |
|
Other
2007 catastrophes
|
|
|
|
|
|
|
15 |
|
|
|
9 |
|
|
|
24 |
|
Development
on 2006 and prior catastrophes
|
|
|
|
|
(10 |
) |
|
|
(11 |
) |
|
|
(21 |
) |
Calendar
year incurred total
|
|
|
|
$ |
17 |
|
|
$ |
9 |
|
|
$ |
26 |
|
The rise
in the total underwriting expense ratio since 2007 largely was due to the rise
in non-commission underwriting expenses, reflecting our continued investment in
the people and systems necessary for our future growth, and also reflecting
lower premiums. Commission expenses include our profit-sharing, or contingent
commissions, which are primarily based on the profitability of an agency’s
aggregate property casualty book of Cincinnati business. The commission ratio
has declined from the 2007 level. These profit-based commissions generally
fluctuate with our loss and loss expense ratio, with the expense ratio generally
increasing when our loss and loss expense ratio declines. The change in our
pension plan added 0.5 percentage points to the 2008 non-commission underwriting
expense ratio.
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Commission
expenses
|
|
$ |
539 |
|
|
$ |
552 |
|
|
$ |
599 |
|
|
|
(2.5 |
) |
|
|
(7.8 |
) |
Underwriting
expenses
|
|
|
400 |
|
|
|
404 |
|
|
|
375 |
|
|
|
(1.0 |
) |
|
|
7.9 |
|
Policyholder
dividends
|
|
|
17 |
|
|
|
15 |
|
|
|
15 |
|
|
|
16.2 |
|
|
|
(3.5 |
) |
Total
underwriting expenses
|
|
$ |
956 |
|
|
$ |
971 |
|
|
$ |
989 |
|
|
|
(1.5 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Commission
expenses
|
|
|
18.5
|
% |
|
|
18.3
|
% |
|
|
19.2
|
% |
|
|
0.2 |
|
|
|
(0.9 |
) |
Underwriting
expenses
|
|
|
13.7 |
|
|
|
13.5 |
|
|
|
12.0 |
|
|
|
0.2 |
|
|
|
1.5 |
|
Policyholder
dividends
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.0 |
|
Total
underwriting expense ratio
|
|
|
32.8
|
% |
|
|
32.3
|
% |
|
|
31.7
|
% |
|
|
0.5 |
|
|
|
0.6 |
|
The
discussions of our property casualty insurance segments provide additional
detail about these factors.
Commercial
Lines Insurance Results Of Operations
Overview
— Three-Year Highlights
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
2,199 |
|
|
$ |
2,316 |
|
|
$ |
2,411 |
|
|
|
(5.1 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
1,596 |
|
|
|
1,671 |
|
|
|
1,572 |
|
|
|
(4.5 |
) |
|
|
6.3 |
|
Current
accident year catastrophe losses
|
|
|
66 |
|
|
|
106 |
|
|
|
26 |
|
|
|
(37.9 |
) |
|
|
299.7 |
|
Prior
accident years before catastrophe losses
|
|
|
(135 |
) |
|
|
(270 |
) |
|
|
(194 |
) |
|
|
50.0 |
|
|
|
(39.3 |
) |
Prior
accident year catastrophe losses
|
|
|
(12 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(282.7 |
) |
|
|
69.3 |
|
Total
loss and loss expenses
|
|
|
1,515 |
|
|
|
1,504 |
|
|
|
1,394 |
|
|
|
0.7 |
|
|
|
7.8 |
|
Underwriting
expenses
|
|
|
719 |
|
|
|
742 |
|
|
|
756 |
|
|
|
(3.1 |
) |
|
|
(1.8 |
) |
Underwriting
(loss) profit
|
|
$ |
(35 |
) |
|
$ |
70 |
|
|
$ |
261 |
|
|
nm
|
|
|
|
(73.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Current
accident year before catastrophe losses
|
|
|
72.5
|
% |
|
|
72.1
|
% |
|
|
65.2
|
% |
|
|
0.4 |
|
|
|
6.9 |
|
Current
accident year catastrophe losses
|
|
|
3.0 |
|
|
|
4.6 |
|
|
|
1.1 |
|
|
|
(1.6 |
) |
|
|
3.5 |
|
Prior
accident years before catastrophe losses
|
|
|
(6.1 |
) |
|
|
(11.7 |
) |
|
|
(8.0 |
) |
|
|
5.6 |
|
|
|
(3.7 |
) |
Prior
accident year catastrophe losses
|
|
|
(0.5 |
) |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
0.3 |
|
Total
loss and loss expenses
|
|
|
68.9 |
|
|
|
64.9 |
|
|
|
57.9 |
|
|
|
4.0 |
|
|
|
7.0 |
|
Underwriting
expenses
|
|
|
32.7 |
|
|
|
32.1 |
|
|
|
31.3 |
|
|
|
0.6 |
|
|
|
0.8 |
|
Combined
ratio
|
|
|
101.6
|
% |
|
|
97.0
|
% |
|
|
89.2
|
% |
|
|
4.6 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio
|
|
|
101.6
|
% |
|
|
97.0
|
% |
|
|
89.2
|
% |
|
|
4.6 |
|
|
|
7.8 |
|
Contribution
from catastrophe losses and prior years reserve
development
|
|
|
(3.6 |
) |
|
|
(7.2 |
) |
|
|
(7.3 |
) |
|
|
3.6 |
|
|
|
0.1 |
|
Combined
ratio before catastrophe losses and prior years reserve
development
|
|
|
105.2
|
% |
|
|
104.2
|
% |
|
|
96.5
|
% |
|
|
1.0 |
|
|
|
7.7 |
|
Performance
highlights for the commercial lines segment include:
|
·
|
Premiums
– Pricing in our industry continues to be very competitive, and the poor
economy is driving exposures lower. Our commercial lines net written
premium decline for 2009 of 5.6 percent compared favorably with the
estimated decline of 7.9 percent for the overall commercial lines
industry, and our 2008 decline of 4.2 percent was slightly worse than
the decline of 3.9 percent estimated for the industry. We believe our pace
for new and renewal business in recent years is consistent with our
agents’ practice of selecting and retaining accounts with manageable risk
characteristics that support the lower prevailing prices. We also believe
our favorable comparison to the industry for 2009 reflects the advantages
we achieve through our field focus, which provides us with quality
intelligence on local market conditions. Our earned premiums declined in
2009 and 2008, following the pattern of our written premiums, after rising
slightly in 2007.
|
|
·
|
Combined
ratio – Our commercial lines combined ratio rose to 101.6 percent in 2009
from 97.0 percent in 2008, following a very strong performance
in 2007. Compared with 2008, results for 2009 reflected approximately half
as much benefit from net favorable reserve development on prior accident
years, accounting for 5.2 percentage points of the 4.6 percentage-point
combined ratio increase. The reduction in the net favorable reserve
development on prior accident years occurred primarily for our commercial
casualty and workers’ compensation lines of business. We continue to
focus on sound underwriting fundamentals and obtaining adequate premiums
for risks insured by each individual policy. The 2009 and 2008 ratios for
current accident year before catastrophe losses largely reflect loss cost
trends that are outpacing earned premium trends. Approximately $49
million, or 2.1 percentage points, of the rise in 2008 accident year
loss and loss expenses was due to refinements made to the allocation of
IBNR reserves by accident year. We discuss factors affecting the combined
ratio and reserve development by line of business
below.
|
Our
commercial lines statutory combined ratio was 101.8 percent in 2009
compared with 96.6 percent in 2008 and 89.2 percent in 2007. By comparison,
the estimated industry commercial lines combined ratio was 101.2 percent in
2009, 107.2 percent in 2008 and 95.1 percent in 2007. Industry commercial
lines estimates include mortgage and financial guaranty insurers, which saw a
surge in claims following the historically high level of mortgage defaults in
2008, driving an unusually high industry combined ratio for 2008.
Commercial
Lines Insurance Premiums
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Agency
renewal written premiums
|
|
$ |
2,013 |
|
|
$ |
2,156 |
|
|
$ |
2,271 |
|
|
|
(6.6 |
) |
|
|
(5.1 |
) |
Agency
new business written premiums
|
|
|
298 |
|
|
|
312 |
|
|
|
287 |
|
|
|
(4.6 |
) |
|
|
8.8 |
|
Other
written premiums
|
|
|
(130 |
) |
|
|
(157 |
) |
|
|
(145 |
) |
|
|
16.8 |
|
|
|
(8.3 |
) |
Net
written premiums
|
|
|
2,181 |
|
|
|
2,311 |
|
|
|
2,413 |
|
|
|
(5.6 |
) |
|
|
(4.2 |
) |
Unearned
premium change
|
|
|
18 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
265.4 |
|
|
nm
|
|
Earned
premiums
|
|
$ |
2,199 |
|
|
$ |
2,316 |
|
|
$ |
2,411 |
|
|
|
(5.1 |
) |
|
|
(3.9 |
) |
As
commercial lines markets have grown more competitive over the past several
years, we have focused on leveraging our local relationships as well as the
efforts of our agents and the teams that work with them. In this environment, we
have been careful to maintain appropriate pricing discipline for both new and
renewal business as we emphasize the importance of assessing account quality to
our agencies and underwriters. We continue to make case-by-case decisions
not to write or renew certain business. We continue to use rate credits to
retain renewals of quality business and earn new business, but do so selectively
in order to avoid commercial accounts that we believe have insufficient profit
margins. Our experience remains that the larger the account, the higher the
credits needed to write or retain the account, with variations by geographic
region and class of business.
Over the
past three years, we continued to focus on seeking and maintaining adequate
premium per risk exposure as well as pursuing non-pricing means of enhancing
longer-term profitability. Non-pricing means have included deliberate reviews of
each risk, terms and conditions and limits of insurance. We continue to adhere
to our underwriting guidelines, to re-underwrite books of business with
selected agencies and to update policy terms and conditions. In addition, we
continue to leverage our strong local presence. Our field marketing
representatives meet with local agencies to reaffirm agreements on the extent of
the frontline renewal underwriting that agents will perform. Loss control,
machinery and equipment and field claims representatives continue to conduct
on-site inspections. To assist underwriters, field claims representatives
prepare full reports on their first-hand observations of risk
quality.
Both
renewal and new business reflected the effects of the economic slowdown in many
regions, as exposures declined and policyholders became increasingly focused on
reducing expenses. For commercial accounts, we typically calculate general
liability premiums based on sales or payroll volume, while we calculate workers’
compensation premiums based on payroll volume. A change in sales or payroll
volume generally indicates a change in demand for a business’s goods or
services, as well as a change in its exposure to risk. Policyholders
who experience sales or payroll volume changes due to economic factors may
be purchasers of other types of insurance, such as commercial auto or commercial
property, in addition to general liability and workers’ compensation. Premium
levels for these other types of policies generally are not linked directly to
sales or payroll volumes.
In 2009,
we estimated that policyholders with a contractor-related ISO general liability
code accounted for approximately 34 percent of our general liability
premiums, which are included in the commercial casualty line of business, and
that policyholders with a contractor-related National Council on Compensation
Insurance Inc. (NCCI) workers’ compensation code accounted for approximately
46 percent of our workers’ compensation premiums. The market seeking to
insure contractors has been more adversely affected by the economic slowdown
than some other markets.
The
decline in 2009 agency renewal written premiums was largely driven by pricing
and exposure declines while policy retention rates declined slightly. For
renewal business, our headquarters underwriters talk regularly with agents. Our
field teams are available to assist headquarters underwriters by conducting
inspections and holding renewal review meetings with agency staff. These
activities can help verify that a commercial account retains the characteristics
that caused us to write the business initially. We measure average changes in
commercial lines renewal pricing as the rate of change in renewal premium for
the new policy period compared with the premium for the expiring policy
period, assuming no change in the level of insured exposures or policy coverage
between those periods for respective policies. For policies renewed during 2009,
the typical pricing decline on average was in the low-single-digit range. For
larger accounts we typically experienced more significant premium declines and
for smaller accounts we sometimes saw little if any premium change at renewal.
The 2009 average represented an improvement from the mid-single-digit range
average pricing decline experienced in 2008. In addition to pricing pressures,
premiums confirmed by audits of policyholder sales and payrolls declined
significantly in 2009. Written and earned premiums from audits decreased $38
million and $52 million, respectively, for the year 2009 compared with
2008.
For new
business, our field associates are frequently in our agents’ offices helping to
judge the quality of each account, emphasizing the Cincinnati value proposition,
calling on sales prospects with those agents, carefully evaluating risk exposure
and providing their best quotes. In 2009, new business premium growth largely
was driven by agencies appointed in recent years, which includes Texas agents
appointed since late 2008 when we entered that state. Texas agencies generated
new business growth of $11 million during
2009
while other agencies appointed during 2008 and 2009 contributed $23 million of
our new commercial lines business. During 2009 we wrote fewer policies with
annual premiums above $100,000, reflecting significant competition for larger
accounts as many carriers continued to protect their renewal portfolio of
business during the soft pricing environment. Some of our 2009 new business came
from accounts that were not new to the agent. We believe these seasoned accounts
tend to be priced more accurately than business that is less familiar to our
agent because it was recently obtained from a competing agent. As we appoint new
agencies who choose to move accounts to us, we report these accounts as new
business to us.
In 2009,
other written premiums had less of a downward impact on commercial lines net
written premiums than in 2008, primarily due to a lower overall cost for
reinsurance and a smaller adjustment for estimated premiums of policies in
effect but not yet processed. The adjustment for estimated premiums had an
immaterial effect on earned premiums. Higher ceded reinsurance costs were the
primary driver of the larger negative effect in 2008, including $5 million for
ceded premium to reinstate coverage for our catastrophe reinsurance
treaty.
Commercial
Lines Insurance Loss and Loss Expenses
Loss and
loss expenses include both net paid losses and reserve changes for unpaid losses
as well as the associated loss expenses.
(Dollars
in millions)
Accident
year loss and loss expenses incurred and ratios to earned
premiums:
|
Accident Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
1,662 |
|
|
$ |
1,644 |
|
|
$ |
1,467 |
|
|
|
75.5 |
%
|
|
|
71.0
|
% |
|
|
60.8
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
1,777 |
|
|
|
1,493 |
|
|
|
|
|
|
|
76.7 |
|
|
|
61.9 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
66.3 |
|
The trend
for our commercial lines current accident year loss and loss expense ratio
before catastrophe losses over the past three years reflected normal loss cost
inflation as well as softer pricing that began in 2005 and continued through
2009, as discussed above.
Catastrophe
losses were volatile over the three-year period as discussed in Consolidated
Property Casualty Insurance Results of Operations, Page 46. Catastrophe losses
added 3.0, 4.6 and 1.1 percentage points to the commercial lines accident year
loss and loss expense ratios in the table above.
Commercial
lines reserve development for prior accident years continued to net to a
favorable amount in 2009, although it was less than in 2008, as discussed in
Commercial Lines Insurance Segment Reserves, Page 75. Accident years 2008
and 2007 for the commercial lines segment have developed favorably, as indicated
in the table above.
Trends
for commercial lines loss and loss expenses and the related ratios are further
analyzed in Commercial Lines of Business Analysis, Pages 52 through
57.
Commercial
Lines Insurance Losses by Size
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
New
losses greater than $4,000,000
|
|
$ |
52 |
|
|
$ |
41 |
|
|
$ |
4 |
|
|
|
26.5 |
|
|
|
835.3 |
|
New
losses $1,000,000-$4,000,000
|
|
|
130 |
|
|
|
153 |
|
|
|
201 |
|
|
|
(14.7 |
) |
|
|
(24.3 |
) |
New
losses $250,000-$1,000,000
|
|
|
164 |
|
|
|
184 |
|
|
|
155 |
|
|
|
(10.8 |
) |
|
|
18.8 |
|
Case
reserve development above $250,000
|
|
|
245 |
|
|
|
229 |
|
|
|
201 |
|
|
|
7.1 |
|
|
|
13.9 |
|
Total
large losses incurred
|
|
|
591 |
|
|
|
607 |
|
|
|
561 |
|
|
|
(2.5 |
) |
|
|
8.0 |
|
Other
losses excluding catastrophe losses
|
|
|
565 |
|
|
|
547 |
|
|
|
502 |
|
|
|
3.4 |
|
|
|
8.9 |
|
Catastrophe
losses
|
|
|
54 |
|
|
|
103 |
|
|
|
16 |
|
|
|
(47.1 |
) |
|
|
560.2 |
|
Total
losses incurred
|
|
$ |
1,210 |
|
|
$ |
1,257 |
|
|
$ |
1,079 |
|
|
|
(3.6 |
) |
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
New
losses greater than $4,000,000
|
|
|
2.4
|
% |
|
|
1.8
|
% |
|
|
0.2 |
% |
|
|
0.6 |
|
|
|
1.6 |
|
New
losses $1,000,000-$4,000,000
|
|
|
5.9 |
|
|
|
6.6 |
|
|
|
8.3 |
|
|
|
(0.7 |
) |
|
|
(1.7 |
) |
New
losses $250,000-$1,000,000
|
|
|
7.5 |
|
|
|
8.0 |
|
|
|
6.4 |
|
|
|
(0.5 |
) |
|
|
1.6 |
|
Case
reserve development above $250,000
|
|
|
11.2 |
|
|
|
9.9 |
|
|
|
8.4 |
|
|
|
1.3 |
|
|
|
1.5 |
|
Total
large loss ratio
|
|
|
27.0 |
|
|
|
26.3 |
|
|
|
23.3 |
|
|
|
0.7 |
|
|
|
3.0 |
|
Other
losses excluding catastrophe losses
|
|
|
25.7 |
|
|
|
23.4 |
|
|
|
20.8 |
|
|
|
2.3 |
|
|
|
2.6 |
|
Catastrophe
losses
|
|
|
2.5 |
|
|
|
4.5 |
|
|
|
0.7 |
|
|
|
(2.0 |
) |
|
|
3.8 |
|
Total
loss ratio
|
|
|
55.2 |
% |
|
|
54.2
|
% |
|
|
44.8 |
% |
|
|
1.0 |
|
|
|
9.4 |
|
The 2009
decline of $16 million or 2.5 percent in the loss and loss expenses from new
losses and case reserve increases greater than $250,000, net of reinsurance, was
more than offset by a larger decline in commercial lines earned premiums,
causing an increase in the corresponding ratio. Our analysis indicated no
unexpected concentration of these losses and reserve increases by geographic
region, policy inception, agency or field marketing territory. We believe the
inherent volatility of loss experience for larger policies is greater than that
of smaller policies, and we continue to monitor that in addition to general
inflationary trends in loss costs. In 2007, our retention for our property
and casualty working treaties was $4 million.
In 2008, we raised the casualty treaty retention to $5 million
and raised it to $6 million effective January 1, 2009, when we also
raised the property treaty retention to $5 million.
Commercial
Lines Insurance Underwriting Expenses
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Commission
expenses
|
|
$ |
392 |
|
|
$ |
413 |
|
|
$ |
454 |
|
|
|
(5.2 |
) |
|
|
(8.9 |
) |
Underwriting
expenses
|
|
|
310 |
|
|
|
314 |
|
|
|
287 |
|
|
|
(1.1 |
) |
|
|
9.5 |
|
Policyholder
dividends
|
|
|
17 |
|
|
|
15 |
|
|
|
15 |
|
|
|
16.2 |
|
|
|
(3.5 |
) |
Total
underwriting expenses
|
|
$ |
719 |
|
|
$ |
742 |
|
|
$ |
756 |
|
|
|
(3.1 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Commission
expenses
|
|
|
17.8
|
% |
|
|
17.8
|
% |
|
|
18.8
|
% |
|
|
0.0 |
|
|
|
(1.0 |
) |
Underwriting
expenses
|
|
|
14.1 |
|
|
|
13.7 |
|
|
|
11.9 |
|
|
|
0.4 |
|
|
|
1.8 |
|
Policyholder
dividends
|
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
0.0 |
|
Total
underwriting expense ratio
|
|
|
32.7
|
% |
|
|
32.1
|
% |
|
|
31.3
|
% |
|
|
0.6 |
|
|
|
0.8 |
|
Commercial
lines commission expenses as a percent of earned premium remained stable during
2009. The decrease in the commission expenses ratio in 2008 reflected a
lower level of our profit-sharing, or contingent commissions, which are
primarily based on the profitability of an agency’s aggregate property casualty
book of Cincinnati business.
In 2009,
non-commission underwriting expenses declined slightly, but to a lesser extent
than earned premiums, causing the non-commission underwriting expense ratio
component of the underwriting expense ratio to rise. In 2008, non-commission
underwriting expenses rose on declining earned premiums, which also led to
unfavorable deferred acquisition expense comparisons. Further, in 2008, the
salary cost contribution rose by approximately 0.8 percentage points and
the change in our pension plan contributed 0.5 percentage points to the ratio.
Refinements in the allocation of expenses between our commercial lines and
personal lines segments also contributed to minor variations in the
non-commission underwriting expenses.
Commercial
Lines Insurance Outlook
Industrywide
commercial lines written premiums are projected to decline approximately 5.6
percent in 2010 with the industry combined ratio estimated at 103.7
percent. As discussed in Item 1, Commercial Lines Property Casualty Insurance
Segment, Page 12, over the past several years, renewal and new business pricing
has come under steadily increasing pressure, reinforcing the need for more
flexibility and careful risk selection. Price competition remains intense and
shows no signs of abating in the near term.
We intend
to continue marketing our products to a broad range of business classes, pricing
our products appropriately and taking a package approach. We intend to maintain
our underwriting selectivity and carefully manage our rate levels as well as our
programs that seek to accurately match exposures with appropriate premiums. We
will continue to evaluate each risk individually and to make decisions about
rates, the use of three-year commercial policies and other policy conditions on
a case-by-case basis, even in lines and classes of business that are under
competitive pressure. Nonetheless, we expect commercial lines profitability to
remain under pressure in 2010, in part due to small average pricing declines on
policies renewed during 2009 for which premiums will be earned during
2010.
In Item
1, Strategic Initiatives, Page 8, we discuss the initiatives we are implementing
to achieve our corporate performance objectives. We discuss factors influencing
future results of our property casualty insurance operations in the Executive
Summary, Page 34.
Commercial
Lines of Business Analysis
Approximately
95 percent of our commercial lines premiums relate to accounts with coverages
from more than one of our business lines. As a result, we believe that the
commercial lines segment is best measured and evaluated on a segment basis.
However, we provide line-of-business data to summarize growth and profitability
trends separately for each line. The accident year loss data provides current
estimates of incurred loss and loss expenses and corresponding ratios over the
most recent three accident years. Accident year data classifies losses according
to the year in which the corresponding loss events occur, regardless of when the
losses are actually reported, recorded or paid. For 2009, the only commercial
line of business that exhibited significant adverse profitability trends was
workers’ compensation. Most of the profit deterioration in worker’s compensation
was a result of prior accident year reserve development. As discussed
below, actions we are taking to improve pricing and reduce loss costs are
expected to benefit future profitability trends.
Commercial
Casualty
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Commercial
casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
|
|
$ |
704 |
|
|
$ |
764 |
|
|
$ |
830 |
|
|
|
(7.9 |
) |
|
|
(7.9 |
) |
Earned
premiums
|
|
|
|
|
712 |
|
|
|
763 |
|
|
|
827 |
|
|
|
(6.7 |
) |
|
|
(7.8 |
) |
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
|
|
542 |
|
|
|
576 |
|
|
|
572 |
|
|
|
(5.9 |
) |
|
|
0.7 |
|
Current
accident year catastrophe losses
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Prior
accident years before catastrophe losses
|
|
|
|
|
(154 |
) |
|
|
(257 |
) |
|
|
(149 |
) |
|
|
40.3 |
|
|
|
(72.3 |
) |
Prior
accident year catastrophe losses
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
|
|
$ |
388 |
|
|
$ |
319 |
|
|
$ |
423 |
|
|
|
22.0 |
|
|
|
(24.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Current
accident year before catastrophe losses
|
|
|
|
|
76.2 |
% |
|
|
75.4 |
% |
|
|
69.2 |
% |
|
|
0.8 |
|
|
|
6.2 |
|
Current
accident year catastrophe losses
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Prior
accident years before catastrophe losses
|
|
|
|
|
(21.6 |
) |
|
|
(33.7 |
) |
|
|
(18.1 |
) |
|
|
12.1 |
|
|
|
(15.6 |
) |
Prior
accident year catastrophe losses
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Total
loss and loss expense ratio
|
|
|
|
|
54.6 |
% |
|
|
41.7 |
% |
|
|
51.1 |
% |
|
|
12.9 |
|
|
|
(9.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
|
Accident
Year:
|
|
2009
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$542 |
|
$ |
488 |
|
|
$ |
443 |
|
|
|
76.2 |
% |
|
|
63.9 |
% |
|
|
53.5 |
% |
as
of December 31, 2008
|
|
|
|
|
576 |
|
|
|
479 |
|
|
|
|
|
|
|
75.4 |
|
|
|
57.9 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
69.2 |
|
Commercial
casualty is our largest business line. The decline in commercial casualty
premiums reflected the intensifying competition in the casualty market. In
addition, premiums for this business line reflect economic trends, including
changes in underlying exposures, particularly for general liability coverages
where the premium amount is heavily influenced by economically-driven measures
of risk exposure such as sales volume.
The
calendar year total loss and loss expense ratio increased during 2009 largely
because of a lower level, compared with 2008, of favorable development on prior
accident year reserves. Factors contributing to the 2008 higher level of
favorable prior accident year reserve development included refinements to our
IBNR reserve allocation, quarter-to-quarter reductions in actuarial reserve
estimates, the introduction of an additional umbrella liability reserving model,
sooner-than-expected moderation in the inflation trend of allocated loss
expenses and unusual deviations from predictions of reserving methods and
models.
The 2009
current accident year loss and loss expense ratio before catastrophe losses
deteriorated slightly, reflecting lower pricing per exposure and normal loss
cost inflation.
Commercial
Property
|
|
|
|
Years ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars in millions)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Commercial
property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
|
|
$ |
485 |
|
|
$ |
481 |
|
|
$ |
499 |
|
|
|
0.7 |
|
|
|
(3.6 |
) |
Earned
premiums
|
|
|
|
|
485 |
|
|
|
487 |
|
|
|
497 |
|
|
|
(0.5 |
) |
|
|
(2.0 |
) |
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
|
|
257 |
|
|
|
282 |
|
|
|
240 |
|
|
|
(8.6 |
) |
|
|
17.3 |
|
Current
accident year catastrophe losses
|
|
|
|
|
42 |
|
|
|
81 |
|
|
|
20 |
|
|
|
(47.9 |
) |
|
|
304.2 |
|
Prior
accident years before catastrophe losses
|
|
|
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(10 |
) |
|
|
29.0 |
|
|
|
29.1 |
|
Prior
accident year catastrophe losses
|
|
|
|
|
(11 |
) |
|
|
(3 |
) |
|
|
(9 |
) |
|
|
(336.3 |
) |
|
|
73.4 |
|
Total
loss and loss expenses
|
|
|
|
$ |
283 |
|
|
$ |
353 |
|
|
$ |
241 |
|
|
|
(19.7 |
) |
|
|
46.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
|
|
53.1 |
% |
|
|
57.7 |
% |
|
|
48.3 |
% |
|
|
(4.6 |
) |
|
|
9.4 |
|
Current
accident year catastrophe losses
|
|
|
|
|
8.8 |
|
|
|
16.6 |
|
|
|
4.0 |
|
|
|
(7.8 |
) |
|
|
12.6 |
|
Prior
accident years before catastrophe losses
|
|
|
|
|
(1.1 |
) |
|
|
(1.3 |
) |
|
|
(2.0 |
) |
|
|
0.2 |
|
|
|
0.7 |
|
Prior
accident year catastrophe losses
|
|
|
|
|
(2.2 |
) |
|
|
(0.4 |
) |
|
|
(1.8 |
) |
|
|
(1.8 |
) |
|
|
1.4 |
|
Total
loss and loss expense ratio
|
|
|
|
|
58.6 |
% |
|
|
72.6 |
% |
|
|
48.5 |
% |
|
|
(14.0 |
) |
|
|
24.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
|
Accident
Year:
|
|
2009
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$299 |
|
$ |
348 |
|
|
$ |
259 |
|
|
|
61.9
|
% |
|
|
71.5 |
% |
|
|
52.2 |
% |
as
of December 31, 2008
|
|
|
|
|
363 |
|
|
|
260 |
|
|
|
|
|
|
|
74.3 |
|
|
|
52.3 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
52.3 |
|
Commercial
property is our second largest business line. Net written premiums for 2009
increased slightly, largely due to more reinsurance ceded premium in 2008,
including $4 million to reinstate coverage for our catastrophe reinsurance
treaty. The overall declining trend in premium since 2007 also reflected
pricing declines.
The
calendar year loss and loss expense ratio improved compared with 2008, primarily
due to lower catastrophe losses. The 2008 ratio was also adversely affected by
3.4 percentage points for new losses and case reserve increases greater than
$250,000. Development on prior period reserves was relatively stable for all
periods shown.
The 2009
current accident year loss and loss expense ratio before catastrophe losses also
improved compared with 2008. A portion of the higher 2008 ratio was due to a
higher loss expense allocation because of the level of non-catastrophe
weather-related losses. In addition, the refinement in the allocation of IBNR
reserves by accident year accounted for approximately 2 percentage points
of the difference between the 2007 and 2008 ratios.
Commercial
Auto
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Commercial
auto:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
388 |
|
|
$ |
402 |
|
|
$ |
429 |
|
|
|
(3.4 |
) |
|
|
(6.2 |
) |
Earned
premiums
|
|
|
394 |
|
|
|
411 |
|
|
|
440 |
|
|
|
(4.1 |
) |
|
|
(6.7 |
) |
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
273 |
|
|
|
303 |
|
|
|
303 |
|
|
|
(9.9 |
) |
|
|
(0.5 |
) |
Current
accident year catastrophe losses
|
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
12.9 |
|
|
|
240.5 |
|
Prior
accident years before catastrophe losses
|
|
|
(20 |
) |
|
|
(8 |
) |
|
|
(25 |
) |
|
|
(146.2 |
) |
|
|
67.6 |
|
Prior
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
(1 |
) |
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
256 |
|
|
$ |
297 |
|
|
$ |
278 |
|
|
|
(13.9 |
) |
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
69.2 |
% |
|
|
73.7 |
% |
|
|
69.3 |
% |
|
|
(4.5 |
) |
|
|
4.4 |
|
Current
accident year catastrophe losses
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.6 |
|
Prior
accident years before catastrophe losses
|
|
|
(5.0 |
) |
|
|
(2.0 |
) |
|
|
(5.8 |
) |
|
|
(3.0 |
) |
|
|
3.8 |
|
Prior
accident year catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Total
loss and loss expense ratio
|
|
|
64.9 |
% |
|
|
72.3 |
% |
|
|
63.5 |
% |
|
|
(7.4 |
) |
|
|
8.8 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
276 |
|
|
$ |
292 |
|
|
$ |
293 |
|
|
|
69.9 |
% |
|
|
71.0 |
% |
|
|
66.7 |
% |
as
of December 31, 2008
|
|
|
|
|
|
|
305 |
|
|
|
298 |
|
|
|
|
|
|
|
74.3 |
|
|
|
67.7 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
69.3 |
|
The
decline in commercial auto premiums over the three-year period reflected the
downward pressure exerted by the market on the pricing of commercial accounts.
Commercial auto is one of the business lines that we renew and price annually,
so market trends may be reflected here more quickly than in other lines.
Commercial auto also experiences pricing pressure because it often represents
the largest portion of insurance costs for many commercial
policyholders.
The
calendar year loss and loss expense ratio improved during 2009 due in part to a
higher amount of favorable development on prior accident year reserves. The 2009
accident year loss and loss expense ratio also improved, reflecting more
favorable loss experience due in part to the general slump in U.S. economic
activity and also reflecting volatility in the number of commercial auto losses
greater than $1 million.
Workers’
Compensation
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Workers'
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
323 |
|
|
$ |
382 |
|
|
$ |
378 |
|
|
|
(15.6 |
) |
|
|
1.1 |
|
Earned
premiums
|
|
|
326 |
|
|
|
375 |
|
|
|
373 |
|
|
|
(13.0 |
) |
|
|
0.6 |
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
355 |
|
|
|
342 |
|
|
|
326 |
|
|
|
4.0 |
|
|
|
4.9 |
|
Current
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Prior
accident years before catastrophe losses
|
|
|
48 |
|
|
|
(3 |
) |
|
|
(10 |
) |
|
nm
|
|
|
|
75.0 |
|
Prior
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
403 |
|
|
$ |
339 |
|
|
$ |
316 |
|
|
|
18.9 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
108.8 |
% |
|
|
91.1 |
% |
|
|
87.3 |
% |
|
|
17.7 |
|
|
|
3.8 |
|
Current
accident year catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Prior
accident years before catastrophe losses
|
|
|
14.7 |
|
|
|
(0.7 |
) |
|
|
(2.7 |
) |
|
|
15.4 |
|
|
|
2.0 |
|
Prior
accident year catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Total
loss and loss expense ratio
|
|
|
123.5
|
% |
|
|
90.4 |
% |
|
|
84.6 |
% |
|
|
33.1 |
|
|
|
5.8 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
355 |
|
|
$ |
331 |
|
|
$ |
310 |
|
|
|
108.8
|
% |
|
|
88.1
|
% |
|
|
83.0
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
342 |
|
|
|
305 |
|
|
|
|
|
|
|
91.1 |
|
|
|
81.7 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
|
87.3 |
|
Workers’
compensation premiums declined sharply in 2009, primarily due to lower exposures
from the weak economy and more selective underwriting and the non-renewal of a
number of policies in our worst pricing tier. In addition, premiums resulting
from audits of policyholder payroll levels declined $28 million, reflecting the
weak economy.
Since we
pay a lower commission rate on workers’ compensation business, this line has a
higher calendar year loss and loss expense breakeven point than our other
commercial business lines. Nonetheless, the ratio was at an unprofitable level
in each of the last three years, and management continues to work to improve
financial performance for this line. During 2009, we began using a predictive
modeling tool to improve risk selection and pricing capabilities. Predictive
modeling increases pricing precision so that our agents can better compete for
the most desirable workers’ compensation business. We also added to our staff of
loss control field representatives, premium audit field representatives and
field claims representatives specializing in workers’ compensation risks. In
early 2010, we implemented direct reporting of workers’ compensation claims,
allowing us to quickly obtain detailed information to promptly assign the
appropriate level of claims handling expertise for each case. Obtaining more
information sooner for specific claims allows for medical care appropriate to
the nature of each injury, benefiting injured workers, employers and agents
while ultimately lowering overall loss costs.
The
workers’ compensation business line includes our longest tail exposures, making
initial estimates of accident year loss and loss expenses incurred more
uncertain. Due to the lengthy payout period of workers’ compensation claims,
small shifts in medical cost inflation and payout periods could have a
significant effect on our potential future liability compared with our current
projections. Our workers’ compensation reserve analyses completed during the
first half of 2009 indicated that loss cost inflation was higher than previously
estimated, leading us to make more conservative assumptions about future loss
cost inflation when estimating loss reserves, thereby significantly increasing
losses incurred. Prior analyses attributed a larger share of the rise in claim
payments for recent accident years to exposure growth rather than loss cost
inflation. However, declining claim frequencies reflected in reserving data as
of December 31, 2008, indicated that exposure growth was less of a source of the
rise in claim payments for recent accident years than was loss cost inflation.
The higher estimates of loss cost inflation derived from analyses during
2009 affected reserves estimated for many prior accident years. Accident
years 2006 through 2008 had net favorable development of $4 million, largely due
to favorable development on the loss expense component of the reserves. Accident
years 2000 through 2005 had net unfavorable development of $37 million, and
accident years prior to 2000 had net unfavorable development of $15 million.
Workers’ compensation prior accident year reserve development for full-year 2009
was unfavorable by $48 million for all prior accident years in total
compared with favorable development of $2 million for 2008. As discussed in
Property Casualty Insurance Loss and Loss Expense Reserves, including the table
on Page 42 showing ranges for estimated reserves, the significant strengthening
of reserves during 2009 moved the carried reserves for workers’ compensation
into the upper half of the range.
Specialty
Packages
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Specialty
packages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
148 |
|
|
$ |
145 |
|
|
$ |
146 |
|
|
|
1.7 |
|
|
|
(0.5 |
) |
Earned
premiums
|
|
|
147 |
|
|
|
144 |
|
|
|
146 |
|
|
|
2.4 |
|
|
|
(1.3 |
) |
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
84 |
|
|
|
87 |
|
|
|
80 |
|
|
|
(4.1 |
) |
|
|
9.2 |
|
Current
accident year catastrophe losses
|
|
|
21 |
|
|
|
23 |
|
|
|
6 |
|
|
|
(6.7 |
) |
|
|
287.4 |
|
Prior
accident years before catastrophe losses
|
|
|
1 |
|
|
|
(3 |
) |
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Prior
accident year catastrophe losses
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(85.0 |
) |
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
105 |
|
|
$ |
106 |
|
|
$ |
86 |
|
|
|
(1.6 |
) |
|
|
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
56.9 |
% |
|
|
60.8 |
% |
|
|
54.8 |
% |
|
|
(3.9 |
) |
|
|
6.0 |
|
Current
accident year catastrophe losses
|
|
|
14.2 |
|
|
|
15.6 |
|
|
|
4.0 |
|
|
|
(1.4 |
) |
|
|
11.6 |
|
Prior
accident years before catastrophe losses
|
|
|
0.3 |
|
|
|
(2.5 |
) |
|
|
0.5 |
|
|
|
2.8 |
|
|
|
(3.0 |
) |
Prior
accident year catastrophe losses
|
|
|
(0.8 |
) |
|
|
(0.4 |
) |
|
|
0.1 |
|
|
|
(0.4 |
) |
|
|
(0.5 |
) |
Total
loss and loss expense ratio
|
|
|
70.6 |
% |
|
|
73.5 |
% |
|
|
59.4 |
% |
|
|
(2.9 |
) |
|
|
14.1 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
105 |
|
|
$ |
106 |
|
|
$ |
89 |
|
|
|
71.1
|
% |
|
|
73.9
|
% |
|
|
61.0
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
110 |
|
|
|
87 |
|
|
|
|
|
|
|
76.4 |
|
|
|
59.9 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
58.8 |
|
Specialty
packages premiums were relatively flat over the three-year period. Our
commercial lines policy processing system for businessowners policies, which are
included in this business line, already had several of the technology features
we recently introduced to our agents with our new commercial lines policy
processing system, thereby meeting many of the ease of use requirements of our
agencies.
The
calendar year and accident year loss and loss expense ratios reflected the
volatility in catastrophe losses over the three-year period. In addition,
pricing reductions and normal loss cost inflation continued to put upward
pressure on the ratios.
Surety
and Executive Risk
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Surety
and executive risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
101 |
|
|
$ |
107 |
|
|
$ |
102 |
|
|
|
(5.1 |
) |
|
|
4.0 |
|
Earned
premiums
|
|
|
104 |
|
|
|
107 |
|
|
|
100 |
|
|
|
(3.5 |
) |
|
|
7.7 |
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
76 |
|
|
|
71 |
|
|
|
41 |
|
|
|
6.8 |
|
|
|
75.2 |
|
Current
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Prior
accident years before catastrophe losses
|
|
|
(3 |
) |
|
|
7 |
|
|
|
1 |
|
|
nm
|
|
|
|
494.7 |
|
Prior
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
73 |
|
|
$ |
78 |
|
|
$ |
42 |
|
|
|
(6.4 |
) |
|
|
87.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Current
accident year before catastrophe losses
|
|
|
73.2 |
% |
|
|
66.1 |
% |
|
|
40.6 |
% |
|
|
7.1 |
|
|
|
25.5 |
|
Current
accident year catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Prior
accident years before catastrophe losses
|
|
|
(2.7 |
) |
|
|
6.5 |
|
|
|
1.2 |
|
|
|
(9.2 |
) |
|
|
5.3 |
|
Prior
accident year catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Total
loss and loss expense ratio
|
|
|
70.5 |
% |
|
|
72.6 |
% |
|
|
41.8 |
% |
|
|
(2.1 |
) |
|
|
30.8 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
76 |
|
|
$ |
69 |
|
|
$ |
63 |
|
|
|
73.2
|
% |
|
|
64.5
|
% |
|
|
63.6
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
71 |
|
|
|
54 |
|
|
|
|
|
|
|
66.1 |
|
|
|
54.3 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
40.6 |
|
Surety
and executive risk premiums declined in 2009 as we non-renewed many policies in
an effort to improve the quality of the financial institution portion of this
book of business. Prior to the credit crisis in 2008, this line of business had
been growing in response to our marketing of these products.
Director
and officer liability coverage accounted for 60.3 percent of surety and
executive risk premiums in 2009 compared with 58.9 percent in 2008 and 62.3
percent in 2007. We have actively managed the potentially high risk of writing
director and officer liability by:
|
·
|
Marketing
primarily to nonprofit organizations, which accounted for approximately 70
percent of the director and officer liability policies we wrote in
2009.
|
|
·
|
Limiting
the number of for-profit policies. At year-end 2009, our in-force director
and officer liability policies provided coverage to 14 non-financial
publicly traded companies, including two Fortune 1000 companies. We also
provided this coverage to approximately 500 banks, savings and loans and
other financial institutions.
|
|
o
|
The
majority of these financial institution policyholders are smaller
community banks, and we believe they have no unusual exposure to
credit-market concerns, including subprime mortgages. Based on new policy
data or information from the most recent policy renewal, only 14 of
our bank and savings and loan policyholders have assets greater than
$2 billion, only 22 have assets between $1 billion and $2 billion;
and 41 have assets between $500 million and
$1 billion.
|
|
·
|
Writing
on a claims-made basis, which normally restricts coverage to losses
reported during the policy term.
|
|
·
|
Providing
limits no higher than $10 million with facultative or treaty
reinsurance in place in 2010 to cover losses greater than
$6 million.
|
The
calendar year and current accident year loss and loss expense ratios rose
substantially in 2008 and remained high in 2009, driven by director and officer
new losses and case reserve increases greater than $250,000. During 2009, there
were 37 new director and officer losses and case reserve increases, compared
with 38 in 2008 and 20 in 2007. This added approximately $36 million to loss and
loss expenses compared with $43 million in 2008 and $9 million in 2007. The
higher level in both 2009 and 2008 was largely from claims related to prior
lending practices at financial institutions. To address the potential risk
inherent in the financial institutions book of our surety and executive risk
business line moving forward, we continue to work with our agents to limit the
number of new director and officer policies for financial institutions, in
addition to using credit rating and other metrics to carefully re-underwrite
in-force policies when they are considered for renewal.
Machinery
and Equipment
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Machinery
and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
32 |
|
|
$ |
30 |
|
|
$ |
29 |
|
|
|
7.5 |
|
|
|
3.5 |
|
Earned
premiums
|
|
|
31 |
|
|
|
29 |
|
|
|
28 |
|
|
|
7.3 |
|
|
|
3.1 |
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
9 |
|
|
|
11 |
|
|
|
10 |
|
|
|
(19.9 |
) |
|
|
10.9 |
|
Current
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Prior
accident years before catastrophe losses
|
|
|
(2 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
nm
|
|
|
nm
|
|
Prior
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
7 |
|
|
$ |
12 |
|
|
$ |
8 |
|
|
|
(45.4 |
) |
|
|
57.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
26.9 |
% |
|
|
36.1 |
% |
|
|
33.6 |
% |
|
|
(9.2 |
) |
|
|
2.5 |
|
Current
accident year catastrophe losses
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
0.0 |
|
|
|
(0.6 |
) |
|
|
0.9 |
|
Prior
accident years before catastrophe losses
|
|
|
(5.8 |
) |
|
|
5.5 |
|
|
|
(5.5 |
) |
|
|
(11.3 |
) |
|
|
11.0 |
|
Prior
accident year catastrophe losses
|
|
|
0.2 |
|
|
|
0.0 |
|
|
|
(0.3 |
) |
|
|
0.2 |
|
|
|
0.3 |
|
Total
loss and loss expense ratio
|
|
|
21.6 |
% |
|
|
42.5 |
% |
|
|
27.8 |
% |
|
|
(20.9 |
) |
|
|
14.7 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
9 |
|
|
$ |
10 |
|
|
$ |
9 |
|
|
|
27.2
|
% |
|
|
35.6
|
% |
|
|
32.0
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
11 |
|
|
|
10 |
|
|
|
|
|
|
|
37.0 |
|
|
|
34.2 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
33.6 |
|
Machinery
and equipment premiums continued to rise in 2009. Because of the relatively
small size of this business line, the calendar year and accident year loss and
loss expense ratios can fluctuate substantially.
Personal
Lines
Insurance Results Of Operations
Overview
— Three-Year Highlights
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Earned
premiums
|
|
$ |
685 |
|
|
$ |
689 |
|
|
$ |
714 |
|
|
|
(0.6 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
485 |
|
|
|
498 |
|
|
|
459 |
|
|
|
(2.4 |
) |
|
|
8.7 |
|
Current
accident year catastrophe losses
|
|
|
106 |
|
|
|
99 |
|
|
|
20 |
|
|
|
6.9 |
|
|
|
396.4 |
|
Prior
accident years before catastrophe losses
|
|
|
(45 |
) |
|
|
(51 |
) |
|
|
(30 |
) |
|
|
9.9 |
|
|
|
(67.6 |
) |
Prior
accident year catastrophe losses
|
|
|
5 |
|
|
|
1 |
|
|
|
(11 |
) |
|
|
325.7 |
|
|
nm
|
|
Total
loss and loss expenses
|
|
|
551 |
|
|
|
547 |
|
|
|
438 |
|
|
|
0.7 |
|
|
|
25.2 |
|
Underwriting
expenses
|
|
|
215 |
|
|
|
224 |
|
|
|
233 |
|
|
|
(4.1 |
) |
|
|
(3.9 |
) |
Underwriting
(loss) profit
|
|
$ |
(81 |
) |
|
$ |
(82 |
) |
|
$ |
43 |
|
|
|
1.9 |
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Current
accident year before catastrophe losses
|
|
|
70.9 |
% |
|
|
72.2 |
% |
|
|
64.3 |
% |
|
|
(1.3 |
) |
|
|
7.9 |
|
Current
accident year catastrophe losses
|
|
|
15.4 |
|
|
|
14.4 |
|
|
|
2.8 |
|
|
|
1.0 |
|
|
|
11.6 |
|
Prior
accident years before catastrophe losses
|
|
|
(6.6 |
) |
|
|
(7.3 |
) |
|
|
(4.3 |
) |
|
|
0.7 |
|
|
|
(3.0 |
) |
Prior
accident year catastrophe losses
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
(1.5 |
) |
|
|
0.6 |
|
|
|
1.6 |
|
Total
loss and loss expenses
|
|
|
80.4 |
|
|
|
79.4 |
|
|
|
61.3 |
|
|
|
1.0 |
|
|
|
18.1 |
|
Underwriting
expenses
|
|
|
31.4 |
|
|
|
32.5 |
|
|
|
32.6 |
|
|
|
(1.1 |
) |
|
|
(0.1 |
) |
Combined
ratio
|
|
|
111.8 |
% |
|
|
111.9 |
% |
|
|
93.9 |
% |
|
|
(0.1 |
) |
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio
|
|
|
111.8 |
% |
|
|
111.9 |
% |
|
|
93.9 |
% |
|
|
(0.1 |
) |
|
|
18.0 |
|
Contribution
from catastrophe losses and prior years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserve
development
|
|
|
9.5 |
|
|
|
7.2 |
|
|
|
(3.0 |
) |
|
|
2.3 |
|
|
|
10.2 |
|
Combined
ratio before catastrophe losses and prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
years
reserve development
|
|
|
102.3 |
% |
|
|
104.7 |
% |
|
|
96.9 |
% |
|
|
(2.4 |
) |
|
|
7.8 |
|
Performance
highlights for the personal lines segment include:
|
·
|
Premiums
– Very strong competition in our personal lines markets continued in 2009
and we continued to adjust pricing in an effort to return to consistent
profitability in our personal lines segment. Net written premiums grew
slightly, driven by new business growth that included expansion into new
states where we previously offered only commercial lines policies.
Industry average written premium growth was estimated at negative
1.1 percent in 2009 and negative 0.7 percent in 2008 after being flat
in 2007.
|
|
·
|
Combined
ratio – The combined ratio improved slightly in 2009, reflecting in part
improved pricing, following substantial deterioration in 2008. The level
of catastrophe losses remained high in 2009, and the current accident year
loss and loss expense ratio remained fairly steady, once refinements made
to the IBNR reserve allocation in 2008, noted below, are taken into
account. In 2008, the current
accident
|
|
|
year
loss and loss expense ratio before catastrophe losses also rose
substantially, in part due to approximately $20 million, or
2.9 percentage points, from refinements made to the allocation of
IBNR reserves by accident year.
|
Our
personal lines statutory combined ratio was 111.4 percent in 2009, 111.6 percent
in 2008 and 94.7 percent in 2007. By comparison, the estimated industry personal
lines combined ratio was 101.0 percent in 2009, 103.6 percent in 2008
and 96.1 percent in 2007. Our concentration of business in areas hard-hit
by catastrophe events contributed to recent results that differed from the
overall industry, an issue we are addressing in part through geographic
expansion as noted below. The contribution of catastrophe losses to our personal
lines statutory combined ratio was 16.1 percentage points in 2009, 14.5 percent
points in 2008 and 1.3 percentage points in 2007, compared to an estimated 4.5,
7.5, and 2.1 percentage points, respectively, for the industry.
Personal
Lines Insurance Premiums
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Agency
renewal written premiums
|
|
$ |
642 |
|
|
$ |
672 |
|
|
$ |
690 |
|
|
|
(4.5 |
) |
|
|
(2.5 |
) |
Agency
new business written premiums
|
|
|
75 |
|
|
|
42 |
|
|
|
38 |
|
|
|
80.6 |
|
|
|
9.5 |
|
Other
written premiums
|
|
|
(26 |
) |
|
|
(29 |
) |
|
|
(24 |
) |
|
|
11.1 |
|
|
|
(22.5 |
) |
Net
written premiums
|
|
|
691 |
|
|
|
685 |
|
|
|
704 |
|
|
|
0.9 |
|
|
|
(2.7 |
) |
Unearned
premium change
|
|
|
(6 |
) |
|
|
4 |
|
|
|
10 |
|
|
nm
|
|
|
|
(53.2 |
) |
Earned
premiums
|
|
$ |
685 |
|
|
$ |
689 |
|
|
$ |
714 |
|
|
|
(0.6 |
) |
|
|
(3.4 |
) |
Personal
lines insurance is a strategic component of our overall relationship with many
of our agencies and an important component of our agencies’ relationships with
their clients. We believe agents recommend Cincinnati personal insurance
products for their value-oriented clients who seek to balance quality and price
and who are attracted by our superior claims service and the benefits of our
package approach.
Our
personal lines policy retention and new business levels have remained at higher
levels following introduction in recent years of a limited program of policy
credits for personal auto and homeowner pricing in most of the states in which
we operate. The program provided credits for eligible new and renewal
policyholders identified as above-average quality risks. Additional pricing and
credit changes were implemented in early 2009, further improving pricing for the
best accounts, which should help us retain and attract even more of our agents’
preferred business.
Our
personal lines new business written by our agencies rose significantly in 2009
as the number of agency locations writing our personal lines rose by 133, or
14.4 percent, following an increase of 136 agency locations in 2008. Since early
2008, we have worked to improve our geographic diversification by expanding our
personal lines operation to several states less prone to catastrophes. There are
seven states where we began writing business or significantly expanded our
personal lines product offerings and automation capabilities beginning in 2008,
and they accounted for $13 million of our 2009 increase in our personal lines
new business written premiums. Those seven states are Arizona, Idaho, Maryland,
Montana, North Carolina, South Carolina, and Utah.
For the
three-year period, other written premiums, primarily premiums that are ceded to
reinsurers and that lower our net written premiums, remained relatively stable.
Additional premiums ceded to reinsurers to reinstate our catastrophe reinsurance
treaty contributed $9 million to other written premiums
in 2008.
Personal
Lines Insurance Loss and Loss Expenses
Loss and
loss expenses include both net paid losses and reserve changes for unpaid losses
as well as the associated loss expenses. Catastrophe losses were unusually high
during 2009 and 2008, and also are inherently volatile, as discussed above and
in Consolidated Property Casualty Insurance Results of Operations, Page 46.
Development on loss and loss expense reserves for prior accident years continued
to trend favorably in 2009 as discussed in Personal Lines Insurance Segment
Reserves, Page 77.
The
increase in the current accident year loss and loss expense ratio before
catastrophe losses since 2007 reflects the pricing factors discussed above,
normal loss cost inflation and higher non-catastrophe weather-related losses.
During 2009, one unusually large fire loss for our homeowner line of business
contributed $5 million to personal lines segment losses. In addition,
refinements made to the allocation of IBNR reserves by accident year increased
the 2008 ratio.
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
591 |
|
|
$ |
575 |
|
|
$ |
468 |
|
|
|
86.3 |
% |
|
|
83.4 |
% |
|
|
65.6 |
% |
as
of December 31, 2008
|
|
|
|
|
|
|
597 |
|
|
|
480 |
|
|
|
|
|
|
|
86.6 |
|
|
|
67.3 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
67.0 |
|
The
effect on the loss and loss expense ratio from new losses and case reserve
increases greater than $250,000, net of reinsurance, was higher in 2009 than it
was in 2008. Our analysis indicated no unexpected concentration of these
losses and reserve increases by risk category, geographic region, policy
inception, agency or field marketing territory.
Personal
Lines Insurance Losses by Size
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
New
losses greater than $4,000,000
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
0 |
|
|
|
0.0 |
|
|
nm
|
|
New
losses $1,000,000-$4,000,000
|
|
|
17 |
|
|
|
16 |
|
|
|
28 |
|
|
|
8.4 |
|
|
|
(42.2 |
) |
New
losses $250,000-$1,000,000
|
|
|
48 |
|
|
|
44 |
|
|
|
44 |
|
|
|
6.7 |
|
|
|
1.3 |
|
Case
reserve development above $250,000
|
|
|
19 |
|
|
|
16 |
|
|
|
19 |
|
|
|
24.7 |
|
|
|
(20.1 |
) |
Total
large losses incurred
|
|
|
89 |
|
|
|
81 |
|
|
|
91 |
|
|
|
10.0 |
|
|
|
(11.0 |
) |
Other
losses excluding catastrophe losses
|
|
|
281 |
|
|
|
295 |
|
|
|
279 |
|
|
|
(4.4 |
) |
|
|
5.6 |
|
Catastrophe
losses
|
|
|
111 |
|
|
|
100 |
|
|
|
10 |
|
|
|
10.4 |
|
|
|
958.8 |
|
Total
losses incurred
|
|
$ |
481 |
|
|
$ |
476 |
|
|
$ |
380 |
|
|
|
1.1 |
|
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
New
losses greater than $4,000,000
|
|
|
0.7 |
% |
|
|
0.7 |
% |
|
|
0.0 |
% |
|
|
0.0 |
|
|
|
0.7 |
|
New
losses $1,000,000-$4,000,000
|
|
|
2.5 |
|
|
|
2.3 |
|
|
|
3.9 |
|
|
|
0.2 |
|
|
|
(1.6 |
) |
New
losses $250,000-$1,000,000
|
|
|
6.9 |
|
|
|
6.4 |
|
|
|
6.2 |
|
|
|
0.5 |
|
|
|
0.2 |
|
Case
reserve development above $250,000
|
|
|
2.8 |
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
0.5 |
|
|
|
(0.4 |
) |
Total
large losses incurred
|
|
|
12.9 |
|
|
|
11.7 |
|
|
|
12.8 |
|
|
|
1.2 |
|
|
|
(1.1 |
) |
Other
losses excluding catastrophe losses
|
|
|
41.1 |
|
|
|
42.8 |
|
|
|
39.1 |
|
|
|
(1.7 |
) |
|
|
3.7 |
|
Catastrophe
losses
|
|
|
16.2 |
|
|
|
14.5 |
|
|
|
1.3 |
|
|
|
1.7 |
|
|
|
13.2 |
|
Total
loss ratio
|
|
|
70.2 |
% |
|
|
69.0 |
% |
|
|
53.2 |
% |
|
|
1.2 |
|
|
|
15.8 |
|
Personal
Lines Insurance Underwriting Expenses
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Commission
expenses
|
|
$ |
136 |
|
|
$ |
136 |
|
|
$ |
145 |
|
|
|
(0.2 |
) |
|
|
(6.4 |
) |
Underwriting
expenses
|
|
|
79 |
|
|
|
88 |
|
|
|
88 |
|
|
|
(10.1 |
) |
|
|
0.4 |
|
Total
underwriting expenses
|
|
$ |
215 |
|
|
$ |
224 |
|
|
$ |
233 |
|
|
|
(4.1 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Commission
expenses
|
|
|
19.8 |
% |
|
|
19.7 |
% |
|
|
20.3 |
% |
|
|
0.1 |
|
|
|
(0.6 |
) |
Underwriting
expenses
|
|
|
11.6 |
|
|
|
12.8 |
|
|
|
12.3 |
|
|
|
(1.2 |
) |
|
|
0.5 |
|
Total
underwriting expense ratio
|
|
|
31.4 |
% |
|
|
32.5 |
% |
|
|
32.6 |
% |
|
|
(1.1 |
) |
|
|
(0.1 |
) |
Personal
lines commission expense as a percent of earned premium for 2009 was essentially
flat compared with 2008. The decrease in the commission expenses ratio in 2008
reflected a lower level of our profit-sharing, or contingent commissions, which
are primarily based on the profitability of an agency’s aggregate property
casualty book of Cincinnati business.
Non-commission
underwriting expenses declined in 2009 primarily due to lower depreciation
expense on previously capitalized software expenditures. In 2008 there was an
unusual expense of $3 million due to a pension charge. Refinements in the
allocation of expenses between our commercial lines and personal lines segments
also contributed to minor variations between year-to-year comparisons in the
non-commission underwriting expenses.
Personal
Lines Insurance Outlook
A.M. Best
estimates industrywide personal lines written premiums may rise approximately
1.8 percent in 2010, with the combined ratio estimated at 100.3 percent.
With improvement in our new business levels and by maintaining our strong policy
retention rate along with rate increases in the homeowner line effected in late
2009, we expect our growth rate to be slightly higher than the industry target
for 2010. In Item 1, Strategic Initiatives, Page 8, we discuss the initiatives
we are implementing to address the unsatisfactory performance of our personal
lines segment, in particular the homeowner line of business. We also
describe steps that will enhance our response to the changing marketplace. We
are aware that our personal lines pricing and loss activity are at levels that
could put achievement of our corporate financial objectives at risk if those
trends continue. We discuss our overall outlook for our property casualty
insurance operations in the Executive Summary, Page 34.
Personal
Lines of Business Analysis
We prefer
to write personal lines coverages within accounts that include both auto and
homeowner coverages as well as coverages from the other personal business line.
As a result, we believe that the personal lines segment is best measured and
evaluated on a segment basis. However, we provide line-of-business data to
summarize growth and profitability trends separately for each line. The accident
year loss data provides current estimates of incurred loss and loss expenses and
corresponding ratios over the most recent three accident years. Accident year
data classifies losses according to the year in which the corresponding loss
events occur, regardless of when the losses are actually reported, recorded or
paid. For 2009, the personal line of business that exhibited the most
significant adverse profitability trend was homeowner. As discussed above, we
continue to take action to improve pricing per risk and overall rates, which is
expected to improve future profitability trends. In addition, we anticipate that
the unusually high
catastrophe
loss level of 2009 may return nearer to the historical average, with the
long-term future catastrophe loss ratio improving due to our gradual geographic
diversification into states less prone to catastrophe losses.
Personal
Auto
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Personal
auto:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
324 |
|
|
$ |
320 |
|
|
$ |
332 |
|
|
|
1.3 |
|
|
|
(3.7 |
) |
Earned
premiums
|
|
|
319 |
|
|
|
325 |
|
|
|
342 |
|
|
|
(1.7 |
) |
|
|
(5.0 |
) |
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
224 |
|
|
|
226 |
|
|
|
225 |
|
|
|
(0.6 |
) |
|
|
0.3 |
|
Current
accident year catastrophe losses
|
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
|
|
(23.7 |
) |
|
|
266.3 |
|
Prior
accident years before catastrophe losses
|
|
|
(6 |
) |
|
|
(12 |
) |
|
|
5 |
|
|
|
42.7 |
|
|
nm
|
|
Prior
accident year catastrophe losses
|
|
|
0 |
|
|
|
0 |
|
|
|
(3 |
) |
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
221 |
|
|
$ |
218 |
|
|
$ |
228 |
|
|
|
0.9 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
70.2 |
% |
|
|
69.4 |
% |
|
|
65.8 |
% |
|
|
0.8 |
|
|
|
3.6 |
|
Current
accident year catastrophe losses
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
0.9 |
|
Prior
accident years before catastrophe losses
|
|
|
(2.0 |
) |
|
|
(3.4 |
) |
|
|
1.6 |
|
|
|
1.4 |
|
|
|
(5.0 |
) |
Prior
accident year catastrophe losses
|
|
|
(0.2 |
) |
|
|
0.0 |
|
|
|
(0.9 |
) |
|
|
(0.2 |
) |
|
|
0.9 |
|
Total
loss and loss expense ratio
|
|
|
69.0 |
% |
|
|
67.2 |
% |
|
|
66.8 |
% |
|
|
1.8 |
|
|
|
0.4 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
227 |
|
|
$ |
227 |
|
|
$ |
234 |
|
|
|
71.2
|
% |
|
|
69.8
|
% |
|
|
68.3
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
230 |
|
|
|
237 |
|
|
|
|
|
|
|
70.6 |
|
|
|
69.2 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
66.1 |
|
Net
written premiums for personal auto increased slightly in 2009 as strong new
business growth offset pricing decreases taken in early 2009 and business lost
due to normal attrition. We continue to monitor and modify selected rates and
credits to address our competitive position.
The
calendar year loss and loss expense ratio rose slightly over the three-year
period. In recent years, we have seen generally higher costs for liability
claims, including severe injuries, and we have sought rate increases for
liability coverages that partially offset price decreases for physical damage
coverages.
Price
reductions, in part reflecting our trend toward a higher quality book of
business, combined with normal loss cost inflation as the primary drivers in the
rise in the accident year loss and loss expense ratio before catastrophe losses
since 2007. The 2008 accident year loss and loss expense ratio also reflected
refinements made to our IBNR reserve allocation by accident year that
contributed approximately 4 percentage points.
Homeowner
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Homeowner:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
275 |
|
|
$ |
277 |
|
|
$ |
284 |
|
|
|
(0.6 |
) |
|
|
(2.5 |
) |
Earned
premiums
|
|
|
276 |
|
|
|
277 |
|
|
|
285 |
|
|
|
(0.4 |
) |
|
|
(2.6 |
) |
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
202 |
|
|
|
194 |
|
|
|
161 |
|
|
|
4.1 |
|
|
|
20.5 |
|
Current
accident year catastrophe losses
|
|
|
96 |
|
|
|
89 |
|
|
|
17 |
|
|
|
7.8 |
|
|
|
416.6 |
|
Prior
accident years before catastrophe losses
|
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(3 |
) |
|
|
49.7 |
|
|
|
(235.4 |
) |
Prior
accident year catastrophe losses
|
|
|
5 |
|
|
|
1 |
|
|
|
(7 |
) |
|
|
278.7 |
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
298 |
|
|
$ |
275 |
|
|
$ |
168 |
|
|
|
8.3 |
|
|
|
63.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt.
Change
|
|
Current
accident year before catastrophe losses
|
|
|
73.0 |
% |
|
|
69.9 |
% |
|
|
56.5 |
% |
|
|
3.1 |
|
|
|
13.4 |
|
Current
accident year catastrophe losses
|
|
|
34.7 |
|
|
|
32.1 |
|
|
|
6.0 |
|
|
|
2.6 |
|
|
|
26.1 |
|
Prior
accident years before catastrophe losses
|
|
|
(1.6 |
) |
|
|
(3.2 |
) |
|
|
(1.0 |
) |
|
|
1.6 |
|
|
|
(2.2 |
) |
Prior
accident year catastrophe losses
|
|
|
1.7 |
|
|
|
0.4 |
|
|
|
(2.5 |
) |
|
|
1.3 |
|
|
|
2.9 |
|
Total
loss and loss expense ratio
|
|
|
107.8 |
% |
|
|
99.2 |
% |
|
|
59.0 |
% |
|
|
8.6 |
|
|
|
40.2 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
298 |
|
|
$ |
281 |
|
|
$ |
180 |
|
|
|
107.7
|
% |
|
|
101.5
|
% |
|
|
63.3
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
283 |
|
|
|
177 |
|
|
|
|
|
|
|
102.0 |
|
|
|
62.3 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
62.5 |
|
Premiums for 2009 were relatively flat compared with 2008. Both
years were lower than 2007 and reflected improved new business levels offset by
higher reinsurance premiums in both years. Premiums ceded for reinsurance, which
reduce premium revenue, were $22 million in 2009; $26 million in
2008,
including
a reinstatement premium of $8 million; and $23 million in 2007. The pricing
changes of the past several years have had a positive effect on policyholder
retention and new business activity. We continue to monitor and modify selected
rates and credits to address our competitive position and to achieve long-term
profitability. Implementation of predictive modeling has provided additional
pricing points to target profitability. Various rate changes were implemented
beginning in October 2009, including rate increases that respond in part to
weather-related loss trends as well as other trends in loss costs. The increases
for the homeowner line of business averaged approximately 6 percent in affected
states, although some individual policies will see renewal increases in the
double-digit range. These actions, in addition to geographic diversification,
are important steps we are taking to improve homeowner results.
The
calendar year loss and loss expense ratio over the past three years fluctuated
with catastrophe losses, non-catastrophe weather-related losses and other large
losses. Catastrophe losses have been above our expected range in recent years,
averaging 34.5 percent of homeowner earned premium from 2008 to 2009, compared
with the most recent 10-year average of 21.9 percent.
The
current accident year loss and loss expense ratio before catastrophe losses
remained high in 2009, in part due to the same non-catastrophe weather related
losses and other large losses that affected the calendar year result.
Non-catastrophe weather-related losses contributed about 14.0 percentage
points to the 2009 ratio and about 5 percentage points to the 2008 ratio. In
addition, the refinements made to our IBNR reserve allocation by accident year
and a lower estimate of salvage and subrogation reserves raised the 2008 ratio
by about 2 percentage points.
Other
Personal
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change %
|
|
|
Change %
|
|
Other
personal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
92 |
|
|
$ |
88 |
|
|
$ |
88 |
|
|
|
4.7 |
|
|
|
0.6 |
|
Earned
premiums
|
|
|
90 |
|
|
|
87 |
|
|
|
87 |
|
|
|
3.1 |
|
|
|
0.1 |
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
60 |
|
|
|
79 |
|
|
|
72 |
|
|
|
(23.4 |
) |
|
|
8.6 |
|
Current
accident year catastrophe losses
|
|
|
7 |
|
|
|
6 |
|
|
|
2 |
|
|
|
15.0 |
|
|
|
271.0 |
|
Prior
accident years before catastrophe losses
|
|
|
(34 |
) |
|
|
(30 |
) |
|
|
(33 |
) |
|
|
(14.4 |
) |
|
|
8.4 |
|
Prior
accident year catastrophe losses
|
|
|
0 |
|
|
|
(1 |
) |
|
|
0 |
|
|
nm
|
|
|
nm
|
|
Total
loss and loss expenses
|
|
$ |
33 |
|
|
$ |
54 |
|
|
$ |
41 |
|
|
|
(38.8 |
) |
|
|
32.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
Pt. Change
|
|
Current
accident year before catastrophe losses
|
|
|
66.9 |
% |
|
|
89.9 |
% |
|
|
82.9 |
% |
|
|
(23.0 |
) |
|
|
7.0 |
|
Current
accident year catastrophe losses
|
|
|
7.7 |
|
|
|
6.9 |
|
|
|
1.9 |
|
|
|
0.8 |
|
|
|
5.0 |
|
Prior
accident years before catastrophe losses
|
|
|
(38.3 |
) |
|
|
(34.4 |
) |
|
|
(37.6 |
) |
|
|
(3.9 |
) |
|
|
3.2 |
|
Prior
accident year catastrophe losses
|
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
0.8 |
|
|
|
0.0 |
|
Total
loss and loss expense ratio
|
|
|
36.9 |
% |
|
|
62.2 |
% |
|
|
47.0 |
% |
|
|
(25.3 |
) |
|
|
15.2 |
|
Accident year loss and loss expenses incurred and ratios to earned premiums:
|
Accident
Year:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
as
of December 31, 2009
|
|
$ |
67 |
|
|
$ |
67 |
|
|
$ |
54 |
|
|
|
74.6
|
% |
|
|
76.8
|
% |
|
|
62.2
|
% |
as
of December 31, 2008
|
|
|
|
|
|
|
85 |
|
|
|
66 |
|
|
|
|
|
|
|
96.8 |
|
|
|
76.1 |
|
as
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
84.8 |
|
Other
personal premiums increased in 2009 reflecting the growth in our personal auto
and homeowner lines before the effects of reinsurance. Most of our other
personal coverages are endorsed to homeowner or auto policies.
The
calendar year and accident year loss and loss expense ratio for other personal
improved in 2009. Reserve development on prior accident years can fluctuate
significantly for this business line because personal umbrella liability is a
major component of other personal losses.
Life
Insurance Results Of Operations
Overview
— Three-Year Highlights
Performance
highlights for the life insurance segment include:
|
·
|
Revenues
– Driven by higher term life insurance premiums, earned premiums have
grown over the past three years. Gross in-force policy face amounts
increased to $69.815 billion at year-end 2009 from $65.888 billion at
year-end 2008 and $61.875 billion at year-end
2007.
|
|
·
|
Profitability
– The life insurance segment frequently reports only a small profit or
loss because most of its investment income is included in investment
segment results. We include only investment income credited to contract
holders (interest assumed in life insurance policy reserve calculations)
in life insurance segment results. The segment reported a $2 million
profit in 2009.
|
Life
Insurance Results
|
|
|
Years
ended December 31,
|
|
|
|
2009-2008
|
|
|
|
2008-2007
|
|
(In
millions)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
Change
%
|
|
|
|
Change
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
143 |
|
|
$ |
126 |
|
|
$ |
125 |
|
|
|
13.0 |
|
|
|
0.8 |
|
Separate
account investment management fees
|
|
|
- |
|
|
|
2 |
|
|
|
4 |
|
|
nm
|
|
|
|
(56.0 |
) |
Total
revenues
|
|
|
143 |
|
|
|
128 |
|
|
|
129 |
|
|
|
11.5 |
|
|
|
(1.1 |
) |
Contract
holders' benefits incurred
|
|
|
160 |
|
|
|
142 |
|
|
|
133 |
|
|
|
13.3 |
|
|
|
6.1 |
|
Investment
interest credited to contract holders
|
|
|
(69 |
) |
|
|
(63 |
) |
|
|
(59 |
) |
|
|
10.0 |
|
|
|
(5.2 |
) |
Operating
expenses incurred
|
|
|
50 |
|
|
|
45 |
|
|
|
52 |
|
|
|
9.1 |
|
|
|
(12.8 |
) |
Total
benefits and expenses
|
|
|
141 |
|
|
|
124 |
|
|
|
126 |
|
|
|
13.5 |
|
|
|
(1.2 |
) |
Life
insurance segment profit
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
3 |
|
|
|
(52.7 |
) |
|
|
0.9 |
|
Life
Insurance Growth
We market
term, whole and universal life products, fixed annuities and disability income
products. In addition, we offer term, whole and universal life and
disability insurance to employees at their worksite. These products provide our
property casualty agency force with excellent cross-serving opportunities for
both commercial and personal accounts.
Earned
premiums increased in 2009 largely because of growth in our term and universal
life insurance business. Earned premiums from term insurance grew $10 million,
or 13.4 percent, and earned premiums from universal life insurance grew $4
million, or 17.8 percent.
Separate
account investment management fee income contributed less than $1 million to
total revenue in 2009, compared with a $2 million contribution in 2008 and $4
million in 2007. These fees declined primarily because of a net realized capital
loss sharing agreement between the separate account and the general
account.
Over the
past several years, we have worked to maintain a portfolio of simple, yet
competitive products, primarily under the LifeHorizons banner. Our product
development efforts emphasize death benefit protection and guarantees.
Distribution expansion within our property casualty insurance agencies remains a
high priority. In the past several years, we have added life field marketing
representatives for the western, southeastern and northeastern states. Our 32
life field marketing representatives work in partnership with our more than
100 property casualty field marketing representatives. Approximately 70
percent of our term and other life insurance product premiums were generated
through our property casualty insurance agency relationships.
Life
Insurance Profitability
Although
we exclude most of our life insurance company investment income from investment
segment results, we recognize that assets under management, capital
appreciation and investment income are integral to evaluation of the
success of the life insurance segment because of the long duration of life
products. On a basis that includes investment income and realized gains or
losses from life insurance-related invested assets, the life insurance
company reported a net profit of $22 million in 2009, compared with a net
loss of $19 million in 2008 and a net profit of $65 million in 2007. The life
insurance company portfolio had after-tax realized investment losses of $13
million in 2009, including $15 million in other-than-temporary impairment
charges, compared with after-tax realized investment losses of $58 million in
2008, which included $66 million in other-than-temporary impairment charges.
Realized investment losses were minimal in 2007, when we reported after-tax
realized investment gains of $26 million. Realized investment gains and
losses are discussed under Investment Results of Operations, Page
64.
Life
segment expenses consist principally of:
|
·
|
Contract
holders’ (policyholders’) benefits incurred related to traditional life
and interest-sensitive products accounted for 76.4 percent of 2009 total
benefits and expenses compared with 75.7 percent in 2008 and
71.9 percent in 2007. Total benefits and expenses rose due to net
death claims that increased but remained within our range of pricing
expectations.
|
|
·
|
Operating
expenses incurred, net of deferred acquisition costs, accounted for 23.6
percent of 2009 total benefits and expenses compared with 24.3 percent in
2008 and 28.1 percent in 2007. Operating expenses increased
principally because of the level of commission expense associated with new
term life insurance and fixed annuity policies, partially offset by
deferred acquisition costs related to these
products.
|
Life
segment profitability depends largely on premium levels, the adequacy of product
pricing, underwriting skill and operating efficiencies. Life segment results
include only investment interest credited to contract holders (interest assumed
in life insurance policy reserve calculations). The remaining investment income
is reported in the investment segment results. The life investment portfolio is
managed to earn target spreads between earned investment rates on general
account assets and rates credited to policyholders. We consider the value of
assets under management and investment income for the life investment portfolio
as key performance indicators for the life insurance segment.
We seek
to maintain a competitive advantage with respect to benefits paid and reserve
increases by consistently achieving better than average claims experience due to
skilled underwriting. Commissions paid by the life insurance operation are on
par with industry averages.
During
the past several years, we have invested in imaging and workflow technology and
have significantly improved application processing. We have achieved process
efficiencies while improving our service. These efficiencies have played a
significant role in cost containment and in our ability to increase total
premiums and policy count over the past 10 years with minimal headcount
additions.
Life
Insurance Outlook
Life
insurer balance sheets strengthened nicely in 2009 after weathering a difficult
2008. Many companies increased prices or exited selected lines of business to
preserve and enhance valuable capital. Our strong surplus position and
straight-forward portfolio of products allowed us to maintain our pricing and
continue to offer the products and services upon which our agents have come to
rely. This strategy led to strong growth in our life and annuity lines in 2009;
we expect this trend will continue with respect to life sales but expect some
moderation with respect to annuity sales in 2010.
Our
property casualty agencies remain the main distribution system for our life
insurance segment, and we continue to emphasize securing an increasing share of
the life insurance premium produced by these agencies. While other life insurers
continue to expand nontraditional distribution channels such as direct sales, we
intend to market through agencies affiliated with our property casualty
insurance operations or independent life-only agencies. In 2009 our property
casualty agencies produced 70 percent and our life-only agencies 30 percent of
our life insurance premium. Term insurance continues to fit well with the sales
goals of both our property casualty and life-only agencies and remains our
largest product line. We continue to introduce new term products with features
our agents tell us are important. We will complete a comprehensive review of our
term portfolio as well as introduce a new second-to-die universal life product
in 2010. We continue to emphasize the cross-serving opportunities of our
worksite products for our property casualty agencies’ commercial
accounts.
As we
seek to improve internal efficiencies, we are consolidating our legacy life
insurance administrative systems into a single system. We anticipate this
effort will be completed by mid-2011. We are also exploring online
initiatives including intelligent electronic applications. We expect these
projects to directly affect our ability to increase revenue and reduce
expenses.
Current
statutory laws and regulations require life insurers to hold redundant reserves,
particularly for preferred risk underwriting classes. While these redundant
reserves have no direct effect on GAAP results, they depress statutory earnings
and require a large commitment of capital. Redundant reserves are a significant
challenge, not just for our life insurance operations, but for all writers of
term insurance and universal life insurance with secondary
guarantees.
The
National Association of Insurance Commissioners recognizes the problems caused
by redundant reserves and is considering a principles-based reserving system
rather than the current formulaic one. While still capturing all material risks,
a principles-based system would allow a company to use its own experience,
subject to credibility standards and appropriate margins for uncertainty. Also,
under the proposed principles-based system, the insurer would fully document and
disclose all of its assumptions and methods to regulatory
officials.
Investment
Results Of Operations
Overview
— Three-Year Highlights
The
investment segment contributes investment income and realized gains and losses
to results of operations. Investments provide our primary source of pretax and
after-tax profits.
|
·
|
Investment
income – Pretax investment income declined 6.8 percent in 2009, primarily
because of prior year dividend cuts in our common stock portfolio. Pretax
investment income declined 11.6 percent in 2008, primarily because of
dividend reductions by common and preferred holdings, including reductions
during the year on positions subsequently sold or reduced. After-tax
investment income declined 11.3 percent in 2009 compared with 10.9 percent
in 2008. This after-tax decline has been primarily driven by the
above-mentioned dividend
reductions.
|
|
·
|
Realized
investment gains and losses – We reported realized investment gains in all
three years, largely due to investment sales that were discretionary in
timing and amount. Those sales were somewhat offset in 2009 and 2008,
respectively, by $131 million and $510 million of
other-than-temporary impairment charges for the write-down of
50 securities in 2009 and 126 securities in
2008.
|
Investment
Results
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income, net of expenses, pre-tax
|
|
$ |
501 |
|
|
$ |
537 |
|
|
$ |
608 |
|
|
|
(6.8 |
) |
|
|
(11.6 |
) |
Investment
interest credited to contract holders
|
|
|
(69 |
) |
|
|
(63 |
) |
|
|
(59 |
) |
|
|
(10.0 |
) |
|
|
(5.2 |
) |
Realized
investment gains and losses summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains and losses
|
|
|
440 |
|
|
|
686 |
|
|
|
409 |
|
|
|
(35.8 |
) |
|
|
67.6 |
|
Change
in fair value of securities with embedded derivatives
|
|
|
27 |
|
|
|
(38 |
) |
|
|
(11 |
) |
|
nm
|
|
|
|
(243.8 |
) |
Other-than-temporary
impairment charges
|
|
|
(131 |
) |
|
|
(510 |
) |
|
|
(16 |
) |
|
|
74.3 |
|
|
nm
|
|
Total
realized investment gains and losses
|
|
|
336 |
|
|
|
138 |
|
|
|
382 |
|
|
|
144.5 |
|
|
|
(64.0 |
) |
Investment
operations profit
|
|
$ |
768 |
|
|
$ |
612 |
|
|
$ |
931 |
|
|
|
25.5 |
|
|
|
(34.2 |
) |
Investment
Income
The
primary drivers of investment income were:
|
·
|
Interest
income rose again in 2009 as we increased our allocation of investments to
fixed maturity securities. At year-end 2009, the fixed maturities fair
value was 104.5 percent of book value compared with
96.2 percent at year-end 2008.
|
|
·
|
Dividend
income declined 50.8 percent in 2009 after declining 30.5 percent in 2008
and rising in 2007. During 2008, we reduced the size of our common stock
portfolio by more than 50 percent in response to actual or anticipated
dividend reductions as well as for the implementation of a risk management
program.
|
We are
investing available cash flow in both fixed income and equity securities in a
manner that we believe balances current income needs with longer-term growth
goals.
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
402 |
|
|
$ |
326 |
|
|
$ |
308 |
|
|
|
23.1 |
|
|
|
6.0 |
|
Dividends
|
|
|
100 |
|
|
|
204 |
|
|
|
294 |
|
|
|
(50.8 |
) |
|
|
(30.5 |
) |
Other
|
|
|
7 |
|
|
|
14 |
|
|
|
15 |
|
|
|
(53.3 |
) |
|
|
(4.5 |
) |
Investment
expenses
|
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(9 |
) |
|
|
(5.2 |
) |
|
|
12.6 |
|
Total
investment income, net of expenses, pre-tax
|
|
|
501 |
|
|
|
537 |
|
|
|
608 |
|
|
|
(6.8 |
) |
|
|
(11.6 |
) |
Income
taxes
|
|
|
(118 |
) |
|
|
(106 |
) |
|
|
(124 |
) |
|
|
(11.5 |
) |
|
|
14.6 |
|
Total
investment income, net of expenses, after-tax
|
|
$ |
383 |
|
|
$ |
431 |
|
|
$ |
484 |
|
|
|
(11.3 |
) |
|
|
(10.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
23.6 |
% |
|
|
19.7 |
% |
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
invested assets
|
|
$ |
10,550 |
|
|
$ |
11,193 |
|
|
$ |
13,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
yield pre-tax
|
|
|
4.7 |
% |
|
|
4.8 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
Average
yield after-tax
|
|
|
3.6 |
% |
|
|
3.9 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
Net
Realized Investment Gains and Losses
Net
realized investment gains and losses are made up of realized investment gains
and losses on the sale of securities, changes in the valuation of embedded
derivatives within certain convertible securities and other-than-temporary
impairment charges. These three areas are discussed below.
Investment
gains or losses are recognized upon the sales of investments or as otherwise
required under GAAP. The timing of realized gains or losses from sales can have
a material effect on results in any quarter.
However,
such gains or losses usually have little, if any, effect on total shareholders’
equity because most equity and fixed maturity investments are carried at fair
value, with the unrealized gain or loss included as a component of other
comprehensive income.
Realized
Investment Gains and Losses
As appropriate,
we buy, hold or sell both fixed-maturity and equity securities on an ongoing
basis to help achieve our portfolio objectives. Pretax realized investment gains
in the past three years largely were due to the sale of equity
holdings.
Net
realized investment gains and losses totaling $440 million for the year ended
December 31, 2009, reflected:
|
·
|
$624
million in realized gains from equity sales including $161 million from
the merger of Wyeth with Pfizer (NYSE: PFE); $133 million from the sale of
ExxonMobil (NYSE: XOM); $100 million from the sale of Procter &
Gamble; $67 million from the sale of Fifth Third Bancorp (NASDAQ: FITB);
$52 million from the sale of Piedmont Natural Gas (NYSE: PNY); and
$111 million from the sale of various other equity
holdings.
|
|
·
|
$162
million in realized losses from the sales of various equity securities,
including $52 million from the sale of General Electric Co.
(NYSE: GE). These realized losses partially offset the $624 million
in realized gains from equity
sales.
|
|
·
|
$15
million in net losses from fixed-maturity sales and
calls.
|
|
·
|
$7
million in other net losses, including $6 million from a write-off of an
other invested asset.
|
In 2008,
most of the gain was due to sales of holdings of common and preferred stocks of
financial services issuers, to reduce our historical weighting in financial
sector securities. The majority of these holdings were sold following reductions
or elimination of their cash dividends to shareholders. Because of our low cost
basis, we were able to record gains on many of these sales despite the decline
in overall stock market values during 2008. Realized gains were lower in 2007,
although we chose to take gains from partial sales of selected holdings and to
sell other holdings because of general credit concerns that began in the
subprime mortgage market and spread to other areas in the homebuilding and
related industries over the course of 2007.
We
generally purchase fixed income securities with the intention to hold until
maturity. Securities that no longer meet our investment criteria, usually due to
a change in credit fundamentals, are divested.
Change
in the Valuation of Securities with Embedded Derivatives
We have a
small portfolio of convertible preferred stocks and bonds, which have an
embedded derivative component. In 2009 we recorded $27 million in fair value
realized gains compared with $38 million and $11 million in fair value
declines for 2008 and 2007. These changes in fair value were due to the
application of ASC 815-15-25, which allows us to account for the entire hybrid
financial instrument at fair value, with changes recognized in realized
investment gains and losses. The changes in fair values are recognized in net
income in the period they occur. See the discussion of Derivative Financial
Instruments and Hedging Activities in Item 8, Note 1 of the
Consolidated Financial Statements, Page 94, for details on the
accounting for convertible security embedded options.
Other-than-temporary
Impairment Charges
In 2009,
we recorded $131 million in write-downs of 50 securities that we deemed had
experienced an other-than-temporary decline in fair value versus $510 million
for 126 securities in 2008 and $16 million in 2007. The factors we consider when
evaluating impairments are discussed in Critical Accounting Estimates, Asset
Impairment, Page 42. The other-than-temporary impairment charges in 2009
approximated 1.2 percent of our total invested assets at year-end compared
with 5.7 percent for 2008. Other-than-temporary impairment charges also include
unrealized losses of holdings that we intend to sell but have not yet completed
a transaction.
Other-than-temporary
impairment charges from the investment portfolio by the asset class we described
in Item 1, Investments Segment, Page 18, are summarized below:
|
|
Years
ended December 31,
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Taxable
fixed maturities:
|
|
Impairment
amount
|
|
$ |
(61 |
) |
|
$ |
(162 |
) |
|
$ |
(14 |
) |
New
book value
|
|
$ |
81 |
|
|
$ |
187 |
|
|
$ |
46 |
|
Percent
to total owned
|
|
|
2
|
% |
|
|
6
|
% |
|
|
1
|
% |
Number
of securities impaired
|
|
|
37 |
|
|
|
86 |
|
|
|
18 |
|
Percent
to total owned
|
|
|
3
|
% |
|
|
10
|
% |
|
|
2
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
amount
|
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
0 |
|
New
book value
|
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
0 |
|
Percent
to total owned
|
|
|
0
|
% |
|
|
0
|
% |
|
|
0
|
% |
Number
of securities impaired
|
|
|
2 |
|
|
|
1 |
|
|
|
0 |
|
Percent
to total owned
|
|
|
0
|
% |
|
|
0
|
% |
|
|
0
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
amount
|
|
$ |
(59 |
) |
|
$ |
(214 |
) |
|
$ |
(2 |
) |
New
book value
|
|
$ |
48 |
|
|
$ |
87 |
|
|
$ |
2 |
|
Percent
to total owned
|
|
|
2
|
% |
|
|
5
|
% |
|
|
0
|
% |
Number
of securities impaired
|
|
|
8 |
|
|
|
9 |
|
|
|
2 |
|
Percent
to total owned
|
|
|
16
|
% |
|
|
18
|
% |
|
|
4
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
amount
|
|
$ |
(10 |
) |
|
$ |
(133 |
) |
|
$ |
0 |
|
New
book value
|
|
$ |
5 |
|
|
$ |
98 |
|
|
$ |
0 |
|
Percent
to total owned
|
|
|
7
|
% |
|
|
52
|
% |
|
|
0
|
% |
Number
of securities impaired
|
|
|
3 |
|
|
|
30 |
|
|
|
0 |
|
Percent
to total owned
|
|
|
12
|
% |
|
|
86
|
% |
|
|
0
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
amount
|
|
$ |
(131 |
) |
|
$ |
(510 |
) |
|
$ |
(16 |
) |
New
book value
|
|
$ |
137 |
|
|
$ |
373 |
|
|
$ |
48 |
|
Percent
to total owned
|
|
|
1
|
% |
|
|
5
|
% |
|
|
1
|
% |
Number
of securities impaired
|
|
|
50 |
|
|
|
126 |
|
|
|
20 |
|
Percent
to total owned
|
|
|
2
|
% |
|
|
6
|
% |
|
|
1
|
% |
Other-than-temporary
impairment charges from the investment portfolio by industry are summarized
as follows:
|
Years
ended December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
Financial
|
|
$ |
(30 |
) |
|
$ |
(72 |
) |
|
$ |
(4 |
) |
Services
cyclical
|
|
|
(14 |
) |
|
|
(17 |
) |
|
|
(6 |
) |
Real
estate
|
|
|
(11 |
) |
|
|
(49 |
) |
|
|
0 |
|
Consumer
cyclical
|
|
|
(5 |
) |
|
|
(14 |
) |
|
|
(1 |
) |
Other
|
|
|
(2 |
) |
|
|
(11 |
) |
|
|
(3 |
) |
Total
fixed maturities
|
|
|
(62 |
) |
|
|
(163 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
|
|
(35 |
) |
|
|
0 |
|
|
|
0 |
|
Consumer
discretionary
|
|
|
(10 |
) |
|
|
0 |
|
|
|
0 |
|
Material
|
|
|
(8 |
) |
|
|
0 |
|
|
|
0 |
|
Health
|
|
|
(6 |
) |
|
|
(30 |
) |
|
|
0 |
|
Financial
|
|
|
0 |
|
|
|
(184 |
) |
|
|
0 |
|
Real
estate
|
|
|
0 |
|
|
|
0 |
|
|
|
(2 |
) |
Total
common equities
|
|
|
(59 |
) |
|
|
(214 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
(10 |
) |
|
|
(132 |
) |
|
|
0 |
|
Other
|
|
|
0 |
|
|
|
(1 |
) |
|
|
0 |
|
Total
preferred equities
|
|
|
(10 |
) |
|
|
(133 |
) |
|
|
0 |
|
Total
|
|
$ |
(131 |
) |
|
$ |
(510 |
) |
|
$ |
(16 |
) |
The
decrease in other-than-temporary impairment charges in 2009 was largely due to
the improvement in values as asset markets rebounded. The increase in
other-than-temporary impairment charges in 2008 was largely due to write-downs
of holdings of bonds and common and preferred stocks of financial services
issuers, reflecting our historical weighting in this sector and the decline in
overall stock market values during 2008.
Investments
Outlook
We
continue to focus on portfolio strategies to balance near-term income generation
and long-term book value growth. In 2010, we expect to continue to allocate a
portion of cash available for investment to equity securities, taking into
consideration corporate liquidity and income requirements, as well as insurance
department regulations and ratings agency comments. We discuss our portfolio
strategies in Item 1, Investments Segment, Page 18.
We
believe that a weak or prolonged recovery from current economic conditions could
heighten the risk of renewed pressure on securities markets, which could lead to
additional other-than-temporary impairment charges. Our asset impairment
committee continues to monitor the investment portfolio. The current asset
impairment policy is described in Critical Accounting Estimates, Asset
Impairment, Page 42.
Other
Revenues
for our Other businesses increased during 2009, primarily due to earned premiums
from our excess and surplus lines business. Other also includes other income of
our standard market insurance subsidiary, as well as non-investment operations
of the parent company and its subsidiary, CFC Investment Company, and
former subsidiary CinFin Capital Management Company. Upon commencing our excess
and surplus lines operations in 2008, we also included results of The Cincinnati
Specialty Underwriters Insurance Company and CSU Producer
Resources.
Losses
before income taxes for Other were largely driven by interest expense from debt
of the parent company plus losses and loss expenses and underwriting expenses
from our excess and surplus lines operation.
|
|
Years
ended December 31,
|
|
|
2009-2008
|
|
|
2008-2007
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
%
|
|
|
Change
%
|
|
Interest
and fees on loans and leases
|
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
10 |
|
|
|
(10.2 |
) |
|
|
(21.1 |
) |
Earned
premiums
|
|
|
27 |
|
|
|
5 |
|
|
|
0 |
|
|
|
499.0 |
|
|
nm
|
|
Money
management fees
|
|
|
- |
|
|
|
2 |
|
|
|
3 |
|
|
nm
|
|
|
|
(29.2 |
) |
Other
revenues
|
|
|
5 |
|
|
|
1 |
|
|
|
2 |
|
|
|
181.0 |
|
|
|
(27.8 |
) |
Total
revenues
|
|
|
39 |
|
|
|
16 |
|
|
|
15 |
|
|
|
144.6 |
|
|
|
6.6 |
|
Interest
expense
|
|
|
55 |
|
|
|
53 |
|
|
|
51 |
|
|
|
3.5 |
|
|
|
3.8 |
|
Loss
and loss expenses
|
|
|
20 |
|
|
|
5 |
|
|
|
0 |
|
|
|
308.6 |
|
|
nm
|
|
Underwriting
expenses
|
|
|
21 |
|
|
|
5 |
|
|
|
1 |
|
|
|
343.1 |
|
|
|
318.9 |
|
Operating
expenses
|
|
|
15 |
|
|
|
17 |
|
|
|
9 |
|
|
|
(11.3 |
) |
|
|
74.3 |
|
Total
expenses
|
|
|
111 |
|
|
|
80 |
|
|
|
61 |
|
|
|
22.3 |
|
|
|
20.8 |
|
Other
loss
|
|
$ |
(72 |
) |
|
$ |
(64 |
) |
|
$ |
(46 |
) |
|
|
10.6 |
|
|
|
(25.3 |
) |
Taxes
We had
$150 million of income tax expense in 2009 compared with $111 million in 2008
and $337 million in 2007. The effective tax rate for 2009 was 25.7
percent compared with 20.7 percent in 2008 and 28.3 percent
in 2007.
The
change in our effective tax rate was driven by changes in pretax income from
underwriting results, investment income from dividends and the amount of
realized investment gains and losses. Higher tax-exempt interest and changes in
our dividends received deduction in the current year compared with prior years
also contributed with the change in the effective tax rates from 2007 to
2009.
Historically,
we have pursued a strategy of investing some portion of cash flow in
tax-advantaged fixed-maturity and equity securities to minimize our overall tax
liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities, Page
19 for further discussion on municipal bond purchases in our fixed-maturity
investment portfolio. For our insurance subsidiaries, approximately 85
percent of income from tax-advantaged fixed-maturity investments is exempt from
federal tax. Our non-insurance companies own an immaterial amount of
tax-advantaged fixed-maturity investments. For our insurance subsidiaries, the
dividend received deduction, after the dividend proration of the 1986 Tax Reform
Act, exempts approximately 60 percent of dividends from qualified equities from
federal tax. For our non-insurance subsidiaries, the dividend received deduction
exempts 70 percent of dividends from qualified equities. Details about our
effective tax rate are found on Note 11, Income Taxes,
Page 108.
Liquidity
And Capital Resources
Liquidity
and capital resources represent the overall financial strength of our company
and our ability to generate cash flows to meet the short- and long-term cash
requirements of business obligations and growth needs. We seek to maintain
prudent levels of liquidity and financial strength for the protection of our
policyholders, creditors and shareholders. We manage liquidity at two levels.
The first is the liquidity of the parent company. The second is the liquidity of
our insurance subsidiary. The management of liquidity at both levels is
essential because each has different funding needs and sources, and each is
subject to certain regulatory guidelines and requirements.
Parent
Company Liquidity
The
parent company’s primary means of meeting liquidity requirements are dividends
from our insurance subsidiary, investment income and sale proceeds from
investments held at the parent company level. The parent company’s primary
contractual obligations are interest and principal payments on long- and
short-term debt as described under Contractual Obligations, Page 71. Other uses
of parent company cash include general operating expenses described under Other
Commitments, Page 71, as well as dividends to shareholders and common stock
repurchases. As of December 31, 2009, the parent company had $998 million
in cash and marketable securities, providing strong liquidity to fund uses of
cash.
This
table below shows a summary, by the direct method, of the major sources and uses
of liquidity by the parent company. Dividends received in 2009 and 2008
from our insurance subsidiary were much lower than in the several years prior to
that, in order to maintain strong statutory surplus and financial strength
ratings. We expect sources of liquidity to increase in 2010 and beyond, as we
anticipate investment income growth and improved profitability for our property
casualty operations. A dividend of $50 million was received from our insurance
subsidiary in January 2010. The majority of expenditures for the parent company
have been consistent during the last three years, and we expect future
expenditures to remain fairly stable.
|
|
Years
ended December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Sources
of liquidity:
|
|
|
|
|
|
|
|
|
|
Insurance
subsidiary dividends received
|
|
$ |
0 |
|
|
$ |
220 |
|
|
$ |
450 |
|
Other
operating subsidiaries' dividends received
|
|
|
0 |
|
|
|
10 |
|
|
|
0 |
|
Investment
income received
|
|
|
41 |
|
|
|
81 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses
of liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
interest payments
|
|
$ |
52 |
|
|
$ |
53 |
|
|
$ |
52 |
|
Pension
payments
|
|
|
34 |
|
|
|
34 |
|
|
|
10 |
|
Shareholders
dividend payments
|
|
|
249 |
|
|
|
250 |
|
|
|
240 |
|
Purchase
(issuance) of treasury shares
|
|
|
(1 |
) |
|
|
138 |
|
|
|
307 |
|
At the
discretion of the board of directors, the company can return cash directly to
shareholders:
|
·
|
Dividends
to shareholders – Over the past 10 years, the company has paid an average
of 39.9 percent of net income as dividends. The ability of the
company to continue paying cash dividends is subject to factors the board
of directors may deem relevant.
|
Through
2009, the board had increased our cash dividend for 49 consecutive years. The
board decision in August 2009 to increase the dividend demonstrated confidence
in the company’s strong capital, liquidity, financial flexibility and
initiatives to improve earnings performance. While the board and management
believe there is merit to sustaining the company’s record of dividend increases,
our first priority is the company’s financial strength.
|
·
|
Common
stock repurchase – Generally, our board believes that stock repurchases
can help fulfill our commitment to enhancing shareholder value.
Consequently, the board has authorized the repurchase of outstanding
shares, giving management discretion to purchase shares at reasonable
prices in light of circumstances at the time of purchase, pursuant to SEC
regulations.
|
Consistent
with our approach for the second half of 2008, in 2009 we chose to preserve
capital rather than repurchase shares. During the first half of 2008, we
repurchased 3.8 million shares. In the past, repurchases have occurred when we
believed that stock prices on the open market were favorable for such
repurchases. Our corporate Code of Conduct restricts repurchases during certain
time periods. The details of the repurchase authorizations and activity are
described in Item 5, Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities, Page 30.
Between February 1999 and year-end 2009, we have repurchased
28.7 million shares at a total cost to the company of $1.105 billion.
We do not adjust the number of shares repurchased and average price
per repurchased share for stock dividends.
Insurance
Subsidiary Liquidity
Our
insurance subsidiary’s primary means of meeting liquidity requirements are
investment income, sale proceeds from investments held at the subsidiary level
and collection of insurance premiums. Property casualty insurance premiums
generally are received before losses are paid under the policies purchased with
those premiums. While first-year life insurance expenses normally exceed
first-year premiums, subsequent premiums are used to generate investment income
until the policy benefits are paid or the policy term expires.
Our
insurance subsidiaries’ primary contractual obligations are property casualty
loss and loss expenses and life policyholder obligations as well as certain
ongoing operating expenses as shown under Contractual Obligations, Page 71.
Other uses of insurance subsidiary cash include payments of dividends to the
parent company and other operating expenses as discussed under Other
Commitments, Page 71.
This
table shows a summary of operating cash flow of the insurance subsidiary (direct
method):
|
|
Years
ended December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Premiums
collected
|
|
$ |
3,083 |
|
|
$ |
3,163 |
|
|
$ |
3,256 |
|
Loss
and loss expenses paid
|
|
|
(2,030 |
) |
|
|
(2,064 |
) |
|
|
(1,888 |
) |
Commissions
and other underwriting expenses paid
|
|
|
(1,049 |
) |
|
|
(1,078 |
) |
|
|
(1,053 |
) |
Insurance
subsidiary cash flow from underwriting
|
|
|
4 |
|
|
|
21 |
|
|
|
315 |
|
Investment
income received
|
|
|
432 |
|
|
|
475 |
|
|
|
502 |
|
Insurance
subsidiary operating cash flow
|
|
$ |
436 |
|
|
$ |
496 |
|
|
$ |
817 |
|
Over the
past three years, cash receipts from property casualty and life insurance
premiums, along with investment income, have been more than sufficient to pay
claims, operating expenses and dividends to the parent company. We discuss the
factors that affected insurance operations in Commercial Lines and Personal
Lines Insurance Results of Operations, Page 48 and Page 57.
Additional
Sources of Liquidity
Investing
is a primary source of liquidity for both the parent company and our insurance
subsidiary operations. For both, cash in excess of operating requirements
is invested in fixed-maturity and equity securities. Equity securities provide
the potential for future increases in dividend income and for appreciation. In
Item 1, Investments Segment, Page 18, we discuss our investment strategy,
portfolio allocation and quality.
Income
from our investments is the most important investment contribution to cash flow.
While we have never sold investments to make claims payments, the sale of
investments could provide an additional source of liquidity at either the parent
company or insurance subsidiary level, if required, although we follow a
buy-and-hold investment philosophy seeking to compound cash flows over the
long-term. In addition to possible sales of investments, proceeds of call or
maturities of fixed maturities also can provide liquidity. During the next five
years, $2.135 billion, or 28.4 percent, of our fixed-maturity portfolio will
mature. At year-end 2009, total unrealized gains in the investment portfolio,
before deferred income taxes, were $1.026 billion, up from $588 million at
year-end 2008. Net unrealized gains in 2009 nearly doubled from year-end 2008,
even after a significant amount of gains was realized during 2009. Further,
financial resources of the parent company also could be made available to our
insurance subsidiaries, if circumstances required. This flexibility would
include our ability to access the capital markets and short-term bank
borrowings.
One way
we seek to maintain a solid financial position and provide capital flexibility
is by keeping our ratio of debt to total capital moderate. We target a ratio
below 20 percent. At year-end 2009, the ratio was 15.0 percent
compared with 16.7 percent at year-end 2008. The decrease in the
debt-to-total-capital ratio was due entirely to the increase in shareholders’
equity at year-end 2009. Based on our present capital requirements, we do not
believe we will need to increase debt levels during 2010. As a result, we
believe that changes in our debt-to-capital ratio will again be a function of
changes in shareholders’ equity.
We had
$790 million of long-term debt and $49 million in borrowings on our short-term
lines of credit at year-end 2009. We generally have minimized our reliance on
debt financing although we may use lines of credit to fund short-term cash
needs.
Long-Term
Debt
We
provide details of our three long-term notes in Item 8, Note 8 of the
Consolidated Financial Statements, Page 106. None of the notes are encumbered by
rating triggers:
|
·
|
$391
million aggregate principal amount of 6.92% senior debentures due
2028.
|
|
·
|
$28
million aggregate principal amount of 6.9% senior debentures due
2028.
|
|
·
|
$374
million aggregate principal amount of 6.125% senior debentures due
2034.
|
The
company’s senior debt is rated investment grade by independent ratings firms. On
August 2, 2009, Fitch Ratings lowered our senior debt rating from A- to BBB+.
Three other rating agencies made no changes
to our debt ratings in 2009. Our debt ratings from the other rating
agencies are: a from A.M. Best, A3 from Moody’s Investors Service and BBB+ from
Standard & Poor’s Ratings Services. The ratings are described in
Item 1, Financial Strength, Page 3.
Short-Term
Debt
At
December 31, 2009, we had two lines of credit with commercial banks amounting to
$225 million, with $49 million borrowed. Access to these lines of credit
requires compliance with various covenants, including maintaining a minimum
consolidated net worth and not exceeding a certain debt-to-capital ratio. As of
December 31, 2009, we were well within compliance with all of the covenants
under the credit agreements.
Our $75
million unsecured line of credit with PNC Bank, N.A. was established more than
five years ago and was renewed effective August 31, 2009, for a one-year term to
expire on August 29, 2010. CFC Investment Company, a subsidiary of
Cincinnati Financial Corporation, also is a borrower under this line of credit.
At year-end 2008, $49 million was outstanding on this line of credit, which was
repaid in 2009. PNC Bank is a subsidiary of PNC Financial Services Group, Inc.
(NYSE:PNC).
The second
line of credit is an unsecured $150 million revolving line of credit
administered by The Huntington National Bank. It was established
in 2007 and will mature in 2012. CFC Investment Company, a subsidiary
of Cincinnati Financial Corporation, also is a borrower under this line of
credit. At year-end 2009, there was $49 million outstanding on this line of
credit. The Huntington National Bank, a subsidiary of Huntington Bancshares Inc.
(NASDAQ:HBAN), is the lead participant with a $75 million share. U.S.
Bancorp (NYSE:USB), Bank of America (NYSE:BAC) and Northern Trust Corporation
(NASDAQ:NTRS) also participate, each providing $25 million of
capacity.
The line
of credit includes a swing line sub-facility for same-day borrowing in the
amount of $35 million. The credit agreement provides alternative
interest charges based on the type of borrowing and our debt rating. The
interest rate charged for an advancement is adjusted LIBOR plus the applicable
margin. Based on our debt ratings at year-end 2009, interest for Eurodollar
rate advances is adjusted LIBOR plus 33 basis points, and for floating rate
advances is adjusted LIBOR. Utilization and commitment fees based on Cincinnati
Financial Corporation’s current debt rating are 5 basis points and 8 basis
points, respectively. CFC Investment Company, a subsidiary of Cincinnati
Financial Corporation, is a co-borrower under the agreement.
Liquidity
and Capital Resources Outlook
A
long-term perspective governs all of our major decisions, with the goal of
benefiting our policyholders, agents, shareholders and associates over time.
While our insurance results remained weak for 2009, even after a strong second
half of the year, our improved capital position from year-end 2008 provided
adequate cushion. We have taken the necessary steps to protect our capital and
are confident in our strategies to return our insurance operations to growth and
profitability.
Our
consistent cash flows and prudent cash balances continue to create strong
liquidity. As of December 31, 2009, we had $557 million in cash and cash
equivalents. That strong liquidity and our consistent cash flows gives us the
flexibility to meet current obligations while building value by prudently
investing where we see potential for both current income and long-term
return.
In any
year, we consider the most likely source of pressure on liquidity would be an
unusually high level of catastrophe losses within a short period of time. This
could create additional obligations for our insurance operations by increasing
the severity or frequency of claims. To address the risk of unusual insurance
loss obligations including catastrophe events, we maintain property casualty
reinsurance contracts with highly rated reinsurers, as discussed under 2010
Reinsurance Programs, Page 79. We also monitor the financial condition of our
reinsurers because an insolvency could place in jeopardy a portion of our $675
million in outstanding reinsurance recoverables as of
December 31, 2009.
Continued
economic weakness also has the potential to affect our liquidity and capital
resources in a number of different ways, including: delinquent payments from
agencies, defaults on interest payments by fixed-maturity holdings in our
portfolio, dividend reductions by holdings in our equity portfolio or declines
in the market value of holdings in our portfolio.
Further,
parent company liquidity could be constrained by State of Ohio regulatory
requirements that restrict the dividends insurance subsidiaries can pay. During
2010, total dividends that our insurance subsidiary can pay to our parent
company without regulatory approval are approximately
$365 million.
Off-Balance-Sheet
Arrangements
We do not
use any special-purpose financing vehicles or have any undisclosed
off-balance-sheet arrangements (as that term is defined in applicable SEC rules)
that are reasonably likely to have a current or future material effect on the
company’s financial condition, results of operation, liquidity, capital
expenditures or capital resources. Similarly, the company holds no fair-value
contracts for which a lack of marketplace quotations would necessitate the use
of fair-value techniques.
Obligations
We pay
obligations to customers, suppliers and associates in the normal course of our
business operations. Some are contractual obligations that define the amount,
circumstances and/or timing of payments. We have other commitments for business
expenditures; however, the amount, circumstances and/or timing of our other
commitments are not dictated by contractual arrangements.
Other
Commitments
As of
December 31, 2009, we believe our most significant other commitments
are:
|
·
|
Qualified
pension plan – In 2010, we currently estimate a voluntary cash
contribution of $25 million to our qualified pension plan, a $12
million net pension expense and a $7 million expense for company
401(k) contributions. Going forward, potential savings due to lower
funding requirements for the pension plan are expected to be offset by the
company 401(k) contributions. In 2008, we chose to transition away from a
defined benefit plan to reduce the company’s future market risk while
offering associates an up-to-date, more flexible benefits program. We
discuss the change to the pension plan, future contributions and plan
assets in Item 8, Note 13 to the Consolidated Financial Statements,
Page 109.
|
|
·
|
Commissions
– We expect commission payments to generally track with written premiums.
We discuss commission trends in the Commercial Lines and Personal Lines
Insurance Results of Operations, Page 49 and Page
57.
|
|
·
|
Other
operating expenses – Many of our operating expenses are not contractual
obligations but reflect the ongoing expenses of our business. Technology –
In addition to contractual obligations for hardware and software discussed
below, we anticipate capitalizing approximately $20 million in spending
for key technology initiatives in 2010. Technology projects are discussed
in Item 1, Strategic Initiatives, Page 8. Capitalized development
costs related to key technology initiatives totaled $28 million in 2009
and $38 million in 2008. These activities are conducted at our discretion,
and we have no material contractual obligations for activities planned as
part of these projects.
|
Contractual
Obligations
As of
December 31, 2009, we estimate our future contractual obligations as
follows:
|
|
Payment
due by period
|
|
|
|
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
There-
|
|
|
|
|
(In
millions)
|
|
2010
|
|
|
|
2011-2012 |
|
|
|
2013-2014 |
|
|
after
|
|
|
Total
|
|
Gross
property casualty loss and loss expense payments
|
|
$ |
1,210 |
|
|
$ |
1,324 |
|
|
$ |
590 |
|
|
$ |
972 |
|
|
$ |
4,096 |
|
Gross
life policyholder obligations
|
|
|
46 |
|
|
|
76 |
|
|
|
112 |
|
|
|
3,268 |
|
|
|
3,502 |
|
Interest
on long-term debt
|
|
|
52 |
|
|
|
104 |
|
|
|
104 |
|
|
|
838 |
|
|
|
1,098 |
|
Long-term
debt
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
793 |
|
|
|
793 |
|
Short-term
debt
|
|
|
49 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
49 |
|
Profit-sharing
commissions
|
|
|
81 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
81 |
|
Operating
property
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
Capital
lease obligations
|
|
|
12 |
|
|
|
15 |
|
|
|
1 |
|
|
|
0 |
|
|
|
28 |
|
Computer
hardware and software
|
|
|
12 |
|
|
|
13 |
|
|
|
3 |
|
|
|
0 |
|
|
|
28 |
|
Other
invested assets
|
|
|
4 |
|
|
|
7 |
|
|
|
0 |
|
|
|
0 |
|
|
|
11 |
|
Total
|
|
$ |
1,467 |
|
|
$ |
1,539 |
|
|
$ |
810 |
|
|
$ |
5,871 |
|
|
$ |
9,687 |
|
Our most
significant contractual obligations are discussed in conjunction with related
insurance reserves in Gross Property Casualty Loss and Loss Expense Payments and
Gross Life Insurance Policyholder Obligations on Page 71 and Page 78,
respectively. Other future contractual obligations include:
|
·
|
Interest
on long- and short-term debt – We expect total interest expense to be
approximately $52 million in 2010. We discuss outstanding debt in
Additional Sources of Liquidity, Page
69.
|
|
·
|
Profit-sharing
commissions – Profit-sharing, or contingent, commissions are paid to
agencies using a formula that takes into account agency profitability and
other factors. We estimate 2010 contingent commission payments of
approximately $81 million. We discuss commission expense trends in
Commercial Lines and Personal Lines Insurance Results of Operations, Page
49 and Page 57.
|
|
·
|
Computer
hardware and software – We expect to need approximately $25 million over
the next three years for current material commitments for computer
hardware and software, including maintenance contracts on hardware and
other known obligations. We discussed above the non-contractual
expenses we anticipate for computer hardware and software in
2010.
|
Property
Casualty Loss and Loss Expense Obligations and Reserves
Gross
Property Casualty Loss and Loss Expense Payments
Our
estimate of future gross property casualty loss and loss expense payments of
$4.096 billion is lower than loss and loss expense reserves of $4.142 billion as
of year-end 2009. The $46 million difference is
due to
life and health loss reserves, as discussed in Item 8, Note 5 of the
Consolidated Financial Statements, Page 105.
While we
believe that historical performance of property casualty and life loss payment
patterns is a reasonable source for projecting future claim payments, there is
inherent uncertainty in this estimate of contractual obligations. We believe
that we could meet our obligations under a significant and unexpected change in
the timing of these payments because of the liquidity of our invested assets,
strong financial position and access to lines of credit.
Our
estimates of gross property casualty loss and loss expense payments also do not
include reinsurance receivables or ceded losses. As discussed in 2010
Reinsurance Programs, Page 79, we purchase reinsurance to mitigate our property
casualty risk exposure. Ceded property casualty reinsurance unpaid receivables
of $435 million at year-end 2009 are an offset to our gross property
casualty loss and loss expense obligations. Our reinsurance program mitigates
the liquidity risk of a single large loss or an unexpected rise in claim
severity or frequency due to a catastrophic event. Reinsurance does not relieve
us of our obligation to pay covered claims. The financial strength of our
reinsurers is important because our ability to recover losses under our
reinsurance agreements depends on the financial viability of
the reinsurers.
We direct
our associates and agencies to settle claims and pay losses as quickly as is
practical and we made $1.923 billion of net claim payments during
2009. At year-end 2009, net property casualty reserves reflected
$2.026 billion in unpaid amounts on reported claims (case reserves),
$792 million in loss expense reserves and $843 million in estimates of
claims that were incurred but had not yet been reported (IBNR).
The specific amounts and timing of obligations related to case reserves and
associated loss expenses are not set contractually. The amounts and timing of
obligations for IBNR claims and related loss expenses are unknown. We discuss
our methods of establishing loss and loss expense reserves and our belief that
reserves are adequate in Critical Accounting Estimates, Property Casualty
Insurance Loss and Loss Expense Reserves, Page 38.
The
historical pattern of using premium receipts for the payment of loss and loss
expenses has enabled us to extend slightly the maturities of our investment
portfolio beyond the estimated settlement date of the loss reserves.
The effective duration of our consolidated fixed-maturity portfolio was 5.3
years at year-end 2009. By contrast, the duration of our loss and loss
expense reserves was approximately three years. We believe this difference in
duration does not affect our ability to meet current obligations because cash
flow from operations is sufficient to meet these obligations. In addition,
investment holdings could be liquidated, if necessary, to meet higher than
anticipated loss and loss expenses.
Range
of Reasonable Reserves
The
company established a reasonably likely range for net loss and loss expense
reserves of $3.459 billion to $3.774 billion at year-end 2009, with the
company carrying net reserves of $3.661 billion. The likely range was
$3.256 billion to $3.592 billion at year-end 2008, with the company
carrying net reserves of $3.498 billion. Our loss and loss expense reserves
are not discounted for the time-value of money, but we have reduced the reserves
by an estimate of the amount of salvage and subrogation payments we expect to
recover. We provide a reconciliation of the property casualty reserves with
the loss and loss expense reserve as shown on the balance sheet in Item 8,
Note 5 of the Consolidated Financial Statements,
Page 105.
The low
point of each year’s range corresponds to approximately one standard error below
each year’s mean reserve estimate, while the high point corresponds to
approximately one standard error above each year’s mean reserve estimate. We
discussed management’s reasons for basing reasonably likely reserve ranges on
standard errors in Critical Accounting Estimates, Reserve Estimate Variability,
Page 41.
The
ranges reflect our assessment of the most likely unpaid loss and loss expenses
at year-end 2009 and 2008. However, actual unpaid loss and loss expenses
could nonetheless fall outside of the indicated ranges.
Management’s
best estimate of total loss and loss expense reserves as of year-end 2009 was
consistent with the corresponding actuarial best estimate. Management’s best
estimate of total loss and loss expense reserves as of year-end 2008 also
was consistent with the corresponding actuarial best estimate.
Development
of Reserves for Loss and Loss Expenses
We
reconcile the beginning and ending balances of our reserves for loss and loss
expenses at December 31, 2009, 2008 and 2007, in Item 8, Note 5 of the
Consolidated Financial Statements, Page 105. The reconciliation of our
year-end 2008 reserve balance to net incurred losses one year later recognizes
approximately $188 million of favorable reserve development.
The table
on the following page shows the development of estimated reserves for loss and
loss expenses for the past 10 years.
|
·
|
Section
A shows our total property casualty loss and loss expense reserves
recorded at the balance sheet date for each of the indicated calendar
years on a gross and net basis. Those reserves represent
|
the
estimated amount of unpaid loss and loss expenses for claims arising in the
indicated calendar year and all prior accident years at the balance sheet date,
including losses that were incurred but not yet reported to the company.
|
·
|
Section
B shows the cumulative net amount paid with respect to the previously
recorded reserve as of the end of each succeeding year. For example, as of
December 31, 2009, we had paid $1.567 billion of loss and loss expenses in
calendar years 2000 through 2009 for losses that occurred in accident
years 1999 and prior. An estimated $201 million of losses remained
unpaid as of year-end 2009 (net re-estimated reserves of $1.768
billion from Section C less cumulative net paid loss and loss expenses
of $1.567 billion).
|
|
·
|
Section
C shows the re-estimated amount of the previously reported reserves based
on experience as of the end of each succeeding year. The estimate is
increased or decreased as we learn more about the development of the
related claims.
|
Section
D, cumulative net reserve development, represents the aggregate change in the
estimates for all years subsequent to the year the reserves were initially
established. For example, reserves established at December 31, 1999, had
developed favorably by $164 million over 10 years, net of reinsurance, which was
reflected in income over the 10 years. The table shows favorable reserve
development as a negative number. Favorable reserve development on prior
accident years, which represents a negative expense, is favorable to income. The
reconciliation shows the effects on income before income taxes in 2009,
2008 and 2007 of changes in estimates of the reserves for loss and loss expenses
for all accident years. The effect was favorable to pre-tax income for those
three years by $188 million, $323 million, and $244 million,
respectively. Our annual review has led us to add to income in each of the past
21 years due to favorable development of reserves on prior accident
years.
In
evaluating the development of our estimated reserves for loss and loss expenses
for the past 10 years, note that each amount includes the effects of all
changes in amounts for prior periods. For example, payments or reserve
adjustments related to losses settled in 2009 but incurred in 2002 are included
in the cumulative deficiency or redundancy amount for 2002 and each subsequent
year. In addition, this table presents calendar year data, not accident or
policy year development data, which readers may be more accustomed to analyzing.
Conditions and trends that affected development of reserves in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future reserve development based on this data.
Differences
between the property casualty reserves reported in the accompanying consolidated
balance sheets (prepared in accordance with GAAP) and those same reserves
reported in the annual statements (filed with state insurance departments in
accordance with statutory accounting practices – SAP), relate principally to the
reporting of reinsurance recoverables, which are recognized as receivables for
GAAP and as an offset to reserves for SAP.
Development
of Estimated Reserves for Loss and Loss Expenses
|
Calendar
year ended December 31,
|
|
|
|
|
|
|
|
(In
millions)
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
A. Originally reported reserves for
unpaid loss and loss expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
of reinsurance
|
|
$ |
2,093 |
|
|
$ |
2,401 |
|
|
$ |
2,865 |
|
|
$ |
3,150 |
|
|
$ |
3,386 |
|
|
$ |
3,514 |
|
|
$ |
3,629 |
|
|
$ |
3,860 |
|
|
$ |
3,925 |
|
|
$ |
4,040 |
|
|
$ |
4,096 |
|
Reinsurance
recoverable
|
|
|
161 |
|
|
|
219 |
|
|
|
513 |
|
|
|
542 |
|
|
|
541 |
|
|
|
537 |
|
|
|
518 |
|
|
|
504 |
|
|
|
528 |
|
|
|
542 |
|
|
|
435 |
|
Net
of reinsurance
|
|
$ |
1,932 |
|
|
$ |
2,182 |
|
|
$ |
2,352 |
|
|
$ |
2,608 |
|
|
$ |
2,845 |
|
|
$ |
2,977 |
|
|
$ |
3,111 |
|
|
$ |
3,356 |
|
|
$ |
3,397 |
|
|
$ |
3,498 |
|
|
$ |
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
Cumulative net paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year later
|
|
$ |
591 |
|
|
$ |
697 |
|
|
$ |
758 |
|
|
$ |
799 |
|
|
$ |
817 |
|
|
$ |
907 |
|
|
$ |
944 |
|
|
$ |
1,006 |
|
|
$ |
979 |
|
|
$ |
994 |
|
|
|
|
|
Two
years later
|
|
|
943 |
|
|
|
1,116 |
|
|
|
1,194 |
|
|
|
1,235 |
|
|
|
1,293 |
|
|
|
1,426 |
|
|
|
1,502 |
|
|
|
1,547 |
|
|
|
1,523 |
|
|
|
|
|
|
|
|
|
Three
years later
|
|
|
1,195 |
|
|
|
1,378 |
|
|
|
1,455 |
|
|
|
1,519 |
|
|
|
1,626 |
|
|
|
1,758 |
|
|
|
1,845 |
|
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four
years later
|
|
|
1,327 |
|
|
|
1,526 |
|
|
|
1,614 |
|
|
|
1,716 |
|
|
|
1,823 |
|
|
|
1,963 |
|
|
|
2,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five
years later
|
|
|
1,412 |
|
|
|
1,623 |
|
|
|
1,717 |
|
|
|
1,823 |
|
|
|
1,945 |
|
|
|
2,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
years later
|
|
|
1,464 |
|
|
|
1,680 |
|
|
|
1,778 |
|
|
|
1,889 |
|
|
|
2,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven
years later
|
|
|
1,496 |
|
|
|
1,717 |
|
|
|
1,819 |
|
|
|
1,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight
years later
|
|
|
1,520 |
|
|
|
1,750 |
|
|
|
1,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
|
|
1,545 |
|
|
|
1,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
|
|
1,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
Net reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year later
|
|
$ |
1,912 |
|
|
$ |
2,120 |
|
|
$ |
2,307 |
|
|
$ |
2,528 |
|
|
$ |
2,649 |
|
|
$ |
2,817 |
|
|
$ |
2,995 |
|
|
$ |
3,112 |
|
|
$ |
3,074 |
|
|
$ |
3,310 |
|
|
|
|
|
Two
years later
|
|
|
1,833 |
|
|
|
2,083 |
|
|
|
2,263 |
|
|
|
2,377 |
|
|
|
2,546 |
|
|
|
2,743 |
|
|
|
2,871 |
|
|
|
2,893 |
|
|
|
3,042 |
|
|
|
|
|
|
|
|
|
Three
years later
|
|
|
1,802 |
|
|
|
2,052 |
|
|
|
2,178 |
|
|
|
2,336 |
|
|
|
2,489 |
|
|
|
2,657 |
|
|
|
2,724 |
|
|
|
2,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four
years later
|
|
|
1,771 |
|
|
|
2,010 |
|
|
|
2,153 |
|
|
|
2,299 |
|
|
|
2,452 |
|
|
|
2,578 |
|
|
|
2,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five
years later
|
|
|
1,757 |
|
|
|
1,999 |
|
|
|
2,127 |
|
|
|
2,276 |
|
|
|
2,414 |
|
|
|
2,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
years later
|
|
|
1,733 |
|
|
|
1,992 |
|
|
|
2,122 |
|
|
|
2,259 |
|
|
|
2,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven
years later
|
|
|
1,739 |
|
|
|
1,994 |
|
|
|
2,111 |
|
|
|
2,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight
years later
|
|
|
1,746 |
|
|
|
1,986 |
|
|
|
2,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
|
|
1,741 |
|
|
|
2,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
|
|
1,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
Cumulative net redundancy as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year later
|
|
$ |
(20 |
) |
|
$ |
(62 |
) |
|
$ |
(45 |
) |
|
$ |
(80 |
) |
|
$ |
(196 |
) |
|
$ |
(160 |
) |
|
$ |
(116 |
) |
|
$ |
(244 |
) |
|
$ |
(323 |
) |
|
$ |
(188 |
) |
|
|
|
|
Two
years later
|
|
|
(99 |
) |
|
|
(99 |
) |
|
|
(89 |
) |
|
|
(231 |
) |
|
|
(299 |
) |
|
|
(234 |
) |
|
|
(240 |
) |
|
|
(463 |
) |
|
|
(355 |
) |
|
|
|
|
|
|
|
|
Three
years later
|
|
|
(130 |
) |
|
|
(130 |
) |
|
|
(174 |
) |
|
|
(272 |
) |
|
|
(356 |
) |
|
|
(320 |
) |
|
|
(387 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Four
years later
|
|
|
(161 |
) |
|
|
(172 |
) |
|
|
(199 |
) |
|
|
(309 |
) |
|
|
(393 |
) |
|
|
(399 |
) |
|
|
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five
years later
|
|
|
(175 |
) |
|
|
(183 |
) |
|
|
(225 |
) |
|
|
(332 |
) |
|
|
(431 |
) |
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
years later
|
|
|
(199 |
) |
|
|
(190 |
) |
|
|
(230 |
) |
|
|
(349 |
) |
|
|
(376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven
years later
|
|
|
(193 |
) |
|
|
(188 |
) |
|
|
(241 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight
years later
|
|
|
(186 |
) |
|
|
(196 |
) |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
years later
|
|
|
(191 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten
years later
|
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserves re-estimated—latest
|
|
$ |
1,768 |
|
|
$ |
2,018 |
|
|
$ |
2,147 |
|
|
$ |
2,298 |
|
|
$ |
2,469 |
|
|
$ |
2,645 |
|
|
$ |
2,776 |
|
|
$ |
2,898 |
|
|
$ |
3,042 |
|
|
$ |
3,310 |
|
|
|
|
|
Re-estimated
recoverable—latest
|
|
|
220 |
|
|
|
247 |
|
|
|
519 |
|
|
|
550 |
|
|
|
532 |
|
|
|
552 |
|
|
|
512 |
|
|
|
506 |
|
|
|
484 |
|
|
|
522 |
|
|
|
|
|
Gross
liability re-estimated—latest
|
|
$ |
1,988 |
|
|
$ |
2,265 |
|
|
$ |
2,666 |
|
|
$ |
2,848 |
|
|
$ |
3,001 |
|
|
$ |
3,197 |
|
|
$ |
3,288 |
|
|
$ |
3,404 |
|
|
$ |
3,526 |
|
|
$ |
3,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
gross redundancy
|
|
$ |
(105 |
) |
|
$ |
(136 |
) |
|
$ |
(199 |
) |
|
$ |
(302 |
) |
|
$ |
(385 |
) |
|
$ |
(317 |
) |
|
$ |
(341 |
) |
|
$ |
(456 |
) |
|
$ |
(399 |
) |
|
$ |
(208 |
) |
|
|
|
|
Asbestos
and Environmental Reserves
We
carried $118 million of net loss and loss expense reserves for asbestos and
environmental claims as of year-end 2009, compared with $114 million for such
claims as of year-end 2008. These amounts constitute 3.2 percent and 3.3
percent of total loss and loss expense reserves as of these year-end
dates.
We
believe our exposure to asbestos and environmental claims is limited, largely
because our reinsurance retention was $500,000 or below prior to 1987. We also
predominantly were a personal lines company in the 1960s and 1970s when asbestos
and pollution exclusions were not widely used. During the 1980s and early 1990s,
commercial lines grew as a percentage of our overall business and our exposure
to asbestos and environmental claims grew accordingly. Over that period, we
endorsed to or included in most policies an asbestos and environmental
exclusion.
Additionally,
since 2002, we have revised policy terms where permitted by state regulation to
limit our exposure to mold claims prospectively and further reduce our exposure
to other environmental claims generally. Finally, we have not engaged in any
mergers or acquisitions through which such a liability could have been assumed.
We continue to monitor our claims for evidence of material exposure to other
mass tort classes such as silicosis, but we have found no such credible evidence
to date.
Reserving
data for asbestos and environmental claims has characteristics that limit the
usefulness of the methods and models used to analyze loss and loss expense
reserves for other claims. Specifically, asbestos and environmental loss and
loss expenses for different accident years do not emerge independently of one
another as loss development and Bornhuetter-Ferguson methods assume. In
addition, asbestos and environmental loss and loss expense data available to
date does not reflect a well-defined tail, greatly complicating the
identification of an appropriate probabilistic trend family model.
Due to
these considerations, our actuarial staff elected to use a paid survival ratio
method to estimate reserves for incurred but not yet reported asbestos and
environmental claims. Although highly uncertain, reserve estimates obtained via
this method have developed in a reasonably stable fashion since 2004. Between
2006 and 2009, total asbestos and environmental reserves decreased 9.6 percent.
Since our exposure to such claims is limited, we believe the paid survival ratio
method is sufficient.
Commercial
Lines Insurance Segment Reserves
For the
business lines in the commercial lines insurance segment, the following table
shows the breakout of gross reserves among case, IBNR and loss expense reserves.
The rise in total gross reserves for our commercial business lines is primarily
due to workers’ compensation IBNR reserve strengthening, as discussed in
Commercial Lines Insurance Results of Operations, Page 49.
|
|
Loss
reserves
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
expense
|
|
|
gross
|
|
|
Percent
|
|
(Dollars
in millions)
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
of
total
|
|
At
December 31, 2009
|
|
Commercial
casualty
|
|
$ |
1,044 |
|
|
$ |
309 |
|
|
$ |
540 |
|
|
$ |
1,893 |
|
|
|
50.8
|
% |
Commercial
property
|
|
|
84 |
|
|
|
15 |
|
|
|
31 |
|
|
|
130 |
|
|
|
3.5 |
|
Commercial
auto
|
|
|
266 |
|
|
|
47 |
|
|
|
65 |
|
|
|
378 |
|
|
|
10.1 |
|
Workers'
compensation
|
|
|
452 |
|
|
|
458 |
|
|
|
143 |
|
|
|
1,053 |
|
|
|
28.3 |
|
Specialty
packages
|
|
|
68 |
|
|
|
5 |
|
|
|
10 |
|
|
|
83 |
|
|
|
2.2 |
|
Surety
and executive risk
|
|
|
128 |
|
|
|
(2 |
) |
|
|
55 |
|
|
|
181 |
|
|
|
4.9 |
|
Machinery
and equipment
|
|
|
2 |
|
|
|
3 |
|
|
|
1 |
|
|
|
6 |
|
|
|
0.2 |
|
Total
|
|
$ |
2,044 |
|
|
$ |
835 |
|
|
$ |
845 |
|
|
$ |
3,724 |
|
|
|
100.0
|
% |
At
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
casualty
|
|
$ |
1,046 |
|
|
$ |
327 |
|
|
$ |
527 |
|
|
$ |
1,900 |
|
|
|
52.0
|
% |
Commercial
property
|
|
|
135 |
|
|
|
7 |
|
|
|
32 |
|
|
|
174 |
|
|
|
4.8 |
|
Commercial
auto
|
|
|
276 |
|
|
|
48 |
|
|
|
65 |
|
|
|
389 |
|
|
|
10.6 |
|
Workers'
compensation
|
|
|
445 |
|
|
|
353 |
|
|
|
126 |
|
|
|
924 |
|
|
|
25.3 |
|
Specialty
packages
|
|
|
74 |
|
|
|
1 |
|
|
|
10 |
|
|
|
85 |
|
|
|
2.3 |
|
Surety
and executive risk
|
|
|
129 |
|
|
|
(4 |
) |
|
|
50 |
|
|
|
175 |
|
|
|
4.8 |
|
Machinery
and equipment
|
|
|
3 |
|
|
|
3 |
|
|
|
1 |
|
|
|
7 |
|
|
|
0.2 |
|
Total
|
|
$ |
2,108 |
|
|
$ |
735 |
|
|
$ |
811 |
|
|
$ |
3,654 |
|
|
|
100.0
|
% |
The
following table shows net reserve changes at year-end 2009, 2008 and 2007 by
commercial line of business and accident year:
|
|
Commercial
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Workers'
|
|
|
Specialty
|
|
|
Surety
&
|
|
|
Machinery
&
|
|
|
|
|
|
|
casualty
|
|
|
property
|
|
|
auto
|
|
|
compensation
|
|
|
packages
|
|
|
exec
risk
|
|
|
equipment
|
|
|
Totals
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
accident year
|
|
$ |
(89 |
) |
|
$ |
(15 |
) |
|
$ |
(13 |
) |
|
$ |
(11 |
) |
|
$ |
(4 |
) |
|
$ |
(2 |
) |
|
$ |
0 |
|
|
$ |
(134 |
) |
2007
accident year
|
|
|
(36 |
) |
|
|
0 |
|
|
|
(5 |
) |
|
|
5 |
|
|
|
2 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
(26 |
) |
2006
accident year
|
|
|
(33 |
) |
|
|
4 |
|
|
|
(4 |
) |
|
|
2 |
|
|
|
0 |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(35 |
) |
2005
accident year
|
|
|
(17 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
6 |
|
|
|
2 |
|
|
|
(5 |
) |
|
|
0 |
|
|
|
(14 |
) |
2004
accident year
|
|
|
3 |
|
|
|
(2 |
) |
|
|
0 |
|
|
|
6 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8 |
|
2003
accident year
|
|
|
9 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
6 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
15 |
|
2002
and prior accident years
|
|
|
9 |
|
|
|
(1 |
) |
|
|
0 |
|
|
|
34 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
0 |
|
|
|
39 |
|
Deficiency/(redundancy)
|
|
$ |
(154 |
) |
|
$ |
(16 |
) |
|
$ |
(20 |
) |
|
$ |
48 |
|
|
$ |
0 |
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
estimated as of December 31, 2008
|
|
$ |
1,559 |
|
|
$ |
136 |
|
|
$ |
385 |
|
|
$ |
842 |
|
|
$ |
82 |
|
|
$ |
130 |
|
|
$ |
7 |
|
|
$ |
3,141 |
|
Reserves re-estimated as of December 31, 2009
|
|
|
1,405 |
|
|
|
120 |
|
|
|
365 |
|
|
|
890 |
|
|
|
82 |
|
|
|
127 |
|
|
|
5 |
|
|
|
2,994 |
|
Deficiency/(redundancy)
|
|
$ |
(154 |
) |
|
$ |
(16 |
) |
|
$ |
(20 |
) |
|
$ |
48 |
|
|
$ |
0 |
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
2007
accident year
|
|
$ |
(93 |
) |
|
$ |
0 |
|
|
$ |
(7 |
) |
|
$ |
(21 |
) |
|
$ |
1 |
|
|
$ |
14 |
|
|
$ |
0 |
|
|
$ |
(106 |
) |
2006
accident year
|
|
|
(55 |
) |
|
|
(7 |
) |
|
|
5 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
1 |
|
|
|
(59 |
) |
2005
accident year
|
|
|
(48 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
5 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
0 |
|
|
|
(50 |
) |
2004
accident year
|
|
|
(27 |
) |
|
|
1 |
|
|
|
(4 |
) |
|
|
4 |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
0 |
|
|
|
(31 |
) |
2003
accident year
|
|
|
(19 |
) |
|
|
0 |
|
|
|
1 |
|
|
|
6 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
0 |
|
|
|
(13 |
) |
2002
accident year
|
|
|
(4 |
) |
|
|
0 |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
(4 |
) |
2001
and prior accident years
|
|
|
(11 |
) |
|
|
(2 |
) |
|
|
0 |
|
|
|
3 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(10 |
) |
Deficiency/(redundancy)
|
|
$ |
(257 |
) |
|
$ |
(10 |
) |
|
$ |
(8 |
) |
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
$ |
7 |
|
|
$ |
1 |
|
|
$ |
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
estimated as of December 31, 2007
|
|
$ |
1,565 |
|
|
$ |
121 |
|
|
$ |
383 |
|
|
$ |
777 |
|
|
$ |
76 |
|
|
$ |
94 |
|
|
$ |
8 |
|
|
$ |
3,024 |
|
Reserves
re-estimated as of December 31, 2008
|
|
|
1,308 |
|
|
|
111 |
|
|
|
375 |
|
|
|
775 |
|
|
|
72 |
|
|
|
101 |
|
|
|
9 |
|
|
|
2,751 |
|
Deficiency/(redundancy)
|
|
$ |
(257 |
) |
|
$ |
(10 |
) |
|
$ |
(8 |
) |
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
$ |
7 |
|
|
$ |
1 |
|
|
$ |
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007
|
|
2006
accident year
|
|
$ |
(70 |
) |
|
$ |
(4 |
) |
|
$ |
(15 |
) |
|
$ |
(20 |
) |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
(1 |
) |
|
$ |
(106 |
) |
2005
accident year
|
|
|
(22 |
) |
|
|
(13 |
) |
|
|
(7 |
) |
|
|
0 |
|
|
|
2 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
(38 |
) |
2004
accident year
|
|
|
(34 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(35 |
) |
2003
accident year
|
|
|
(2 |
) |
|
|
0 |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(3 |
) |
|
|
0 |
|
|
|
(9 |
) |
2002
accident year
|
|
|
(15 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
0 |
|
|
|
(14 |
) |
2001
accident year
|
|
|
(8 |
) |
|
|
0 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
(6 |
) |
2000
and prior accident years
|
|
|
2 |
|
|
|
0 |
|
|
|
(2 |
) |
|
|
3 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
4 |
|
Deficiency/(redundancy)
|
|
$ |
(149 |
) |
|
$ |
(19 |
) |
|
$ |
(26 |
) |
|
$ |
(10 |
) |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
(2 |
) |
|
$ |
(204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves estimated as of December 31, 2006
|
|
$ |
1,483 |
|
|
$ |
170 |
|
|
$ |
386 |
|
|
$ |
713 |
|
|
$ |
84 |
|
|
$ |
83 |
|
|
$ |
9 |
|
|
$ |
2,928 |
|
Reserves re-estimated as of December 31, 2007
|
|
|
1,334 |
|
|
|
151 |
|
|
|
360 |
|
|
|
703 |
|
|
|
85 |
|
|
|
84 |
|
|
|
7 |
|
|
|
2,724 |
|
Deficiency/(redundancy)
|
|
$ |
(149 |
) |
|
$ |
(19 |
) |
|
$ |
(26 |
) |
|
$ |
(10 |
) |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
(2 |
) |
|
$ |
(204 |
) |
Overall
favorable development for commercial lines reserves of $147 million in 2009
illustrated the potential for revisions inherent in estimating reserves,
especially for long-tail lines such as commercial casualty and workers’
compensation. Favorable reserve development of $154 million for the commercial
casualty line exceeded the segment total in 2009, while adverse reserve
development for the workers’ compensation line reduced segment favorable reserve
development by $48 million. Drivers of commercial casualty and workers’
compensation reserve development are discussed below.
|
·
|
Refinements to umbrella
liability reserving – As discussed on page 79 of our 2008 Annual
Report on 10-K, our actuaries introduced a second reserving model at the
end of 2008 to improve the accuracy of estimates of commercial umbrella
liability loss reserves, which are a component of our commercial casualty
reserves. Further work on these models led to a change in the weighting
accorded to each model’s estimate for deriving actuarial best estimates in
2009. If this change had been in place at the time year-end 2008 reserves
were established, commercial casualty reserves at year-end 2008 would have
been approximately $19 million lower. Accordingly, 2009 favorable reserve
development would have been reduced by a like
amount.
|
|
·
|
Flat paid loss trends –
Two of our commercial casualty coverages exhibited flat paid loss trends
in 2009, which differed from our expectations. Trends in paid losses on a
calendar-year basis for medical malpractice and non-discounted
premises/operations coverages were essentially flat in 2009, while
year-end 2008 reserve estimates reflected upward trends of over 8 percent
for these coverages. Had our actuaries reflected these flat trends in paid
losses in their reserve estimates a year ago, commercial casualty reserves
at year-end 2008 would have been reduced by $22 million, and favorable
reserve development in 2009 would have been similarly
lower.
|
|
·
|
Moderation in trend
selections – Various commercial casualty coverages that we write
have reflected moderating loss cost trends over periods of one or more
years. A number of factors seem to have played a role, including sluggish
economic activity, favorable court decisions, policy form restrictions,
medical malpractice tort reform and claims department initiatives.
Accordingly, it is not wholly clear whether these moderating loss cost
trends represent short-term or longer-term changes, and our
|
actuaries have responded cautiously to these changes, electing to
recognize improvements in trends used for estimating reserves in a progressive,
incremental fashion. If the resulting, revised trends had been used to estimate
year-end 2008 reserves, those reserves and 2009 favorable reserve development
would have been $31 million lower.
|
·
|
Unusual deviations from
predictions of reserving methods and models – Similar to 2008,
commercial multi-peril liability coverages made a major contribution to
favorable reserve development again in 2009, because both paid loss and
reported loss emergence deviated favorably from projections. Projected to
rise more than $5 million in 2009, calendar year paid losses on these
coverages, excluding asbestos and environmental claims, fell by $22
million instead. Reported losses for accident years 2005 and 2008 also
developed more favorably than expected, while reported loss development
related to other accident years aligned closely with expectations. If our
actuaries had been able to take this information into account when
estimating year-end 2008 reserves, their estimates would have been $59
million lower, as would 2009 favorable reserve
development.
|
|
·
|
Workers’ compensation reserve
strengthening – Additions to workers’ compensation IBNR reserves on
accident years prior to 2009 lowered commercial lines favorable reserve
development by $48 million. A reserving model adjustment necessitated by
increasingly large deviations between expected and actual paid loss
emergence prompted the additions to IBNR reserves. To account
for the increasingly large deviations, our actuaries partially shifted the
attribution of recent accident years’ paid loss growth from exposure
growth to loss cost inflation in their workers’ compensation reserving
models. This adjustment produced a significantly higher estimate of loss
cost inflation, which raised reserve estimates for all active accident
years, not just the recent accident years for which paid loss growth had
been previously misinterpreted. The reserving models resulting from this
adjustment would have increased the year-end 2008 reserve estimate for
workers’ compensation by approximately $61 million had they been available
at the time the estimate was derived. In such an event, 2009 favorable
reserve development would have increased by a comparable
amount.
|
|
·
|
Refinement in
commercial/personal umbrella liability IBNR Reserve Allocation – A
2009 study indicated that personal umbrella coverages had been allocated
too large a portion of the total IBNR reserve for all umbrella coverages.
As a result, $7 million of personal umbrella IBNR reserves was shifted to
commercial umbrella, partially offsetting the favorable reserve
development detailed in the first four points
above.
|
The above
points cover drivers of commercial casualty and workers’ compensation reserve
development in 2009 attributable to unusual deviations from expectations and
changes in methods, models, and procedures. An examination of factors
contributing to the remaining $41 million of commercial lines favorable reserve
development, not accounted for by the commercial casualty and workers’
compensation lines, did not turn up any abnormal or unexpected variations. As
noted in Critical Accounting Estimates, Key Assumptions - Loss Reserving, Page
40, our models predict that actual loss and loss expense emergence will differ
from projections, and we do not attempt to monitor or identify such normal
variations.
Personal
Lines Insurance Segment Reserves
For the
business lines in the personal lines insurance segment, the following table
shows the breakout of gross reserves among case, IBNR and loss expense
reserves. Total gross reserves were down from year-end 2008 due to
favorable reserve development and the decline in premiums and exposures for this
segment, as we discussed in Personal Lines Insurance Results of Operations, Page
57.
|
|
Loss
reserves
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
expense
|
|
|
gross
|
|
|
Percent
|
|
(Dollars
in millions) |
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
of
total
|
|
At
December 31, 2009
|
|
Personal
auto
|
|
$ |
130 |
|
|
$ |
(4 |
) |
|
$ |
28 |
|
|
$ |
154 |
|
|
|
44.2
|
% |
Homeowners
|
|
|
56 |
|
|
|
26 |
|
|
|
17 |
|
|
|
99 |
|
|
|
28.4 |
|
Other
personal
|
|
|
45 |
|
|
|
42 |
|
|
|
9 |
|
|
|
96 |
|
|
|
27.4 |
|
Total
|
|
$ |
231 |
|
|
$ |
64 |
|
|
$ |
54 |
|
|
$ |
349 |
|
|
|
100.0
|
% |
At
December 31, 2008
|
|
Personal
auto
|
|
$ |
141 |
|
|
$ |
(3 |
) |
|
$ |
28 |
|
|
$ |
166 |
|
|
|
43.5
|
% |
Homeowners
|
|
|
67 |
|
|
|
17 |
|
|
|
15 |
|
|
|
99 |
|
|
|
26.0 |
|
Other
personal
|
|
|
53 |
|
|
|
52 |
|
|
|
11 |
|
|
|
116 |
|
|
|
30.5 |
|
Total
|
|
$ |
261 |
|
|
$ |
66 |
|
|
$ |
54 |
|
|
$ |
381 |
|
|
|
100.0
|
% |
The
following table shows net reserve changes at year-end 2009, 2008 and 2007 by
personal line of business and accident year:
|
|
Personal
|
|
|
|
|
|
Other
|
|
|
|
|
(In
millions)
|
|
auto
|
|
|
Homeowner
|
|
|
personal
|
|
|
Totals
|
|
As of December 31,
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
accident year
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(17 |
) |
|
$ |
(22 |
) |
2007
accident year
|
|
|
(3 |
) |
|
|
3 |
|
|
|
(12 |
) |
|
|
(12 |
) |
2006
accident year
|
|
|
(1 |
) |
|
|
0 |
|
|
|
(10 |
) |
|
|
(11 |
) |
2005
accident year
|
|
|
1 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
0 |
|
2004
accident year
|
|
|
0 |
|
|
|
0 |
|
|
|
5 |
|
|
|
5 |
|
2003
accident year
|
|
|
0 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
1 |
|
2002
and prior accident years
|
|
|
0 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Deficiency/(redundancy)
|
|
$ |
(6 |
) |
|
$ |
0 |
|
|
$ |
(34 |
) |
|
$ |
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
estimated as of December 31, 2008
|
|
$ |
165 |
|
|
$ |
82 |
|
|
$ |
106 |
|
|
$ |
353 |
|
Reserves
re-estimated as of December 31, 2009
|
|
|
159 |
|
|
|
82 |
|
|
|
72 |
|
|
|
313 |
|
Deficiency/(redundancy)
|
|
$ |
(6 |
) |
|
$ |
0 |
|
|
$ |
(34 |
) |
|
$ |
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
2007
accident year
|
|
$ |
11 |
|
|
$ |
(1 |
) |
|
$ |
(8 |
) |
|
$ |
2 |
|
2006
accident year
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(12 |
) |
2005
accident year
|
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(8 |
) |
|
|
(18 |
) |
2004
accident year
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
2003
accident year
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(8 |
) |
2002
accident year
|
|
|
(1 |
) |
|
|
0 |
|
|
|
(1 |
) |
|
|
(2 |
) |
2001
and prior accident years
|
|
|
(1 |
) |
|
|
0 |
|
|
|
(1 |
) |
|
|
(2 |
) |
Deficiency/(redundancy)
|
|
$ |
(12 |
) |
|
$ |
(8 |
) |
|
$ |
(30 |
) |
|
$ |
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
estimated as of December 31, 2007
|
|
$ |
189 |
|
|
$ |
77 |
|
|
$ |
107 |
|
|
$ |
373 |
|
Reserves
re-estimated as of December 31, 2008
|
|
|
177 |
|
|
|
69 |
|
|
|
77 |
|
|
|
323 |
|
Deficiency/(redundancy)
|
|
$ |
(12 |
) |
|
$ |
(8 |
) |
|
$ |
(30 |
) |
|
$ |
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007
|
|
2006
accident year
|
|
$ |
3 |
|
|
$ |
(7 |
) |
|
$ |
(11 |
) |
|
$ |
(15 |
) |
2005
accident year
|
|
|
5 |
|
|
|
0 |
|
|
|
(5 |
) |
|
|
0 |
|
2004
accident year
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(15 |
) |
2003
accident year
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
2002
accident year
|
|
|
(1 |
) |
|
|
0 |
|
|
|
(4 |
) |
|
|
(5 |
) |
2001
accident year
|
|
|
0 |
|
|
|
0 |
|
|
|
(1 |
) |
|
|
(1 |
) |
2000
and prior accident years
|
|
|
0 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
0 |
|
Deficiency/(redundancy)
|
|
$ |
2 |
|
|
$ |
(10 |
) |
|
$ |
(33 |
) |
|
$ |
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
estimated as of December 31, 2006
|
|
$ |
206 |
|
|
$ |
104 |
|
|
$ |
118 |
|
|
$ |
428 |
|
Reserves
re-estimated as of December 31, 2007
|
|
|
208 |
|
|
|
94 |
|
|
|
85 |
|
|
|
387 |
|
Deficiency/(redundancy)
|
|
$ |
2 |
|
|
$ |
(10 |
) |
|
$ |
(33 |
) |
|
$ |
(41 |
) |
Favorable
development for personal lines segment reserves illustrates the potential for
revisions inherent in estimating reserves. Several atypical factors discussed in
Commercial Lines Insurance Segment Reserves, Page 75, that contributed to
commercial lines segment reserve development in 2009 also contributed to
personal lines favorable reserve development.
In
consideration of the data’s credibility, we analyze commercial and personal
umbrella liability reserves together and then allocate the derived total reserve
estimate to the commercial and personal coverages. Consequently, all of the
umbrella factors that contributed to commercial lines reserve development also
contributed to personal lines reserve development through the other personal
line, of which personal umbrella coverages are a part. Specifically, refinements
in the use of umbrella reserving models, revisions to umbrella trend selections,
and refinements in the umbrella reserve allocation all contributed favorably to
other personal reserve development in 2009. If our actuaries had reflected all
of this information and these related changes in their year-end 2008 reserve
estimates, other personal reserves carried at year-end 2008 would have been $19
million lower. Accordingly, favorable reserve development in 2009 for the other
personal line and the personal lines segment would have been lower by a like
amount.
Life
Insurance Policyholder Obligations and Reserves
Gross
Life Insurance Policyholder Obligations
Our
estimates of life, annuity and disability policyholder obligations reflect
future estimated cash payments to be made to policyholders for future policy
benefits, policyholders’ account balances and separate account liabilities.
These estimates include death and disability claims, policy surrenders, policy
maturities, annuity payments, minimum guarantees on separate account products,
commissions and premium taxes offset by expected future deposits and premiums on
in-force contracts.
Our estimates of gross life, annuity and disability obligations do
not reflect net recoveries from reinsurance agreements. Ceded life reinsurance
receivables were $213 million at year-end 2009. As discussed in
2010 Reinsurance
Programs, Page 79, we purchase reinsurance to mitigate our life insurance risk
exposure. At year-end 2009, ceded death benefits represented approximately
49.0 percent of our total policy face amounts in force.
These
estimated cash outflows are undiscounted with respect to interest. As a result,
the sum of the cash outflows for all years of $3.502 billion (total of life
insurance obligations) exceeds the liabilities recorded in life policy reserves
and separate accounts for future policy benefits and claims of $2.399 billion
(total of life insurance policy reserves and separate account policy reserves).
Separate account policy reserves make up all but $2 million of separate accounts
liabilities.
We have
made significant assumptions to determine the estimated undiscounted cash flows
of these policies and contracts that include mortality, morbidity, future lapse
rates and interest crediting rates. Due to the significance of the
assumptions used, the amounts presented could materially differ from
actual results.
Life
Insurance Reserves
Gross
life policy reserves were $1.783 billion at year-end 2009, compared with $1.551
billion at year-end 2008. We establish reserves for traditional life insurance
policies based on expected expenses, mortality, morbidity, withdrawal rates and
investment yields, including a provision for uncertainty. Once these assumptions
are established, they generally are maintained throughout the lives of the
contracts. We use both our own experience and industry experience adjusted for
historical trends in arriving at our assumptions for expected mortality,
morbidity and withdrawal rates. We use our own experience and historical trends
for setting our assumptions for expected expenses. We base our assumptions for
expected investment income on our own experience adjusted for current economic
conditions.
We
establish reserves for our universal life, deferred annuity and investment
contracts equal to the cumulative account balances, which include premium
deposits plus credited interest less charges and withdrawals. Some of our
universal life insurance policies contain no-lapse guarantee provisions. For
these policies, we establish a reserve in addition to the account balance based
on expected no-lapse guarantee benefits and expected policy
assessments.
We
regularly review our life insurance business to ensure that any deferred
acquisition cost associated with the business is recoverable and that our
actuarial liabilities (life insurance segment reserves) make sufficient
provision for future benefits and related expenses.
2010
Reinsurance Programs
A single
large loss or an unexpected rise in claims severity or frequency due to a
catastrophic event could present us with a liquidity risk. In an effort to
control such losses, we avoid marketing property casualty insurance in specific
geographic areas, monitor our exposure in certain coastal regions, review
aggregate exposures to huge disasters and purchase reinsurance. We use the Risk
Management Solutions (RMS) and Applied Insurance Research (AIR) models to
evaluate exposures to a once-in-a-100 year and a once-in-a-250 year event to
help determine appropriate reinsurance coverage programs. In conjunction with
these activities, we also continue to evaluate information provided by our
reinsurance broker. These various sources explore and analyze credible
scientific evidence, including the impact of global climate change, which may
affect our exposure under insurance policies.
Reinsurance
mitigates the risk of highly uncertain exposures and limits the maximum net loss
that can arise from large risks or risks concentrated in areas of exposure.
Management’s decisions about the appropriate level of risk retention are
affected by various factors, including changes in our underwriting practices,
capacity to retain risks and reinsurance market conditions. Reinsurance does not
relieve us of our obligation to pay covered claims. The financial strength of
our reinsurers is important because our ability to recover for losses covered
under any reinsurance agreement depends on the financial viability of the
reinsurer.
Currently
participating on our standard market property and casualty per-risk and
per-occurrence programs are Hannover Reinsurance Company, Munich Reinsurance
America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America
Corporation, all of which have A.M. Best insurer financial strength ratings of
A (Excellent) or A+ (Superior). Our property catastrophe program is
subscribed through a broker by reinsurers from the United States, Bermuda,
London and the European markets.
Primary
components of the 2010 property and casualty reinsurance program
include:
|
·
|
Property
per risk treaty – The primary purpose of the property treaty is to provide
capacity up to $25 million, adequate for the majority of the risks we
write. It also includes protection for extra-contractual liability
coverage losses. We retain the first $5 million of each loss. Losses
between $5 million and $25 million are reinsured at 100 percent.
The ceded premium is estimated at $36 million for 2010, compared with
$35 million in 2009 and $37 million in
2008.
|
|
·
|
Casualty
per occurrence treaty – The casualty treaty provides capacity up to
$25 million. Similar to the property treaty, it provides sufficient
capacity to cover the vast majority of casualty accounts we insure and
also includes protection for extra-contractual liability coverage losses.
We retain the first $6 million
|
of each loss. Losses between $6 million and $25 million are
reinsured at 100 percent. The ceded premium is estimated at $38 million in
2010, compared with $38 million in 2009 and $43 million
in 2008.
|
·
|
Casualty
excess treaties – We purchase a casualty reinsurance treaty that provides
an additional $25 million in protection for certain casualty losses.
This treaty, along with the casualty per occurrence treaty, provides a
total of $50 million of protection for workers’ compensation,
extra-contractual liability coverage and clash coverage losses, which
would apply when a single occurrence involves multiple policyholders of
The Cincinnati Insurance Companies or multiple coverages for one insured.
The ceded premium is estimated at $2 million in 2010, similar to the
premium we paid in 2009.
|
We
purchase a second casualty excess treaty, which provides an additional $20
million in casualty loss coverage. This treaty also provides catastrophic
coverage for workers’ compensation and extra-contractual liability coverage
losses. The ceded premium is estimated at $1 million for 2010, similar to the
premium we paid in 2009.
|
·
|
Property
catastrophe treaty – To protect against catastrophic events such as wind
and hail, hurricanes or earthquakes, we purchase property catastrophe
reinsurance with a limit up to $500 million. For the
2010 treaty, ceded premiums are estimated at $49 million, similar to
the $50 million in 2009 and $41 million in 2008. We retain the first
$45 million of any loss and varying shares of losses up to
$500 million:
|
|
o
|
34
percent of losses between $45 million and $70
million
|
|
o
|
11
percent of losses between $70 million and $105
million
|
|
o
|
10
percent of losses between $105 million and $200
million
|
|
o
|
18
percent of losses between $200 million and $300
million
|
|
o
|
10
percent of losses between $300 million and $400
million
|
|
o
|
9
percent of losses between $400 million and $500
million
|
After
reinsurance, our maximum exposure to a catastrophic event that caused $500
million in covered losses would be $104 million compared with $118 million in
2009. The largest catastrophe loss in our history was Hurricane Ike in September
2008, which was estimated to be $145 million before reinsurance at December 31,
2009. The treaty contains one reinstatement provision.
Individual
risks with insured values in excess of $25 million, as identified in the policy,
are handled through a different reinsurance mechanism. We typically reinsure
property coverage for individual risks with insured values between $25 million
and $65 million under an automatic facultative treaty. For risks with property
values exceeding $65 million, we negotiate the purchase of facultative coverage
on an individual certificate basis. For casualty coverage on individual
risks with limits exceeding $25 million, facultative reinsurance coverage is
placed on an individual certificate basis.
Terrorism
coverage at various levels has been secured in most of our reinsurance
agreements. The broadest coverage for this peril is found in the property and
casualty working treaties, which provide coverage for commercial and personal
risks. Our property catastrophe treaty provides coverage for personal risks, and
coverage for commercial risks with total insured values of $10 million or
less. For insured values between $10 million and $25 million, there also may be
coverage in the property working treaty.
A form of
reinsurance is also provided through The Terrorism Risk Insurance Act of 2002
(TRIA). TRIA was originally signed into law on November 26, 2002, and
extended on December 22, 2005, in a revised form, and extended again on
December 26, 2007. TRIA provides a temporary federal backstop for
losses related to the writing of the terrorism peril in property casualty
insurance policies. TRIA now is scheduled to expire December 31, 2014.
Under regulations promulgated under this statute, insurers are required to offer
terrorism coverage for certain lines of property casualty insurance, including
property, commercial multi-peril, fire, ocean marine, inland marine, liability,
aircraft and workers’ compensation. In the event of a terrorism event defined by
TRIA, the federal government would reimburse terrorism claim payments subject to
the insurer’s deductible. The deductible is calculated as a percentage of
subject written premiums for the preceding calendar year. Our deductible in 2009
was $383 million (20 percent of 2008 subject premiums), and we
estimate it is $369 million (20 percent of 2009 subject premiums)
in 2010.
Reinsurance
protection for the company’s surety business is covered under separate treaties
with many of the same reinsurers that write the property casualty working
treaties.
The
Cincinnati Specialty Underwriters Insurance Company, which began issuing
insurance policies in 2008, has separate property and casualty reinsurance
treaties for 2010 through Swiss Reinsurance America Corporation. Primary
components of the treaties include:
|
·
|
Property
per risk treaty – The property treaty provides limits up to $5 million,
which is adequate capacity for the risk profile we insure. We retain the
first $1 million of any policy loss. Losses between $1 million and $5
million are reinsured at 100
percent.
|
|
·
|
Casualty
treaties – The casualty treaties are written on a quota share basis and
provide limits up to $5 million, which is adequate capacity for the
risk profile we insure. The maximum exposure for any one casualty loss is
$1 million.
|
|
·
|
Basket
retention – The Cincinnati Specialty Underwriters Insurance Company has
purchased this coverage to limit our retention to $1 million in the event
that the same occurrence results in both a property and a casualty
loss.
|
|
·
|
Property
catastrophe treaty – As a subsidiary of The Cincinnati Insurance Company,
The Cincinnati Specialty Underwriters Insurance Company has been added as
a named insured under our corporate property catastrophe treaty. All terms
and conditions of this treaty apply to policies underwritten by The
Cincinnati Specialty Underwriters Insurance
Company.
|
For
property or casualty risks with limits exceeding $5 million, underwriters place
facultative reinsurance coverage on an individual certificate basis. The
combined property and casualty treaty provides protection on a participating
basis for extra contractual obligations, as well as exposure to losses in excess
of policy limits. The limit is $5 million for both property and
casualty.
Cincinnati
Life, our life insurance subsidiary, purchases reinsurance under separate
treaties with many of the same reinsurers that write the property casualty
working treaties. In 2005, we modified our reinsurance protection for our term
life insurance business due to changes in the marketplace that affected the cost
and availability of reinsurance for term life insurance. We are retaining no
more than a $500,000 exposure, ceding the balance using excess over retention
mortality coverage, and retaining the policy reserve. Retaining the policy
reserve has no direct impact on GAAP results. However, because of the
conservative nature of statutory reserving principles, retaining the policy
reserve unduly depresses our statutory earnings and requires a large commitment
of our capital. We also have catastrophe reinsurance coverage on our life
insurance operations that reimburses us for covered net losses in excess of $9
million. Our recovery is capped at $75 million for losses involving our
associates. For term life insurance business written prior to 2005, we retain
10 percent to 25 percent of each term policy, not to exceed $500,000,
ceding the balance of mortality risk and policy reserve.
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 Item 1A, Risk Factors, Page 23. Although we often review or
update our forward-looking statements when events warrant, we caution our
readers that we undertake no obligation to do so.
Factors
that could cause or contribute to such differences include, but are not limited
to:
|
·
|
Unusually
high levels of catastrophe losses due to risk concentrations, changes in
weather patterns, environmental events, terrorism incidents or other
causes
|
|
·
|
Increased
frequency and/or severity of claims
|
|
·
|
Inadequate
estimates or assumptions used for critical accounting
estimates
|
|
·
|
Recession
or other economic conditions resulting in lower demand for insurance
products or increased payment
delinquencies
|
|
·
|
Delays
in adoption and implementation of underwriting and pricing methods that
could increase our pricing accuracy, underwriting profit and
competitiveness
|
|
·
|
Inability
to defer policy acquisition costs for any business segment if pricing and
loss trends would lead management to conclude that segment could not
achieve sustainable profitability
|
|
·
|
Declines
in overall stock market values negatively affecting the company’s equity
portfolio and book value
|
|
·
|
Events,
such as the credit crisis, followed by prolonged periods of economic
instability or recession, that
lead to:
|
|
o
|
Significant
or prolonged decline in the value of a particular security or group of
securities and impairment of the
asset(s)
|
|
o
|
Significant
decline in investment income due to reduced or eliminated dividend payouts
from a particular security or group of
securities
|
|
o
|
Significant
rise in losses from surety and director and officer policies written for
financial institutions
|
|
·
|
Prolonged
low interest rate environment or other factors that limit the 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
|
|
·
|
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
non-payment or delay in payment by
reinsurers
|
|
·
|
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:
|
|
o
|
Multi-notch
downgrades of the company’s financial strength
ratings
|
|
o
|
Concerns
that doing business with the company is too
difficult
|
|
o
|
Perceptions
that the company’s level of service, particularly claims service, is no
longer a distinguishing characteristic in the
marketplace
|
|
o
|
Delays
or inadequacies in the development, implementation, performance and
benefits of technology projects and
enhancements
|
|
·
|
Actions
of insurance departments, state attorneys general or other regulatory
agencies, including a change to a federal system of regulation from a
state-based system, that:
|
|
o
|
Restrict
our ability to exit or reduce writings of unprofitable coverages or lines
of business
|
|
o
|
Place
the insurance industry under greater regulatory scrutiny or result in new
statutes, rules
and regulations
|
|
o
|
Add
assessments for guaranty funds, other insurance related assessments or
mandatory reinsurance arrangements; or that impair our ability to recover
such assessments through future surcharges or other rate
changes
|
|
o
|
Limit
our ability to set fair, adequate and reasonable
rates
|
|
o
|
Place
us at a disadvantage in the
marketplace
|
|
o
|
Restrict
our ability to execute our business model, including the way we compensate
agents
|
|
·
|
Adverse
outcomes from litigation or administrative
proceedings
|
|
·
|
Events
or actions, including unauthorized intentional circumvention of controls,
that reduce the 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
|
|
·
|
Difficulties
with technology or data security breaches could negatively affect our
ability to conduct business and our relationships with agents,
policyholders and others
|
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 affecting corporate financial reporting and governance.
The ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Introduction
Market
risk is the potential for a decrease in securities value resulting from broad
yet uncontrollable forces such as: inflation, economic growth, interest rates,
world political conditions or other widespread unpredictable events. It is
comprised of many individual risks that, when combined, create a macroeconomic
impact. The company accepts and manages risks in the investment portfolio as
part of the means of achieving portfolio objectives. Some of the risks
are:
|
·
|
Political
– the potential for a decrease in value due to the real or perceived
impact of governmental policies
or conditions
|
|
·
|
Regulatory
– the potential for a decrease in value due to the impact of legislative
proposals or changes in laws or
regulations
|
|
·
|
Economic
– the potential for a decrease in value due to changes in general economic
factors (recession, inflation, deflation,
etc.)
|
|
·
|
Revaluation
– the potential for a decrease in value due to a change in relative value
(change in market multiple) of the market brought on by general economic
factors
|
|
·
|
Interest-rate
– the potential for a decrease in value of a security or portfolio due to
its sensitivity to changes (increases or decreases) in the general level
of interest rates
|
|
·
|
Company-specific
risk – the potential for a particular issuer to experience a decline in
value due to the impact of sector or market risk on the holding or because
of issues specific to the firm
|
|
·
|
Fraud
– the potential for a negative impact on an issuer’s performance due to
actual or alleged illegal or improper activity of individuals it
employs
|
|
·
|
Credit
– the potential for deterioration in an issuer’s financial profile due to
specific company issues, problems it faces in the course of its operations
or industry-related issues
|
|
·
|
Default
– the possibility that an issuer will not make a required payment
(interest payment or return of principal) on its debt. Generally this
occurs after its financial profile has deteriorated (credit risk) and it
no longer has the means to make its
payments
|
The
investment committee of the board of directors monitors the investment risk
management process primarily through its executive oversight of our investment
activities. We take an active approach to managing market and other investment
risks, including the accountabilities and controls over these activities.
Actively managing these market risks is integral to our operations and could
require us to change the character of future investments purchased or sold or
require us to shift the existing asset portfolios to manage exposure to market
risk within acceptable ranges.
Sector
risk is the potential for a negative impact on a particular industry due to its
sensitivity to factors that make up market risk. Market risk affects general
supply/demand factors for an industry and affects companies within that industry
to varying degrees.
Risks
associated with the five asset classes described in Item 1, Investments Segment,
Page 18, can be summarized as follows (H – high, A – average, L –
low):
|
|
Taxable
fixed maturities
|
|
|
Tax-exempt
fixed maturities
|
|
|
Common
equities
|
|
|
Preferred
equities
|
|
|
Short-term
investments
|
|
Political
|
|
|
A |
|
|
|
H |
|
|
|
A |
|
|
|
A |
|
|
|
L |
|
Regulatory
|
|
|
A |
|
|
|
A |
|
|
|
A |
|
|
|
A |
|
|
|
L |
|
Economic
|
|
|
A |
|
|
|
A |
|
|
|
H |
|
|
|
A |
|
|
|
L |
|
Revaluation
|
|
|
A |
|
|
|
A |
|
|
|
H |
|
|
|
A |
|
|
|
L |
|
Interest
rate
|
|
|
H |
|
|
|
H |
|
|
|
A |
|
|
|
H |
|
|
|
L |
|
Fraud
|
|
|
A |
|
|
|
L |
|
|
|
A |
|
|
|
A |
|
|
|
L |
|
Credit
|
|
|
A |
|
|
|
L |
|
|
|
A |
|
|
|
A |
|
|
|
L |
|
Default
|
|
|
A |
|
|
|
L |
|
|
|
A |
|
|
|
A |
|
|
|
L |
|
Fixed-Maturity
Investments
For
investment-grade corporate bonds, the inverse relationship between interest
rates and bond prices leads to falling bond values during periods of increasing
interest rates. We address this risk by attempting to construct a generally
laddered maturity schedule that allows us to reinvest cash flows at prevailing
rates. Although the potential for a worsening financial condition, and
ultimately default, does exist with investment-grade corporate bonds, we address
this risk by performing credit analysis and monitoring as well as maintaining a
diverse portfolio of holdings.
The
primary risk related to high-yield corporate bonds is credit risk or the
potential for a deteriorating financial structure. A weak financial profile can
lead to rating downgrades from the credit rating agencies, which can put further
downward pressure on bond prices. Interest rate risk, while significant, is less
of a factor with high-yield corporate bonds, as valuation is related more
directly to underlying operating performance than to general interest rates.
This puts more emphasis on the financial results achieved by the issuer rather
than on general economic trends or statistics within the marketplace. We address
this concern by analyzing issuer- and industry-specific financial results and by
closely monitoring holdings within this asset class.
The
primary risks related to tax-exempt bonds are interest rate risk and political
risk associated with the specific economic environment within the political
boundaries of the issuing municipal entity. We address these concerns by
focusing on municipalities’ general-obligation debt and on essential-service
bonds. Essential-service bonds derive a revenue stream from municipal services
that are vital to the people living in the area (water service, sewer service,
etc.). Another risk related to tax-exempt bonds is regulatory risk or the
potential for legislative changes that would negate the benefit of owning
tax-exempt bonds. We monitor regulatory activity for situations that may
negatively affect current holdings and our ongoing strategy for investing in
these securities.
The
final, less significant risk is our exposure to credit risk for a portion of the
tax-exempt portfolio that has support from corporate entities. Examples are
bonds insured by corporate bond insurers or bonds with interest payments made by
a corporate entity through a municipal conduit/authority. Our decisions
regarding these investments primarily consider the underlying municipal
situation. The existence of third-party insurance is intended to reduce risk in
the event of default. In circumstances in which the municipality is unable to
meet its obligations, risk would be increased if the insuring entity were
experiencing financial duress. Because of our diverse exposure and selection of
higher-rated entities with strong financial profiles, we do not believe this is
a material concern as we discuss in Item 1, Investments Segment, Page
18.
Interest
Rate Sensitivity Analysis
Because
of our strong surplus, long-term investment horizon and ability to hold most
fixed-maturity investments to maturity, we believe the company is well
positioned if interest rates were to rise. A higher rate environment would
provide the opportunity to invest cash flow in higher-yielding securities, while
reducing the likelihood of untimely redemptions of currently callable
securities. While higher interest rates would be expected to continue to
increase the number of fixed-maturity holdings trading below 100 percent of
book value, we believe lower fixed-maturity security values due solely to
interest rate changes would not signal a decline in credit
quality.
Our
dynamic financial planning model uses analytical tools to assess market risks.
As part of this model, the effective duration of the fixed-maturity
portfolio is continually monitored by our investment department to evaluate the
theoretical impact of interest rate movements.
The table
below summarizes the effect of hypothetical changes in interest rates on the
fixed-maturity portfolio:
|
|
Interest
Rate Shift in Basis Points
|
|
(In
millions) |
|
|
-200
|
|
|
|
-100
|
|
|
|
0
|
|
|
|
100
|
|
|
|
200
|
|
At
December 31, 2009
|
|
$ |
8,705 |
|
|
$ |
8,279 |
|
|
$ |
7,855 |
|
|
$ |
7,428 |
|
|
$ |
7,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008
|
|
$ |
6,467 |
|
|
$ |
6,143 |
|
|
$ |
5,827 |
|
|
$ |
5,506 |
|
|
$ |
5,202 |
|
The
effective duration of the fixed maturity portfolio was 5.3 years at year-end
2009, compared with 5.4 years at year-end 2008. A 100 basis point
movement in interest rates would result in an approximately 5.3 percent
change in the fair value of the fixed maturity portfolio. Generally speaking,
the higher a bond is rated, the more directly correlated movements in its fair
value are to changes in the general level of interest rates, exclusive of call
features. The fair values of average- to lower-rated corporate bonds are
additionally influenced by the expansion or contraction of credit
spreads.
In the
dynamic financial planning model, the selected interest rate change of 100 to
200 basis points represents our views of a shift in rates that is quite possible
over a one-year period. The rates modeled should not be considered a prediction
of future events as interest rates may be much more volatile in the future.
The analysis is not intended to provide a precise forecast of the effect of
changes in rates on our results or financial condition, nor does it take into
account any actions that we might take to reduce exposure to
such risks.
Short-Term
Investments
Our
short-term investments consist primarily of commercial paper, demand notes or
bonds purchased within one year of maturity. We make short-term investments
primarily with funds to be used to make upcoming cash payments, such as taxes.
At year-end 2009, short-term investments included $5 million that was
frozen in The Reserve’s Primary Fund. This amount was received in early
2010.
Equity
Investments
Common
stocks are subject to a variety of risk factors encompassed under the umbrella
of market risk. General economic swings influence the performance of the
underlying industries and companies within those industries. As we saw in 2008,
a downturn in the economy can have a negative effect on an equity
portfolio. Industry- and company-specific risks also have the potential to
substantially affect the value of our portfolio. We implemented new investment
guidelines in 2008 to help address these risks by diversifying the portfolio and
establishing parameters to help manage exposures.
Our
equity holdings represented $2.701 billion in fair value and accounted for
approximately 66.8 percent of the unrealized appreciation of the entire
portfolio at year-end 2009. See Item 1, Investments Segment, Page 18, for
additional details on our holdings.
The
primary risks related to preferred stocks are similar to those related to
investment grade corporate bonds. Falling interest rates adversely affect market
values due to the normal inverse relationship between rates and yields. Credit
risk exists due to the subordinate position of preferred stocks in the capital
structure. We minimize this risk by primarily purchasing investment grade
preferred stocks of issuers with a strong history of paying a common stock
dividend.
Application
Of Asset Impairment Policy
As
discussed in Item 7, Critical Accounting Estimates, Asset Impairment, Page 42,
our fixed-maturity and equity investment portfolios are evaluated differently
for other-than-temporary impairments. The company’s asset impairment committee
monitors a number of significant factors for indications that the value of
investments trading below the carrying amount may not be recoverable. The
application of our impairment policy resulted in other-than-temporary impairment
charges that reduced our income before income taxes by $131 million in 2009,
$510 million in 2008 and $16 million in 2007. Impairments are discussed in
Item 7, Investment Results of Operations, Page 64.
We expect
the number of securities trading below 100 percent of book value to
fluctuate as interest rates rise or fall and credit spreads expand or contract
due to prevailing economic conditions. Further, book values for some securities
have been revised due to impairment charges recognized in prior periods. At
year-end 2009, 355 of the 2,505 securities we owned were trading below 100
percent of book value compared with 944 of the 2,233 securities we owned at
year-end 2008 and 373 of the 2,053 securities we owned at year-end
2007.
The
355 holdings trading below book value at year-end 2009 represented
16.8 percent of invested assets and $84 million in unrealized
losses.
|
·
|
311
of these holdings were trading between 90 percent and 100 percent of book
value. The value of these securities fluctuates primarily because of
changes in interest rates. The fair value of these
311 securities was $1.613 billion at year-end 2009, and they
accounted for $51 million in
unrealized losses.
|
|
·
|
35
of these holdings were trading between 70 percent and 90 percent of book
value. The fair value of these holdings was $168 million, and they
accounted for $30 million in unrealized losses. These securities,
which are being closely monitored, have been affected by a combination of
factors including wider credit spreads driven primarily by the distress in
the mortgage market, slumping real estate valuations, the effects of a
slowing economy and the effects of higher interest rates on longer
duration instruments. The majority of these securities are in the
financial-related sectors.
|
|
·
|
9
securities, all fixed-maturity, were trading below 70 percent of book
value at year-end 2009. The fair value of these holdings was $5 million,
and they accounted for $3 million in unrealized losses. The real estate
sector accounted for 63 percent and the financial sector for 37 percent of
the unrealized losses. The issuers of these debt instruments are current
on contractual payments and we believe that future contractual amounts are
likely to be paid.
|
The
following table summarizes the length of time securities in the investment
portfolio have been in a continuous unrealized gain or loss
position.
(In
millions)
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
At
December 31,
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
2009
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
States,
municipalities and political subdivisions
|
|
$ |
196 |
|
|
$ |
4 |
|
|
$ |
29 |
|
|
$ |
2 |
|
|
$ |
225 |
|
|
$ |
6 |
|
Government-sponsored
enterprises
|
|
|
347 |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
347 |
|
|
|
7 |
|
Short-term
investments
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
Collateralized
mortgage obligations
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
|
6 |
|
|
|
27 |
|
|
|
6 |
|
Corporate
bonds
|
|
|
397 |
|
|
|
19 |
|
|
|
309 |
|
|
|
17 |
|
|
|
706 |
|
|
|
36 |
|
Total
|
|
|
941 |
|
|
|
30 |
|
|
|
365 |
|
|
|
25 |
|
|
|
1,306 |
|
|
|
55 |
|
Equity
securities
|
|
|
65 |
|
|
|
3 |
|
|
|
415 |
|
|
|
26 |
|
|
|
480 |
|
|
|
29 |
|
Total
|
|
$ |
1,006 |
|
|
$ |
33 |
|
|
$ |
780 |
|
|
$ |
51 |
|
|
$ |
1,786 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
States,
municipalities and political subdivisions
|
|
$ |
592 |
|
|
$ |
26 |
|
|
$ |
94 |
|
|
$ |
5 |
|
|
$ |
686 |
|
|
$ |
31 |
|
Convertibles
and bonds with warrants attached
|
|
|
195 |
|
|
|
15 |
|
|
|
38 |
|
|
|
5 |
|
|
|
233 |
|
|
|
20 |
|
Government-sponsored
enterprises
|
|
|
141 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
141 |
|
|
|
2 |
|
All
other corporate bonds and short-term investments
|
|
|
1,367 |
|
|
|
215 |
|
|
|
254 |
|
|
|
68 |
|
|
|
1,621 |
|
|
|
283 |
|
Total
|
|
|
2,295 |
|
|
|
258 |
|
|
|
386 |
|
|
|
78 |
|
|
|
2,681 |
|
|
|
336 |
|
Equity
securities
|
|
|
820 |
|
|
|
219 |
|
|
|
79 |
|
|
|
41 |
|
|
|
899 |
|
|
|
260 |
|
Total
|
|
$ |
3,115 |
|
|
$ |
477 |
|
|
$ |
465 |
|
|
$ |
119 |
|
|
$ |
3,580 |
|
|
$ |
596 |
|
The
following table summarizes the investment portfolio:
(Dollars
in millions)
|
|
Number
of
issues
|
|
|
Book
value
|
|
|
Fair
value
|
|
|
Gross
unrealized
gain/loss
|
|
|
Gross
investment
income
|
|
At
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
9 |
|
|
$ |
8 |
|
|
$ |
5 |
|
|
$ |
(3 |
) |
|
$ |
1 |
|
Trading
at 70% to less than 100% of book value
|
|
|
257 |
|
|
|
1,213 |
|
|
|
1,165 |
|
|
|
(48 |
) |
|
|
55 |
|
Trading
at 100% and above of book value
|
|
|
849 |
|
|
|
3,423 |
|
|
|
3,693 |
|
|
|
270 |
|
|
|
204 |
|
Securities
sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
19 |
|
Total
|
|
|
1,115 |
|
|
|
4,644 |
|
|
|
4,863 |
|
|
|
219 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Trading
at 70% to less than 100% of book value
|
|
|
76 |
|
|
|
139 |
|
|
|
135 |
|
|
|
(4 |
) |
|
|
6 |
|
Trading
at 100% and above of book value
|
|
|
1,236 |
|
|
|
2,731 |
|
|
|
2,857 |
|
|
|
126 |
|
|
|
118 |
|
Securities
sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2 |
|
Total
|
|
|
1,312 |
|
|
|
2,870 |
|
|
|
2,992 |
|
|
|
122 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Trading
at 70% to less than 100% of book value
|
|
|
7 |
|
|
|
477 |
|
|
|
452 |
|
|
|
(25 |
) |
|
|
16 |
|
Trading
at 100% and above of book value
|
|
|
43 |
|
|
|
1,464 |
|
|
|
2,156 |
|
|
|
692 |
|
|
|
65 |
|
Securities
sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
9 |
|
Total
|
|
|
50 |
|
|
|
1,941 |
|
|
|
2,608 |
|
|
|
667 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Trading
at 70% to less than 100% of book value
|
|
|
5 |
|
|
|
32 |
|
|
|
28 |
|
|
|
(4 |
) |
|
|
2 |
|
Trading
at 100% and above of book value
|
|
|
20 |
|
|
|
43 |
|
|
|
65 |
|
|
|
22 |
|
|
|
4 |
|
Securities
sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
Total
|
|
|
25 |
|
|
|
75 |
|
|
|
93 |
|
|
|
18 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Trading
at 70% to less than 100% of book value
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
Trading
at 100% and above of book value
|
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
|
|
0 |
|
|
|
0 |
|
Securities
sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
|
3 |
|
|
|
6 |
|
|
|
6 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
9 |
|
|
|
8 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
1 |
|
Trading
at 70% to less than 100% of book value
|
|
|
346 |
|
|
|
1,862 |
|
|
|
1,781 |
|
|
|
(81 |
) |
|
|
79 |
|
Trading
at 100% and above of book value
|
|
|
2,150 |
|
|
|
7,666 |
|
|
|
8,776 |
|
|
|
1,110 |
|
|
|
391 |
|
Investment
income on securities sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
31 |
|
Total
|
|
|
2,505 |
|
|
$ |
9,536 |
|
|
$ |
10,562 |
|
|
$ |
1,026 |
|
|
$ |
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
below 70% of book value
|
|
|
83 |
|
|
$ |
528 |
|
|
$ |
322 |
|
|
$ |
(206 |
) |
|
$ |
25 |
|
Trading
at 70% to less than 100% of book value
|
|
|
861 |
|
|
|
3,648 |
|
|
|
3,258 |
|
|
|
(390 |
) |
|
|
176 |
|
Trading
at 100% and above of book value
|
|
|
1,279 |
|
|
|
4,043 |
|
|
|
5,227 |
|
|
|
1,184 |
|
|
|
290 |
|
Investment
income on securities sold in current year
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
39 |
|
Total
|
|
|
2,223 |
|
|
$ |
8,219 |
|
|
$ |
8,807 |
|
|
$ |
588 |
|
|
$ |
530 |
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
Responsibility
For Financial Statements
We have
prepared the consolidated financial statements of Cincinnati Financial
Corporation and our subsidiaries for the year ended December 31, 2009, in
accordance with accounting principles generally accepted in the United States of
America (GAAP).
We are
responsible for the integrity and objectivity of these financial statements. The
amounts, presented on an accrual basis, reflect our best estimates and judgment.
These statements are consistent in all material aspects with other financial
information in the Annual Report on Form 10-K. Our accounting system and related
internal controls are designed to assure that our books and records accurately
reflect the company’s transactions in accordance with established policies and
procedures as implemented by qualified personnel.
Our board
of directors has established an audit committee of independent outside
directors. We believe these directors are free from any relationships that could
interfere with their independent judgment as audit committee
members.
The audit
committee meets periodically with management, our independent registered public
accounting firm and our internal auditors to discuss how each is handling
responsibilities. The audit committee reports its findings to the board of
directors. The audit committee recommends to the board the annual appointment of
the independent registered public accounting firm. The audit committee reviews
with this firm the scope of the audit assignment and the adequacy of internal
controls and procedures.
Deloitte
& Touche LLP, our independent registered public accounting firm, audited the
consolidated financial statements of Cincinnati Financial Corporation and
subsidiaries for the year ended December 31, 2009. Its report is on
Page 89. Deloitte’s auditors met with our audit committee to discuss the results
of their examination. They have the opportunity to discuss the adequacy of
internal controls and the quality of financial reporting without management
present.
Management’s
Annual Report On Internal Control Over Financial Reporting
The
management of Cincinnati Financial Corporation and its subsidiaries is
responsible for establishing and maintaining adequate internal controls,
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The company’s internal control over financial reporting
includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and that
receipts and expenditures of the company are being made only in accordance
with authorizations of management and the directors of the company;
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets
that could have a material effect on the financial
statements.
|
All
internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention of
overriding controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation and
presentation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
The
company’s management assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2009, as required by Section
404 of the Sarbanes Oxley Act of 2002. Management’s assessment was based on the
criteria established in the Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and was
designed to provide reasonable assurance that the company maintained effective
internal control over financial reporting as of December 31, 2009. The
assessment led management to conclude that, as of December 31, 2009, the
company’s internal control over financial reporting was effective based on those
criteria.
The
company’s independent registered public accounting firm has issued an audit
report on our internal control over financial reporting as of December 31, 2009.
This report appears on Page 89.
/S/
Kenneth W. Stecher
Kenneth
W. Stecher
President
and Chief Executive Officer
/S/
Steven J. Johnston
Steven J.
Johnston, FCAS, MAAA, CFA
Chief
Financial Officer, Senior Vice President, Secretary and Treasurer
February
26, 2010
Report
Of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of Cincinnati Financial
Corporation
Fairfield,
Ohio
We have
audited the accompanying consolidated balance sheets of Cincinnati Financial
Corporation and subsidiaries (the company) as of December 31, 2009 and 2008, and
the related consolidated statements of income, shareholders’ equity, and cash
flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial statement
schedules listed in the Index at Item 15(c). We also have audited the company’s
internal control over financial reporting as of December 31, 2009,
based on criteria established in the Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The company’s management is responsible for these financial statements and
financial statement schedules, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and financial statement schedules and an
opinion on the company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that: (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the company as of
December 31, 2009 and 2008, and the results of their operations and
their cash flows for each of the three years in the period ended December
31, 2009, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein. Also, in our opinion, the company maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As
discussed in Note 1 to the consolidated financial statements, the company
changed its method of accounting for the recognition and presentation of
other-than-temporary impairments in 2009.
/S/
Deloitte & Touche LLP
Cincinnati,
Ohio
February
26, 2010
Cincinnati
Financial Corporation And Subsidiaries
Consolidated
Balance Sheets
|
|
December 31,
|
|
|
December 31,
|
|
(In millions except per share data)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Fixed
maturities, at fair value (amortized cost: 2009—$7,514;
2008—$6,058)
|
|
$ |
7,855 |
|
|
$ |
5,827 |
|
Equity
securities, at fair value (cost: 2009—$2,016; 2008—$2,077)
|
|
|
2,701 |
|
|
|
2,896 |
|
Short-term
investments, at fair value (amortized cost: 2009—$6;
2008—$84)
|
|
|
6 |
|
|
|
84 |
|
Other
invested assets
|
|
|
81 |
|
|
|
83 |
|
Total
investments
|
|
|
10,643 |
|
|
|
8,890 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
557 |
|
|
|
1,009 |
|
Investment
income receivable
|
|
|
118 |
|
|
|
98 |
|
Finance
receivable
|
|
|
75 |
|
|
|
71 |
|
Premiums
receivable
|
|
|
995 |
|
|
|
1,059 |
|
Reinsurance
receivable
|
|
|
675 |
|
|
|
759 |
|
Prepaid
reinsurance premiums
|
|
|
15 |
|
|
|
15 |
|
Deferred
policy acquisition costs
|
|
|
481 |
|
|
|
509 |
|
Deferred
income tax
|
|
|
- |
|
|
|
126 |
|
Land,
building and equipment, net, for company use (accumulated depreciation:
2009—$335;
2008—$297)
|
|
|
251 |
|
|
|
236 |
|
Other
assets
|
|
|
45 |
|
|
|
49 |
|
Separate
accounts
|
|
|
585 |
|
|
|
548 |
|
Total
assets
|
|
$ |
14,440 |
|
|
$ |
13,369 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
|
|
|
|
|
|
Loss
and loss expense reserves
|
|
$ |
4,142 |
|
|
$ |
4,086 |
|
Life
policy reserves
|
|
|
1,783 |
|
|
|
1,551 |
|
Unearned
premiums
|
|
|
1,509 |
|
|
|
1,544 |
|
Other
liabilities
|
|
|
670 |
|
|
|
618 |
|
Deferred
income tax
|
|
|
152 |
|
|
|
- |
|
Note
payable
|
|
|
49 |
|
|
|
49 |
|
6.125%
senior notes due 2034
|
|
|
371 |
|
|
|
371 |
|
6.9%
senior debentures due 2028
|
|
|
28 |
|
|
|
28 |
|
6.92%
senior debentures due 2028
|
|
|
391 |
|
|
|
392 |
|
Separate
accounts
|
|
|
585 |
|
|
|
548 |
|
Total
liabilities
|
|
|
9,680 |
|
|
|
9,187 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities (Note 16)
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, par value—$2 per share; (authorized: 2009—500 million shares,
2008—500
million shares; issued: 2009—196 million shares, 2008—196 million
shares)
|
|
|
393 |
|
|
|
393 |
|
Paid-in
capital
|
|
|
1,081 |
|
|
|
1,069 |
|
Retained
earnings
|
|
|
3,862 |
|
|
|
3,579 |
|
Accumulated
other comprehensive income
|
|
|
624 |
|
|
|
347 |
|
Treasury
stock at cost (2009—34 million shares, 2008—34 million
shares)
|
|
|
(1,200 |
) |
|
|
(1,206 |
) |
Total
shareholders' equity
|
|
|
4,760 |
|
|
|
4,182 |
|
Total
liabilities and shareholders' equity
|
|
$ |
14,440 |
|
|
$ |
13,369 |
|
Accompanying
notes are an integral part of these consolidated financial
statements.
Cincinnati
Financial Corporation And Subsidiaries
Consolidated
Statements Of Income
|
|
Years ended December 31,
|
|
(In millions except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
|
|
|
|
|
|
|
|
Property
casualty
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,125 |
|
Life
|
|
|
143 |
|
|
|
126 |
|
|
|
125 |
|
Investment
income, net of expenses
|
|
|
501 |
|
|
|
537 |
|
|
|
608 |
|
Other
income
|
|
|
12 |
|
|
|
13 |
|
|
|
19 |
|
Realized
investment gains (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairments on fixed maturity securities
|
|
|
(62 |
) |
|
|
(163 |
) |
|
|
(14 |
) |
Other-than-temporary
impairments on fixed maturity securities transferred to Other
Comprehensive Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
realized investment gains, net
|
|
|
398 |
|
|
|
301 |
|
|
|
396 |
|
Total
realized investment gains (losses), net
|
|
|
336 |
|
|
|
138 |
|
|
|
382 |
|
Total
revenues
|
|
|
3,903 |
|
|
|
3,824 |
|
|
|
4,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
losses and policyholder benefits
|
|
|
2,242 |
|
|
|
2,193 |
|
|
|
1,963 |
|
Underwriting,
acquisition and insurance expenses
|
|
|
1,004 |
|
|
|
1,016 |
|
|
|
1,039 |
|
Other
operating expenses
|
|
|
20 |
|
|
|
22 |
|
|
|
13 |
|
Interest
expense
|
|
|
55 |
|
|
|
53 |
|
|
|
52 |
|
Total
benefits and expenses
|
|
|
3,321 |
|
|
|
3,284 |
|
|
|
3,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
582 |
|
|
|
540 |
|
|
|
1,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
79 |
|
|
|
238 |
|
|
|
325 |
|
Deferred
|
|
|
71 |
|
|
|
(127 |
) |
|
|
12 |
|
Total
provision for income taxes
|
|
|
150 |
|
|
|
111 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
432 |
|
|
$ |
429 |
|
|
$ |
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income—basic
|
|
$ |
2.66 |
|
|
$ |
2.63 |
|
|
$ |
5.01 |
|
Net
income—diluted
|
|
|
2.65 |
|
|
|
2.62 |
|
|
|
4.97 |
|
Accompanying
notes are an integral part of these consolidated financial
statements.
Cincinnati
Financial Corporation And Subsidiaries
Consolidated
Statements Of Shareholders’ Equity
|
|
Years ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
COMMON
STOCK
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
$ |
393 |
|
|
$ |
393 |
|
|
$ |
391 |
|
Stock
options exercised
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
End
of year
|
|
|
393 |
|
|
|
393 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
1,069 |
|
|
|
1,049 |
|
|
|
1,015 |
|
Stock
options exercised
|
|
|
- |
|
|
|
4 |
|
|
|
19 |
|
Stock-based
compensation
|
|
|
10 |
|
|
|
15 |
|
|
|
14 |
|
Other
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
End
of year
|
|
|
1,081 |
|
|
|
1,069 |
|
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
3,579 |
|
|
|
3,404 |
|
|
|
2,786 |
|
Cumulative
effect of change in accounting for hybrid financial
securities
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
Cumulative
effect of change in accounting for uncertain tax positions
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
Adjusted
beginning of year
|
|
|
3,579 |
|
|
|
3,404 |
|
|
|
2,790 |
|
Cumulative
effect of change in accounting for other-than-temporary impairments as of
April 1,2009, net of tax
|
|
|
106 |
|
|
|
- |
|
|
|
- |
|
Net
income
|
|
|
432 |
|
|
|
429 |
|
|
|
855 |
|
Dividends
declared
|
|
|
(255 |
) |
|
|
(254 |
) |
|
|
(241 |
) |
End
of year
|
|
|
3,862 |
|
|
|
3,579 |
|
|
|
3,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
347 |
|
|
|
2,151 |
|
|
|
3,379 |
|
Cumulative
effect of change in accounting for hybrid financial
securities
|
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
Adjusted
beginning of year
|
|
|
347 |
|
|
|
2,151 |
|
|
|
3,374 |
|
Cumulative
effect of change in accounting for other-than-temporary impairments as of
April 1, 2009, net of tax
|
|
|
(106 |
) |
|
|
- |
|
|
|
- |
|
Other
comprehensive income (loss), net
|
|
|
383 |
|
|
|
(1,804 |
) |
|
|
(1,223 |
) |
End
of year
|
|
|
624 |
|
|
|
347 |
|
|
|
2,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TREASURY
STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
(1,206 |
) |
|
|
(1,068 |
) |
|
|
(763 |
) |
Purchased
|
|
|
- |
|
|
|
(139 |
) |
|
|
(306 |
) |
Reissued
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
End
of year
|
|
|
(1,200 |
) |
|
|
(1,206 |
) |
|
|
(1,068 |
) |
Total
shareholders' equity
|
|
$ |
4,760 |
|
|
$ |
4,182 |
|
|
$ |
5,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK - NUMBER OF SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
162 |
|
|
|
166 |
|
|
|
173 |
|
Purchase
of treasury shares
|
|
|
- |
|
|
|
(4 |
) |
|
|
(7 |
) |
Reissuance
of treasury shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
End
of year
|
|
|
162 |
|
|
|
162 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
432 |
|
|
$ |
429 |
|
|
$ |
855 |
|
Other
comprehensive income (loss), net
|
|
|
383 |
|
|
|
(1,804 |
) |
|
|
(1,223 |
) |
Pension
obligations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
comprehensive income (loss)
|
|
$ |
815 |
|
|
$ |
(1,375 |
) |
|
$ |
(368 |
) |
Accompanying
notes are an integral part of these consolidated financial
statements.
Cincinnati
Financial Corporation And Subsidiaries
Consolidated
Statements Of Cash Flows
|
|
Years ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
432 |
|
|
$ |
429 |
|
|
$ |
855 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and other non-cash items
|
|
|
38 |
|
|
|
32 |
|
|
|
36 |
|
Realized
gains on investments
|
|
|
(336 |
) |
|
|
(138 |
) |
|
|
(382 |
) |
Stock-based
compensation
|
|
|
10 |
|
|
|
15 |
|
|
|
14 |
|
Interest
credited to contract holders
|
|
|
43 |
|
|
|
34 |
|
|
|
36 |
|
Deferred
income tax
|
|
|
71 |
|
|
|
(127 |
) |
|
|
12 |
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income receivable
|
|
|
(20 |
) |
|
|
26 |
|
|
|
(3 |
) |
Premiums
and reinsurance receivable
|
|
|
148 |
|
|
|
43 |
|
|
|
(50 |
) |
Deferred
policy acquisition costs
|
|
|
(12 |
) |
|
|
(17 |
) |
|
|
(8 |
) |
Other
assets
|
|
|
10 |
|
|
|
5 |
|
|
|
(4 |
) |
Loss
and loss expense reserves
|
|
|
56 |
|
|
|
119 |
|
|
|
71 |
|
Life
policy reserves
|
|
|
110 |
|
|
|
67 |
|
|
|
101 |
|
Unearned
premiums
|
|
|
(35 |
) |
|
|
(20 |
) |
|
|
(15 |
) |
Other
liabilities
|
|
|
5 |
|
|
|
(25 |
) |
|
|
64 |
|
Current
income tax receivable/payable
|
|
|
5 |
|
|
|
41 |
|
|
|
(22 |
) |
Net
cash provided by operating activities
|
|
|
525 |
|
|
|
484 |
|
|
|
705 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of fixed maturities
|
|
|
187 |
|
|
|
167 |
|
|
|
321 |
|
Call
or maturity of fixed maturities
|
|
|
659 |
|
|
|
1,029 |
|
|
|
520 |
|
Sale
of equity securities
|
|
|
1,247 |
|
|
|
2,052 |
|
|
|
812 |
|
Collection
of finance receivables
|
|
|
30 |
|
|
|
36 |
|
|
|
37 |
|
Purchase
of fixed maturities
|
|
|
(2,135 |
) |
|
|
(1,695 |
) |
|
|
(924 |
) |
Purchase
of equity securities
|
|
|
(796 |
) |
|
|
(771 |
) |
|
|
(769 |
) |
Change
in short-term investments, net
|
|
|
78 |
|
|
|
20 |
|
|
|
(5 |
) |
Investment
in buildings and equipment, net
|
|
|
(42 |
) |
|
|
(36 |
) |
|
|
(70 |
) |
Investment
in finance receivables
|
|
|
(34 |
) |
|
|
(17 |
) |
|
|
(23 |
) |
Change
in other invested assets, net
|
|
|
(9 |
) |
|
|
(17 |
) |
|
|
(1 |
) |
Change
in securities lending collateral invested
|
|
|
- |
|
|
|
741 |
|
|
|
(760 |
) |
Net
cash provided by (used in) investing activities
|
|
|
(815 |
) |
|
|
1,509 |
|
|
|
(862 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of cash dividends to shareholders
|
|
|
(249 |
) |
|
|
(250 |
) |
|
|
(240 |
) |
Purchase
of treasury shares
|
|
|
- |
|
|
|
(139 |
) |
|
|
(307 |
) |
Change
in notes payable
|
|
|
- |
|
|
|
(20 |
) |
|
|
20 |
|
Proceeds
from stock options exercised
|
|
|
- |
|
|
|
4 |
|
|
|
19 |
|
Contract
holders' funds deposited
|
|
|
162 |
|
|
|
25 |
|
|
|
12 |
|
Contract
holders' funds withdrawn
|
|
|
(66 |
) |
|
|
(66 |
) |
|
|
(79 |
) |
Change
in securities lending payable
|
|
|
- |
|
|
|
(760 |
) |
|
|
760 |
|
Excess
tax benefits on share-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Other
|
|
|
(9 |
) |
|
|
(4 |
) |
|
|
(6 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(162 |
) |
|
|
(1,210 |
) |
|
|
181 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(452 |
) |
|
|
783 |
|
|
|
24 |
|
Cash
and cash equivalents at beginning of year
|
|
|
1,009 |
|
|
|
226 |
|
|
|
202 |
|
Cash
and cash equivalents at end of period
|
|
$ |
557 |
|
|
$ |
1,009 |
|
|
$ |
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid (net of capitalized interest: 2009—$0; 2008—$3;
2007—$4)
|
|
$ |
55 |
|
|
$ |
53 |
|
|
$ |
51 |
|
Income
taxes paid
|
|
|
74 |
|
|
|
197 |
|
|
|
346 |
|
Non-cash
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of securities
|
|
$ |
90 |
|
|
$ |
25 |
|
|
$ |
20 |
|
Equipment
acquired under capital lease obligations
|
|
|
15 |
|
|
|
2 |
|
|
|
12 |
|
Accompanying
notes are an integral part of these consolidated financial
statements.
Notes
To Consolidated Financial Statements
1. Summary
Of Significant Accounting Policies
Nature
of Operations
Cincinnati
Financial Corporation operates through our insurance group and two complementary
subsidiary companies:
The
Cincinnati Insurance Company leads our standard market property casualty
insurance group that also includes two subsidiaries: The Cincinnati Casualty
Company and The Cincinnati Indemnity Company. This group markets a broad range
of standard market business, homeowner and auto policies. The group provides
quality customer service to our select group of 1,180 independent insurance
agencies with 1,463 reporting locations across 37 states. Other
subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life
Insurance Company, which markets life and disability income insurance and
annuities, and The Cincinnati Specialty Underwriters Insurance Company,
which began offering excess and surplus lines insurance products in
2008.
The two
complementary subsidiaries are CSU Producer Resources Inc., which offers
insurance brokerage services to our independent agencies so their clients can
access our excess and surplus lines insurance products, and CFC Investment
Company (CFC-I), which offers commercial leasing and financing services to our
agents, their clients and other customers.
Basis
of Presentation
Our
consolidated financial statements include the accounts of the parent company and
our wholly owned subsidiaries. We present our statements in accordance with
accounting principles generally accepted in the United States of America
(GAAP). In consolidating our accounts, we have eliminated intercompany balances
and transactions.
In
accordance with GAAP, we have made estimates and assumptions that affect the
amounts we report and discuss in the consolidated financial statements and
accompanying notes. Actual results could differ from our estimates.
Earnings
per Share
Net
income per common share is based on the weighted average number of common shares
outstanding during each of the respective years. We calculate net income per
common share (diluted) assuming the exercise of stock-based awards. We have
adjusted shares and earnings per share to reflect all stock splits and dividends
prior to December 31, 2009.
Share-Based
Compensation
We grant
qualified and non-qualified share-based compensation under authorized plans. The
stock options vest ratably over three years following the date of grant and are
exercisable over 10-year periods. In 2008, the committee approved a mix of stock
options and restricted stock units for stock-based awards. Stock options granted
had similar terms but generally were awarded for fewer shares compared with
previous years to accommodate new awards of service-based and performance-based
restricted stock units.
Employee
Benefit Pension Plan
We
sponsor a defined benefit pension plan that was modified during 2008. We froze
entry into the pension plan, and only participants 40 years of age or older
could elect to remain in the plan. Our pension expense is based on certain
actuarial assumptions and also is composed of several components that are
determined using the projected unit credit actuarial cost method. Refer to
Note 13, Employee Retirement Benefits, Page 109 for more information
regarding our defined benefit pension plan.
Property
Casualty Insurance
Property
casualty written premiums are deferred and recorded as earned premiums on a pro
rata basis over the terms of the policies. We record as unearned premiums the
portion of written premiums that applies to unexpired policy terms. The expenses
associated with issuing insurance policies – primarily commissions, premium
taxes and underwriting costs – are deferred and amortized over the terms of the
policies. Our standard market insurance operations consist of two segments,
commercial lines and personal lines. We assess recoverability of deferred
acquisition costs at the segment level, consistent with the ways we acquire,
service and manage insurance and measure profitability. We also have deferred
acquisition costs in our surplus lines operation, which is reported in Other. We
analyze our acquisition cost assumptions periodically to reflect actual
experience; we evaluate our deferred acquisition cost for recoverability; and we
regularly conduct reviews for potential premium deficiencies.
A premium
deficiency is recorded when the sum of expected loss and loss adjustment
expenses, expected policyholder dividends, unamortized acquisition costs and
maintenance costs exceeds the total of unearned premiums and anticipated
investment income. A premium deficiency is first recognized by charging any
unamortized acquisition costs to expense to the extent required to eliminate the
deficiency. If the premium
deficiency
is greater than unamortized acquisition costs, a liability is accrued for the
excess deficiency. We did not record a premium deficiency for the three years
ended 2009, 2008 and 2007.
Certain
property casualty policies are not booked before the effective date. An
actuarial estimate is made to determine the amount of unbooked written premiums.
The majority of the estimate is unearned and does not have a material impact on
earned premium.
Effective
in the second quarter 2009, we changed our presentation of underwriting expenses
in our consolidated statements of income. We have summarized commissions,
insurance operating expenses, increase in deferred acquisition costs and taxes,
licenses and fees to a single caption, “Underwriting, acquisition and insurance
expenses.”
We
establish reserves to cover the expected cost of claims, or losses, and our
expenses related to investigating, processing and resolving claims. Although
determining the appropriate amount of reserves is inherently uncertain, we base
our decisions on past experience and current facts. Reserves are based on claims
reported prior to the end of the year and estimates of unreported claims.
We take into account the fact that we may recover some of our costs through
salvage and subrogation. We regularly review and update reserves using the most
current information available. Any resulting adjustments are reflected in
current year insurance losses and policyholder benefits.
The
consolidated property casualty companies actively write property casualty
insurance through independent agencies in 37 states.
Our 10 largest states generated 68.1 percent and 68.7 percent of total
earned premiums in 2009 and 2008. Ohio, our largest state, accounted for 21.0
percent and 20.9 percent of total earned premiums in 2009 and 2008.
Georgia, Illinois, Indiana, Michigan, North Carolina, Pennsylvania and Virginia
each accounted for between 4 percent and 9 percent of total earned premiums in
2009. Our largest single agency relationship accounted for approximately
1.2 percent of the company's total earned premiums in 2009. Our
largest reinsurer, Swiss Reinsurance Company, accounted for 21.5 percent of
total ceded earned premiums.
Policyholder
Dividends
Certain
workers’ compensation policies include the possibility of a policyholder earning
a return of a portion of its premium in the form of a policyholder dividend. The
dividend generally is calculated by determining the profitability of a policy
year along with the associated premium. We reserve for all probable future
policyholder dividend payments.
Life
and Health Insurance
We offer
several types of life and health insurance, and we account for each according to
the duration of the contract. Short-duration contracts are written to cover
claims that arise during a short, fixed term of coverage. We generally have the
right to change the amount of premium charged or cancel the coverage at the end
of each contract term. Group life insurance is an example. We record premiums
for short-duration contracts similarly to property casualty
contracts.
Long-duration
contracts are written to provide coverage for an extended period of time.
Traditional long-duration contracts require policyholders to pay scheduled gross
premiums, generally not less frequently than annually, over the term of the
coverage. Premiums for these contracts are recognized as revenue when due. Whole
life insurance and disability income insurance are examples. Some traditional
long-duration contracts have premium payment periods shorter than the period
over which coverage is provided. For these contracts, the excess of premium over
the amount required to pay expenses and benefits is recognized over the term of
the coverage rather than over the premium payment period. Ten-pay whole life
insurance is an example.
We
establish a liability for traditional long-duration contracts as we receive
premiums. The amount of this liability is the present value of future expenses
and benefits less the present value of future net premiums. Net premium is
the portion of gross premium required to provide for all expenses and benefits.
We estimate future expenses and benefits and net premium using assumptions for
expected expenses, mortality, morbidity, withdrawal rates and investment income.
We include a provision for deviation, meaning we allow for some uncertainty in
making our assumptions. We establish our assumptions when the contract is issued
and we generally maintain those assumptions for the life of the contract. We use
both our own experience and industry experience, adjusted for historical trends,
in arriving at our assumptions for expected mortality, morbidity and withdrawal
rates. We use our own experience and historical trends for setting our
assumption for expected expenses. We base our assumption for expected investment
income on our own experience, adjusted for current economic
conditions.
When we
issue a traditional long-duration contract, we capitalize acquisition costs.
Acquisition costs are costs that vary with, and are primarily related to,
the production of new business. We then charge these deferred policy
acquisition costs to expenses over the premium-paying period of the contract,
and we use the same assumptions that we use when we establish the liability
for the contract. We update our acquisition cost assumptions periodically to
reflect actual experience, and we evaluate our deferred acquisition cost
for recoverability.
Universal
life contracts are long-duration contracts for which contractual provisions are
not fixed, unlike whole life insurance. Universal life contracts allow
policyholders to vary the amount of premium, within limits, without our consent.
However, we may vary the mortality and expense charges, within limits, and the
interest crediting rate used to accumulate policy values. We do not record
universal life premiums as revenue. Instead we recognize as revenue the
mortality charges, administration charges and surrender charges when received.
Some of our universal life contracts assess administration charges in the early
years of the contract that are compensation for services we will provide in the
later years of the contract. These administration charges are deferred and are
recognized over the period when we provide those future services.
For
universal life long-duration contracts, we maintain a liability equal to the
policyholder account value. There is no provision for adverse deviation. Some of
our universal life policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance, based on
expected no-lapse guarantee benefits and expected policy
assessments.
When we
issue a universal life long-duration contract, we capitalize acquisition costs.
We then charge these capitalized costs to expenses over the term of coverage of
the contract. When we charge deferred policy acquisition costs to expenses, we
use assumptions based on our best estimates of long-term experience.
We review and modify these assumptions on a regular basis.
Effective
in the second quarter 2009, we changed our presentation of underwriting expenses
in our consolidated statements of income. We have summarized commissions,
insurance operating expenses, increase in deferred acquisition costs and taxes,
licenses and fees to a single caption, “Underwriting, acquisition and insurance
expenses.”
Separate
Accounts
We issue
life contracts with guaranteed minimum returns, referred to as bank-owned life
insurance contracts (BOLIs). We legally segregate and record as separate
accounts the assets and liabilities for some of our BOLIs, based on the specific
contract provisions. We guarantee minimum investment returns, account values and
death benefits for our separate account BOLIs. Our other BOLIs are general
account products.
We carry
the assets of separate account BOLIs at fair value. The liabilities on separate
account BOLIs primarily are the contract holders’ claims to the related assets
and are carried at an amount equal to the contract holders’ account value. At
December 31, 2009, the current fair value of the BOLI invested assets and cash
exceeded the current fair value of the contract holders’ account value by
approximately $7 million. If the BOLI projected fair value were to fall
below the value we guaranteed, a liability would be established by a charge to
the company’s earnings.
Generally,
investment income and realized investment gains and losses of the separate
accounts accrue directly to the contract holder, and we do not include them in
the Consolidated Statements of Income. Revenues and expenses related to separate
accounts consist of contractual fees and mortality, surrender and expense risk
charges. Also, each separate account BOLI includes a negotiated gain and loss
sharing arrangement with the company. A percentage of each separate account’s
realized gain and loss representing contract fees and assessments accrues to us
and is transferred from the separate account to our general account and is
recognized as revenue or expense.
Reinsurance
We reduce
risk and uncertainty by buying property casualty and life reinsurance.
Reinsurance contracts do not relieve us from our duty to policyholders, but
rather help protect our financial strength to perform that duty. All of our
reinsurance contracts transfer the economic risk of loss.
We also
serve in a limited way as a reinsurer for other insurance companies, reinsurers
and involuntary state pools. We record our transactions for such assumed
reinsurance based on reports provided to us by the ceding
reinsurer.
Reinsurance
assumed and ceded premiums are deferred and recorded as earned premiums on a pro
rata basis over the terms of the contract. We estimate loss amounts
recoverable from our reinsurers based on the reinsurance policy terms.
Historically, our claims with reinsurers have been paid. We do not have an
allowance for uncollectible reinsurance.
Cash
and Cash Equivalents
Cash and
cash equivalents are highly liquid instruments that include liquid debt
instruments with original maturities of less than three months. These are
carried at cost and approximate fair value.
Investments
Our
portfolio investments are primarily in publicly traded fixed-maturity, equity
and short-term investments. Fixed-maturity investments (taxable bonds,
tax-exempt bonds, redeemable preferred stocks and collateralized mortgage
obligations) and equity investments (common and non-redeemable preferred stocks)
are classified as available for sale and recorded at fair value in the
consolidated financial
statements.
The number of fixed-maturity securities trading below 100 percent of book
value can be expected to fluctuate as interest rates rise or fall. Because of
our strong surplus and long-term investment horizon, our general intent is to
hold fixed-maturity investments until maturity, regardless of short-term
fluctuations in fair values.
On April
1, 2009, we adopted Accounting Standards Codification (ASC) 320, Recognition and
Presentation of Other-Than-Temporary Impairments (OTTI). Our invested asset
impairment policy states that fixed maturities the company (1) intends to
sell or (2) are more likely than not will be required to sell before recovery of
their amortized cost basis are deemed to be other-than-temporarily impaired. The
book value of any such securities is reduced to fair value as the new cost
basis, and a realized loss is recorded in the period in which it is recognized.
When these two criteria are not met, and the company believes that full
collection of interest and/or principal is not likely, we determine the net
present value of future cash flows by using the effective interest rate implicit
in the security at the date of acquisition as the discount rate and compare that
amount to the amortized cost and fair value of the security. The difference
between the net present value of the expected future cash flows and amortized
cost of the security is considered a credit loss and recognized as a realized
loss in the period in which it occurred. The difference between the fair value
and the net present value of the cash flows of the security, the non-credit
loss, is recognized in other comprehensive income as an unrealized loss. With
the adoption of this ASC in the second quarter of 2009, we recognized a
cumulative effect adjustment of $106 million, net of tax, to reclassify the
non-credit component of previously recognized impairments by increasing
retained earnings and reducing accumulated other comprehensive
income.
ASC 320
does not allow retrospective application of the new other-than-temporary
impairment model. Our Consolidated Statements of Income for the year ended
December 31, 2009, are not measured on the same basis as prior period
amounts and, accordingly, these amounts are not comparable.
When
determining OTTI charges for our equity portfolio, our invested asset impairment
policy considers qualitative and quantitative factors, including facts and
circumstances specific to individual securities, asset classes, the financial
condition of the issuer, changes in dividend payment, the length of time fair
value had been less than book value, the severity of the decline in fair value
below book value, the volatility of the security and our ability and intent to
hold each position until its forecasted recovery.
Included
within our other invested assets are life policy loans, venture capital fund
investments and investment in real estate. Life policy loans are carried at the
receivable value. We use the equity method of accounting for venture capital
fund investments. The venture capital funds provide their financial statements
to us and generally report investments on their balance sheets at fair value.
Investment in real estate consists of one office building that is carried at
cost less accumulated depreciation.
We
include the non-credit portion of fixed maturities and all other unrealized
gains and losses on investments, net of taxes, in shareholders’ equity as
accumulated other comprehensive income. Realized gains and losses on investments
are recognized in net income based on the trade date accounting
method.
Investment
income consists mainly of interest and dividends. We record interest on an
accrual basis and record dividends at the ex-dividend date. We amortize premiums
and discounts on fixed-maturity securities using the effective interest method
over the expected life of the security.
Fair
Value Disclosures
We
account for our investment portfolio at fair value and apply fair value
measurements as defined by ASC 820, Fair Value Measurements and
Disclosures, to financial instruments. Fair value is applicable to ASC 320,
Investments-Debt and Equity Securities, ASC 815, “Derivatives and Hedging,” and
ASC 825, Financial Instruments.
We
adopted the provisions of Fair Value Measurements on January 1, 2008. Fair Value
Measurements defines fair value as the exit price or the amount that would be
(1) received to sell an asset or (2) paid to transfer a liability in an orderly
transaction between marketplace participants at the measurement date. When
determining an exit price we must, whenever possible, rely upon observable
market data. We primarily base fair value for investments in equity and
fixed-maturity securities (including redeemable preferred stock and assets held
in separate accounts) on quoted market prices or on prices from
FT Interactive Data, an outside resource that supplies global securities
pricing, dividend, corporate action and descriptive information to support fund
pricing, securities operations, research and portfolio management. When a price
is not available from these sources, as in the case of securities that are not
publicly traded, we determine the fair value using various inputs including
quotes from independent brokers. The fair value of investments not priced by FT
Interactive Data is less than 1 percent of the fair value of our total
investment portfolio.
For the
purpose of ASC 825 disclosure, we estimate the fair value for liabilities of
investment contracts and annuities. We also estimate the fair value for assets
arising from policyholder loans on insurance contracts. These estimates are
developed using discounted cash flow calculations across a wide range of
economic interest rate scenarios with a provision for our own credit risk. We
base fair value for long-term senior notes
on the
quoted market prices for such notes. We base fair value for notes payable on our
year-end outstanding balance.
Derivative
Financial Instruments and Hedging Activities
We
account for derivative financial instruments as defined by ASC 815, Derivatives
and Hedging. The hedging definitions included in ASC 815 guide our recognition
of the changes in the fair value of derivative financial instruments as realized
gains or losses in the consolidated statements of income or as a component of
accumulated other comprehensive income in shareholder’s equity in the period for
which they occur.
Securities
Lending Program
During
the third quarter of 2008, we terminated our securities lending
program.
Lease/Finance
Our
leasing subsidiary provides auto and equipment direct financing (leases and
loans) to commercial and individual clients. We generally transfer ownership of
the property to the client as the terms of the leases expire. Our lease
contracts contain bargain purchase options. We record income over the financing
term using the effective interest method.
We
capitalize and amortize lease or loan origination costs over the life of the
financing using the effective interest method. These costs may include, but are
not limited to: finder fees, broker fees, filing fees and the cost of
credit reports. We account for these leases and loans as direct
financing-type leases.
Land,
Building and Equipment
We record
building and equipment at cost less accumulated depreciation. Certain equipment
held under capital leases also is classified as property and equipment with the
related lease obligations recorded as liabilities. Our depreciation is based on
estimated useful lives (ranging from three years to 39½ years) using
straight-line and accelerated methods. Depreciation expense was $48 million in
2009, $35 million in 2008, and $38 million in 2007. We monitor land,
building and equipment for potential impairments. Potential impairments may
include a significant decrease in the fair values of the assets, considerable
cost overruns on projects or a change in legal factors or business climate, or
other factors that indicate that the carrying amount may not be recoverable.
There were no recorded land, building and equipment impairments for 2009, 2008
or 2007.
We
capitalize and amortize costs for internally developed computer software during
the application development stage. These costs generally consist of external
consulting, payroll and payroll-related costs.
Income
Taxes
We
calculate deferred income tax liabilities and assets using tax rates in effect
for the time when temporary differences in book and taxable income are estimated
to reverse. We recognize deferred income taxes for numerous temporary
differences between our taxable income and book-basis income and other changes
in shareholders’ equity. Such temporary differences relate primarily to
unrealized gains and losses on investments and differences in the recognition of
deferred acquisition costs and insurance reserves. We charge deferred income
taxes associated with unrealized appreciation and depreciation (except the
amounts related to the effect of income tax rate changes) to shareholders’
equity in accumulated other comprehensive income. We charge deferred taxes
associated with other differences to income.
There are
no amounts in our ASC 740 liability that would change the effective tax rate if
recognized. Although no penalties currently are accrued, if incurred, they would
be recognized as a component of income tax expense. Accrued interest expense is
recognized as other interest expense in the consolidated statements of
income.
Subsequent
Events
There
were no subsequent events requiring adjustment to the financial statements or
disclosure.
Pending
Accounting Standards
|
·
|
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures. ASU 2010-06 applies to all entities that are required to
make disclosures about recurring or nonrecurring fair value measurements.
ASU 2010-06 requires separate disclosures of the activity in the Level 3
category related to any purchases, sales, issuances and settlements on a
gross basis. The effective date of the disclosures regarding level 3
category purchases, sales, issuances and settlements are for interim and
annual periods ending after December 15, 2010. The portion of ASU 2010-06
that has not yet been adopted will not have a material impact on our
company’s financial position, cash flows or results of operations as it
focuses on additional disclosures.
|
Adopted
Accounting Standards
|
·
|
In
December 2008, the FASB issued ASC 715-20-65-2, Employers’ Disclosures
about Postretirement Benefit Plan Assets. ASC 715-20-65-2 is an amendment
of ASC 715-20, Employers’ Disclosures about Pensions and Other
Postretirement Benefits, an amendment of ASC 715-10, 715-30, and 715-60.
ASC 715-20-65-2 provides guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement plan. The
effective date of this ASC is the company’s fiscal year ending after
December 15, 2009. We adopted this standard; however, it did not have
an impact on our company’s financial position, cash flows or results
of operations as it focuses on additional
disclosures.
|
|
·
|
In
April 2009, the FASB issued ASC 820-10-50, Interim Disclosures about Fair
Value of Financial Instruments. ASC 820-10-50 is an amendment of ASC
825-10-50, Disclosures about Fair Value of Financial Instruments and ASC
270, Interim Financial Reporting. ASC 820-10-50 expands the fair value
disclosures for all financial instruments within the scope of ASC
825-10-50 to interim reporting periods. We have adopted ASC 820-10-50, and
it is effective for interim reporting periods ending after
June 15, 2009. It did not have an impact on our company’s
financial position, cash flows or results of operations as it focuses on
additional disclosures.
|
|
·
|
In
April 2009, the FASB issued ASC 320, Recognition and Presentation of
Other-Than-Temporary Impairments effective for interim and annual
reporting periods ending after June 15, 2009. ASC 320 is an amendment of
ASC 320-10, Accounting for Certain Investments in Debt and Equity
Securities and ASC 958-320, Accounting for Certain Investments Held by
Not-for-Profit Organizations. ASC 320 amends the other-than-temporary
impairment guidance for debt securities and expands the presentation and
disclosure of other-than-temporary impairments on debt and equity
securities in the financial statements. We adopted this ASC as of April 1,
2009.
|
|
·
|
In
April 2009, the FASB issued ASC 820-10-65-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.
ASC 820-10-65-4 is an amendment of ASC 820-10, Fair Value Measurements.
ASC 820-10-65-4 applies to all assets and liabilities and provides
guidance on measuring fair value when the volume and level of activity has
significantly decreased and guidance on identifying transactions that are
not orderly. ASC 820-10-65-4 requires interim and annual disclosures of
the inputs and valuation techniques used to measure fair value and a
discussion of changes in valuation techniques and related inputs, if any,
that occurred during the period. We have adopted this ASC, which is
effective for interim and annual reporting periods ending after
June 15, 2009. It did not have a material impact on our
company’s financial position, cash flows or results
of operations.
|
|
·
|
In
May 2009, the FASB issued ASC 855, Subsequent Events. ASC 855 provides
guidance on the disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. The date through which any subsequent events have been evaluated
and the basis for that date must be disclosed. ASC 855 requires that we
disclose the analysis of subsequent events through the date that our
Financial Statements are issued. ASC 855 also defines the circumstances
under which an entity should recognize such events or transactions and the
related disclosures of such events or transactions that occur after the
balance sheet date. We adopted this ASC, which is effective for interim or
annual financial periods ending after June 15, 2009. It did not
have an impact on our company’s financial position, cash flows or results
of operations.
|
|
·
|
In
June 2009, the FASB issued ASC 105, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting
Principles–a replacement of FASB Statement No. 162. ASC 105
establishes a single source of authoritative, nongovernmental U.S. GAAP,
except for rules and interpretive releases of the SEC. We have
adopted this ASC, which is effective for interim and annual reporting
periods ending after September 15, 2009. It did not have
an impact on our company’s financial position, cash flows or results
of operations as it does not change authoritative
guidance.
|
|
·
|
In
August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair
Value. ASU 2009-05 is an amendment of ASC 820, Fair Value Measurements and
Disclosures. ASU 2009-05 applies to all entities that measure liabilities
at fair value within the scope of ASC 820, Fair Value Measurements and
Disclosures. ASU 2009-05 provides guidance on measuring fair value of
liabilities under circumstances in which a quoted price in an active
market for the identical liability is not available. We have
adopted this ASU, which is effective for the first interim or annual
reporting period beginning after August 28, 2009. It did not
have a material impact on our company’s financial position, cash flows or
results of operations.
|
|
·
|
In
September 2009, the FASB issued ASU 2009-12, Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent). ASU 2009-12 provides guidance on estimating fair value of
alternative investments when using the net asset value per share provided
by the investment entity. We have adopted this ASU, which is
effective for interim and annual periods ending after
December 15, 2009, with early adoption permitted. It did not
have a material impact on our company’s financial position, cash flows or
results of operations.
|
|
·
|
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures. ASU 2010-06 applies to all entities that are required to
make disclosures about recurring or nonrecurring fair value measurements.
ASU 2010-06 provides guidance on additional disclosures on any
significant transfers in and out of Level 1 and Level 2 and a description
of the transfer. ASU 2010-06 also requires separate disclosures of
the activity in the Level 3 category related to any purchases, sales,
issuances and settlements on a gross basis. The effective date of the new
disclosures relating to the existing disclosures regarding Level 1 and
Level 2 categories is for interim and annual periods ending after December
15, 2009. We have adopted the portion of ASU 2010-06 related to
significant transfers in and out of Level 1 and Level 2. The effective
date of the disclosures regarding purchases, sales, issuances and
settlements to the Level 3 category is for interim and annual periods
ending after December 15, 2010. The portion of ASU 2010-06 that has
been adopted did not have a material impact on our company’s
financial position, cash flows or results of operations as it focuses on
additional disclosures.
|
2. Investments
The
following table analyzes investment income, realized investment gains and losses
and the change in unrealized investment gains and losses:
|
|
Years ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Investment
income summarized by investment category:
|
|
|
|
|
|
|
|
|
|
Interest
on fixed maturities
|
|
$ |
402 |
|
|
$ |
326 |
|
|
$ |
308 |
|
Dividends
on equity securities
|
|
|
100 |
|
|
|
204 |
|
|
|
294 |
|
Other
investment income
|
|
|
7 |
|
|
|
14 |
|
|
|
15 |
|
Total
|
|
|
509 |
|
|
|
544 |
|
|
|
617 |
|
Less
investment expenses
|
|
|
8 |
|
|
|
7 |
|
|
|
9 |
|
Total
|
|
$ |
501 |
|
|
$ |
537 |
|
|
$ |
608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains and losses summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
$ |
15 |
|
|
$ |
4 |
|
|
$ |
8 |
|
Gross
realized losses
|
|
|
(30 |
) |
|
|
(36 |
) |
|
|
(18 |
) |
Other-than-temporary
impairments
|
|
|
(62 |
) |
|
|
(163 |
) |
|
|
(14 |
) |
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
|
624 |
|
|
|
1,020 |
|
|
|
438 |
|
Gross
realized losses
|
|
|
(162 |
) |
|
|
(280 |
) |
|
|
(24 |
) |
Other-than-temporary
impairments
|
|
|
(69 |
) |
|
|
(347 |
) |
|
|
(2 |
) |
Securities
with embedded derivatives
|
|
|
27 |
|
|
|
(38 |
) |
|
|
(11 |
) |
Other
|
|
|
(7 |
) |
|
|
(22 |
) |
|
|
5 |
|
Total
|
|
$ |
336 |
|
|
$ |
138 |
|
|
$ |
382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized investment gains and losses and other
summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$ |
734 |
|
|
$ |
(296 |
) |
|
$ |
7 |
|
Equity
securities
|
|
|
(134 |
) |
|
|
(2,455 |
) |
|
|
(1,904 |
) |
Adjustment
to deferred acquisition costs and life policy reserves
|
|
|
(24 |
) |
|
|
19 |
|
|
|
(1 |
) |
Pension
obligations
|
|
|
(14 |
) |
|
|
(15 |
) |
|
|
12 |
|
Other
|
|
|
28 |
|
|
|
(34 |
) |
|
|
0 |
|
Income
taxes on above
|
|
|
(207 |
) |
|
|
977 |
|
|
|
663 |
|
Total
|
|
$ |
383 |
|
|
$ |
(1,804 |
) |
|
$ |
(1,223 |
) |
At
December 31, 2009, contractual maturity dates for fixed-maturity and short-term
investments were:
|
|
Amortized
|
|
|
Fair
|
|
|
% of Fair
|
|
(Dollars
in millions)
|
|
cost
|
|
|
value
|
|
|
value
|
|
Maturity
dates occurring:
|
|
|
|
|
|
|
|
|
|
Less
than 1 year
|
|
$ |
105 |
|
|
$ |
107 |
|
|
|
1.4 |
% |
Years
1 – 5
|
|
|
2,030 |
|
|
|
2,147 |
|
|
|
27.3 |
|
Years
6 – 10
|
|
|
3,476 |
|
|
|
3,663 |
|
|
|
46.6 |
|
Years
11 – 20
|
|
|
1,712 |
|
|
|
1,755 |
|
|
|
22.3 |
|
Over
20 years
|
|
|
197 |
|
|
|
189 |
|
|
|
2.4 |
|
Total
|
|
$ |
7,520 |
|
|
$ |
7,861 |
|
|
|
100.0 |
% |
Actual
maturities may differ from contractual maturities when there is a right to call
or prepay obligations with or without call or prepayment penalties.
At
December 31, 2009, investments with book value of $85 million and fair value of
$89 million were on deposit with various states in compliance with
regulatory requirements.
The
following table analyzes cost or amortized cost, gross unrealized gains, gross
unrealized losses, fair value and other-than-temporary impairments (OTTI)
in accumulated other comprehensive income (AOCI) for
our investments:
|
|
Cost or
amortized
|
|
|
Gross unrealized
|
|
|
Fair
|
|
|
|
|
(In millions)
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
OTTI in AOCI
|
|
At December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States,
municipalities and political subdivisions
|
|
$ |
3,007 |
|
|
$ |
128 |
|
|
$ |
6 |
|
|
$ |
3,129 |
|
|
$ |
- |
|
Convertibles
and bonds with warrants attached
|
|
|
91 |
|
|
|
- |
|
|
|
- |
|
|
|
91 |
|
|
|
- |
|
United
States government
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
Government-sponsored
enterprises
|
|
|
354 |
|
|
|
- |
|
|
|
7 |
|
|
|
347 |
|
|
|
- |
|
Foreign
government
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
Short-term
investments
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
Collateralized
mortgage obligations
|
|
|
37 |
|
|
|
- |
|
|
|
6 |
|
|
|
31 |
|
|
|
- |
|
Corporate
bonds
|
|
|
4,018 |
|
|
|
268 |
|
|
|
36 |
|
|
|
4,250 |
|
|
|
- |
|
Total
|
|
$ |
7,520 |
|
|
$ |
396 |
|
|
$ |
55 |
|
|
$ |
7,861 |
|
|
$ |
- |
|
Equity
securities
|
|
$ |
2,016 |
|
|
$ |
714 |
|
|
$ |
29 |
|
|
$ |
2,701 |
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States,
municipalities and political subdivisions
|
|
$ |
2,704 |
|
|
$ |
60 |
|
|
$ |
31 |
|
|
$ |
2,733 |
|
|
|
|
|
Convertibles
and bonds with warrants attached
|
|
|
102 |
|
|
|
- |
|
|
|
- |
|
|
|
102 |
|
|
|
|
|
United
States government
|
|
|
4 |
|
|
|
1 |
|
|
|
- |
|
|
|
5 |
|
|
|
|
|
Government-sponsored
enterprises
|
|
|
391 |
|
|
|
- |
|
|
|
2 |
|
|
|
389 |
|
|
|
|
|
Foreign
government
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
|
|
All
other corporate bonds and short-term investments
|
|
|
2,938 |
|
|
|
44 |
|
|
|
303 |
|
|
|
2,679 |
|
|
|
|
|
Total
|
|
$ |
6,142 |
|
|
$ |
105 |
|
|
$ |
336 |
|
|
$ |
5,911 |
|
|
|
|
|
Equity
securities
|
|
$ |
2,077 |
|
|
$ |
1,079 |
|
|
$ |
260 |
|
|
$ |
2,896 |
|
|
|
|
|
At
year-end 2009, Procter & Gamble was our largest stock holding of the
publicly traded common stock portfolio at 5.8 percent. At year-end 2008 and 2007
our largest stock holding made up 14.5 percent and 28.1 percent of the
publicly traded common stock portfolio, respectively. We also diversified our
investment portfolio as a result of the fourth-quarter 2009 Pfizer acquisition
of Wyeth (NYSE:WYE). In addition to receiving approximately $146 million in cash
for our Wyeth shares, we sold approximately 2.4 million shares of Pfizer
subsequent to the merger. As a result of these transactions, our stock portfolio
exposure to the healthcare sector reduced to 18.0 percent at December
31, 2009, from 24.6 percent at
September 30, 2009.
This
table reviews unrealized losses and fair values by investment category and by
the duration of the securities’ continuous unrealized loss
position:
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
At December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States,
municipalities and political subdivisions
|
|
$ |
196 |
|
|
$ |
4 |
|
|
$ |
29 |
|
|
$ |
2 |
|
|
$ |
225 |
|
|
$ |
6 |
|
Government-sponsored
enterprises
|
|
|
347 |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
347 |
|
|
|
7 |
|
Short-term
investments
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
Collateralized
mortgage obligations
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
|
6 |
|
|
|
27 |
|
|
|
6 |
|
Corporate
bonds
|
|
|
397 |
|
|
|
19 |
|
|
|
309 |
|
|
|
17 |
|
|
|
706 |
|
|
|
36 |
|
Total
|
|
|
941 |
|
|
|
30 |
|
|
|
365 |
|
|
|
25 |
|
|
|
1,306 |
|
|
|
55 |
|
Equity
securities
|
|
|
65 |
|
|
|
3 |
|
|
|
415 |
|
|
|
26 |
|
|
|
480 |
|
|
|
29 |
|
Total
|
|
$ |
1,006 |
|
|
$ |
33 |
|
|
$ |
780 |
|
|
$ |
51 |
|
|
$ |
1,786 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States,
municipalities and political subdivisions
|
|
$ |
592 |
|
|
$ |
26 |
|
|
$ |
94 |
|
|
$ |
5 |
|
|
$ |
686 |
|
|
$ |
31 |
|
Convertibles
and bonds with warrants attached
|
|
|
195 |
|
|
|
15 |
|
|
|
38 |
|
|
|
5 |
|
|
|
233 |
|
|
|
20 |
|
Government-sponsored
enterprises
|
|
|
141 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
141 |
|
|
|
2 |
|
All
other corporate bonds and short-term investments
|
|
|
1,367 |
|
|
|
215 |
|
|
|
254 |
|
|
|
68 |
|
|
|
1,621 |
|
|
|
283 |
|
Total
|
|
|
2,295 |
|
|
|
258 |
|
|
|
386 |
|
|
|
78 |
|
|
|
2,681 |
|
|
|
336 |
|
Equity
securities
|
|
|
820 |
|
|
|
219 |
|
|
|
79 |
|
|
|
41 |
|
|
|
899 |
|
|
|
260 |
|
Total
|
|
$ |
3,115 |
|
|
$ |
477 |
|
|
$ |
465 |
|
|
$ |
119 |
|
|
$ |
3,580 |
|
|
$ |
596 |
|
Other-than-temporary
Impairment Charges
The
following table provides the amount of OTTI charges:
|
|
Years
ended December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Other-than-temporary
impairment charges:
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$ |
(62 |
) |
|
$ |
(163 |
) |
|
$ |
(14 |
) |
Equity
securities
|
|
|
(69 |
) |
|
|
(347 |
) |
|
|
(2 |
) |
Total
|
|
$ |
(131 |
) |
|
$ |
(510 |
) |
|
$ |
(16 |
) |
The
following table provides the amount of credit losses on fixed-maturity
securities for which a portion of OTTI has been recognized in other
comprehensive income:
(In
millions)
|
|
|
|
Impairments
due to credit losses reconciliation
|
|
|
|
Balance
at April 1, 2009
|
|
$ |
4 |
|
Additional
credit impairments on:
|
|
|
|
|
Previously
impaired securities
|
|
|
1 |
|
Securities
without prior impairments
|
|
|
- |
|
Reductions
|
|
|
(5 |
) |
Balance
December 31, 2009
|
|
$ |
- |
|
During
2009, we impaired 50 securities. At December 31, 2009, 121 fixed-maturity
investments with a total unrealized loss of $25 million had been in an
unrealized loss position for 12 months or more. Of that total, eight fixed
maturity investments were trading below 70 percent of book value with a total
unrealized loss of $2 million. Ten equity investments with a total
unrealized loss of $26 million had been in an unrealized loss position for
12 months or more as of December 31, 2009. Of that total, no equity
investments were trading below 70 percent of book value.
During
2008, we impaired 126 securities. At December 31, 2008, 142 fixed-maturity
investments with a total unrealized loss of $78 million had been in an
unrealized loss position for 12 months or more. Of that total, no fixed-maturity
investments were trading below 70 percent of book value. Six equity investments
with a total unrealized loss of $41 million had been in an unrealized loss
position for 12 months or more as of December 31, 2008, with two
trading below 70 percent of book value. As a result of this evaluation, we did
not record impairment on the six equity securities in an unrealized loss
position in excess of 12 months at December 31, 2008.
During
2007, we impaired 20 securities. At December 31, 2007, 184 fixed-maturity
investments with a total unrealized loss of $20 million had been in an
unrealized position for 12 months or more. Three of these securities were
trading below 70 percent of book value with a total unrealized loss of $6
million. There were no equities trading below book value for 12 months or
more.
When
determining OTTI charges for our fixed-maturity portfolio, management places
significant emphasis on whether issuers of debt are current on contractual
payments and whether future contractual amounts are likely to be paid. As
required by the new accounting standard for fixed-maturity securities, our
invested asset impairment policy states that OTTI is considered to have occurred
(1) if we intend to sell the impaired fixed maturity security; (2) if it is more
likely than not we will be required to sell the fixed maturity security before
recovery of its amortized cost basis; or (3) the present value of the expected
cash flows is not sufficient to recover the entire amortized cost basis. If we
intend to sell or it is more likely than not we will be required to sell, the
book value of any such securities is reduced to fair value as the new cost
basis, and a realized loss is recorded in the period in which it is recognized.
When we believe that full collection of interest and/or principal is not likely,
we determine the net present value of future cash flows by using the effective
interest rate implicit in the security at the date of acquisition as the
discount rate and compare that amount to the amortized cost and fair value of
the security. The difference between the net present value of the expected
future cash flows and amortized cost of the security is considered a credit loss
and recognized as a realized loss in the period in which it occurred. The
difference between the fair value and the net present value of the cash flows of
the security, the non-credit loss, is recognized in other comprehensive income
as an unrealized loss.
With the
adoption of ASC 320 in the second quarter of 2009, we recognized a cumulative
effect adjustment of $106 million, net of tax, to reclassify the non-credit
component of previously recognized impairments by increasing retained
earnings and reducing accumulated other comprehensive income. ASC 320 does not
allow retrospective application of the new OTTI model. Our Consolidated
Statements of Income for the year ended December 31, 2009, are not measured on
the same basis as prior period amounts and, accordingly, these amounts are not
comparable.
When
determining OTTI charges for our equity portfolio, our invested asset impairment
policy considers qualitative and quantitative factors, including facts and
circumstances specific to individual securities, asset classes, the financial
condition of the issuer, changes in dividend payment, the length of time
fair
value had
been less than book value, the severity of the decline in fair value below book
value, the volatility of the security and our ability and intent to hold each
position until its forecasted recovery.
For each
of our equity securities in an unrealized loss position at December 31, 2009, we
applied the objective quantitative and qualitative criteria of our invested
asset impairment policy for OTTI. Our long-term equity investment philosophy,
emphasizing companies with strong indications of paying and growing dividends,
combined with our strong surplus, liquidity and cash flow, provides us the
ability to hold these investments through what we believe to be slightly longer
recovery periods occasioned by the recession and historic levels of market
volatility. Each quarter we review the expected recovery period for each
individual security. Based on the individual qualitative and quantitative
factors, as discussed above, we evaluate and determine an expected recovery
period for each security. A change in the condition of a security can warrant
impairment before the expected recovery period. If the security has not
recovered cost within the expected recovery period, the security is
impaired.
3. Fair
Value Measurements
Fair
Value Hierarchy
In
accordance with fair value measurements and disclosures, we categorized our
financial instruments, based on the priority of the observable and market-based
data for valuation technique, into a three-level fair value hierarchy. The fair
value hierarchy gives the highest priority to quoted prices with readily
available independent data in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable market inputs (Level 3). Our
valuation techniques have not changed from December 31, 2008, and
ultimately management determines fair value.
When
various inputs for measurement fall within different levels of the fair value
hierarchy, the lowest observable input that has a significant impact on fair
value measurement is used.
Financial
instruments are categorized based upon the following characteristics or inputs
to the valuation techniques:
|
·
|
Level
1 – Financial assets and liabilities for which inputs are observable and
are obtained from reliable quoted prices for identical assets or
liabilities in actively traded markets. This is the most reliable fair
value measurement and includes, for example, active exchange-traded equity
securities.
|
|
·
|
Level
2 – Financial assets and liabilities for which values are based on quoted
prices in markets that are not active or for which values are based on
similar assets and liabilities that are actively traded. This also
includes pricing models for which the inputs are corroborated by market
data.
|
|
·
|
Level
3 – Financial assets and liabilities for which values are based on prices
or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. Level 3 inputs include
the following:
|
|
o
|
Quotes
from brokers or other external sources that are not considered
binding;
|
|
o
|
Quotes
from brokers or other external sources where it can not be determined that
market participants would in fact transact for the asset or liability at
the quoted price;
|
|
o
|
Quotes
from brokers or other external sources where the inputs are not deemed
observable.
|
We
conduct a thorough review of fair value hierarchy classifications on a quarterly
basis. Reclassification of certain financial instruments may occur when input
observability changes. As noted below in the Level 3 disclosure table,
reclassifications are reported as transfers in/out of the Level 3 category as of
the beginning of the quarter in which the reclassification
occurred.
The
following tables illustrate the fair value hierarchy for those assets measured
at fair value on a recurring basis for the periods ended December 31, 2009, and
December 31, 2008. We do not have any material liabilities carried at fair
value. There were also no significant transfers between Level 1 or Level
2.
|
|
Asset fair value measurements at December 31, 2009 using:
|
|
(In millions)
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Total
|
|
Fixed
maturities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities
|
|
$ |
- |
|
|
$ |
4,314 |
|
|
$ |
27 |
|
|
$ |
4,341 |
|
Foreign
government
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
3 |
|
U.S.
Treasury and U.S. government agencies
|
|
|
4 |
|
|
|
347 |
|
|
|
- |
|
|
|
351 |
|
Collateralized
mortgage obligations
|
|
|
- |
|
|
|
31 |
|
|
|
- |
|
|
|
31 |
|
States,
municipalities and political subdivisions
|
|
|
- |
|
|
|
3,125 |
|
|
|
4 |
|
|
|
3,129 |
|
Taxable
fixed maturities separate accounts
|
|
|
- |
|
|
|
555 |
|
|
|
- |
|
|
|
555 |
|
Total
|
|
|
4 |
|
|
|
8,375 |
|
|
|
31 |
|
|
|
8,410 |
|
Common
equities, available for sale
|
|
|
2,474 |
|
|
|
134 |
|
|
|
- |
|
|
|
2,608 |
|
Preferred
equities, available for sale
|
|
|
- |
|
|
|
88 |
|
|
|
5 |
|
|
|
93 |
|
Short-term
investments
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
Top
Hat Savings Plan
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
Total
|
|
$ |
2,485 |
|
|
$ |
8,603 |
|
|
$ |
36 |
|
|
$ |
11,124 |
|
|
|
Asset fair value measurements at December 31, 2008 using:
|
|
(In millions)
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Total
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
fixed maturities
|
|
$ |
395 |
|
|
$ |
2,619 |
|
|
$ |
50 |
|
|
$ |
3,064 |
|
Taxable
fixed maturities separate accounts
|
|
|
65 |
|
|
|
422 |
|
|
|
6 |
|
|
|
493 |
|
Tax-exempt
fixed maturities
|
|
|
- |
|
|
|
2,728 |
|
|
|
5 |
|
|
|
2,733 |
|
Common
equities
|
|
|
2,657 |
|
|
|
- |
|
|
|
64 |
|
|
|
2,721 |
|
Preferred
equities
|
|
|
- |
|
|
|
153 |
|
|
|
22 |
|
|
|
175 |
|
Collateralized
mortgage obligations
|
|
|
- |
|
|
|
30 |
|
|
|
- |
|
|
|
30 |
|
Short-term
investments
|
|
|
- |
|
|
|
84 |
|
|
|
- |
|
|
|
84 |
|
Top
Hat Savings Plan
|
|
|
4 |
|
|
|
1 |
|
|
|
- |
|
|
|
5 |
|
Total
|
|
$ |
3,121 |
|
|
$ |
6,037 |
|
|
$ |
147 |
|
|
$ |
9,305 |
|
Each
financial instrument that was deemed to have significant unobservable inputs
when determining valuation is summarized in the tables below by security type
with a summary of changes in fair value for the year ended December 31,
2009 and 2008. As of December 31, 2009, total Level 3 assets were less than
1 percent of financial assets measured at fair value compared with 1.6
percent at December 31, 2008.
|
|
Asset fair value measurements using significant unobservable inputs (Level 3)
|
|
(In millions)
|
|
Corporate
fixed
maturities
|
|
|
Taxable fixed
maturities-
separate
accounts
|
|
|
States, municipalities
and
political subdivisions
fixed maturities
|
|
|
Common
equities
|
|
|
Preferred
equities
|
|
|
Total
|
|
Beginning
balance, January 1, 2009
|
|
$ |
50 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
64 |
|
|
$ |
22 |
|
|
$ |
147 |
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
(3 |
) |
Included
in other comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
5 |
|
|
|
2 |
|
Purchases,
sales, issuances and settlements
|
|
|
5 |
|
|
|
- |
|
|
|
(1 |
) |
|
|
(61 |
) |
|
|
(4 |
) |
|
|
(61 |
) |
Transfers
in and/or out of Level 3
|
|
|
(28 |
) |
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(15 |
) |
|
|
(49 |
) |
Ending
balance, December 31, 2009
|
|
$ |
27 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
36 |
|
|
|
Asset fair value measurements using significant unobservable inputs (Level 3)
|
|
(In millions)
|
|
Taxable
fixed
maturities
|
|
|
Taxable fixed
maturities-
separate accounts
|
|
|
Tax-exempt
fixed
maturities
|
|
|
Common
equities
|
|
|
Preferred
equities
|
|
|
Total
|
|
Beginning
balance, January 1, 2008
|
|
$ |
85 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
59 |
|
|
$ |
58 |
|
|
$ |
210 |
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
(4 |
) |
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(21 |
) |
Included
in other comprehensive income
|
|
|
(6 |
) |
|
|
1 |
|
|
|
- |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
(2 |
) |
Purchases,
sales, issuances and settlements
|
|
|
(18 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9 |
) |
|
|
(27 |
) |
Transfers
in and/or out of Level 3
|
|
|
(7 |
) |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
(9 |
) |
|
|
(13 |
) |
Ending
balance, December 31, 2008
|
|
$ |
50 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
64 |
|
|
$ |
22 |
|
|
$ |
147 |
|
For the
year ended December 31, 2009, two preferred equity securities totaling $15
million were transferred from Level 3 to Level 2. There was also a $3
million OTTI of one preferred equity during the first quarter of 2009. As a
result of the change in use of observable or unobservable inputs throughout
2009,
corporate
fixed-maturity securities decreased $28 million as nine securities totaling
$35 million transferred from Level 3 to Level 2 and two securities
totaling $7 million transferred from Level 2 to Level 3. At
December 31, 2009, total fair value of assets priced with broker
quotes and other non-observable market inputs for the fair value measurements
and disclosures was $36 million.
4.
Deferred Acquisition Costs
This
table summarizes components of our deferred policy acquisition costs
asset:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Deferred
policy acquisition costs asset at beginning of year
|
|
$ |
509 |
|
|
$ |
461 |
|
|
$ |
453 |
|
Capitalized
deferred policy acquisition costs
|
|
|
650 |
|
|
|
649 |
|
|
|
666 |
|
Amortized
deferred policy acquisition costs
|
|
|
(638 |
) |
|
|
(632 |
) |
|
|
(657 |
) |
Amortized
shadow deferred policy acquisition costs
|
|
|
(40 |
) |
|
|
31 |
|
|
|
(1 |
) |
Deferred
policy acquisition costs asset at end of year
|
|
$ |
481 |
|
|
$ |
509 |
|
|
$ |
461 |
|
5. Property
Casualty Loss And Loss Expenses
This
table summarizes our consolidated property casualty loss and loss
expense reserves:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Gross
loss and loss expense reserves, January 1,
|
|
$ |
4,040 |
|
|
$ |
3,925 |
|
|
$ |
3,860 |
|
Less
reinsurance receivable
|
|
|
542 |
|
|
|
528 |
|
|
|
504 |
|
Net
loss and loss expense reserves, January 1,
|
|
|
3,498 |
|
|
|
3,397 |
|
|
|
3,356 |
|
Net
incurred loss and loss expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year
|
|
|
2,274 |
|
|
|
2,379 |
|
|
|
2,076 |
|
Prior
accident years
|
|
|
(188 |
) |
|
|
(323 |
) |
|
|
(244 |
) |
Total
incurred
|
|
|
2,086 |
|
|
|
2,056 |
|
|
|
1,832 |
|
Net
paid loss and loss expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year
|
|
|
929 |
|
|
|
976 |
|
|
|
785 |
|
Prior
accident years
|
|
|
994 |
|
|
|
979 |
|
|
|
1,006 |
|
Total
paid
|
|
|
1,923 |
|
|
|
1,955 |
|
|
|
1,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss and loss expense reserves, December 31
|
|
|
3,661 |
|
|
|
3,498 |
|
|
|
3,397 |
|
Plus
reinsurance receivable
|
|
|
435 |
|
|
|
542 |
|
|
|
528 |
|
Gross
loss and loss expense reserves, December 31
|
|
$ |
4,096 |
|
|
$ |
4,040 |
|
|
$ |
3,925 |
|
We use
actuarial methods, models, and judgment to estimate, as of a financial statement
date, the property casualty loss and loss expense reserves required to pay
for and settle all outstanding insured claims, including incurred but not
reported (IBNR) claims, as of that date. The actuarial estimate is subject
to review and adjustment by an inter-departmental committee that includes
actuarial management and is familiar with relevant company and industry
business, claims, and underwriting trends, as well as general economic and legal
trends, that could affect future loss and loss
expense payments.
Because
of changes in estimates of insured events in prior years, we decreased the
provision for loss and loss expenses by $188 million, $323 million and $244
million in calendar years 2009, 2008 and 2007. These decreases are partly due to
the effects of settling reported (case) and unreported (IBNR) reserves
established in prior years for amounts less than expected. The reserve for loss
and loss expenses in the consolidated balance sheets also includes $46 million
for both 2009 and 2008, and $42 million at December 31, 2007, for certain
life and health losses.
6. Life
Policy Reserves
We
establish the reserves for traditional life insurance policies based on expected
expenses, mortality, morbidity, withdrawal rates and investment yields,
including a provision for uncertainty. Once these assumptions are established,
they generally are maintained throughout the lives of the contracts.
We use both our own experience and industry experience, adjusted for
historical trends, in arriving at our assumptions for expected mortality,
morbidity and withdrawal rates as well as for expected expenses. We base
our assumptions for expected investment income on our own experience adjusted
for current economic conditions.
We
establish reserves for the company’s universal life, deferred annuity and
investment contracts equal to the cumulative account balances, which include
premium deposits plus credited interest less charges and withdrawals. Some of
our universal life policies contain no-lapse guarantee provisions. For these
policies, we establish a reserve in addition to the account balance, based
on expected no-lapse guarantee benefits and expected policy
assessments.
Here is a
summary of our life policy reserves:
|
|
At
December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
Ordinary/traditional
life
|
|
$ |
579 |
|
|
$ |
528 |
|
Universal
life
|
|
|
450 |
|
|
|
442 |
|
Deferred
annuities
|
|
|
539 |
|
|
|
374 |
|
Investment
contracts
|
|
|
197 |
|
|
|
195 |
|
Other
|
|
|
18 |
|
|
|
12 |
|
Total
|
|
$ |
1,783 |
|
|
$ |
1,551 |
|
Reserves
for deferred annuities and other investment contracts were $736 million and $569
million for December 31, 2009, and December 31, 2008, respectively. Fair value
for these deferred annuities and investment contracts was $737 million and
$460 million for December 31, 2009, and December 31, 2008,
respectively. Fair values of liabilities associated with certain investment
contracts are calculated based upon internally developed models because active,
observable markets do not exist for those items. To determine the fair value, we
make the following significant assumptions: (1) the discount rates used to
calculate the present value of expected payments are the risk-free spot rates
plus an A3 rated bond spread for financial issuers as of December 31, 2009,
to account for non-performance risk; (2) the rate of interest credited to
policyholders is the portfolio net earned interest rate less a spread for
expenses and profit; and (3) additional lapses occur when the credited interest
rate is exceeded by an assumed competitor credited rate, which is a function of
the risk-free rate of the economic scenario being modeled. The fair value of
life policy loans outstanding principal and interest approximated
$44 million, compared with book value of $40 million reported in the
consolidated balance sheets as of December 31, 2009.
7. Notes
Payable
At
December 31, 2009 and 2008, we had two lines of credit with commercial banks
with an aggregate borrowing capacity of $225 million. Our note payable
balance, which approximates fair value, was $49 million at year-end 2009
and at year-end 2008. The $75 million line of credit expires August of 2010. The
$150 million line of credit with a $49 million balance expires July of
2012. We had no compensating balance requirements on short-term debt for either
2009 or 2008. Interest rates charged on borrowings ranged from 2.58 percent
to 6.86 percent during 2009.
8. Senior
Debt
This
table summarizes the principal amounts of our long-term debt excluding
unamortized discounts:
(In
millions)
|
|
|
|
|
|
At
December 31,
|
|
Interest rate
|
|
Year of issue
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
6.900%
|
|
1998
|
|
Senior
debentures, due 2028
|
|
$ |
28 |
|
|
$ |
28 |
|
6.920%
|
|
2005
|
|
Senior
debentures, due 2028
|
|
|
391 |
|
|
|
392 |
|
6.125%
|
|
2004
|
|
Senior
notes, due 2034
|
|
|
374 |
|
|
|
375 |
|
|
|
|
|
Total
|
|
$ |
793 |
|
|
$ |
795 |
|
The fair
value of our senior debt approximated $740 million at year-end 2009 compared
with $595 million at year-end 2008. Fair value for 2009 and 2008 was
determined under ASC 820 based on market pricing of these or similar debt
instruments that are actively trading. Fair value can vary with macro economic
concerns. Regardless of the fluctuations in fair value, the outstanding
principal amount of our long-term debt was reduced slightly from year-end 2008.
None of the notes are encumbered by rating triggers.
9. Shareholders’
Equity And Dividend Restrictions
Our
insurance subsidiary declared dividends to the parent company of $50 million in
2009, $160 million in 2008 and $420 million in 2007. State regulatory
requirements restrict the dividends insurance subsidiaries can pay. Generally,
the most our insurance subsidiaries can pay without prior regulatory approval is
the greater of 10 percent of policyholder surplus or 100 percent of statutory
net income for the prior calendar year. Dividends exceeding these
limitations may be paid only with approval of the insurance department of the
domiciliary state. During 2010, the total dividends that our lead insurance
subsidiary may pay to our parent company without regulatory approval is
approximately $365 million.
As of
December 31, 2009, 7.7 million shares of common stock were available for future
equity award grants.
Declared
cash dividends per share were $1.57, $1.56 and $1.42 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Accumulated
Other Comprehensive Income
The
change in unrealized gains and losses on investments, pension obligations and
derivatives included:
|
|
Years ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Before
|
|
|
Income
|
|
|
|
|
|
Before
|
|
|
Income
|
|
|
|
|
|
Before
|
|
|
Income
|
|
|
|
|
(In
millions) |
|
tax
|
|
|
tax
|
|
|
Net
|
|
|
tax
|
|
|
tax
|
|
|
Net
|
|
|
tax
|
|
|
tax
|
|
|
Net
|
|
Accumulated
unrealized gains on securities available for sale at January
1,
|
|
$ |
570 |
|
|
$ |
189 |
|
|
$ |
381 |
|
|
$ |
3,336 |
|
|
$ |
1,161 |
|
|
$ |
2,175 |
|
|
$ |
5,241 |
|
|
$ |
1,830 |
|
|
$ |
3,411 |
|
Cumulative
effect of change in accounting for hybrid financial
securities
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
(5 |
) |
Adjusted
accumulated unrealized gains on securities available for sale at January
1,
|
|
|
570 |
|
|
|
189 |
|
|
|
381 |
|
|
|
3,336 |
|
|
|
1,161 |
|
|
|
2,175 |
|
|
|
5,234 |
|
|
|
1,828 |
|
|
|
3,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase
in unrealized gains
|
|
|
936 |
|
|
|
330 |
|
|
|
606 |
|
|
|
(2,618 |
) |
|
|
(915 |
) |
|
|
(1,703 |
) |
|
|
(1,515 |
) |
|
|
(530 |
) |
|
|
(985 |
) |
Cumulative
effect of change in accounting for other-than-temporary
impairments
|
|
|
(163 |
) |
|
|
(57 |
) |
|
|
(106 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Reclassification
adjustment for (gains) losses included in net income
|
|
|
(336 |
) |
|
|
(119 |
) |
|
|
(217 |
) |
|
|
(138 |
) |
|
|
(53 |
) |
|
|
(85 |
) |
|
|
(382 |
) |
|
|
(137 |
) |
|
|
(245 |
) |
Adjustment to
deferred acquisition costs and life policy reserves
|
|
|
5 |
|
|
|
2 |
|
|
|
3 |
|
|
|
(10 |
) |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
0 |
|
|
|
(1 |
) |
Effect on
other comprehensive income
|
|
|
442 |
|
|
|
156 |
|
|
|
286 |
|
|
|
(2,766 |
) |
|
|
(972 |
) |
|
|
(1,794 |
) |
|
|
(1,898 |
) |
|
|
(667 |
) |
|
|
(1,231 |
) |
Accumulated
unrealized gains on securities available for sale at December
31,
|
|
$ |
1,012 |
|
|
$ |
345 |
|
|
$ |
667 |
|
|
$ |
570 |
|
|
$ |
189 |
|
|
$ |
381 |
|
|
$ |
3,336 |
|
|
$ |
1,161 |
|
|
$ |
2,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
unrealized losses for pension obligations at January 1,
|
|
$ |
(52 |
) |
|
$ |
(18 |
) |
|
$ |
(34 |
) |
|
$ |
(37 |
) |
|
$ |
(13 |
) |
|
$ |
(24 |
) |
|
$ |
(49 |
) |
|
$ |
(17 |
) |
|
$ |
(32 |
) |
Change in
pension obligations
|
|
|
(14 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
12 |
|
|
|
4 |
|
|
|
8 |
|
Accumulated
unrealized losses for pension obligations at December 31,
|
|
$ |
(66 |
) |
|
$ |
(23 |
) |
|
$ |
(43 |
) |
|
$ |
(52 |
) |
|
$ |
(18 |
) |
|
$ |
(34 |
) |
|
$ |
(37 |
) |
|
$ |
(13 |
) |
|
$ |
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income at January 1,
|
|
$ |
518 |
|
|
$ |
171 |
|
|
$ |
347 |
|
|
$ |
3,299 |
|
|
$ |
1,148 |
|
|
$ |
2,151 |
|
|
$ |
5,185 |
|
|
$ |
1,811 |
|
|
$ |
3,374 |
|
Unrealized
investment gains and losses and other adjustments
|
|
|
442 |
|
|
|
156 |
|
|
|
286 |
|
|
|
(2,766 |
) |
|
|
(972 |
) |
|
|
(1,794 |
) |
|
|
(1,898 |
) |
|
|
(667 |
) |
|
|
(1,231 |
) |
Change in
pension obligations
|
|
|
(14 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
12 |
|
|
|
4 |
|
|
|
8 |
|
Accumulated
other comprehensive income at December 31,
|
|
$ |
946 |
|
|
$ |
322 |
|
|
$ |
624 |
|
|
$ |
518 |
|
|
$ |
171 |
|
|
$ |
347 |
|
|
$ |
3,299 |
|
|
$ |
1,148 |
|
|
$ |
2,151 |
|
10. Reinsurance
Our
consolidated statements of income include earned consolidated property casualty
insurance premiums on assumed and ceded business:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Direct
earned premiums
|
|
$ |
3,068 |
|
|
$ |
3,175 |
|
|
$ |
3,278 |
|
Assumed
earned premiums
|
|
|
12 |
|
|
|
13 |
|
|
|
22 |
|
Ceded
earned premiums
|
|
|
(169 |
) |
|
|
(178 |
) |
|
|
(175 |
) |
Net
earned premiums
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
|
3,125 |
|
Our
consolidated statements of income incurred consolidated property casualty
insurance loss and loss expenses on assumed and ceded business:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Direct
incurred loss and loss expenses
|
|
$ |
2,135 |
|
|
$ |
2,172 |
|
|
$ |
1,920 |
|
Assumed
incurred loss and loss expenses
|
|
|
10 |
|
|
|
5 |
|
|
|
17 |
|
Ceded
incurred loss and loss expenses
|
|
|
(63 |
) |
|
|
(126 |
) |
|
|
(107 |
) |
Net
incurred loss and loss expenses
|
|
$ |
2,082 |
|
|
$ |
2,051 |
|
|
$ |
1,830 |
|
Our
consolidated statements of income include earned life insurance premiums on
assumed and ceded business:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Direct
earned premiums
|
|
$ |
196 |
|
|
$ |
180 |
|
|
$ |
178 |
|
Assumed
earned premiums
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Ceded
earned premiums
|
|
|
(53 |
) |
|
|
(54 |
) |
|
|
(53 |
) |
Net
earned premiums
|
|
$ |
143 |
|
|
$ |
126 |
|
|
$ |
125 |
|
Our
consolidated statements of income include life insurance contract holders’
benefits incurred on assumed and ceded business:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Direct
contract holders' benefits incurred
|
|
$ |
201 |
|
|
$ |
175 |
|
|
$ |
173 |
|
Assumed
contract holders' benefits incurred
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Ceded
contract holders' benefits incurred
|
|
|
(41 |
) |
|
|
(33 |
) |
|
|
(40 |
) |
Net
incurred loss and loss expenses
|
|
$ |
160 |
|
|
$ |
142 |
|
|
$ |
133 |
|
11. Income
Taxes
Deferred
tax assets and liabilities reflect temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amount recognized for tax purposes. The significant components of deferred tax
assets and liabilities included in the consolidated balance sheets at
December 31 were as follows:
|
|
At
December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Loss
and loss expense reserves
|
|
$ |
182 |
|
|
$ |
196 |
|
Unearned
premiums
|
|
|
104 |
|
|
|
107 |
|
Investments
|
|
|
40 |
|
|
|
121 |
|
Other
|
|
|
31 |
|
|
|
41 |
|
Total
|
|
|
357 |
|
|
|
465 |
|
Deferred
tax liabilities:
|
|
Unrealized
gains on investments and derivatives
|
|
|
(332 |
) |
|
|
(182 |
) |
Deferred
acquisition costs
|
|
|
(152 |
) |
|
|
(149 |
) |
Other
|
|
|
(25 |
) |
|
|
(8 |
) |
Total
|
|
|
(509 |
) |
|
|
(339 |
) |
Net
deferred tax (liability) asset
|
|
$ |
(152 |
) |
|
$ |
126 |
|
The
provision for federal income taxes is based upon filing a consolidated income
tax return for the company and its subsidiaries. As of December 31, 2009, we had
no operating or capital loss carry forwards.
The
differences between the 35 percent statutory income tax rate and our effective
income tax rate were as follows:
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Tax
at statutory rate
|
|
|
35.0
|
% |
|
|
35.0
|
% |
|
|
35.0
|
% |
Increase
(decrease) resulting from:
|
|
Tax-exempt
municipal bonds
|
|
|
(6.5 |
) |
|
|
(6.2 |
) |
|
|
(2.7 |
) |
Dividend
received exclusion
|
|
|
(3.4 |
) |
|
|
(8.9 |
) |
|
|
(4.7 |
) |
Other
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
0.7 |
|
Effective
rate
|
|
|
25.7
|
% |
|
|
20.7
|
% |
|
|
28.3
|
% |
ASC
740, Income Taxes
As a
result of positions taken in our 2008 federal tax return filed with the IRS, we
believe it is more likely than not that tax positions for which we previously
carried a liability for unrecognized tax benefits will be sustained upon
examination by the IRS.
Below is
the unrecognized tax benefit for the years ended December
31:
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Gross
unrecognized tax benefits at January 1,
|
|
$ |
2 |
|
|
$ |
14 |
|
|
$ |
25 |
|
Gross
increase in prior year positions
|
|
|
0 |
|
|
|
3 |
|
|
|
0 |
|
Gross
decrease in prior year positions
|
|
|
(2 |
) |
|
|
0 |
|
|
|
(12 |
) |
Gross
increase in current year positions
|
|
|
0 |
|
|
|
2 |
|
|
|
1 |
|
Settlements
with tax authorities
|
|
|
0 |
|
|
|
(17 |
) |
|
|
0 |
|
Gross
unrecognized tax benefits at December 31,
|
|
$ |
0 |
|
|
$ |
2 |
|
|
$ |
14 |
|
In May
2008, the IRS concluded the examination phase of its audit of our 2005 and 2006
tax years and presented us with adjustments primarily related to the valuation
of our loss reserves. In October 2008, we reached agreement with the IRS
settling all issues related to the 2005 and 2006 tax years. As a result of the
IRS agreement for tax years 2005 and 2006, management refined certain
assumptions used to calculate the unrecognized tax benefits associated with loss
reserves, resulting in a revised measurement of the unrecognized tax benefits as
of December 31, 2008.
The IRS
has begun the audit of tax years 2007 and 2008. It is reasonably possible that a
change in our liability for unrecognized tax benefits may occur once the
examination phase of this audit has concluded. At this time, we can neither
estimate the settlement date of, nor quantify an estimated range for any
potential change to our liability for unrecognized tax benefits relating to
these years.
In
addition to our IRS filings, we file income tax returns in various state
jurisdictions. Material amounts of income tax are paid to Ohio, Illinois and
Florida. In December 2009, the State of Illinois began an income tax audit of
amended returns for tax years 2002 through 2006 as well as an audit of the
return filed for tax year 2007. Although we have not yet been presented
with the final examination reports for any of these years, we do not expect any
material changes as a result of the Illinois audits. With the exception of
Illinois, no other state audits are currently under way nor are we aware of any
audits pending. Excluding years under examination by Illinois, tax years 2006
and forward remain open for state examination.
12. Net
Income Per Common Share
Basic
earnings per share are computed based on the weighted average number of shares
outstanding. Diluted earnings per share are computed based on the weighted
average number of common and dilutive potential common shares outstanding. We
have adjusted shares and earnings per share to reflect all stock splits and
dividends prior to December 31, 2009.
Here are
calculations for basic and diluted earnings per share:
|
|
Years
ended December 31,
|
|
(In millions except per share
data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income—basic and diluted
|
|
$ |
432 |
|
|
$ |
429 |
|
|
$ |
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
162,595,041 |
|
|
|
163,150,329 |
|
|
|
170,595,204 |
|
Effect
of stock based awards
|
|
|
271,822 |
|
|
|
212,080 |
|
|
|
1,572,248 |
|
Adjusted
diluted weighted-average shares
|
|
|
162,866,863 |
|
|
|
163,362,409 |
|
|
|
172,167,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.66 |
|
|
$ |
2.63 |
|
|
$ |
5.01 |
|
Diluted
|
|
|
2.65 |
|
|
|
2.62 |
|
|
|
4.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of anti-dilutive stock based awards
|
|
|
9,875,411 |
|
|
|
9,781,652 |
|
|
|
1,870,579 |
|
Exercise
price of anti-dilutive stock based awards
|
|
$ |
25.08-45.26 |
|
|
$ |
25.08-45.26 |
|
|
$ |
44.79-45.26 |
|
The
current sources of dilution of our common shares are certain equity-based awards
as discussed in Note 17 Stock-Based Associate Compensation Plans, Page 113.
The above table shows the number of anti-dilutive stock-based awards at year-end
2009, 2008 and 2007. We did not include these stock-based awards in the
computation of net income per common share (diluted) because their exercise
would have anti-dilutive effects.
13. Employee
Retirement Benefits
We
sponsor a defined benefit pension plan and a defined contribution plan (401(k)
savings plan). During 2008, we changed the form of retirement benefit we offer
some associates to a company match on contributions to the 401(k) plan from the
defined benefit pension plan. We froze entry into the pension plan for new
associates during 2008. Only participants 40 years of age or older could elect
to continue to participate. For participants remaining in the pension plan, we
continue to contribute to fund future benefit obligations. Benefits for the
defined benefit pension plan are based on years of credited service and
compensation level. Contributions are based on the prescribed method defined in
the Pension Protection Act. Our pension expense is based on certain actuarial
assumptions and also is composed of several components that are determined using
the projected unit credit actuarial cost method.
We also
maintain a supplemental executive retirement plan (SERP) with liabilities of
approximately $5 million at year-end 2009 and $6 million at year-end 2008.
The SERP is included in the obligation and expense amounts in the tables
below. The company also makes available to a select group of associates the
Cincinnati Financial Corporation Top Hat Savings Plan, a non-qualified deferred
compensation plan.
For any
participant who left the pension plan, benefit accruals were frozen during 2008.
We transferred $60 million of the pension plan’s accumulated benefit
obligation during 2008 to an intermediary spin-off plan to facilitate the
partial curtailment and settlement for these participants. For SERP participants
who chose to leave the defined benefit pension plan, benefit accruals were
frozen in the SERP as of December 31, 2008. During 2009, the frozen accrued
benefit for those participants, collectively amounting to approximately
$1 million, transferred to the Top Hat Savings Plan. Beginning in 2009, for
these associates, the company has begun matching deferrals to the Top Hat
Savings Plan up to the first 6 percent of an associate’s compensation that
exceeds the compensation limit specified by the Internal Revenue Code of 1986,
as amended.
Pursuant
to ASC 715-30 we recognized expense of $3 million during 2008 in the
consolidated statement of income associated with the partial termination of the
qualified pension plan. In addition, we recognized $27 million in the
consolidated statement of income during 2008 for a settlement loss associated
with the payout to the participants who left the pension plan of the obligation
held in their behalf. Included in the charge is the contribution of
$24 million to complete funding of benefits that were distributed in 2008
to participants leaving the pension plan.
Matching
contributions to our sponsored 401(k) plan, which we began making during 2008,
totaled $7 million and $3 million during the years 2009 and 2008.
Associates who are not accruing benefits under the pension plan are eligible to
receive the company match of up to 6 percent of cash compensation. We also
pay all operating expenses for the 401(k) plan. Participants vest in the
company match for the 401(k) plan and Top Hat Savings Plan after three
years of eligible service.
Defined
Benefit Pension Plan Assumptions
Key
assumptions used in developing the 2009 net pension obligation were a
6.10 percent discount rate and rates of compensation increases ranging from
4.00 percent to 6.00 percent. To determine the discount rate, the
plan’s particular liability characteristics – the amounts, timing and interest
sensitivity of expected benefit payments – were evaluated and then matched to a
yield curve based on actual high-quality corporate bonds across a full maturity
spectrum. Once the plan’s projected cash flows matched the yield curve, a
present value was developed, which was then calibrated to a single-equivalent
discount rate. That discount rate, when applied to a single sum, would
generate the necessary cash flows to pay benefits when due. We increased the
rate by 0.10 percentage points due to market interest rate conditions at
year-end 2009. We based the rates of compensation increase on the company’s
historical data.
Key
assumptions used in developing the 2009 net pension expense were a
6.00 percent discount rate, an 8.00 percent expected return on
plan assets and rates of compensation increases ranging from 4.00 percent
to 6.00 percent. The 8.00 percent return on plan assets assumption is
consistent with current expectations of inflation and based partially on the
fact that our common stock holdings pay dividends. We believe this rate is
representative of the expected long-term rate of return on these assets. These
assumptions were consistent with the prior year, except that the discount rate
was decreased by 0.25 percentage points due to market interest rate
conditions at the beginning of the year.
Here is a
summary of the weighted-average assumptions we use to determine our net expense
for the plan:
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.00
|
% |
|
|
6.25
|
% |
|
|
5.75
|
% |
|
|
6.00
|
% |
|
|
6.25
|
% |
|
|
5.75
|
% |
Expected
return on plan assets
|
|
|
8.00 |
|
|
|
8.00 |
|
|
|
8.00 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Rate
of compensation increase
|
|
|
4-6 |
|
|
|
4-6 |
|
|
|
4-6 |
|
|
|
4-6 |
|
|
|
4-6 |
|
|
|
4-6 |
|
Benefit
obligation activity using an actuarial measurement date for our qualified plan
and SERP at December 31 follows:
|
|
At
December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Change
in projected benefit obligation:
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
206 |
|
|
$ |
270 |
|
Service
cost
|
|
|
10 |
|
|
|
14 |
|
Interest
cost
|
|
|
12 |
|
|
|
17 |
|
Actuarial
loss
|
|
|
2 |
|
|
|
21 |
|
Benefits
paid
|
|
|
(7 |
) |
|
|
(11 |
) |
Curtailment
|
|
|
0 |
|
|
|
(27 |
) |
Settlement
|
|
|
(2 |
) |
|
|
(78 |
) |
Projected
benefit obligation at end of year
|
|
$ |
221 |
|
|
$ |
206 |
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$ |
186 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$ |
118 |
|
|
$ |
210 |
|
Actual
return on plan assets
|
|
|
0 |
|
|
|
(36 |
) |
Employer
contributions
|
|
|
33 |
|
|
|
33 |
|
Benefits
paid
|
|
|
(7 |
) |
|
|
(11 |
) |
Settlement
|
|
|
0 |
|
|
|
(78 |
) |
Fair
value of plan assets at end of year
|
|
$ |
144 |
|
|
$ |
118 |
|
|
|
|
|
|
|
|
|
|
Unfunded
status:
|
|
|
|
|
|
|
|
|
Unfunded
status at end of year
|
|
$ |
(77 |
) |
|
$ |
(88 |
) |
A
reconciliation follows of the funded status for our qualified plan and SERP at
the end of the measurement period to the amounts recognized in the consolidated
balance sheets at December 31:
|
|
At
December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Amounts
recognized in the consolidated balance sheets consists of:
|
|
Pension
liability
|
|
$ |
(77 |
) |
|
$ |
(88 |
) |
Total
|
|
$ |
(77 |
) |
|
$ |
(88 |
) |
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive
income
not yet recognized as a component of net
periodic
benefit costs consist of:
|
|
Net
actuarial loss
|
|
$ |
63 |
|
|
$ |
47 |
|
Prior
service cost
|
|
|
3 |
|
|
|
5 |
|
Total
|
|
$ |
66 |
|
|
$ |
52 |
|
The
weighted-average assumptions used to determine benefit obligations for our
qualified plan and SERP at December 31 follows:
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
6.10
|
% |
|
|
6.00
|
% |
Rate
of compensation increase
|
|
|
4-6 |
|
|
|
4-6 |
|
We
evaluate our pension plan assumptions annually and update them as necessary. The
discount rate assumptions for our benefit obligation track with high grade
corporate bond yields and yearly adjustments reflect any changes to those bond
yields. Compensation increase assumptions reflect historical calendar year
compensation increases.
Here are
the components of our net periodic benefit cost, as well as other changes in
plan assets and benefit obligations recognized in other comprehensive income for
our qualified plan and SERP at December 31:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
10 |
|
|
$ |
14 |
|
|
$ |
17 |
|
Interest
cost
|
|
|
12 |
|
|
|
17 |
|
|
|
16 |
|
Expected
return on plan assets
|
|
|
(12 |
) |
|
|
(16 |
) |
|
|
(15 |
) |
Amortization
of actuarial loss, prior service cost and transition asset
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
Curtailment
|
|
|
0 |
|
|
|
3 |
|
|
|
0 |
|
Settlement
|
|
|
0 |
|
|
|
27 |
|
|
|
0 |
|
Net
periodic benefit cost
|
|
$ |
11 |
|
|
$ |
47 |
|
|
$ |
21 |
|
|
|
Years ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current
year actuarial loss (gain)
|
|
$ |
15 |
|
|
$ |
73 |
|
|
$ |
(10 |
) |
Recognition
of actuarial (loss) gain
|
|
|
0 |
|
|
|
(54 |
) |
|
|
(1 |
) |
Recognition
of prior service cost
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Total
recognized in other comprehensive income
|
|
$ |
14 |
|
|
$ |
15 |
|
|
$ |
(12 |
) |
The total
recognized in net periodic benefit cost and other comprehensive income was
$25 million, $62 million and $9 million for the periods ended December
31, 2009, 2008 and 2007, respectively. The estimated costs to be amortized from
accumulated other comprehensive income into net periodic benefit cost over the
next year for our plans are a $2 million actuarial loss and a $1 million prior
service cost.
Defined
Benefit Pension Plan Assets
The
pension plan assets are managed to maximize total return over the long term
while providing sufficient liquidity and current return to satisfy the cash flow
requirements of the plan. The plan’s day-to-day investment decisions are managed
by our internal investment department; however, overall investment strategies
are agreed upon by our employee benefits committee.
Reflecting
the long-term time horizon of pension obligations, during 2009 we allocated
60 percent to 65 percent of the pension portfolio to domestic equity
investments, which are priced from highly observable and actively traded
markets. The remainder of the portfolio is allocated to domestic fixed-maturity
investments and cash. Our corporate bond portfolio is investment grade. The plan
does not engage in derivative transactions.
Investments
in securities traded on a national securities exchange are valued at the last
reported sales price on the last business day of the year. Investments in
securities that are traded in active markets are based on quoted market prices
at December 31, 2009 and 2008. Investments in securities that are not
actively
traded are valued based on pricing models which the inputs have been
corroborated by market data at December 31, 2009 and 2008.
The plan,
which ultimately determines fair value, categorized its financial instruments,
based on the priority of the observable and market-based data for valuation
technique, into a three-level fair value hierarchy. The fair value hierarchy
gives the highest priority to quoted prices with readily available independent
data in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable market inputs (Level 3).
When
various inputs for measurement fall within different levels of the fair value
hierarchy, the lowest observable input that has a significant impact on fair
value measurement is used.
Refer to
Note 3, Fair Value Measurements, Page 103 for valuation techniques and
categorization of financial instruments within the pension plan assets. The
methods described may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, while we believe our valuation methods are appropriate and
consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value
measurement.
The
following table illustrates the fair value hierarchy for those assets measured
at fair value on a recurring basis for period ended December 31, 2009. The
pension plan does not have any assets categorized as Level 3. During 2008,
plan assets held were 83 percent equity securities, 4 percent fixed maturities
and 13 percent cash and cash equivalents.
|
|
Asset fair value measurements at December 31, 2009 using:
|
|
(In millions)
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
Total
|
|
Money market fund
|
|
$ |
23 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
23 |
|
Fixed
maturities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities
|
|
|
- |
|
|
|
28 |
|
|
|
- |
|
|
|
28 |
|
States,
municipalities and political subdivisions
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
Total
fixed maturities, available for sale
|
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
29 |
|
Common
equities, available for sale
|
|
|
89 |
|
|
|
- |
|
|
|
- |
|
|
|
89 |
|
Preferred
equities, available for sale
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
Total
|
|
$ |
115 |
|
|
$ |
29 |
|
|
$ |
- |
|
|
$ |
144 |
|
Our
pension plan assets included 642,113 shares of the company’s common stock, which
had a fair value of $17 million and $19 million at December 31, 2009 and 2008,
respectively. The defined benefit pension plan did not purchase or sell any
shares of our common stock during 2009 and 2008. The company paid
$1 million in cash dividends on our common stock to the pension plan in
both 2009 and 2008.
In 2010,
we expect to contribute $25 million to our qualified plan. We expect to make the
following benefit payments for our qualified plan and SERP, reflecting expected
future service:
(In millions)
|
|
Years ended December 31,
|
|
For the years ended December 31,
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
|
2015 - 2019
|
|
Expected
future benefit payments
|
|
$ |
12 |
|
|
$ |
17 |
|
|
$ |
19 |
|
|
$ |
16 |
|
|
$ |
15 |
|
|
$ |
115 |
|
|
14.
|
Statutory
Accounting Information (Unaudited)
|
Insurance
companies use statutory accounting practices (SAP) as prescribed by regulatory
authorities. The primary differences between SAP and GAAP include:
|
·
|
valuation
of unrealized investment gains and
losses,
|
|
·
|
expensing
of policy acquisition costs,
|
|
·
|
actuarial
assumptions for life insurance reserves
and
|
|
·
|
deferred
income taxes based on differences in statutory and taxable
income.
|
Statutory
net income and capital and surplus as determined in accordance with SAP
prescribed or permitted by insurance regulatory authorities for four legal
entities, our insurance subsidiary and its three insurance subsidiaries, are as
follows:
|
|
SAP Net Income (Loss)
|
|
|
Capital and Surplus
|
|
|
|
Years ended December 31,
|
|
|
At December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
The
Cincinnati Insurance Company
|
|
$ |
339 |
|
|
$ |
194 |
|
|
$ |
658 |
|
|
$ |
3,648 |
|
|
$ |
3,360 |
|
The
Cincinnati Casualty Company
|
|
|
29 |
|
|
|
16 |
|
|
|
12 |
|
|
|
254 |
|
|
|
263 |
|
The
Cincinnati Indemnity Company
|
|
|
8 |
|
|
|
2 |
|
|
|
1 |
|
|
|
67 |
|
|
|
66 |
|
The
Cincinnati Specialty Underwriters Insurance Company
|
|
|
(7 |
) |
|
|
(38 |
) |
|
|
0 |
|
|
|
168 |
|
|
|
174 |
|
The
Cincinnati Life Insurance Company
|
|
|
15 |
|
|
|
(70 |
) |
|
|
39 |
|
|
|
300 |
|
|
|
290 |
|
Statutory
capital and surplus for our insurance subsidiary, The Cincinnati Insurance
Company, includes capital and surplus of its four insurance
subsidiaries.
|
15.
|
Transactions
With Affiliated Parties
|
We paid
certain officers and directors, or insurance agencies of which they are
shareholders, commissions of approximately $6 million, $6 million and $7 million
on premium volume of approximately $36 million, $38 million and
$37 million for 2009, 2008 and 2007, respectively.
|
16.
|
Commitments
And Contingent Liabilities
|
In the
ordinary course of conducting business, the company and its subsidiaries are
named as defendants in various legal proceedings. Most of these proceedings are
claims litigation involving the company’s insurance subsidiaries in which the
company is either defending or providing indemnity for third-party claims
brought against insureds who are litigating first-party coverage claims. The
company accounts for
such
activity through the establishment of unpaid loss and loss adjustment expense
reserves. We believe that the ultimate liability, if any, with respect to such
ordinary-course claims litigation, after consideration of provisions made for
potential losses and costs of defense, is immaterial to our consolidated
financial condition, results of operations and cash flows.
The
company and its subsidiaries also are occasionally involved in other legal
actions, some of which assert claims for substantial amounts. These actions
include, among others, putative class actions seeking certification of a state
or national class. Such putative class actions have alleged, for example,
improper reimbursement of medical providers paid under workers’ compensation
insurance policies, erroneous coding of municipal tax locations and excessive
premium charges for uninsured motorist coverage. The company’s insurance
subsidiaries also are occasionally parties to individual actions in which
extra-contractual damages, punitive damages or penalties are sought, such as
claims alleging bad faith in the handling of insurance claims.
On a
quarterly basis, we review the outstanding lawsuits seeking such recourse. Based
on our year-end review, we believe we have valid defenses to each. As a
result, we believe the ultimate liability, if any, with respect to these
lawsuits, after consideration of provisions made for estimated losses, is
immaterial to our consolidated financial position.
Nonetheless,
given the potential for large awards in certain of these actions and the
inherent unpredictability of litigation, an adverse outcome could have a
material adverse effect on the company’s consolidated results of operations or
cash flows.
|
17.
|
Stock-Based
Associate Compensation Plans
|
We
currently have four equity compensation plans that together permit us to grant
various types of equity awards. We currently grant incentive stock options,
non-qualified stock options, service-based restricted stock units and
performance-based restricted stock units under our shareholder-approved plans.
We also have a Holiday Stock Bonus Plan that permits annual awards of one share
of common stock to each full-time associate for each year of service up to a
maximum of 10 shares. One of our equity compensation plans permits us to grant
stock to our outside directors as a component of their annual
compensation.
We use
the modified-prospective-transition method under which we recognize our pretax
and after-tax share-based compensation costs, which are summarized
below:
|
|
Years ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Stock-based
compensation cost
|
|
$ |
10 |
|
|
$ |
15 |
|
|
$ |
14 |
|
Income
tax benefit
|
|
|
3 |
|
|
|
4 |
|
|
|
3 |
|
Stock-based
compensation cost after tax
|
|
$ |
7 |
|
|
$ |
11 |
|
|
$ |
11 |
|
Options
exercised during the year ended December 31, 2009, had no intrinsic value. The
total intrinsic value of options exercised during the years ended
December 31, 2008 and 2007 was $1 million and $8 million,
respectively. (Intrinsic value is the market price less the exercise price.)
Options vested during the years ended December 31, 2009, 2008 and 2007, had no
intrinsic value.
As of
December 31, 2009, we had $11 million of unrecognized total
compensation cost related to non-vested stock options and restricted stock unit
awards. That cost will be recognized over a weighted-average period of 1.5
years.
Stock
options are granted to associates at an exercise price that is equal to the fair
value as reported on the NASDAQ Global Select Market for the grant date and are
exercisable over 10-year periods. The stock options generally vest ratably over
a three-year period. In determining the share-based compensation amounts, we
estimate the fair value of each option granted on the date of grant using the
binomial option-pricing model. We make assumptions in four areas to develop the
binomial option-pricing model:
|
·
|
Weighted-average
expected term is based on historical experience of similar awards with
consideration for current exercise
trends.
|
|
·
|
Expected
volatility is based on our stock price over a historical period that
approximates the
expected term.
|
|
·
|
Dividend
yield is determined by dividing the per share dividend by the stock price
on the date of grant.
|
|
·
|
Risk-free
rates are the implied yield currently available on U.S. Treasury issues
with a remaining term approximating the expected
term.
|
During
2009, we issued our common stock to eligible associates under our Holiday Stock
Bonus Plan. No stock options, service-based or performance-based restricted
stock units were granted to associates during 2009. The following weighted
average assumptions were used for grants issued during 2008 and 2007 in
determining fair value of share-based compensation:
|
|
2009
|
|
2008
|
|
2007
|
|
Weighted
- average expected term
|
|
|
n/a
|
|
7-9
years
|
|
5-7
years
|
|
Expected
volatility
|
|
|
n/a
|
|
20.58-28.52%
|
|
18.29
- 24.14%
|
|
Dividend
yield
|
|
|
n/a
|
|
3.99-6.22%
|
|
3.33%
|
|
Risk-free
rates
|
|
|
n/a
|
|
3.29-3.84%
|
|
4.8-4.81%
|
|
Weighted-average
fair value of options granted during the period
|
|
|
n/a
|
|
$
6.50 |
|
$
9.43 |
|
Here is a
summary of options information:
(Dollars
in millions, shares in thousands)
|
|
Shares
|
|
|
Weighted- average
exercise
|
|
|
Aggregate
intrinsic
value
|
|
2009
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
10,789 |
|
|
$ |
36.31 |
|
|
|
|
Granted
|
|
|
0 |
|
|
|
0.00 |
|
|
|
|
Exercised
|
|
|
(2 |
) |
|
|
27.83 |
|
|
|
|
Forfeited
|
|
|
(912 |
) |
|
|
32.47 |
|
|
|
|
Outstanding
at end of year
|
|
|
9,875 |
|
|
|
36.67 |
|
|
$ |
12 |
|
|
|
|
|
|
|
Options
exercisable at end of period
|
|
|
8,711 |
|
|
$ |
36.99 |
|
|
$ |
4 |
|
Cash
received from the exercise of options was less than $1 million, $4 million and
$19 million for the years ended December 31, 2009, 2008 and 2007, respectively.
We did not realize a tax benefit on options exercised for the years ended
December 31, 2009 and 2008. We realized a $2 million tax benefit on options
exercised for the year ended December 31, 2007.
Options
outstanding and exercisable consisted of the following at December 31,
2009:
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Range of exercise prices
|
|
Shares
|
|
|
Weighted-average
remaining contractual
life
|
|
Weighted-
average
exercise price
|
|
|
Shares
|
|
|
Weighted-
average
exercise price
|
|
$25.00
to $29.99
|
|
|
1,628 |
|
|
|
4.34 |
|
yrs
|
|
$ |
26.77 |
|
|
|
1,107 |
|
|
$ |
26.87 |
|
$30.00
to $34.99
|
|
|
3,044 |
|
|
|
2.08 |
|
yrs
|
|
|
33.39 |
|
|
|
3,044 |
|
|
|
33.39 |
|
$35.00
to $39.99
|
|
|
2,049 |
|
|
|
5.26 |
|
yrs
|
|
|
38.69 |
|
|
|
1,578 |
|
|
|
38.65 |
|
$40.00
to $44.99
|
|
|
1,895 |
|
|
|
5.47 |
|
yrs
|
|
|
42.55 |
|
|
|
1,723 |
|
|
|
42.32 |
|
$45.00
to $49.99
|
|
|
1,259 |
|
|
|
5.86 |
|
yrs
|
|
|
45.26 |
|
|
|
1,259 |
|
|
|
45.26 |
|
Total
|
|
|
9,875 |
|
|
|
4.25 |
|
yrs
|
|
|
36.67 |
|
|
|
8,711 |
|
|
|
36.99 |
|
The
weighted-average remaining contractual life for exercisable awards as of
December 31, 2009, was 3.7 years. A total of 16.9 million shares are
authorized to be granted under the shareholder-approved plans.
At December 31, 2009, 7.7 million shares were available for
future issuance under the plans. During the second quarter of 2009, our
shareholders approved the Directors’ Stock Plan of 2009, which authorizes
300,000 shares to be granted to our directors. During 2009, we granted 23,944
shares of common stock under the expiring plan to our directors for 2008 board
service fees. We currently issue new shares or use treasury shares for
stock-based compensation award issues or exercises.
Restricted
Stock Units
Service-based
and performance-based restricted stock units are granted to associates at fair
value of the shares on the date of grant less the present value of the dividends
that holders of restricted stock units will not receive on the shares underlying
the restricted stock units during the vesting period. Service-based restricted
stock units cliff vest three years after the date of grant.
If
certain performance targets are attained, performance-based restricted stock
units vest on the first day of March after a three-calendar-year performance
period. Quarterly, management reviews and determines the likelihood that the
company will achieve the performance targets for the outstanding groups of
performance-based restricted stock units.
As of
December 31, 2009, management assumed that performance targets used for
restricted stock unit awards granted during November 2008 would be met, and we
recognized related compensation cost.
Management
concluded that the company would not meet performance targets for all other
performance-based restricted stock unit awards and did not recognize related
compensation costs.
Here is a
summary of restricted stock unit information for 2009:
(Shares
in thousands)
|
|
Service-based
nonvested shares
|
|
|
Weighted-average
grant-date fair
value
|
|
|
Performance-based
nonvested shares
|
|
|
Weighted-average
grant-date fair
value
|
|
Nonvested
at January 1, 2009
|
|
|
610 |
|
|
$ |
31.60 |
|
|
|
136 |
|
|
$ |
30.49 |
|
Granted
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
0.00 |
|
Exercised
|
|
|
(3 |
) |
|
|
33.14 |
|
|
|
(9 |
) |
|
|
39.93 |
|
Forfeited
|
|
|
(10 |
) |
|
|
31.31 |
|
|
|
(6 |
) |
|
|
31.43 |
|
Nonvested
at December 31, 2009
|
|
|
597 |
|
|
|
31.60 |
|
|
|
121 |
|
|
|
29.75 |
|
We
operate primarily in two industries, property casualty insurance and life
insurance. We regularly review four different reporting segments to make
decisions about allocating resources and assessing performance:
|
·
|
Commercial
lines property casualty insurance
|
|
·
|
Personal
lines property casualty insurance
|
We report
as Other the non-investment operations of the parent company and its non-insurer
subsidiaries, CFC Investment Company and CSU Producers Resources Inc. We
also report as Other the results of The Cincinnati Specialty Underwriters
Insurance Company, as well as other income of our standard market property
casualty insurance subsidiary. Also included in 2009, 2008 and 2007 results for
this segment are the operations of a former subsidiary, CinFin Capital
Management.
Revenues
come primarily from unaffiliated customers:
|
·
|
All
three insurance segments record revenues from insurance premiums earned.
Life insurance segment revenues also include separate account investment
management fees.
|
|
·
|
Our
investment operations’ revenues are pretax net investment income plus
realized investment gains and
losses.
|
|
·
|
Other
revenues are primarily finance/lease income and, for 2009 and 2008, earned
premiums from The Cincinnati Specialty Underwriters Insurance
Company.
|
Income or
loss before income taxes for each segment is reported based on the nature of
that business area’s operations:
|
·
|
Income
before income taxes for the insurance segments is defined as underwriting
income or loss.
|
|
o
|
For
commercial lines and personal lines insurance segments, we calculate
underwriting income or loss by recording premiums earned minus loss and
loss expenses and underwriting expenses
incurred.
|
|
o
|
For
the life insurance segment, we calculate underwriting income or loss by
recording premiums earned and separate account investment management fees,
minus contract holders’ benefits and expenses incurred, plus investment
interest credited to contract
holders.
|
|
·
|
Income
before income taxes for the investment operations segment is net
investment income plus realized investment gains and losses for
investments of the entire company, minus investment interest credited to
contract holders of the life insurance
segment.
|
|
·
|
Loss
before income taxes for the Other category is primarily due to interest
expense from debt of the parent company, operating expenses of our
headquarters and, for 2009 and 2008, loss and loss expenses and
underwriting expenses from The Cincinnati Specialty Underwriters Insurance
Company.
|
Identifiable
assets are used by each segment in its operations. We do not separately report
the identifiable assets for the commercial or personal lines segments because we
do not use that measure to analyze the segments. We include all investment
assets, regardless of ownership, in the investment
operations segment.
This
table summarizes segment information:
|
|
Years
ended December 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
Commercial
lines insurance
|
|
Commercial
casualty
|
|
$ |
712 |
|
|
$ |
763 |
|
|
$ |
827 |
|
Commercial
property
|
|
|
485 |
|
|
|
487 |
|
|
|
497 |
|
Commercial
auto
|
|
|
394 |
|
|
|
411 |
|
|
|
440 |
|
Workers'
compensation
|
|
|
326 |
|
|
|
375 |
|
|
|
373 |
|
Specialty
packages
|
|
|
147 |
|
|
|
144 |
|
|
|
146 |
|
Surety
and executive risk
|
|
|
104 |
|
|
|
107 |
|
|
|
100 |
|
Machinery
and equipment
|
|
|
31 |
|
|
|
29 |
|
|
|
28 |
|
Total
commercial lines insurance
|
|
|
2,199 |
|
|
|
2,316 |
|
|
|
2,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
lines insurance
|
|
Personal
auto
|
|
|
319 |
|
|
|
325 |
|
|
|
342 |
|
Homeowner
|
|
|
276 |
|
|
|
277 |
|
|
|
285 |
|
Other
personal lines
|
|
|
90 |
|
|
|
87 |
|
|
|
87 |
|
Total
personal lines insurance
|
|
|
685 |
|
|
|
689 |
|
|
|
714 |
|
|
|
Life
insurance
|
|
|
143 |
|
|
|
128 |
|
|
|
129 |
|
Investment
operations
|
|
|
837 |
|
|
|
675 |
|
|
|
990 |
|
Other
|
|
|
39 |
|
|
|
16 |
|
|
|
15 |
|
Total
|
|
$ |
3,903 |
|
|
$ |
3,824 |
|
|
$ |
4,259 |
|
|
|
Income
(loss) before income taxes:
|
|
Insurance
underwriting results:
|
|
Commercial
lines insurance
|
|
$ |
(35 |
) |
|
$ |
70 |
|
|
$ |
261 |
|
Personal
lines insurance
|
|
|
(81 |
) |
|
|
(82 |
) |
|
|
43 |
|
Life
insurance
|
|
|
2 |
|
|
|
4 |
|
|
|
3 |
|
Investment
operations
|
|
|
768 |
|
|
|
612 |
|
|
|
931 |
|
Other
|
|
|
(72 |
) |
|
|
(64 |
) |
|
|
(46 |
) |
Total
|
|
$ |
582 |
|
|
$ |
540 |
|
|
$ |
1,192 |
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Property
casualty insurance
|
|
$ |
2,202 |
|
|
$ |
2,676 |
|
|
|
|
|
Life
insurance
|
|
|
1,176 |
|
|
|
1,091 |
|
|
|
|
|
Investment
operations
|
|
|
10,684 |
|
|
|
8,907 |
|
|
|
|
|
Other
|
|
|
378 |
|
|
|
695 |
|
|
|
|
|
Total
|
|
$ |
14,440 |
|
|
$ |
13,369 |
|
|
|
|
|
|
19.
|
Quarterly
Supplementary Data (Unaudited)
|
This
table includes unaudited quarterly financial information for the years ended
December 31, 2009 and 2008:
|
|
Quarter
|
|
|
|
|
(Dollars in millions except per share
data)
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Full year
|
|
2009
|
|
Revenues
*
|
|
$ |
890 |
|
|
$ |
874 |
|
|
$ |
1,007 |
|
|
$ |
1,133 |
|
|
$ |
3,903 |
|
Income
(loss) before income taxes
|
|
|
34 |
|
|
|
(50 |
) |
|
|
244 |
|
|
|
355 |
|
|
|
582 |
|
Net
income (loss)
|
|
|
35 |
|
|
|
(19 |
) |
|
|
171 |
|
|
|
245 |
|
|
|
432 |
|
Net
income (loss) per common share—basic
|
|
|
0.22 |
|
|
|
(0.12 |
) |
|
|
1.05 |
|
|
|
1.50 |
|
|
|
2.66 |
|
Net
income (loss) per common share—diluted
|
|
|
0.22 |
|
|
|
(0.12 |
) |
|
|
1.05 |
|
|
|
1.50 |
|
|
|
2.65 |
|
|
|
2008
|
|
Revenues
*
|
|
$ |
704 |
|
|
$ |
917 |
|
|
$ |
1,186 |
|
|
$ |
1,017 |
|
|
$ |
3,824 |
|
Income
(loss) before income taxes
|
|
|
(100 |
) |
|
|
64 |
|
|
|
356 |
|
|
|
220 |
|
|
|
540 |
|
Net
income (loss)
|
|
|
(42 |
) |
|
|
63 |
|
|
|
247 |
|
|
|
161 |
|
|
|
429 |
|
Net
income (loss) per common share—basic
|
|
|
(0.26 |
) |
|
|
0.38 |
|
|
|
1.51 |
|
|
|
0.99 |
|
|
|
2.63 |
|
Net
income (loss) per common share—diluted
|
|
|
(0.26 |
) |
|
|
0.38 |
|
|
|
1.50 |
|
|
|
0.99 |
|
|
|
2.62 |
|
Note: The
sum of the quarterly reported per share amounts may not equal the full year as
each is computed independently.
|
*
|
Revenues
include realized investment gains and losses, which are integral to our
financial results over the long term may cause this value to fluctuate
substantially because we have substantial discretion in the timing of
investment sales. Also, applicable accounting standards require us to
recognize gains and losses from certain changes in fair values of
securities and embedded derivatives without actual realization of those
gains and losses. We discuss realized investment gains for the past three
years in Item 7, Investments Results of Operations,
Page 64.
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
We had no
disagreements with the independent registered public accounting firm on
accounting and financial disclosure during the last two fiscal
years.
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures – The company maintains disclosure
controls and procedures (as that term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange
Act)).
Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
company’s management, with the participation of the company’s chief executive
officer and chief financial officer, has evaluated the effectiveness of the
design and operation of the company’s disclosure controls and procedures as of
December 31, 2009. Based upon that evaluation, the company’s chief executive
officer and chief financial officer concluded that the design and operation of
the company’s disclosure controls and procedures provided reasonable assurance
that the disclosure controls and procedures are effective to ensure
that:
|
·
|
information
required to be disclosed in the company’s reports under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms,
and
|
|
·
|
such
information is accumulated and communicated to the company’s management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosures.
|
Changes
in Internal Control over Financial Reporting – During the three months ended
December 31, 2009, there were no changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Management’s Annual
Report on Internal Control Over Financial Reporting and the Report of the
Independent Registered Public Accounting Firm are set forth in Item 8, Pages 88
and 89.
|
Item 9B.
|
Other
Information
|
None
Part
III
Our Proxy
Statement will be filed with the SEC in preparation for the 2010 Annual Meeting
of Shareholders no later than April 2, 2010. As permitted in Paragraph G(3) of
the General Instructions for Form 10-K, we are incorporating by reference to
that statement portions of the information required by Part III as noted in
Item 10 through Item 14 below.
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
|
a)
|
The
following sections of our Proxy Statement for our Annual Meeting of
Shareholders to be held May 1, 2010, are incorporated herein by reference:
“Security Ownership of Principal Shareholders and Management,” “Section
16(a) Beneficial Ownership Reporting Compliance,” “Information about the
Board of Directors”, and “Governance of Your
Company,”
|
|
b)
|
Information
about the “Code of Ethics for Senior Financial Officers” appeared in the
2004 Proxy Statement as an appendix and is available at www.cinfin.com/investors.
Our Code of Ethics applies to those who are responsible for preparing
and disclosing our financial information. This includes our chief
executive officer, chief financial officer and others performing similar
functions or reporting directly to these
officers.
|
|
c)
|
Set
forth below is information concerning the company’s executive officers who
are not also directors of the company, as of
February 26, 2010.
|
Name and Age
|
|
Primary Title(s) and Business
Responsibilities Since February 2005
|
|
Executive
Officer
Since
|
Donald
J. Doyle, Jr., CPCU, AIM (43)
|
|
Senior
vice president of The Cincinnati Insurance Company. Responsible since 2007
for excess and surplus lines underwriting and operations; responsible
until 2007 for internal audit.
|
|
2008
|
|
|
|
|
|
Craig
W. Forrester, CLU (51)
|
|
Senior
vice president of The Cincinnati Insurance Company. Responsible
for information technology systems.
|
|
2003
|
|
|
|
|
|
Martin
F. Hollenbeck, CFA, CPCU (50)
|
|
President
and chief operating officer since 2008 of CFC Investment Company, a
subsidiary. President from 2008 to 2009 of CinFin Capital Management
Company, a former subsidiary. Chief investment officer since 2009, senior
vice president, assistant secretary and assistant treasurer since 2008 of
Cincinnati Financial Corporation. Chief investment officer and senior vice
president since 2009 of The Cincinnati Insurance Company; vice president
until 2009. Responsible for investment operations and leasing and
financing services; responsible until 2009 for asset management services
operations.
|
|
2008
|
|
|
|
|
|
Steven
J. Johnston, FCAS, MAAA, CFA (50)
|
|
Senior
vice president, chief financial officer and secretary since 2008 of
Cincinnati Financial Corporation and The Cincinnati Insurance Company.
Treasurer since 2008 of Cincinnati Financial. From 2006 to 2008, consulted
on risk management, economic capital and executive compensation modeling,
and agency valuation. Until 2006, chief financial officer, senior vice
president and treasurer of State Auto Financial
Corporation.
|
|
2008
|
|
|
|
|
|
Thomas
A. Joseph, CPCU (54)
|
|
President
since 2008 of The Cincinnati Casualty Company. Senior vice president
of The Cincinnati Insurance Company. Responsible for property casualty
reinsurance and for personal lines underwriting and operations;
responsible until 2008 for commercial lines underwriting operations except
machinery and equipment.
|
|
2003
|
|
|
|
|
|
Eric
N. Mathews, CPCU, AIAF (54)
|
|
Principal
accounting officer since 2008 and vice president, assistant secretary and
assistant treasurer. Senior vice president of The Cincinnati
Insurance Company.
|
|
2001
|
|
|
|
|
|
Martin
J. Mullen, CPCU (54)
|
|
Senior
vice president and chief claims officer since 2008 of The Cincinnati
Insurance Company; vice president until 2008. Responsible for
headquarters and field claims operations, special investigations unit and
claims administration; responsible until 2008 for casualty
claims.
|
|
2008
|
|
|
|
|
|
David
H. Popplewell, FALU, LLIF (65)
|
|
President
and chief operating officer of The Cincinnati Life Insurance Company.
Responsible for life insurance underwriting and
operations.
|
|
1997
|
Name and Age
|
|
Primary Title(s) and Business
Responsibilities Since February 2005
|
|
Executive
Officer
Since
|
Jacob
F. Scherer, Jr. (57)
|
|
Executive
vice president since 2008 of The Cincinnati Insurance Company; senior
vice president until 2008. Responsible for sales and marketing, including
new commercial lines business, relationships with independent agencies
and, since 2008, meetings and travel.
|
|
1995
|
|
|
|
|
|
Joan
O. Shevchik, CPCU, CLU (59)
|
|
Senior
vice president of The Cincinnati Insurance Company. Responsible for
corporate communications.
|
|
2003
|
|
|
|
|
|
Charles
P. Stoneburner II, CPCU, AIM (57)
|
|
Senior
vice president since 2008 of The Cincinnati Insurance Company; vice
president until 2008. Responsible for commercial lines underwriting and
operations, loss control, premium audit and staff underwriting;
responsible until 2008 for field claims operations.
|
|
2008
|
|
|
|
|
|
Timothy
L. Timmel (61)
|
|
Senior
vice president of The Cincinnati Insurance Company. Responsible for
operations including corporate communications, learning and
development, legal, personnel and, since 2008, administrative services,
data entry, maintenance, printing, regulatory and consumer relations,
security and information security; also responsible until 2008 for field
claims operations.
|
|
1997
|
|
Item
11.
|
Executive
Compensation
|
The
“Compensation of Named Executive Officers and Directors,” section of our Proxy
Statement for our Annual Meeting of Shareholders to be held May 1, 2010, which
includes the “Report of the Compensation Committee,” “Compensation Committee
Interlocks and Insider Participation,” and the “Discussion and Analysis,” is
incorporated herein by reference.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
a)
|
The
“Security Ownership of Principal Shareholders and Management” section of
our Proxy Statement for our Annual Meeting of Shareholders to be held May
1, 2010, is incorporated herein by
reference.
|
|
b)
|
Information
on securities authorized for issuance under equity compensation plans
appears in Part II, Item 5, Market for the Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities, Page 30, as securities authorized for issuance under
equity compensation plans. Additional information on share-based
compensation under our equity compensation plans is available in Item 8,
Note 17 of the Consolidated Financial Statements,
Page 113.
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
following sections of our Proxy Statement for our Annual Meeting of Shareholders
to be held May 1, 2010, are incorporated by reference: “Governance of
Your Company — Director Independence” and “Governance of Your Company — Certain
Relationships and Transactions.”
|
Item
14.
|
Principal
Accountant Fees and Services
|
The
“Audit-Related Matters,” section of our Proxy Statement for our Annual Meeting
of Shareholders to be held May 1, 2010, which includes the “Proposal
4—Ratification of Selection of Independent Registered Public Accounting Firm,”
“Report of the Audit Committee,” “Fees Billed by the Independent Registered
Public Accounting Firm,” “Services Provided by the Independent Registered Public
Accounting Firm,” is incorporated herein by reference.
Part
IV
|
Item
15.
|
Exhibits,
Financial Statement Schedules
|
|
a)
|
Financial
Statements – information contained in Part II, Item 8, of this report,
Page 90 to Page 93
|
|
b)
|
Exhibits
– see Index of Exhibits, Page 132
|
|
c)
|
Financial
Statement Schedules
|
|
Schedule
I – Summary of Investments — Other than Investments in Related Parties,
Page 121
|
|
Schedule
II – Condensed Financial Statements of Registrant, Page
123
|
|
Schedule
III – Supplementary Insurance Information, Page
126
|
|
Schedule
IV – Reinsurance, Page 128
|
|
Schedule
V – Valuation and Qualifying Accounts, Page
129
|
|
Schedule
VI – Supplementary Information Concerning Property Casualty Insurance
Operations, Page 130
|
SCHEDULE
I
Cincinnati
Financial Corporation and Subsidiaries
Summary
of Investments - Other than Investments in Related Parties
(In
millions)
|
|
At
December 31, 2009
|
|
Type
of investment
|
|
Cost
or
amortized cost
|
|
|
Fair
value
|
|
|
Balance
sheet
|
|
Fixed
maturities:
|
|
United
States government:
|
|
|
|
|
|
|
|
|
|
The
Cincinnati Life Insurance Company
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Total
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Government-sponsored
enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Cincinnati Insurance Company
|
|
|
200 |
|
|
|
196 |
|
|
|
196 |
|
The
Cincinnati Life Insurance Company
|
|
|
154 |
|
|
|
151 |
|
|
|
151 |
|
Total
|
|
|
354 |
|
|
|
347 |
|
|
|
347 |
|
Foreign
government:
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Cincinnati Insurance Company
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Total
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
States,
municipalities and political subdivisions:
|
|
The
Cincinnati Insurance Company
|
|
|
2,591 |
|
|
|
2,699 |
|
|
|
2,699 |
|
The
Cincinnati Casualty Company
|
|
|
158 |
|
|
|
165 |
|
|
|
165 |
|
The
Cincinnati Indemnity Company
|
|
|
36 |
|
|
|
38 |
|
|
|
38 |
|
The
Cincinnati Specialty Underwriters Insurance Company
|
|
|
109 |
|
|
|
114 |
|
|
|
114 |
|
The
Cincinnati Life Insurance Company
|
|
|
113 |
|
|
|
113 |
|
|
|
113 |
|
Total
|
|
|
3,007 |
|
|
|
3,129 |
|
|
|
3,129 |
|
Convertibles
and bonds with warrants attached:
|
|
The
Cincinnati Insurance Company
|
|
|
80 |
|
|
|
80 |
|
|
|
80 |
|
The
Cincinnati Life Insurance Company
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Cincinnati
Financial Corporation
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
Total
|
|
|
91 |
|
|
|
91 |
|
|
|
91 |
|
Collateralized
mortgage obligations
|
|
The
Cincinnati Insurance Company
|
|
|
25 |
|
|
|
21 |
|
|
|
21 |
|
The
Cincinnati Life Insurance Company
|
|
|
12 |
|
|
|
10 |
|
|
|
10 |
|
Total
|
|
|
37 |
|
|
|
31 |
|
|
|
31 |
|
All
other corporate bonds:
|
|
The
Cincinnati Insurance Company
|
|
|
2,059 |
|
|
|
2,178 |
|
|
|
2,178 |
|
The
Cincinnati Casualty Company
|
|
|
53 |
|
|
|
57 |
|
|
|
57 |
|
The
Cincinnati Indemnity Company
|
|
|
23 |
|
|
|
24 |
|
|
|
24 |
|
The
Cincinnati Specialty Underwriters Insurance Company
|
|
|
83 |
|
|
|
88 |
|
|
|
88 |
|
The
Cincinnati Life Insurance Company
|
|
|
1,568 |
|
|
|
1,645 |
|
|
|
1,645 |
|
CSU
Producers Resources Inc.
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Cincinnati
Financial Corporation
|
|
|
227 |
|
|
|
253 |
|
|
|
253 |
|
Total
|
|
|
4,018 |
|
|
|
4,250 |
|
|
|
4,250 |
|
Total
fixed maturities
|
|
$ |
7,514 |
|
|
$ |
7,855 |
|
|
$ |
7,855 |
|
SCHEDULE
I (CONTINUED)
Cincinnati
Financial Corporation and Subsidiaries
Summary
of Investments - Other than Investments in Related Parties
(In
millions)
|
|
At
December 31, 2009
|
|
Type
of investment
|
|
Cost
or
amortized cost
|
|
|
Fair
value
|
|
|
Balance sheet
|
|
Equity
securities:
|
|
Common
stocks:
|
|
The
Cincinnati Insurance Company
|
|
$ |
1,226 |
|
|
$ |
1,790 |
|
|
$ |
1,790 |
|
The
Cincinnati Casualty Company
|
|
|
22 |
|
|
|
37 |
|
|
|
37 |
|
The
Cincinnati Indemnity Company
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
The
Cincinnati Life Insurance Company
|
|
|
100 |
|
|
|
97 |
|
|
|
97 |
|
Cincinnati
Financial Corporation
|
|
|
591 |
|
|
|
682 |
|
|
|
682 |
|
Total
|
|
|
1,941 |
|
|
|
2,608 |
|
|
|
2,608 |
|
Nonredeemable
preferred stocks:
|
|
The
Cincinnati Insurance Company
|
|
|
68 |
|
|
|
81 |
|
|
|
81 |
|
The
Cincinnati Life Insurance Company
|
|
|
7 |
|
|
|
12 |
|
|
|
12 |
|
Total
|
|
|
75 |
|
|
|
93 |
|
|
|
93 |
|
Total
equity securities
|
|
$ |
2,016 |
|
|
$ |
2,701 |
|
|
$ |
2,701 |
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Cincinnati Insurance Company
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
CSU
Producers Resources Inc.
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Total
short-term investments
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
6 |
|
Other
invested assets:
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati
Financial Corporation
|
|
$ |
6 |
|
|
|
— |
|
|
$ |
6 |
|
Policy
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Cincinnati Life Insurance Company
|
|
|
40 |
|
|
|
— |
|
|
|
40 |
|
Limited
partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati
Financial Corporation
|
|
|
24 |
|
|
|
— |
|
|
|
24 |
|
Other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati
Financial Corporation
|
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
Total
other invested assets
|
|
$ |
81 |
|
|
|
— |
|
|
$ |
81 |
|
Total
investments
|
|
$ |
9,617 |
|
|
|
— |
|
|
$ |
10,643 |
|
SCHEDULE
II
Cincinnati
Financial Corporation (parent company only)
Condensed
Balance Sheets
|
|
At December 31,
|
|
(In millions) |
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Fixed
maturities, at fair value
|
|
$ |
261 |
|
|
$ |
52 |
|
Equity
securities, at fair value
|
|
|
683 |
|
|
|
809 |
|
Short-term
investments, at fair value
|
|
|
0 |
|
|
|
65 |
|
Investment
real estate, net
|
|
|
6 |
|
|
|
6 |
|
Other
invested assets
|
|
|
36 |
|
|
|
40 |
|
Cash
and cash equivalents
|
|
|
54 |
|
|
|
344 |
|
Equity
in net assets of subsidiaries
|
|
|
4,441 |
|
|
|
3,711 |
|
Investment
income receivable
|
|
|
5 |
|
|
|
4 |
|
Land,
building and equipment, net, for company use (accumulated
depreciation:
|
|
|
|
|
|
|
|
|
2009—$71;
2008—$64)
|
|
|
165 |
|
|
|
171 |
|
Prepaid
federal income tax
|
|
|
18 |
|
|
|
0 |
|
Other
assets
|
|
|
14 |
|
|
|
12 |
|
Due
from subsidiaries
|
|
|
53 |
|
|
|
33 |
|
Total
assets
|
|
$ |
5,736 |
|
|
$ |
5,247 |
|
|
|
LIABILITIES
|
|
Dividends
declared but unpaid
|
|
$ |
64 |
|
|
$ |
63 |
|
Deferred
federal income tax
|
|
|
16 |
|
|
|
21 |
|
6.92%
senior debentures due 2028
|
|
|
391 |
|
|
|
392 |
|
6.9%
senior debentures due 2028
|
|
|
28 |
|
|
|
28 |
|
6.125%
senior notes due 2034
|
|
|
371 |
|
|
|
372 |
|
Other
liabilities
|
|
|
106 |
|
|
|
189 |
|
Total
liabilities
|
|
|
976 |
|
|
|
1,065 |
|
|
|
SHAREHOLDERS'
EQUITY
|
|
Common
stock
|
|
|
393 |
|
|
|
393 |
|
Paid-in
capital
|
|
|
1,081 |
|
|
|
1,069 |
|
Retained
earnings
|
|
|
3,862 |
|
|
|
3,579 |
|
Accumulated
other comprehensive income
|
|
|
624 |
|
|
|
347 |
|
Treasury
stock at cost
|
|
|
(1,200 |
) |
|
|
(1,206 |
) |
Total
shareholders' equity
|
|
|
4,760 |
|
|
|
4,182 |
|
Total
liabilities and shareholders' equity
|
|
$ |
5,736 |
|
|
$ |
5,247 |
|
This
condensed financial information should be read in conjunction with the
Consolidated Financial Statements and Notes included in Part II, Item
8, Page 90.
SCHEDULE
II (CONTINUED)
Cincinnati
Financial Corporation (parent company only)
Condensed
Statements of Income
|
|
Years
ended December 31,
|
|
(In
millions) |
|
2009
|
|
|
2008
|
|
|
2007
|
|
REVENUES
|
|
Dividends
from subsidiaries
|
|
$ |
50 |
|
|
$ |
170 |
|
|
$ |
420 |
|
Investment
income, net of expenses
|
|
|
41 |
|
|
|
67 |
|
|
|
100 |
|
Realized
gains on investments
|
|
|
135 |
|
|
|
54 |
|
|
|
97 |
|
Other
revenue
|
|
|
15 |
|
|
|
14 |
|
|
|
10 |
|
Total
revenues
|
|
|
241 |
|
|
|
305 |
|
|
|
627 |
|
|
|
EXPENSES
|
|
Interest
expense
|
|
|
52 |
|
|
|
51 |
|
|
|
49 |
|
Depreciation
expense
|
|
|
7 |
|
|
|
6 |
|
|
|
3 |
|
Other
expenses
|
|
|
20 |
|
|
|
19 |
|
|
|
15 |
|
Total
expenses
|
|
|
79 |
|
|
|
76 |
|
|
|
67 |
|
|
|
INCOME
BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES
|
|
|
162 |
|
|
|
229 |
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
8 |
|
|
|
23 |
|
|
|
34 |
|
Deferred
|
|
|
24 |
|
|
|
(20 |
) |
|
|
(2 |
) |
Total
provision for income taxes
|
|
|
32 |
|
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME BEFORE EARNINGS OF SUBSIDIARIES
|
|
|
130 |
|
|
|
226 |
|
|
|
528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in undistributed earnings of subsidiaries
|
|
|
302 |
|
|
|
203 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
432 |
|
|
$ |
429 |
|
|
$ |
855 |
|
This
condensed financial information should be read in conjunction with the
Consolidated Financial Statements and Notes included in Part II, Item 8, Page
90.
SCHEDULE
II (CONTINUED)
Cincinnati
Financial Corporation (parent company only)
Condensed
Statements of Cash Flows
|
|
Years
ended December 31,
|
|
(In
millions) |
|
2009
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
Net
income
|
|
$ |
432 |
|
|
$ |
429 |
|
|
$ |
855 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8 |
|
|
|
6 |
|
|
|
2 |
|
Realized
(gains) on investments
|
|
|
(135 |
) |
|
|
(54 |
) |
|
|
(97 |
) |
Changes
in:
|
|
Investment
income receivable
|
|
|
(1 |
) |
|
|
14 |
|
|
|
(2 |
) |
Current
federal income taxes
|
|
|
(104 |
) |
|
|
92 |
|
|
|
(21 |
) |
Deferred
income taxes
|
|
|
24 |
|
|
|
(20 |
) |
|
|
(2 |
) |
Other
assets
|
|
|
(2 |
) |
|
|
4 |
|
|
|
0 |
|
Other
liabilities
|
|
|
(22 |
) |
|
|
8 |
|
|
|
12 |
|
Undistributed
earnings of subsidiaries
|
|
|
(302 |
) |
|
|
(203 |
) |
|
|
(327 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(102 |
) |
|
|
276 |
|
|
|
420 |
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
Sale
of fixed-maturities
|
|
|
22 |
|
|
|
0 |
|
|
|
9 |
|
Call
or maturity of fixed-maturities
|
|
|
15 |
|
|
|
24 |
|
|
|
37 |
|
Sale
of equity securities
|
|
|
408 |
|
|
|
629 |
|
|
|
186 |
|
Purchase
of fixed-maturities
|
|
|
(206 |
) |
|
|
0 |
|
|
|
(1 |
) |
Purchase
of equity securities
|
|
|
(246 |
) |
|
|
(125 |
) |
|
|
(231 |
) |
Change
in short-term investments, net
|
|
|
65 |
|
|
|
(64 |
) |
|
|
0 |
|
Investment
in buildings and equipment, net
|
|
|
(1 |
) |
|
|
(14 |
) |
|
|
(49 |
) |
Change
in other invested assets, net
|
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(6 |
) |
Change
in securities lending collateral, net
|
|
|
0 |
|
|
|
9 |
|
|
|
(9 |
) |
Net
cash (used in) provided by investing activities
|
|
|
52 |
|
|
|
450 |
|
|
|
(64 |
) |
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
Change
in notes payable
|
|
|
0 |
|
|
|
(20 |
) |
|
|
20 |
|
Payment
of cash dividends to shareholders
|
|
|
(249 |
) |
|
|
(250 |
) |
|
|
(240 |
) |
Purchase/issuance
of treasury shares
|
|
|
1 |
|
|
|
(138 |
) |
|
|
(307 |
) |
Proceeds
from stock options exercised
|
|
|
0 |
|
|
|
4 |
|
|
|
20 |
|
Net
transfers to subsidiaries
|
|
|
8 |
|
|
|
15 |
|
|
|
120 |
|
Change
in securities lending payable, net
|
|
|
0 |
|
|
|
(9 |
) |
|
|
9 |
|
Net
cash used in financing activities
|
|
|
(240 |
) |
|
|
(398 |
) |
|
|
(378 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(290 |
) |
|
|
328 |
|
|
|
(22 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
344 |
|
|
|
16 |
|
|
|
38 |
|
Cash
and cash equivalents at end of year
|
|
$ |
54 |
|
|
$ |
344 |
|
|
$ |
16 |
|
This
condensed financial information should be read in conjunction with the
Consolidated Financial Statements and Notes included in Part II, Item 8, Page
90.
SCHEDULE
III
Cincinnati
Financial Corporation and Subsidiaries
Supplementary
Insurance Information
|
|
Years
ended December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Deferred
policy acquisition costs:
|
|
Commercial
lines insurance
|
|
$ |
219 |
|
|
$ |
229 |
|
|
$ |
234 |
|
Personal
lines insurance
|
|
|
78 |
|
|
|
77 |
|
|
|
78 |
|
Excess
and surplus lines insurance
|
|
|
6 |
|
|
|
6 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
303 |
|
|
|
312 |
|
|
|
312 |
|
Life
insurance
|
|
|
178 |
|
|
|
197 |
|
|
|
149 |
|
Total
|
|
$ |
481 |
|
|
$ |
509 |
|
|
$ |
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
future policy benefits, losses, claims and expense losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
3,725 |
|
|
$ |
3,654 |
|
|
$ |
3,533 |
|
Personal
lines insurance
|
|
|
349 |
|
|
|
381 |
|
|
|
392 |
|
Excess
and surplus lines insurance
|
|
|
22 |
|
|
|
5 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
4,096 |
|
|
|
4,040 |
|
|
|
3,925 |
|
Life
insurance
|
|
|
1,817 |
|
|
|
1,580 |
|
|
|
1,505 |
|
Total (1)
|
|
$ |
5,913 |
|
|
$ |
5,620 |
|
|
$ |
5,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
unearned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
1,112 |
|
|
$ |
1,166 |
|
|
$ |
1,191 |
|
Personal
lines insurance
|
|
|
372 |
|
|
|
367 |
|
|
|
371 |
|
Excess
and surplus lines insurance
|
|
|
23 |
|
|
|
9 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
1,507 |
|
|
|
1,542 |
|
|
|
1,562 |
|
Life
insurance
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Total (1)
|
|
$ |
1,509 |
|
|
$ |
1,544 |
|
|
$ |
1,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
policy claims and benefits payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Personal
lines insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Excess
and surplus lines insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Life
insurance
|
|
|
12 |
|
|
|
17 |
|
|
|
15 |
|
Total (1)
|
|
$ |
12 |
|
|
$ |
17 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
2,199 |
|
|
$ |
2,316 |
|
|
$ |
2,411 |
|
Personal
lines insurance
|
|
|
685 |
|
|
|
689 |
|
|
|
714 |
|
Excess
and surplus lines insurance
|
|
|
27 |
|
|
|
5 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
2,911 |
|
|
|
3,010 |
|
|
|
3,125 |
|
Life
insurance
|
|
|
143 |
|
|
|
126 |
|
|
|
125 |
|
Consolidated
eliminations
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
$ |
3,054 |
|
|
$ |
3,136 |
|
|
$ |
3,250 |
|
SCHEDULE
III (CONTINUED)
Cincinnati
Financial Corporation and Subsidiaries
Supplementary
Insurance Information
|
|
Years ended December 31,
|
|
(In
millions) |
|
2009
|
|
|
2008
|
|
|
2007
|
|
Investment
income, net of expenses:
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Personal
lines insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Excess
and surplus lines insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
property casualty insurance (2)
|
|
|
336 |
|
|
|
350 |
|
|
|
393 |
|
Life
insurance
|
|
|
122 |
|
|
|
119 |
|
|
|
114 |
|
Total
|
|
$ |
458 |
|
|
$ |
469 |
|
|
$ |
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
claims losses and settlement expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
1,515 |
|
|
$ |
1,504 |
|
|
$ |
1,395 |
|
Personal
lines insurance
|
|
|
551 |
|
|
|
547 |
|
|
|
437 |
|
Excess
and surplus lines insurance
|
|
|
20 |
|
|
|
5 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
2,086 |
|
|
|
2,056 |
|
|
|
1,832 |
|
Life
insurance
|
|
|
160 |
|
|
|
142 |
|
|
|
133 |
|
Consolidated
eliminations
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(2 |
) |
Total
|
|
$ |
2,242 |
|
|
$ |
2,193 |
|
|
$ |
1,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred policy acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
458 |
|
|
$ |
462 |
|
|
$ |
477 |
|
Personal
lines insurance
|
|
|
143 |
|
|
|
145 |
|
|
|
150 |
|
Excess
and surplus lines insurance
|
|
|
10 |
|
|
|
3 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
611 |
|
|
|
610 |
|
|
|
627 |
|
Life
insurance
|
|
|
27 |
|
|
|
22 |
|
|
|
30 |
|
Total (3)
|
|
$ |
638 |
|
|
$ |
632 |
|
|
$ |
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
underwriting and insurance expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
261 |
|
|
$ |
280 |
|
|
$ |
248 |
|
Personal
lines insurance
|
|
|
71 |
|
|
|
79 |
|
|
|
83 |
|
Excess
and surplus lines insurance
|
|
|
11 |
|
|
|
2 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
343 |
|
|
|
361 |
|
|
|
331 |
|
Life
insurance
|
|
|
23 |
|
|
|
23 |
|
|
|
22 |
|
Total (3)
|
|
$ |
366 |
|
|
$ |
384 |
|
|
$ |
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
2,181 |
|
|
$ |
2,311 |
|
|
$ |
2,413 |
|
Personal
lines insurance
|
|
|
691 |
|
|
|
685 |
|
|
|
704 |
|
Excess
and surplus lines insurance
|
|
|
39 |
|
|
|
14 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
2,911 |
|
|
|
3,010 |
|
|
|
3,117 |
|
Accident
health insurance
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Consolidated
eliminations
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
$ |
2,914 |
|
|
$ |
3,013 |
|
|
$ |
3,120 |
|
Notes
to Schedule III:
(1) The
sum of gross future policy benefits, losses, claims and expense losses, gross
unearned premium and other policy claims and benefits payable is equal to the
sum of Loss and loss expense reserves, Life policy reserves and Unearned
premiums reported in the company’s consolidated balance sheets.
(2) This
segment information is not regularly allocated to segments and reviewed by
company management in making decisions about resources to be allocated to the
segments or to assess their performance.
(3) The
sum of amortization of deferred policy acquisition costs and other underwriting
and insurance expenses is equal to underwriting, acquisition and insurance
expenses in the consolidated statements of income.
SCHEDULE
IV
Cincinnati
Financial Corporation and Subsidiaries
Reinsurance
|
|
|
Years
ended December 31,
|
|
(Dollars
in millions)
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Gross
amounts:
|
|
Life
insurance in force
|
|
|
$ |
69,814 |
|
|
$ |
65,887 |
|
|
$ |
61,873 |
|
Earned
premiums
|
|
Commercial
lines insurance
|
|
|
$ |
2,324 |
|
|
$ |
2,449 |
|
|
$ |
2,536 |
|
Personal
lines insurance
|
|
|
|
715 |
|
|
|
721 |
|
|
|
742 |
|
Excess
and surplus lines insurance
|
|
|
|
28 |
|
|
|
5 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
|
3,067 |
|
|
|
3,175 |
|
|
|
3,278 |
|
Life
insurance
|
|
|
|
196 |
|
|
|
180 |
|
|
|
178 |
|
Consolidated
eliminations
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
|
$ |
3,263 |
|
|
$ |
3,355 |
|
|
$ |
3,456 |
|
|
|
Ceded
amounts to other companies:
|
|
Life
insurance in force
|
|
|
$ |
34,232 |
|
|
$ |
33,710 |
|
|
$ |
32,959 |
|
Earned
premiums
|
|
Commercial
lines insurance
|
|
|
$ |
137 |
|
|
$ |
144 |
|
|
$ |
144 |
|
Personal
lines insurance
|
|
|
|
31 |
|
|
|
34 |
|
|
|
31 |
|
Excess
and surplus lines insurance
|
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
|
|
169 |
|
|
|
178 |
|
|
|
175 |
|
Life
insurance
|
|
|
|
53 |
|
|
|
54 |
|
|
|
53 |
|
Total
|
|
|
$ |
222 |
|
|
$ |
232 |
|
|
$ |
228 |
|
|
|
Assumed
amounts from other companies:
|
|
Life
insurance in force
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
Earned
premiums
|
|
Commercial
lines insurance
|
|
|
$ |
12 |
|
|
$ |
11 |
|
|
$ |
20 |
|
Personal
lines insurance
|
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
Excess
and surplus lines insurance
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
|
13 |
|
|
|
13 |
|
|
|
22 |
|
Life
insurance
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
22 |
|
|
|
Net
amounts:
|
|
Life
insurance in force
|
|
|
$ |
35,583 |
|
|
$ |
32,178 |
|
|
$ |
28,916 |
|
Earned
premiums
|
|
Commercial
lines insurance
|
|
|
$ |
2,199 |
|
|
$ |
2,316 |
|
|
$ |
2,411 |
|
Personal
lines insurance
|
|
|
|
685 |
|
|
|
689 |
|
|
|
714 |
|
Excess
and surplus lines insurance
|
|
|
|
27 |
|
|
|
5 |
|
|
|
0 |
|
Total
property casualty insurance
|
|
|
|
2,911 |
|
|
|
3,010 |
|
|
|
3,125 |
|
Life
insurance
|
|
|
|
143 |
|
|
|
126 |
|
|
|
125 |
|
Consolidated
eliminations
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
|
$ |
3,054 |
|
|
$ |
3,136 |
|
|
$ |
3,250 |
|
|
|
Percentage
of amounts assumed to net:
|
|
Life
insurance in force
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Earned
premiums
|
|
Commercial
lines insurance
|
|
|
|
0.5 |
% |
|
|
0.5 |
% |
|
|
0.8 |
% |
Personal
lines insurance
|
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Excess
and surplus lines insurance
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Total
property casualty insurance
|
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.7 |
|
Life
insurance
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Total
|
|
|
|
0.4 |
% |
|
|
0.4 |
% |
|
|
0.7 |
% |
SCHEDULE
V
Cincinnati
Financial Corporation and Subsidiaries
|
|
Valuation
and Qualifying Accounts
|
|
(In
millions)
|
|
At
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Allowance
for doubtful receivables:
|
|
Balance
at beginning of period
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
3 |
|
Additions
charged to costs and expenses
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Deductions
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Balance
at end of period
|
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
4 |
|
SCHEDULE
VI
Cincinnati
Financial Corporation and Subsidiaries
Supplementary
Information Concerning Property Casualty Insurance Operations
|
|
Years
ended December 31,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Deferred
policy acquisition costs:
|
|
Commercial
lines insurance
|
|
$ |
219 |
|
|
$ |
229 |
|
|
$ |
234 |
|
Personal
lines insurance
|
|
|
78 |
|
|
|
77 |
|
|
|
78 |
|
Excess
and surplus lines insurance
|
|
|
6 |
|
|
|
6 |
|
|
|
0 |
|
Total
|
|
$ |
303 |
|
|
$ |
312 |
|
|
$ |
312 |
|
|
|
Reserves
for unpaid claims and claim adjustment expenses:
|
|
Commercial
lines insurance
|
|
$ |
3,725 |
|
|
$ |
3,654 |
|
|
$ |
3,533 |
|
Personal
lines insurance
|
|
|
349 |
|
|
|
381 |
|
|
|
392 |
|
Excess
and surplus lines insurance
|
|
|
22 |
|
|
|
5 |
|
|
|
0 |
|
Total
|
|
$ |
4,096 |
|
|
$ |
4,040 |
|
|
$ |
3,925 |
|
|
|
Reserve
discount deducted
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
Unearned
premiums:
|
|
Commercial
lines insurance
|
|
$ |
1,112 |
|
|
$ |
1,166 |
|
|
$ |
1,191 |
|
Personal
lines insurance
|
|
|
372 |
|
|
|
367 |
|
|
|
371 |
|
Excess
and surplus lines insurance
|
|
|
23 |
|
|
|
9 |
|
|
|
0 |
|
Total
|
|
$ |
1,507 |
|
|
$ |
1,542 |
|
|
$ |
1,562 |
|
|
|
Earned
premiums:
|
|
Commercial
lines insurance
|
|
$ |
2,199 |
|
|
$ |
2,316 |
|
|
$ |
2,411 |
|
Personal
lines insurance
|
|
|
685 |
|
|
|
689 |
|
|
|
714 |
|
Excess
and surplus lines insurance
|
|
|
27 |
|
|
|
5 |
|
|
|
0 |
|
Total
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,125 |
|
|
|
Investment
income:
|
|
Commercial
lines insurance
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Personal
lines insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Excess
and surplus lines insurance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
(1)
|
|
$ |
336 |
|
|
$ |
350 |
|
|
$ |
393 |
|
|
|
Loss
and loss expenses incurred related to current accident
year:
|
|
Commercial
lines insurance
|
|
$ |
1,662 |
|
|
$ |
1,777 |
|
|
$ |
1,598 |
|
Personal
lines insurance
|
|
|
591 |
|
|
|
597 |
|
|
|
478 |
|
Excess
and surplus lines insurance
|
|
|
21 |
|
|
|
5 |
|
|
|
0 |
|
Total
|
|
$ |
2,274 |
|
|
$ |
2,379 |
|
|
$ |
2,076 |
|
|
|
Loss
and loss expenses incurred related to prior accident
years:
|
|
Commercial
lines insurance
|
|
$ |
(147 |
) |
|
$ |
(273 |
) |
|
$ |
(204 |
) |
Personal
lines insurance
|
|
|
(40 |
) |
|
|
(50 |
) |
|
|
(40 |
) |
Excess
and surplus lines insurance
|
|
|
(1 |
) |
|
|
0 |
|
|
|
0 |
|
Total
|
|
$ |
(188 |
) |
|
$ |
(323 |
) |
|
$ |
(244 |
) |
|
|
Amortization
of deferred policy acquisition costs:
|
|
Commercial
lines insurance
|
|
$ |
458 |
|
|
$ |
462 |
|
|
$ |
477 |
|
Personal
lines insurance
|
|
|
143 |
|
|
|
145 |
|
|
|
150 |
|
Excess
and surplus lines insurance
|
|
|
10 |
|
|
|
3 |
|
|
|
0 |
|
Total
|
|
$ |
611 |
|
|
$ |
610 |
|
|
$ |
627 |
|
|
|
Paid
loss and loss expenses:
|
|
Commercial
lines insurance
|
|
$ |
1,348 |
|
|
$ |
1,387 |
|
|
$ |
1,299 |
|
Personal
lines insurance
|
|
|
573 |
|
|
|
568 |
|
|
|
492 |
|
Excess
and surplus lines insurance
|
|
|
2 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
$ |
1,923 |
|
|
$ |
1,955 |
|
|
$ |
1,791 |
|
|
|
Written
premiums:
|
|
Commercial
lines insurance
|
|
$ |
2,181 |
|
|
$ |
2,311 |
|
|
$ |
2,413 |
|
Personal
lines insurance
|
|
|
691 |
|
|
|
685 |
|
|
|
704 |
|
Excess
and surplus lines insurance
|
|
|
39 |
|
|
|
14 |
|
|
|
0 |
|
Total
|
|
$ |
2,911 |
|
|
$ |
3,010 |
|
|
$ |
3,117 |
|
Note
to Schedule VI:
(1) This
segment information is not regularly allocated to segments and not reviewed by
company management in making decisions about resources to be allocated to the
segments or to assess their performance.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) 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
/S/ Eric
N. Mathews
By:
Eric N. Mathews, CPCU, AIAF
Title: Principal
Accounting Officer, Vice President, Assistant Secretary and Assistant
Treasurer
Date: February
26, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
duly signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature
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Title
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Date
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/S/ John J. Schiff, Jr.
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Chairman
of the Board
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February
26, 2010
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John
J. Schiff, Jr.
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/S/ Kenneth W. Stecher
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President,
Chief Executive Officer and Director
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February
26, 2010
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Kenneth
W. Stecher
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/S/ Steven J. Johnston
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Chief
Financial Officer, Senior Vice President, Secretary and
Treasurer
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February
26, 2010
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Steven
J. Johnston
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/S/ William F. Bahl
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Director
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February
26, 2010
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William
F. Bahl
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/S/ James E. Benoski
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Vice
Chairman of the Board
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February
26, 2010
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James
E. Benoski
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/S/ Gregory T. Bier
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Director
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February
26, 2010
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Gregory
T. Bier
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/S/ Linda W. Clement-Holmes
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Director
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February
26, 2010
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Linda
W. Clement-Holmes
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/S/ Kenneth C. Lichtendahl
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Director
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February
26, 2010
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Kenneth
C. Lichtendahl
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/S/ W. Rodney McMullen
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Director
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February
26, 2010
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W.
Rodney McMullen
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/S/ Gretchen W. Price
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Director
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February
26, 2010
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Gretchen
W. Price
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/S/ Thomas R. Schiff
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Director
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February
26, 2010
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Thomas
R. Schiff
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/S/ Douglas S. Skidmore
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Director
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February
26, 2010
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Douglas
S. Skidmore
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/S/ John F. Steele, Jr.
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Director
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February
26, 2010
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John
F. Steele, Jr.
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/S/ Larry R. Webb
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Director
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February
26, 2010
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Larry
R. Webb
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/S/ E. Anthony Woods
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Director
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February
26, 2010
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E.
Anthony Woods
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INDEX
OF EXHIBITS
Exhibit No.
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Exhibit Description
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3.1A
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Amended
Articles of Incorporation of Cincinnati Financial Corporation
(incorporated by reference to the company’s 1999 Annual Report on Form
10-K dated March 23, 2000) (File No. 000-04604)
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3.1B
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Amendment
to Article Fourth of Amended Articles of Incorporation of Cincinnati
Financial Corporation (incorporated by reference to Exhibit 3(i) filed
with the company’s Current Report on Form 8-K dated
July 15, 2005)
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3.2
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Regulations
of Cincinnati Financial Corporation (incorporated by reference to the
company's Definitive Proxy Statement dated March 2, 1992, Exhibit 2, as
subsequently amended pursuant to adoption of Management's Proposal to
Amend Cincinnati Financial Corporation's Code of Regulations on pages 5- 6
of the company's Proxy dated March 20, 2008) (File No.
000-04604).
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4.1
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Indenture
with The Bank of New York Trust Company (incorporated by
reference to the company’s Current Report on Form 8-K dated November 2,
2004, filed with respect to the issuance of the company’s 6.125% Senior
Notes due November 1, 2034)
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4.2
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Supplemental
Indenture with The Bank of New York Trust Company (incorporated
by reference to the company’s Current Report on Form 8-K dated November 2,
2004, filed with respect to the issuance of the company’s 6.125% Senior
Notes due November 1, 2034)
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4.3
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Second
Supplemental Indenture with The Bank of New York Trust Company
(incorporated by reference to the company’s Current Report on Form 8-K
dated May 9, 2005, filed with respect to the completion of the company’s
exchange offer and rescission offer for its 6.90% senior debentures due
2028)
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4.4
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Form
of 6.125% Exchange Note Due 2034 (included in Exhibit
4.2)
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4.5
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Form
of 6.92% Debentures Due 2028 (included in Exhibit 4.3)
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4.6
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Indenture
with the First National Bank of Chicago (subsequently assigned to The Bank
of New York Trust Company) (incorporated by reference to the company’s
registration statement on Form S-3 effective May 22, 1998
(File No. 333-51677))
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4.7
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Form
of 6.90% Debentures Due 2028 (included in Exhibit 4.6)
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10.1
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Agreement
with Messer Construction (incorporated by reference to the company’s 2004
Annual Report on Form 10-K dated March 11, 2005)
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10.2
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Cincinnati
Financial Corporation Directors’ Stock Plan of 2009 (incorporated by
reference to the company’s definitive Proxy Statement dated March 20,
2009)
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10.3
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Cincinnati
Financial Corporation Stock Option Plan No. VI (incorporated by reference
to the company’s definitive Proxy Statement dated March 1, 1999) (File No.
000-04604)
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10.4
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Cincinnati
Financial Corporation Stock Option Plan No. VII (incorporated by reference
to the company’s definitive Proxy Statement dated March 8, 2002) (File No.
000-04604)
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10.5
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Form
of Nonqualified and Incentive Option Agreements for Stock Option Plan No.
VI (incorporated by reference to the company’s 2004 Annual
Report on Form 10-K dated March 11, 2005)
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10.6
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Cincinnati
Financial Corporation Annual Incentive Compensation Plan of 2009
(incorporated by reference to the company’s definitive Proxy Statement
dated March 20, 2009)
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10.7
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Cincinnati
Financial Corporation 2006 Stock Compensation
Plan (incorporated by reference to the company’s definitive
Proxy Statement dated March 30, 2007)
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10.8
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Form
of Combined Incentive/Nonqualified Stock Option for Stock Option Plan VI
(incorporated by reference to Exhibit 10.3 filed with the company’s
Current Report on Form 8-K dated July 15, 2005)
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10.9
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Director
and Named Executive Officer Compensation Summary (incorporated by
reference to the company’s definitive Proxy Statement dated March 20,
2009)
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10.10
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Cincinnati
Financial Corporation Supplemental Retirement Plan (incorporated by
reference to Exhibit 10.17 filed with the company’s Quarterly Report
on Form 10-Q for the quarter ended
September 30, 2006)
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10.11
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Form
of Incentive Stock Option Agreement for Stock Option Plan VII
(incorporated by reference to Exhibit 10.1 filed with the company’s
Current Report on Form 8-K dated October 20, 2006)
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10.12
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Form
of Nonqualified Stock Option Agreement for Stock Option Plan VII
(incorporated by reference to Exhibit 10.2 filed with the company’s
Current Report on Form 8-K dated October 20, 2006)
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10.13
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Form
of Incentive Stock Option Agreement for the 2006 Stock Compensation Plan
(incorporated by reference to Exhibit 10.3 filed with the company’s
Current Report on Form 8-K dated
October 20, 2006)
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10.14
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Form
of Nonqualified Stock Option Agreement for the 2006 Stock Compensation
Plan (incorporated by reference to Exhibit 10.4 filed with the company’s
Current Report on Form 8-K dated October 20, 2006)
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Exhibit No.
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Exhibit Description
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10.15
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Restricted
Stock Unit Agreement for John J. Schiff, Jr., dated January 31, 2007
(incorporated by reference to Exhibit 10.1 filed with the company’s
Current Report on Form 8-K dated January 31, 2007)
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10.16
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Restricted
Stock Unit Agreement for James E. Benoski, dated January 31, 2007
(incorporated by reference to Exhibit 10.2 filed with the company’s
Current Report on Form 8-K dated January 31, 2007)
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10.17
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Restricted
Stock Unit Agreement for Jacob F. Scherer, Jr., dated January 31, 2007
(incorporated by reference to Exhibit 10.3 filed with the company’s
Current Report on Form 8-K dated January 31, 2007)
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10.18
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Restricted
Stock Unit Agreement for Kenneth W. Stecher, dated January 31, 2007
(incorporated by reference to Exhibit 10.4 filed with the company’s
Current Report on Form 8-K dated January 31, 2007)
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10.19
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Restricted
Stock Unit Agreement for Thomas A. Joseph, dated January 31, 2007
(incorporated by reference to Exhibit 10.5 filed with the company’s
Current Report on Form 8-K dated January 31, 2007)
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10.20
|
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Form
of Restricted Stock Unit Agreement for the Cincinnati Financial
Corporation 2006 Stock Compensation Plan (service-based) (incorporated by
reference to Exhibit 10.6 filed with the company’s Current Report on
Form 8-K dated January 31, 2007, as amended)
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10.21
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Form
of Restricted Stock Unit Agreement for use under the Cincinnati Financial
Corporation 2006 Stock Compensation Plan (performance-based) (incorporated
by reference to Exhibit 10.1 filed with the company's Current Report on
Form 8-K dated November 18, 2008)
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10.22
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Form
of Incentive Compensation Agreement for the Cincinnati Financial
Corporation Incentive Compensation Plan of 2009 (incorporated by reference
to Exhibit 10.1 filed with the company's Current Report on Form 8-K dated
March 16, 2009)
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10.23
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Stock
Purchase Agreement between Cincinnati Financial Corporation and the E.
Perry Webb Marital Trust, dated September 5, 2007 (incorporated by
reference to Exhibit 10.34 filed with the company’s Quarterly Report on
Form 10-Q for the quarter ended
September 30, 2007)
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10.24
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Restricted
Stock Unit Agreement for John J. Schiff, Jr. dated February 18, 2008
(incorporated by reference to Exhibit 10.1 filed with the company's
Current Report on Form 8-K dated February 20, 2008)
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10.25
|
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Restricted
Stock Unit Agreement for James E. Benoski dated February 18, 2008
(incorporated by reference to Exhibit 10.2 filed with the company's
Current Report on Form 8-K dated February 20, 2008)
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10.26
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Restricted
Stock Unit Agreement for Jacob F. Scherer, Jr. dated February 18, 2008
(incorporated by reference to Exhibit 10.3 filed with the company's
Current Report on Form 8-K dated February 20, 2008)
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10.27
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Restricted
Stock Unit Agreement for Kenneth W. Stecher dated February 18, 2008
(incorporated by reference to Exhibit 10.4 filed with the company's
Current Report on Form 8-K dated February 20, 2008)
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10.28
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Restricted
Stock Unit Agreement for Thomas A. Joseph dated February 18, 2008
(incorporated by reference to Exhibit 10.5 filed with the company's
Current Report on Form 8-K dated February 20, 2008)
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10.29
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Unwritten
arrangement with Lehman Brothers Inc. to sell 35,000,000 shares of Fifth
Third stock held by the Cincinnati Financial Corporation (incorporated by
reference to the further description of the arrangement set forth on the
company’s Current Report on Form 8-K dated July 25,
2008)
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10.30
|
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Amended
and Restated Cincinnati Financial Corporation Top Hat Savings Plan dated
November 14, 2008 (incorporated by reference to Exhibit 10.38 filed with
the company’s Annual Report on Form 10-K dated February 27,
2009)
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10.31
|
|
Restricted
Stock Unit Agreement for John J. Schiff, Jr. dated November 14, 2008
(incorporated by reference to Exhibit 10.2 filed with the company’s
Current Report on Form 8-K dated November 14, 2008)
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10.32
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Restricted
Stock Unit Agreement for James E. Benoski dated November 14, 2008
(incorporated by reference to Exhibit 10.3 filed with the company’s
Current Report on Form 8-K dated November 14, 2008)
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10.33
|
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Restricted
Stock Unit Agreement for Kenneth W. Stecher dated November 14, 2008
(incorporated by reference to Exhibit 10.4 filed with the company’s
Current Report on Form 8-K dated November 14, 2008)
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10.34
|
|
Restricted
Stock Unit Agreement for Steven J. Johnston dated November 14, 2008
(incorporated by reference to Exhibit 10.5 filed with the company’s
Current Report on Form 8-K dated November 14, 2008)
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|
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10.35
|
|
Restricted
Stock Unit Agreement for Thomas A. Joseph dated November 14, 2008
(incorporated by reference to Exhibit 10.6 filed with the company’s
Current Report on Form 8-K dated November 14, 2008)
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|
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10.36
|
|
Restricted
Stock Unit Agreement for J.F. Scherer dated November 14, 2008
(incorporated by reference to Exhibit 10.7 filed with the company’s
Current Report on Form 8-K dated November 14, 2008)
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10.37
|
|
Incentive
Compensation Award Agreement for Kenneth W. Stecher dated March 16, 2009
under Incentive Compensation Plan of 2009 (incorporated by reference to
Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated
March 16, 2009)
|
Exhibit No.
|
|
Exhibit Description
|
10.38
|
|
Incentive
Compensation Award Agreement for Steven J. Johnston dated March 16, 2009
under Incentive Compensation Plan of 2009 (incorporated by reference to
Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated
March 16, 2009)
|
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10.39
|
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Credit
Agreement by and among Cincinnati Financial Corporation, CFC Investment
Company, and PNC Bank, National Association, dated August 31, 2009 (which
supersedes that certain Offer and Acceptance of terms to renew $75 million
unsecured line of credit with PNC Bank, National Association, effective
June 30, 2009, that was filed with and described in the company’s Current
Report on Form 8-K dated July 7, 2009) (incorporated by reference to
Exhibit 10.1 filed with the company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2009).
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10.40
|
|
Swap
Agreement by and among Cincinnati Financial Corporation, CFC Investment
Company and PNC Bank, National Association, dated August 31, 2009
(incorporated by reference to Exhibit 10.2 filed with the company’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2009).
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11
|
|
Statement
re: Computation of per share earnings for the years ended December
31, 2009, 2008, and 2007 contained in Part II, Item 8, Note 12 to the
Consolidated Financial Statements
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|
14
|
|
Cincinnati
Financial Corporation Code of Ethics for Senior Financial Officers
(incorporated by reference to the company’s Definitive Proxy Statement
data March 18, 2004 (File No. 000-04604))
|
|
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|
21
|
|
Cincinnati
Financial Corporation subsidiaries contained in Part I, Item 1 of this
report
|
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23
|
|
Consent
of Independent Registered Public Accounting Firm
|
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31A
|
|
Certification
pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief
Executive Officer
|
|
|
|
31B
|
|
Certification
pursuant to Section 302 of the Sarbanes Oxley Act of 2002 –
Chief Financial Officer
|
|
|
|
32
|
|
Certification
pursuant to Section 906 of the Sarbanes Oxley Act of
2002
|