Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
(Mark
one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For
the quarterly period ended September 30, 2010.
¨ 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)
Ohio
|
|
31-0746871
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
6200 S. Gilmore Road, Fairfield,
Ohio
|
|
45014-5141
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
Registrant’s
telephone number, including area code: (513) 870-2000
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
þ Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
þ Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company" in Rule 12b-2 of the Exchange Act.
þ Large accelerated
filer o
Accelerated filer o Non-accelerated
filer o
Smaller reporting company
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
o Yes þ No
As of
October 25, 2010, there were 162,736,024 shares of common stock
outstanding.
Cincinnati
Financial Third-Quarter 2010 10-Q
CINCINNATI
FINANCIAL CORPORATION
FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010
TABLE
OF CONTENTS
Part
I – Financial Information
|
3
|
|
|
Item
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
|
Condensed
Consolidated Balance Sheets
|
3
|
|
|
Condensed
Consolidated Statements of Income
|
4
|
|
|
Condensed
Consolidated Statements of Shareholders’ Equity
|
5
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
6
|
|
|
Notes
To Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
|
|
|
Safe
Harbor Statement
|
19
|
|
|
Introduction
|
21
|
|
|
Results
of Operations
|
28
|
|
|
Liquidity
and Capital Resources
|
41
|
|
|
Other
Matters
|
43
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
45
|
|
|
|
Fixed-Maturity
Investments
|
45
|
|
|
Equity
Investments
|
47
|
|
|
Short-Term
Investments
|
47
|
|
|
Unrealized
Investment Gains and Losses
|
47
|
|
|
Item
4.
|
Controls
and Procedures
|
50
|
|
|
|
Part
II – Other Information
|
50
|
|
|
Item
1.
|
Legal
Proceedings
|
50
|
|
|
|
Item
1A.
|
Risk
Factors
|
50
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
50
|
|
|
|
Item
3.
|
Defaults
upon Senior Securities
|
51
|
|
|
|
Item
4.
|
(Removed
and Reserved)
|
51
|
|
|
|
Item
5.
|
Other
Information
|
51
|
|
|
|
Item
6.
|
Exhibits
|
51
|
Cincinnati
Financial Third-Quarter 2010 10-Q
Part
I – Financial Information
Item
1.
|
Financial
Statements (unaudited)
|
Cincinnati
Financial Corporation and Subsidiaries
Condensed
Consolidated Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
(In millions except per share data)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Fixed
maturities, at fair value (amortized cost: 2010—$7,718;
2009—$7,514)
|
|
$ |
8,466 |
|
|
$ |
7,855 |
|
Equity
securities, at fair value (cost: 2010—$2,177; 2009—$2,016)
|
|
|
2,757 |
|
|
|
2,701 |
|
Short-term
investments, at fair value (amortized cost; 2010—$0;
2009—$6)
|
|
|
- |
|
|
|
6 |
|
Other
invested assets
|
|
|
82 |
|
|
|
81 |
|
Total
investments
|
|
|
11,305 |
|
|
|
10,643 |
|
Cash
and cash equivalents
|
|
|
445 |
|
|
|
557 |
|
Investment
income receivable
|
|
|
114 |
|
|
|
118 |
|
Finance
receivable
|
|
|
71 |
|
|
|
75 |
|
Premiums
receivable
|
|
|
1,035 |
|
|
|
995 |
|
Reinsurance
receivable
|
|
|
554 |
|
|
|
675 |
|
Prepaid
reinsurance premiums
|
|
|
17 |
|
|
|
15 |
|
Deferred
policy acquisition costs
|
|
|
469 |
|
|
|
481 |
|
Land,
building and equipment, net, for company use (accumulated depreciation:
2010—$358; 2009—$335)
|
|
|
236 |
|
|
|
251 |
|
Other
assets
|
|
|
176 |
|
|
|
45 |
|
Separate
accounts
|
|
|
648 |
|
|
|
585 |
|
Total
assets
|
|
$ |
15,070 |
|
|
$ |
14,440 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
|
|
|
|
|
|
Loss
and loss expense reserves
|
|
$ |
4,225 |
|
|
$ |
4,142 |
|
Life
policy reserves
|
|
|
1,968 |
|
|
|
1,783 |
|
Unearned
premiums
|
|
|
1,573 |
|
|
|
1,509 |
|
Other
liabilities
|
|
|
560 |
|
|
|
670 |
|
Deferred
income tax
|
|
|
247 |
|
|
|
152 |
|
Note
payable
|
|
|
49 |
|
|
|
49 |
|
Long-term
debt
|
|
|
790 |
|
|
|
790 |
|
Separate
accounts
|
|
|
648 |
|
|
|
585 |
|
Total
liabilities
|
|
|
10,060 |
|
|
|
9,680 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities (Note 10)
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, par value—$2 per share; (authorized: 2010 and 2009—500 million
shares; issued: 2010—196 million shares, 2009—196 million
shares)
|
|
|
393 |
|
|
|
393 |
|
Paid-in
capital
|
|
|
1,087 |
|
|
|
1,081 |
|
Retained
earnings
|
|
|
3,919 |
|
|
|
3,862 |
|
Accumulated
other comprehensive income
|
|
|
814 |
|
|
|
624 |
|
Treasury
stock at cost (2010—33 million shares and 2009—34 million
shares)
|
|
|
(1,203 |
) |
|
|
(1,200 |
) |
Total
shareholders' equity
|
|
|
5,010 |
|
|
|
4,760 |
|
Total
liabilities and shareholders' equity
|
|
$ |
15,070 |
|
|
$ |
14,440 |
|
Accompanying
notes are an integral part of these condensed consolidated financial
statements.
Cincinnati
Financial Third-Quarter 2010 10-Q
Cincinnati
Financial Corporation and Subsidiaries
Condensed
Consolidated Statements of Income
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions except per share data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
784 |
|
|
$ |
766 |
|
|
$ |
2,299 |
|
|
$ |
2,301 |
|
Investment
income, net of expenses
|
|
|
128 |
|
|
|
127 |
|
|
|
388 |
|
|
|
370 |
|
Other
income
|
|
|
4 |
|
|
|
4 |
|
|
|
9 |
|
|
|
9 |
|
Realized
investment gains (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairments on fixed maturity securities
|
|
|
(1 |
) |
|
|
(11 |
) |
|
|
(3 |
) |
|
|
(54 |
) |
Other-than-temporary
impairments on fixed maturity securities transferred to Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
realized investment gains (losses), net
|
|
|
156 |
|
|
|
121 |
|
|
|
143 |
|
|
|
144 |
|
Total
realized investment gains (losses), net
|
|
|
155 |
|
|
|
110 |
|
|
|
140 |
|
|
|
90 |
|
Total
revenues
|
|
|
1,071 |
|
|
|
1,007 |
|
|
|
2,836 |
|
|
|
2,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
losses and policyholder benefits
|
|
|
575 |
|
|
|
498 |
|
|
|
1,686 |
|
|
|
1,737 |
|
Underwriting,
acquisition and insurance expenses
|
|
|
258 |
|
|
|
247 |
|
|
|
772 |
|
|
|
750 |
|
Other
operating expenses
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
14 |
|
Interest
expense
|
|
|
13 |
|
|
|
14 |
|
|
|
40 |
|
|
|
42 |
|
Total
benefits and expenses
|
|
|
850 |
|
|
|
763 |
|
|
|
2,509 |
|
|
|
2,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
221 |
|
|
|
244 |
|
|
|
327 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
59 |
|
|
|
59 |
|
|
|
84 |
|
|
|
6 |
|
Deferred
|
|
|
6 |
|
|
|
14 |
|
|
|
(8 |
) |
|
|
34 |
|
Total
provision (benefit) for income taxes
|
|
|
65 |
|
|
|
73 |
|
|
|
76 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
156 |
|
|
$ |
171 |
|
|
$ |
251 |
|
|
$ |
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income—basic
|
|
$ |
0.95 |
|
|
$ |
1.05 |
|
|
$ |
1.54 |
|
|
$ |
1.15 |
|
Net
income—diluted
|
|
|
0.95 |
|
|
|
1.05 |
|
|
|
1.53 |
|
|
|
1.15 |
|
Accompanying
notes are an integral part of these condensed consolidated financial
statements.
Cincinnati
Financial Third-Quarter 2010 10-Q
Cincinnati
Financial Corporation and Subsidiaries
Condensed
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Share-
|
|
|
|
Outstanding
|
|
|
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
holders'
|
|
(In millions)
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2008
|
|
|
162 |
|
|
$ |
393 |
|
|
$ |
1,069 |
|
|
$ |
3,579 |
|
|
$ |
347 |
|
|
$ |
(1,206 |
) |
|
$ |
4,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
187 |
|
|
|
- |
|
|
|
- |
|
|
|
187 |
|
Other
comprehensive income, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
434 |
|
|
|
- |
|
|
|
434 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
621 |
|
Cumulative
effect of change in accounting for other-than-temporary impairments as of
April 1, 2009, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
106 |
|
|
|
(106 |
) |
|
|
- |
|
|
|
- |
|
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
Stock
options exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
5 |
|
Balance
September 30, 2009
|
|
|
162 |
|
|
$ |
393 |
|
|
$ |
1,078 |
|
|
$ |
3,681 |
|
|
$ |
675 |
|
|
$ |
(1,201 |
) |
|
$ |
4,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2009
|
|
|
162 |
|
|
$ |
393 |
|
|
$ |
1,081 |
|
|
$ |
3,862 |
|
|
$ |
624 |
|
|
$ |
(1,200 |
) |
|
$ |
4,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
251 |
|
|
|
- |
|
|
|
- |
|
|
|
251 |
|
Other
comprehensive income, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
190 |
|
|
|
- |
|
|
|
190 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441 |
|
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(194 |
) |
|
|
- |
|
|
|
- |
|
|
|
(194 |
) |
Stock
options exercised
|
|
|
1 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
1 |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Purchases
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10 |
) |
|
|
(10 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
3 |
|
Balance
September 30, 2010
|
|
|
163 |
|
|
$ |
393 |
|
|
$ |
1,087 |
|
|
$ |
3,919 |
|
|
$ |
814 |
|
|
$ |
(1,203 |
) |
|
$ |
5,010 |
|
Accompanying
notes are an integral part of these condensed consolidated financial
statements.
Cincinnati
Financial Third-Quarter 2010 10-Q
Cincinnati
Financial Corporation and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
251 |
|
|
$ |
187 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and other non-cash items
|
|
|
30 |
|
|
|
21 |
|
Realized
gains on investments
|
|
|
(140 |
) |
|
|
(90 |
) |
Stock-based
compensation
|
|
|
9 |
|
|
|
8 |
|
Interest
credited to contract holders
|
|
|
33 |
|
|
|
30 |
|
Deferred
income tax (benefit) expense
|
|
|
(8 |
) |
|
|
34 |
|
Changes
in:
|
|
|
|
|
|
|
|
|
Investment
income receivable
|
|
|
4 |
|
|
|
(11 |
) |
Premiums
and reinsurance receivable
|
|
|
81 |
|
|
|
65 |
|
Deferred
policy acquisition costs
|
|
|
(19 |
) |
|
|
(16 |
) |
Other
assets
|
|
|
(2 |
) |
|
|
(4 |
) |
Loss
and loss expense reserves
|
|
|
83 |
|
|
|
109 |
|
Life
policy reserves
|
|
|
86 |
|
|
|
80 |
|
Unearned
premiums
|
|
|
64 |
|
|
|
13 |
|
Other
liabilities
|
|
|
(27 |
) |
|
|
(13 |
) |
Current
income tax receivable/payable
|
|
|
(28 |
) |
|
|
(51 |
) |
Net
cash provided by operating activities
|
|
|
417 |
|
|
|
362 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Sale
of fixed maturities
|
|
|
136 |
|
|
|
128 |
|
Call
or maturity of fixed maturities
|
|
|
757 |
|
|
|
577 |
|
Sale
of equity securities
|
|
|
128 |
|
|
|
905 |
|
Collection
of finance receivables
|
|
|
21 |
|
|
|
22 |
|
Purchase
of fixed maturities
|
|
|
(1,145 |
) |
|
|
(1,769 |
) |
Purchase
of equity securities
|
|
|
(276 |
) |
|
|
(656 |
) |
Change
in short-term investments, net
|
|
|
7 |
|
|
|
72 |
|
Investment
in buildings and equipment, net
|
|
|
(14 |
) |
|
|
(31 |
) |
Investment
in finance receivables
|
|
|
(17 |
) |
|
|
(25 |
) |
Change
in other invested assets, net
|
|
|
1 |
|
|
|
(7 |
) |
Net
cash used in investing activities
|
|
|
(402 |
) |
|
|
(784 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payment
of cash dividends to shareholders
|
|
|
(189 |
) |
|
|
(186 |
) |
Purchase
of treasury shares
|
|
|
(10 |
) |
|
|
- |
|
Contract
holders' funds deposited
|
|
|
130 |
|
|
|
102 |
|
Contract
holders' funds withdrawn
|
|
|
(53 |
) |
|
|
(49 |
) |
Excess
tax benefits on share-based compensation
|
|
|
1 |
|
|
|
- |
|
Other
|
|
|
(6 |
) |
|
|
(6 |
) |
Net
cash used in financing activities
|
|
|
(127 |
) |
|
|
(139 |
) |
Net
change in cash and cash equivalents
|
|
|
(112 |
) |
|
|
(561 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
557 |
|
|
|
1,009 |
|
Cash
and cash equivalents at end of period
|
|
$ |
445 |
|
|
$ |
448 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
27 |
|
|
$ |
28 |
|
Income
taxes paid
|
|
|
113 |
|
|
|
57 |
|
Non-cash
activities:
|
|
|
|
|
|
|
|
|
Conversion
of securities
|
|
$ |
5 |
|
|
$ |
12 |
|
Equipment
acquired under capital lease obligations
|
|
|
- |
|
|
|
15 |
|
Accompanying
notes are an integral part of these condensed consolidated financial
statements.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
condensed consolidated financial statements include the accounts of Cincinnati
Financial Corporation and its consolidated subsidiaries, each of which are
wholly owned, and are presented in conformity with accounting principles
generally accepted in the United States of America (GAAP). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The
preparation of financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Our actual results could differ from those
estimates. The December 31, 2009, condensed consolidated balance
sheet amounts are derived from the audited financial statements but do not
include all disclosures required by GAAP.
We have
changed our presentation of earned premiums in our condensed consolidated
statements of income, effective the first quarter of 2010. We have summarized
property casualty and life earned premiums to a single caption, “Earned
premiums.” See Note 7, Reinsurance, Page 15, for further detail on property
casualty and life earned premiums. We have changed our presentation of long-term
debt in our condensed consolidated balance sheet, effective the second quarter
of 2010. We have summarized the long-term debt to a single caption, “Long-term
debt.” See Note 3, Fair Value Measurements, Page 10, for further detail on
interest rates, year of issue and maturity of our long-term debt.
Our
September 30, 2010, condensed consolidated financial statements are unaudited.
Certain financial information that is included in annual financial statements
prepared in accordance with GAAP is not required for interim reporting and has
been condensed or omitted. We believe that we have made all adjustments,
consisting only of normal recurring accruals, that are necessary for fair
presentation. These condensed consolidated financial statements should be read
in conjunction with our consolidated financial statements included in our
2009 Annual Report on Form 10-K. The results of operations for interim
periods do not necessarily indicate results to be expected for the full
year.
With the
adoption of Accounting Standards Codification (ASC) 320, Recognition and
Presentation of Other-Than-Temporary Impairments, 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
(AOCI). ASC 320 does not allow retrospective application of the new
other-than-temporary impairment (OTTI) model. Our condensed consolidated
statements of income for the nine months ended September 30, 2010, are not
measured on the same basis as prior period amounts and, accordingly, these
amounts are not comparable.
Adopted
Accounting Updates
ASU
2010-08, Technical Corrections to Various Topics
In
February 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-08, Technical Corrections to Various Topics. ASU
2010-08 does not change any of the fundamentals of U.S. GAAP, but it does
explain certain clarifications made to the guidance on embedded derivatives and
hedging. We have adopted ASU 2010-08, effective for the first reporting period
after issuance and for fiscal years beginning after December 15, 2009. It did
not have a material impact on our company’s financial position, cash flows or
results of operations.
ASU
2010-09, Subsequent Events
In
February 2010, the FASB issued ASU 2010-09, Subsequent Events. ASU 2010-09
removes the requirement for Securities and Exchange Commission (SEC) filers to
disclose the date through which subsequent events have been evaluated in both
issued and revised financial statements. We have adopted ASU 2010-09, effective
for the first reporting period after issuance. It did not have a material impact
on our company’s financial position, cash flows or results
of operations.
Pending
Accounting Updates
ASU
2010-06, Fair Value Measurements and Disclosures
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 is for interim and annual periods beginning after December 15,
2010. The portion of ASU 2010-06 that we have not yet adopted will not have a
material impact on our company’s financial position, cash flows or results of
operations.
Cincinnati
Financial Third-Quarter 2010 10-Q
ASU
2010-15, How Investments Held through Separate Accounts Affect an Insurer’s
Consolidation Analysis of Those Investments
In April
2010, the FASB issued ASU 2010-15, How Investments Held through Separate
Accounts Affect an Insurer’s Consolidation Analysis of Those Investments. ASU
2010-15 applies to all insurance entities that have separate accounts that
meet the definition and requirements set in the Accounting Standards
Codification Manual.
ASU
2010-15 clarifies that an insurance entity should not consider any separate
account interests held for the benefit of contract holders in an investment to
be the insurer’s interests. The insurance entity should not combine those
interests with its general account interest in the same investment when
assessing the investment for consolidation. The insurance entity may combine
those interests when the separate account interests are held for the benefit of
a related-party policyholder as defined in the Variable Interest Subsections of
Consolidation topic in the Codification Manual.
The
effective date of the amendments in this update is for interim and annual
periods beginning after December 15, 2010, with early adoption permitted. The
amendments in this update do not modify the disclosures currently required by
GAAP and are not expected to have a material impact on our company’s financial
position, cash flows or results of operations.
ASU
2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses
In July
2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 will
improve transparency in financial reporting for companies that hold financing
receivables, which include loans, lease receivables and other long-term
receivables. The additional disclosures required by ASU 2010-20 are effective
for interim and annual reporting periods ending on or after December 15, 2010.
The ASU has not yet been adopted and is not expected to have a material impact
on our company’s financial position, cash flows or results of
operations.
ASU
2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance
Contracts
In
October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts. ASU 2010-26 modifies the definitions
of the type of costs incurred by insurance entities that can be capitalized in
the successful acquisition of new and renewal contracts. ASU 2010-26
requires incremental direct costs of successful contract acquisition as well as
certain costs related to underwriting, policy issuance and processing, medical
and inspection and sales force contract selling for successful contract
acquisition to be capitalized. These incremental direct costs and other
costs are those that are essential to the contract transaction and would not
have been incurred had the contract transaction not occurred. The effective date
of ASU 2010-26 is for interim and annual reporting periods beginning after
December 15, 2011. The ASU has not yet been adopted and we are currently
evaluating the impact this ASU will have on our company’s financial
position, cash flows or results of operations.
Fixed
maturities (bonds and redeemable preferred stocks), equity securities (common
and non-redeemable preferred stocks) and short-term investments have been
classified as available for sale and are stated at fair values at September 30,
2010, and December 31, 2009. Realized gains and losses on investments are
recognized in earnings on a specific identification basis.
The
change in unrealized gains and losses, net of taxes, described in the following
table, is included in other comprehensive income and shareholders’
equity.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Change
in unrealized investment gains and losses and other
summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
$ |
198 |
|
|
$ |
407 |
|
|
$ |
407 |
|
|
$ |
787 |
|
Equity
securities
|
|
|
85 |
|
|
|
165 |
|
|
|
(105 |
) |
|
|
(121 |
) |
Adjustment
to deferred acquisition costs and life policy reserves
|
|
|
(11 |
) |
|
|
(14 |
) |
|
|
(18 |
) |
|
|
(24 |
) |
Pension
obligations
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
Other
|
|
|
2 |
|
|
|
14 |
|
|
|
7 |
|
|
|
26 |
|
Income
taxes on above
|
|
|
(96 |
) |
|
|
(201 |
) |
|
|
(102 |
) |
|
|
(235 |
) |
Total
|
|
$ |
178 |
|
|
$ |
371 |
|
|
$ |
190 |
|
|
$ |
434 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
The
following table analyzes cost or amortized cost, gross unrealized gains, gross
unrealized losses and fair value for our investments, along with the amount
of cumulative non-credit OTTI losses transferred to AOCI in accordance with ASC
320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments, for
securities that also had a credit impairment:
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
amortized
|
|
|
Gross unrealized
|
|
|
Fair
|
|
|
OTTI in
|
|
(In millions)
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
AOCI
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States,
municipalities and political subdivisions
|
|
$ |
2,998 |
|
|
$ |
219 |
|
|
$ |
- |
|
|
$ |
3,217 |
|
|
$ |
- |
|
Convertibles
and bonds with warrants attached
|
|
|
69 |
|
|
|
- |
|
|
|
- |
|
|
|
69 |
|
|
|
- |
|
United
States government
|
|
|
4 |
|
|
|
1 |
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
Government-sponsored
enterprises
|
|
|
123 |
|
|
|
1 |
|
|
|
- |
|
|
|
124 |
|
|
|
- |
|
Foreign
government
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
Corporate
bonds
|
|
|
4,521 |
|
|
|
530 |
|
|
|
3 |
|
|
|
5,048 |
|
|
|
- |
|
Subtotal
|
|
|
7,718 |
|
|
|
751 |
|
|
|
3 |
|
|
|
8,466 |
|
|
|
- |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities
|
|
|
2,102 |
|
|
|
591 |
|
|
|
37 |
|
|
|
2,656 |
|
|
|
|
|
Preferred
equities
|
|
|
75 |
|
|
|
27 |
|
|
|
1 |
|
|
|
101 |
|
|
|
|
|
Subtotal
|
|
|
2,177 |
|
|
|
618 |
|
|
|
38 |
|
|
|
2,757 |
|
|
NA
|
|
Total
|
|
$ |
9,895 |
|
|
$ |
1,369 |
|
|
$ |
41 |
|
|
$ |
11,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
unrealized investment gains at September 30, 2010, were largely due to a net
gain position in our fixed income portfolio of $748 million and a
net gain position in our common stock portfolio of $554 million.
The two primary contributors to the net gain position were Procter
& Gamble Company (NYSE:PG) and Exxon Mobil Corporation (NYSE:XOM)
common stock, which had a combined net gain position of $210 million.
At September 30, 2010, we had $69 million fair value of hybrid
securities included in fixed maturities that follow ASC 815-15-25,
Accounting for Certain Hybrid Financial Instruments. The hybrid securities
are carried at fair value, and the changes in fair value are included in
realized investment gains and losses.
The table
below provides fair values and unrealized losses by investment category and by
the duration of the securities’ continuous unrealized loss
position:
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(In millions)
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States,
municipalities and political subdivisions
|
|
$ |
6 |
|
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
- |
|
|
$ |
16 |
|
|
$ |
- |
|
Government-sponsored
enterprises
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
- |
|
Corporate
bonds
|
|
|
25 |
|
|
|
- |
|
|
|
83 |
|
|
|
3 |
|
|
|
108 |
|
|
|
3 |
|
Subtotal
|
|
|
46 |
|
|
|
- |
|
|
|
93 |
|
|
|
3 |
|
|
|
139 |
|
|
|
3 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities
|
|
|
449 |
|
|
|
37 |
|
|
|
44 |
|
|
|
- |
|
|
|
493 |
|
|
|
37 |
|
Preferred
equities
|
|
|
- |
|
|
|
- |
|
|
|
23 |
|
|
|
1 |
|
|
|
23 |
|
|
|
1 |
|
Subtotal
|
|
|
449 |
|
|
|
37 |
|
|
|
67 |
|
|
|
1 |
|
|
|
516 |
|
|
|
38 |
|
Total
|
|
$ |
495 |
|
|
$ |
37 |
|
|
$ |
160 |
|
|
$ |
4 |
|
|
$ |
655 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
Net
realized gains were $140 million for the nine months ended September 30, 2010,
compared with net realized gains of $90 million for the same period in 2009. For
the quarter, the net realized gains were $155 million for the three months
ended September 30, 2010, and $110 million for the same period in 2009. The
net realized gains for the three months ended September 30, 2010, were
largely due to the sale of Verisk Analytics Inc. (NYSE: VRSK) common stock,
contributing $128 million during the third quarter of 2010.
Other-than-temporary
Impairment Charges
During
the three and nine months ended September 30, 2010, there were no credit losses
on fixed-maturity securities for which a portion of OTTI has been recognized in
other comprehensive income. The following table provides the amount of OTTI
charges for the three and nine months ended September 30, 2010:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Fixed
maturities
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
3 |
|
|
$ |
54 |
|
Equity
securities
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
|
|
59 |
|
Total
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
36 |
|
|
$ |
113 |
|
During
the quarter ended September 30, 2010, we impaired five fixed-maturity securities
for a total of $1 million. For the nine months ended September 30, 2010, we
impaired nine fixed-maturity securities for a total of $3 million and six equity
securities for a total of $33 million. At September 30, 2010,
28 fixed-maturity investments with a total unrealized loss of
$3 million had been in an unrealized loss position for 12 months or more,
but none were trading below 70 percent of book value. At September 30,
2010, four equity securities with a total unrealized loss of $1 million had
been in an unrealized loss position for 12 months or more, but none were
trading below 70 percent of book value.
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.
At December 31, 2009, ten equity investments with a total unrealized loss of
$26 million had been in an unrealized loss position for 12 months or
more but none were trading below 70 percent of book value.
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). 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. Our valuation techniques have not changed from those
used at December 31, 2009, and ultimately management determines fair
value.
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 active 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 cannot be determined that
market participants would in fact transact for the asset or liability at
the quoted price; or
|
|
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 or out of the Level 3 category as
of the beginning of the quarter in which the reclassification
occurred.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
following tables illustrate the fair value hierarchy for those assets measured
at fair value on a recurring basis at September 30, 2010, and December 31, 2009.
We do not have any material liabilities carried at fair value. There were no
significant transfers between Level 1 and Level 2.
Fair
Value Disclosures for Assets
|
|
Asset fair value measurements at September 30, 2010 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
|
|
$ |
- |
|
|
$ |
5,096 |
|
|
$ |
21 |
|
|
$ |
5,117 |
|
Foreign
government
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
3 |
|
U.S.
Treasury and U.S. government agencies
|
|
|
5 |
|
|
|
124 |
|
|
|
- |
|
|
|
129 |
|
States,
municipalities and political subdivisions
|
|
|
- |
|
|
|
3,213 |
|
|
|
4 |
|
|
|
3,217 |
|
Subtotal
|
|
|
5 |
|
|
|
8,436 |
|
|
|
25 |
|
|
|
8,466 |
|
Common
equities, available for sale
|
|
|
2,656 |
|
|
|
- |
|
|
|
- |
|
|
|
2,656 |
|
Preferred
equities, available for sale
|
|
|
- |
|
|
|
96 |
|
|
|
5 |
|
|
|
101 |
|
Taxable
fixed maturities separate accounts
|
|
|
- |
|
|
|
610 |
|
|
|
2 |
|
|
|
612 |
|
Top
Hat Savings Plan
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
Total
|
|
$ |
2,669 |
|
|
$ |
9,142 |
|
|
$ |
32 |
|
|
$ |
11,843 |
|
|
|
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 |
|
Subtotal
|
|
|
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 |
|
Each
financial instrument that was deemed to have significant unobservable inputs
when determining valuation is identified in the tables below by security type
with a summary of changes in fair value for periods ended September 30, 2010 and
2009. As of September 30, 2010, total Level 3 assets continue to be less than
1 percent of financial assets measured at fair value. At September 30,
2010, total fair value of assets priced with broker quotes and other
non-observable market inputs for the fair value measurements and disclosures was
$32 million.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
following table provides the change in Level 3 assets for the three months ended
September 30, 2010. One Level 3 corporate fixed-maturity security
matured resulting in a $4 million decrease. There were no other significant
changes to Level 3 assets during this period.
|
|
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, June 30, 2010
|
|
$ |
23 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
32 |
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Included
in other comprehensive income
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Purchases,
sales, issuances, and settlements
|
|
|
(4 |
) |
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
Transfers
in and/or out of Level 3
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Ending
balance, September 30, 2010
|
|
$ |
21 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
32 |
|
|
|
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, June 30, 2009
|
|
$ |
20 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
64 |
|
|
$ |
8 |
|
|
$ |
97 |
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Included
in other comprehensive income
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
(1 |
) |
Purchases,
sales, issuances, and settlements
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
1 |
|
Transfers
in and/or out of Level 3
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
Ending
balance, September 30, 2009
|
|
$ |
24 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
62 |
|
|
$ |
4 |
|
|
$ |
95 |
|
The
following table provides the change in Level 3 assets for the nine months ended
September 30, 2010. One Level 3 corporate fixed-maturity security was
purchased for $5 million and two corporate fixed-maturity securities
matured for $7 million, resulting in a $2 million decrease to
purchases, sales, issuances, and settlements. As a result of the change in use
of observable or unobservable inputs throughout the nine months ended September
30, 2010, Level 3 corporate fixed-maturity securities decreased $5 million
as two securities totaling $9 million transferred from Level 3 to Level 2
and two securities totaling $4 million transferred from Level 2 to Level 3.
There were no other significant changes to Level 3 assets during this
period.
|
|
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, December 31, 2009
|
|
$ |
27 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
36 |
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Included
in other comprehensive income
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Purchases,
sales, issuances, and settlements
|
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Transfers
in and/or out of Level 3
|
|
|
(5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
Ending
balance, September 30, 2010
|
|
$ |
21 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
32 |
|
|
|
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, December 31, 2008
|
|
$ |
50 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
64 |
|
|
$ |
22 |
|
|
$ |
147 |
|
Total
gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings (or changes in net assets)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
(3 |
) |
Included
in other comprehensive income
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
1 |
|
Purchases,
sales, issuances, and settlements
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
1 |
|
Transfers
in and/or out of Level 3
|
|
|
(30 |
) |
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(15 |
) |
|
|
(51 |
) |
Ending
balance, September 30, 2009
|
|
$ |
24 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
62 |
|
|
$ |
4 |
|
|
$ |
95 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
Fair
Value Disclosure for Senior Debt and Life Insurance Assets and
Liabilities
The
disclosures below are not affected by the fair value hierarchy but are presented
to provide timely information about the effects of current market conditions on
financial instruments that are not reported at fair value in our financial
statements.
This
table summarizes the book value and principal amounts of our long-term
debt:
(In millions)
|
|
|
|
|
|
Book value
|
|
|
Principal amount
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
Interest rate
|
|
Year of issue
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.900 |
% |
1998
|
|
Senior
debentures, due 2028
|
|
$ |
28 |
|
|
$ |
28 |
|
|
$ |
28 |
|
|
$ |
28 |
|
|
6.920 |
% |
2005
|
|
Senior
debentures, due 2028
|
|
|
391 |
|
|
|
391 |
|
|
|
391 |
|
|
|
391 |
|
|
6.125 |
% |
2004
|
|
Senior
notes, due 2034
|
|
|
371 |
|
|
|
371 |
|
|
|
374 |
|
|
|
374 |
|
|
|
|
|
|
Total
|
|
$ |
790 |
|
|
$ |
790 |
|
|
$ |
793 |
|
|
$ |
793 |
|
The fair
value of our senior debt approximated $830 million at September 30, 2010,
compared with $740 million at year-end 2009. Fair value was determined
under the fair value measurements and disclosures accounting rules based on
market pricing of these or similar debt instruments that are actively trading.
Fair value can vary with macro-economic concerns. Regardless of the fluctuations
in fair value, the outstanding principal amount of our long-term debt is
$793 million. None of the long-term debt is encumbered by rating triggers.
Also, we have one note payable with outstanding principal amount of
$49 million, which approximates fair value.
The fair
value of life policy loans outstanding principal and interest approximated
$45 million, compared with book value of $39 million reported in the
condensed consolidated balance sheets at
September 30, 2010.
Life
reserves and liabilities for deferred annuities and other investment contracts
were $886 million and $736 million at September 30, 2010, and December
31, 2009, respectively. Fair value for these deferred annuities and investment
contracts was $873 million and $737 million at September 30, 2010, and
December 31, 2009, 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 at September 30, 2010, 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.
NOTE
4 – Deferred Acquisition Costs
The
expenses associated with issuing insurance policies – primarily commissions,
premium taxes and underwriting costs – are deferred and amortized over the terms
of the policies. We update our acquisition cost assumptions periodically to
reflect actual experience, and we evaluate our deferred acquisition costs for
recoverability. The table below shows the deferred policy acquisition costs and
asset reconciliation, including the amortized deferred policy acquisition
costs.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition costs asset, beginning of period
|
|
$ |
485 |
|
|
$ |
500 |
|
|
$ |
481 |
|
|
$ |
509 |
|
Capitalized
deferred policy acquisition costs
|
|
|
168 |
|
|
|
168 |
|
|
|
510 |
|
|
|
492 |
|
Amortized
deferred policy acquisition costs
|
|
|
(167 |
) |
|
|
(160 |
) |
|
|
(492 |
) |
|
|
(475 |
) |
Amortized
shadow deferred policy acquisition costs
|
|
|
(17 |
) |
|
|
(23 |
) |
|
|
(30 |
) |
|
|
(41 |
) |
Deferred
policy acquisition costs asset, end of period
|
|
$ |
469 |
|
|
$ |
485 |
|
|
$ |
469 |
|
|
$ |
485 |
|
There
were no premium deficiencies recorded in the reported condensed consolidated
statements of income, as the sum of the anticipated loss and loss adjustment
expenses, policyholder dividends, maintenance expenses and underwriting expenses
did not exceed the related unearned premiums and anticipated investment
income.
Cincinnati
Financial Third-Quarter 2010 10-Q
NOTE
5 – Property Casualty Loss And Loss Expenses
This
table summarizes activity for our consolidated property casualty loss and loss
expense reserves:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Gross
loss and loss expense reserves, beginning of period
|
|
$ |
4,131 |
|
|
$ |
4,187 |
|
|
$ |
4,096 |
|
|
$ |
4,040 |
|
Less
reinsurance receivable
|
|
|
311 |
|
|
|
501 |
|
|
|
435 |
|
|
|
542 |
|
Net
loss and loss expense reserves, beginning of period
|
|
|
3,820 |
|
|
|
3,686 |
|
|
|
3,661 |
|
|
|
3,498 |
|
Net
incurred loss and loss expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year
|
|
|
592 |
|
|
|
550 |
|
|
|
1,731 |
|
|
|
1,736 |
|
Prior
accident years
|
|
|
(61 |
) |
|
|
(91 |
) |
|
|
(174 |
) |
|
|
(113 |
) |
Total
incurred
|
|
|
531 |
|
|
|
459 |
|
|
|
1,557 |
|
|
|
1,623 |
|
Net
paid loss and loss expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year
|
|
|
308 |
|
|
|
271 |
|
|
|
641 |
|
|
|
659 |
|
Prior
accident years
|
|
|
196 |
|
|
|
201 |
|
|
|
730 |
|
|
|
789 |
|
Total
paid
|
|
|
504 |
|
|
|
472 |
|
|
|
1,371 |
|
|
|
1,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss and loss expense reserves, end of period
|
|
|
3,847 |
|
|
|
3,673 |
|
|
|
3,847 |
|
|
|
3,673 |
|
Plus
reinsurance receivable
|
|
|
319 |
|
|
|
478 |
|
|
|
319 |
|
|
|
478 |
|
Gross
loss and loss expense reserves, end of period
|
|
$ |
4,166 |
|
|
$ |
4,151 |
|
|
$ |
4,166 |
|
|
$ |
4,151 |
|
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 prior accident years’ loss and loss expenses by
$61 million and $91 million for the three months ended
September 30, 2010 and 2009 and $174 million and
$113 million for the nine months ended September 30, 2010 and 2009,
respectively. A primary cause of the decrease was a reduction in actual
exposures, relative to expectations when prior years reserves were initially
set, especially for the workers’ compensation and umbrella lines of business.
The reserve for loss and loss expenses in the condensed consolidated
balance sheets also includes $59 million
at September 30, 2010, and $46 million at September
30, 2009, for certain life and health loss and loss
expense reserves.
NOTE
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.
|
|
September 30,
|
|
|
December 31,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
Ordinary/traditional
life
|
|
$ |
619 |
|
|
$ |
579 |
|
Universal
life
|
|
|
446 |
|
|
|
450 |
|
Deferred
annuities
|
|
|
685 |
|
|
|
539 |
|
Investment
contracts
|
|
|
201 |
|
|
|
197 |
|
Other
|
|
|
17 |
|
|
|
18 |
|
Total
|
|
$ |
1,968 |
|
|
$ |
1,783 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
Our
condensed consolidated statements of income include earned consolidated property
casualty insurance premiums on assumed and ceded business:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Direct
earned premiums
|
|
$ |
782 |
|
|
$ |
773 |
|
|
$ |
2,295 |
|
|
$ |
2,317 |
|
Assumed
earned premiums
|
|
|
3 |
|
|
|
3 |
|
|
|
8 |
|
|
|
10 |
|
Ceded
earned premiums
|
|
|
(42 |
) |
|
|
(43 |
) |
|
|
(124 |
) |
|
|
(129 |
) |
Net
earned premiums
|
|
$ |
743 |
|
|
$ |
733 |
|
|
$ |
2,179 |
|
|
$ |
2,198 |
|
Our
condensed consolidated statements of income include incurred consolidated
property casualty insurance loss and loss expenses on assumed and ceded
business:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Direct
incurred loss and loss expenses
|
|
$ |
549 |
|
|
$ |
486 |
|
|
$ |
1,526 |
|
|
$ |
1,671 |
|
Assumed
incurred loss and loss expenses
|
|
|
3 |
|
|
|
1 |
|
|
|
8 |
|
|
|
8 |
|
Ceded
incurred loss and loss expenses
|
|
|
(21 |
) |
|
|
(29 |
) |
|
|
23 |
|
|
|
(60 |
) |
Net
incurred loss and loss expenses
|
|
$ |
531 |
|
|
$ |
458 |
|
|
$ |
1,557 |
|
|
$ |
1,619 |
|
Largely
because of a $33 million reduction in second quarter ceded reserves,
total ceded incurred loss and loss expenses for the nine months ended September
30, 2010, increased net incurred loss and loss expenses by $23 million.
This reserve reduction occurred in our USAIG pool, as discussed in our 2009
Annual Report on Form 10-K, Item 1, Risk Factors, Page 27. Direct reserves
were correspondingly reduced by $33 million, so there was no effect on net
incurred loss and loss adjustment expenses. Also, a reduction of $7 million
in ceded IBNR reserves in the first quarter 2010 is included in the
$23 million ceded incurred loss and loss expenses.
Our
condensed consolidated statements of income include earned life insurance
premiums on ceded business:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Direct
earned premiums
|
|
$ |
53 |
|
|
$ |
45 |
|
|
$ |
157 |
|
|
$ |
139 |
|
Ceded
earned premiums
|
|
|
(12 |
) |
|
|
(12 |
) |
|
|
(37 |
) |
|
|
(36 |
) |
Net
earned premiums
|
|
$ |
41 |
|
|
$ |
33 |
|
|
$ |
120 |
|
|
$ |
103 |
|
Our
condensed consolidated statements of income include life insurance contract
holders’ benefits incurred on ceded business:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Direct
contract holders' benefits incurred
|
|
$ |
59 |
|
|
$ |
48 |
|
|
$ |
173 |
|
|
$ |
147 |
|
Ceded
contract holders' benefits incurred
|
|
|
(15 |
) |
|
|
(8 |
) |
|
|
(44 |
) |
|
|
(29 |
) |
Net
incurred loss and loss expenses
|
|
$ |
44 |
|
|
$ |
40 |
|
|
$ |
129 |
|
|
$ |
118 |
|
NOTE
8 – Employee Retirement Benefits
The
following summarizes the components of net periodic costs for our qualified and
supplemental pension plans:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Service
cost
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
7 |
|
|
$ |
7 |
|
Interest
cost
|
|
|
3 |
|
|
|
3 |
|
|
|
10 |
|
|
|
9 |
|
Expected
return on plan assets
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(9 |
) |
Amortization
of actuarial loss and prior service cost
|
|
|
1 |
|
|
|
0 |
|
|
|
2 |
|
|
|
1 |
|
Net
periodic benefit cost
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
$ |
8 |
|
See our
2009 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits,
Page 109 for information on our retirement benefits. We made matching
contributions of $2 million to our 401(k) savings plan during the third
quarter of 2010 and 2009 and contributions of $6 million for the first nine
months of 2010 and 2009.
We
contributed $25 million to our qualified pension plan during the third
quarter of 2010. We do not anticipate further contributions during the remainder
of 2010.
Cincinnati
Financial Third-Quarter 2010 10-Q
NOTE
9 – Stock-Based Associate Compensation Plans
We
currently have four equity compensation plans that permit us to grant various
types of equity awards. We currently grant incentive stock options,
non-qualified stock options, service-based restricted stock units and
performance-based restricted stock units under our shareholder-approved plans.
We also have a Holiday Stock Plan that permits annual awards of one share of
common stock to each full-time associate for each full calendar 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. For additional information about our equity compensation plans,
see our 2009 Annual Report on Form 10-K, Item 8, Note 17, Stock-Based
Associate Compensation Plans, Page 113.
A total
of 17 million shares are authorized to be granted under the
shareholder-approved plans. At September 30, 2010,
six million shares were available for future issuance under the
plans.
Our
pretax and after-tax stock-based compensation costs are summarized
below:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Stock-based
compensation cost
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
$ |
8 |
|
Income
tax benefit
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
2 |
|
Stock-based
compensation cost after tax
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
6 |
|
|
$ |
6 |
|
Stock-Based
Awards
During
the first quarter of 2010, we granted 31,310 shares of common stock to our
directors for 2009 board service fees. Stock-based awards were granted to
associates during the first quarter of 2010 and are summarized in the tables
below. No stock-based awards were granted to associates or directors during the
second and third quarters of 2010.
As of
September 30, 2010, $14 million of unrecognized compensation costs related
to non-vested awards is expected to be recognized over a weighted-average period
of 1.9 years.
Here is a
summary of option information:
(Shares in thousands)
|
|
Shares
|
|
|
Weighted-
average
exercise
price
|
|
Outstanding
at January 1, 2010
|
|
|
9,875 |
|
|
$ |
36.67 |
|
Granted
|
|
|
902 |
|
|
|
26.60 |
|
Exercised
|
|
|
(6 |
) |
|
|
26.75 |
|
Forfeited
|
|
|
(958 |
) |
|
|
28.35 |
|
Outstanding
at September 30, 2010
|
|
|
9,813 |
|
|
|
36.56 |
|
Here is a
summary of restricted stock unit information:
(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, 2010
|
|
|
597 |
|
|
$ |
31.60 |
|
|
|
121 |
|
|
$ |
29.75 |
|
Granted
|
|
|
290 |
|
|
|
22.27 |
|
|
|
52 |
|
|
|
22.41 |
|
Exercised
|
|
|
(155 |
) |
|
|
40.56 |
|
|
|
0 |
|
|
|
0.00 |
|
Forfeited
|
|
|
(9 |
) |
|
|
25.96 |
|
|
|
0 |
|
|
|
0.00 |
|
Cancelled
|
|
|
0 |
|
|
|
0.00 |
|
|
|
(24 |
) |
|
|
40.74 |
|
Nonvested
at September 30, 2010
|
|
|
723 |
|
|
|
26.00 |
|
|
|
149 |
|
|
|
25.38 |
|
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
Cincinnati
Financial Third-Quarter 2010 10-Q
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. Under
current accounting guidance, we establish accruals for lawsuits when it is
probable that a loss has been incurred and we can reasonably estimate its
potential exposure. The company accounts for such probable and estimable
lawsuits, if any, through the establishment of legal expense reserves. Based on
our quarterly review, we believe that our accruals for probable and estimable
lawsuits are reasonable and that the amounts accrued do not have a material
effect on our consolidated financial condition or results of operations.
However, if any one or more of these cases results in a judgment against us or
settlement for an amount that is significantly greater than the amount accrued,
the resulting liability could have a material effect on the company’s
consolidated results of operations or cash flows.
NOTE
11 – Income Taxes
As of
December 31, 2009, we had no liability for unrecognized tax benefits. Details
about our liability for unrecognized tax benefits are found in our 2009 Annual
Report on Form 10-K, Item 8, Note 11, Income Taxes, Pages 108 and
109.
We
anticipate that the Internal Revenue Service will conclude its audit of tax
years 2007 and 2008 within the next three months and that we will reach
agreement settling all issues presented. As a result, there is no liability for
unrecognized tax benefits at September 30, 2010.
We
operate primarily in two industries, property casualty insurance and life
insurance. We regularly review four different reporting segments to make
decisions about allocating resources and assessing performance:
·
|
Commercial
lines property casualty insurance
|
·
|
Personal
lines property casualty insurance
|
We report
as Other the non-investment operations of the parent company and its non-insurer
subsidiaries, CFC Investment Company and CSU Producer Resources Inc. We
also report as Other the results of The Cincinnati Specialty Underwriters
Insurance Company, as well as other income of our standard market property
casualty insurance subsidiary. Also included in 2009 results for this segment
are the operations of a former subsidiary, CinFin Capital Management.
See our 2009 Annual Report on Form 10-K, Item 8, Note 18, Segment
Information, Page 115 for a description of revenue, income or loss before
income taxes and identifiable assets for each of the four segments.
Cincinnati
Financial Third-Quarter 2010 10-Q
Segment
information is summarized in the following table:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
casualty
|
|
$ |
182 |
|
|
$ |
180 |
|
|
$ |
518 |
|
|
$ |
546 |
|
Commercial
property
|
|
|
123 |
|
|
|
122 |
|
|
|
365 |
|
|
|
362 |
|
Commercial
auto
|
|
|
96 |
|
|
|
99 |
|
|
|
287 |
|
|
|
296 |
|
Workers'
compensation
|
|
|
77 |
|
|
|
82 |
|
|
|
230 |
|
|
|
253 |
|
Specialty
packages
|
|
|
38 |
|
|
|
37 |
|
|
|
112 |
|
|
|
110 |
|
Surety
and executive risk
|
|
|
22 |
|
|
|
27 |
|
|
|
71 |
|
|
|
77 |
|
Machinery
and equipment
|
|
|
9 |
|
|
|
8 |
|
|
|
25 |
|
|
|
23 |
|
Total
commercial lines insurance
|
|
|
547 |
|
|
|
555 |
|
|
|
1,608 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
lines insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
auto
|
|
|
86 |
|
|
|
80 |
|
|
|
250 |
|
|
|
239 |
|
Homeowner
|
|
|
72 |
|
|
|
68 |
|
|
|
214 |
|
|
|
207 |
|
Other
personal lines
|
|
|
24 |
|
|
|
22 |
|
|
|
71 |
|
|
|
67 |
|
Total
personal lines insurance
|
|
|
182 |
|
|
|
170 |
|
|
|
535 |
|
|
|
513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance
|
|
|
41 |
|
|
|
33 |
|
|
|
121 |
|
|
|
104 |
|
Investment
operations
|
|
|
283 |
|
|
|
237 |
|
|
|
528 |
|
|
|
460 |
|
Other
|
|
|
18 |
|
|
|
12 |
|
|
|
44 |
|
|
|
26 |
|
Total
|
|
$ |
1,071 |
|
|
$ |
1,007 |
|
|
$ |
2,836 |
|
|
$ |
2,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
underwriting results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
lines insurance
|
|
$ |
(19 |
) |
|
$ |
42 |
|
|
$ |
(39 |
) |
|
$ |
(31 |
) |
Personal
lines insurance
|
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(52 |
) |
|
|
(96 |
) |
Life
insurance
|
|
|
(1 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Investment
operations
|
|
|
262 |
|
|
|
220 |
|
|
|
468 |
|
|
|
410 |
|
Other
|
|
|
(15 |
) |
|
|
(15 |
) |
|
|
(51 |
) |
|
|
(58 |
) |
Total
|
|
$ |
221 |
|
|
$ |
244 |
|
|
$ |
327 |
|
|
$ |
227 |
|
Identifiable
assets:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Property
casualty insurance
|
|
$ |
1,963 |
|
|
$ |
2,202 |
|
Life
insurance
|
|
|
1,238 |
|
|
|
1,176 |
|
Investment
operations
|
|
|
11,468 |
|
|
|
10,684 |
|
Other
|
|
|
401 |
|
|
|
378 |
|
Total
|
|
$ |
15,070 |
|
|
$ |
14,440 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion highlights significant factors influencing the consolidated
results of operations and financial position of Cincinnati Financial Corporation
(CFC). It should be read in conjunction with the consolidated financial
statements and related notes included in our 2009 Annual Report on
Form 10-K. Unless otherwise noted, the industry data is prepared by
A.M. Best Co., a leading insurance industry statistical, analytical and
financial strength rating organization. Information from A.M. Best is presented
on a statutory basis. When we provide our results on a comparable statutory
basis, we label it as such; all other company data is presented in
accordance with accounting principles generally accepted in the
United States of America (GAAP).
We
present per share data on a diluted basis unless otherwise noted, adjusting
those amounts for all stock splits and dividends. Dollar amounts are
rounded to millions; calculations of percent changes are based on
dollar amounts rounded to the nearest million. Certain percentage changes
are identified as not meaningful (nm).
This is
our “Safe Harbor” statement under the Private Securities Litigation Reform Act
of 1995. Our business is subject to certain risks and uncertainties that may
cause actual results to differ materially from those suggested by the
forward-looking statements in this report. Some of those risks and uncertainties
are discussed in our 2009 Annual Report on Form 10-K, 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
|
Downgrades
of the company’s financial strength
ratings
|
Cincinnati
Financial Third-Quarter 2010 10-Q
|
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
measures affecting corporate financial reporting and governance.
The ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
Cincinnati
Financial Third-Quarter 2010 10-Q
Introduction
Corporate
Financial Highlights
Income
Statement and Per Share Data
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions except share data)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
784 |
|
|
$ |
766 |
|
|
|
2 |
|
|
$ |
2,299 |
|
|
$ |
2,301 |
|
|
|
0 |
|
Investment
income, net of expenses
|
|
|
128 |
|
|
|
127 |
|
|
|
1 |
|
|
|
388 |
|
|
|
370 |
|
|
|
5 |
|
Realized
investment gains and losses, pretax
|
|
|
155 |
|
|
|
110 |
|
|
|
41 |
|
|
|
140 |
|
|
|
90 |
|
|
|
56 |
|
Total
revenues
|
|
|
1,071 |
|
|
|
1,007 |
|
|
|
6 |
|
|
|
2,836 |
|
|
|
2,770 |
|
|
|
2 |
|
Net
income
|
|
|
156 |
|
|
|
171 |
|
|
|
(9 |
) |
|
|
251 |
|
|
|
187 |
|
|
|
34 |
|
Per
share data (diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
0.95 |
|
|
|
1.05 |
|
|
|
(10 |
) |
|
|
1.53 |
|
|
|
1.15 |
|
|
|
33 |
|
Cash
dividends declared
|
|
|
0.40 |
|
|
|
0.395 |
|
|
|
1 |
|
|
|
1.19 |
|
|
|
1.175 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
163,175,682 |
|
|
|
162,901,396 |
|
|
|
0 |
|
|
|
163,251,628 |
|
|
|
162,794,767 |
|
|
|
0 |
|
Revenues
were higher for the third quarter of 2010 compared with the third quarter of
2009, driven by growth in earned premiums and realized investment gains.
Revenues for the nine months ended September 30, 2010, increased
compared with the same period of 2009 as higher investment revenues offset
slightly lower earned premiums. Revenue trends and investment revenues are
discussed further in the respective sections of Results of Operations, Page
28.
Realized
investment gains and losses are recognized on the sales of investments or as
otherwise required by GAAP. We have substantial discretion in the timing of
investment sales, and that timing generally is independent of the insurance
underwriting process. GAAP also requires us to recognize in income the gains or
losses from certain changes in fair values of securities even though we continue
to hold the securities.
Net
income for the third quarter of 2010 compared with the 2009 third quarter
decreased primarily due to weaker property casualty underwriting results that
declined $42 million after taxes. On an after-tax basis, investment income
increased $1 million and realized investment gains increased $25 million.
For the nine-month period ended September 30, 2010, net income
improved compared with the same period of 2009. The primary components of the
improvement, on an after-tax basis, included a $32 million increase in realized
investment gains, a $25 million improvement in property casualty underwriting
results, and a $10 million increase in investment income. Property casualty
underwriting performance and investment results are discussed below in Results
of Operations, beginning on Page 28. As discussed in our 2009 Annual Report on
Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 35,
there are several reasons that our performance during 2010 may be below our
long-term targets. In that annual report, as part of Results of Operations, we
also discussed the full-year 2010 outlook for each reporting
segment.
During
the nine months ended September 30, 2010, we repurchased
0.4 million shares of our common stock at a cost of $10 million, with
an average price paid per share of $26.49. We had no repurchases during the
third quarter of 2010.
The board
of directors is committed to rewarding shareholders directly through cash
dividends and through share repurchase authorizations. Through 2009, the company
had increased the indicated annual cash dividend rate for 49 consecutive years,
a record we believe was matched by only 10 other publicly traded companies. In
August 2010 the board of directors increased the fourth quarter dividend to 40
cents per share, and the payment of that dividend in mid-October resulted in our
50th
consecutive year of increasing cash dividends. Our board regularly evaluates
relevant factors in dividend-related decisions, and the increase declared in
August 2010 reflected confidence in our strong capital, liquidity and
initiatives to improve earnings performance.
Cincinnati
Financial Third-Quarter 2010 10-Q
Balance
Sheet Data and Performance Measures
|
|
At September 30,
|
|
|
At December 31,
|
|
(Dollars in millions except share data)
|
|
2010
|
|
|
2009
|
|
Balance
sheet data
|
|
|
|
|
|
|
Invested
assets
|
|
$ |
11,305 |
|
|
$ |
10,643 |
|
Total
assets
|
|
|
15,070 |
|
|
|
14,440 |
|
Short-term
debt
|
|
|
49 |
|
|
|
49 |
|
Long-term
debt
|
|
|
790 |
|
|
|
790 |
|
Shareholders'
equity
|
|
|
5,010 |
|
|
|
4,760 |
|
Book
value per share
|
|
|
30.80 |
|
|
|
29.25 |
|
Debt-to-total-capital
ratio
|
|
|
14.3
|
% |
|
|
15.0
|
% |
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Performance
measure
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
creation ratio
|
|
|
7.1%
|
|
|
|
13.1%
|
|
|
|
9.4%
|
|
|
|
15.0%
|
|
Invested
assets increased 6 percent and total assets increased 4 percent compared with
year-end 2009, largely due to purchases of additional securities and growth in
unrealized investment gains. Shareholders’ equity rose to over $5 billion and
book value per share increased 5 percent. Our debt-to-total-capital ratio
(capital is the sum of debt plus shareholders’ equity) improved compared with
the December 31, 2009, level. The value creation ratio, defined below, was lower
for the first nine months of 2010 compared with 2009, primarily due to less
growth in unrealized investment gains for the 2010 period. The $1.55 increase in
book value per share during the first nine months of 2010 added
5.3 percentage points to the value creation ratio while dividends declared
at $1.19 per share during the first nine months of 2010 contributed
4.1 points.
Through
The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the
25 largest property casualty insurers in the nation, based on 2009 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 as discussed in our 2009 Annual Report on Form 10-K, Item 1, Our
Business and Our Strategy, Page 1. In October 2010, we announced the appointment
of our first agent in Connecticut, our 38th state
of operation.
We
maintain a long-term perspective that guides us in addressing immediate
challenges or opportunities while focusing on the major decisions that best
position our company for success through all market cycles. We believe that this
forward-looking view has consistently benefited our policyholders, agents,
shareholders and associates.
To
measure our long-term progress, we have defined a value creation metric that we
believe captures the contribution of our insurance operations, the success of
our investment strategy and the importance we place on paying cash dividends to
shareholders. This measure, our value creation ratio or VCR, 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 this ratio is an appropriate way to measure our
long-term progress in creating shareholder value.
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, compared with negative
1.0 percent estimated growth rate for the property casualty insurance
industry.
|
For the
first nine months of 2010, our total property casualty net written premiums
increased less than 1 percent overall with our largest segment, commercial
lines, decreasing approximately 3 percent. A.M. Best forecasts a decline in
net written premiums of approximately 2 percent for the U.S. property
casualty industry for the year 2010, with the industry’s commercial lines
segment declining nearly 6 percent. A.M. Best also expects a sluggish
economic recovery and forecasts that premium rates will be flat to slightly down
throughout 2010. Given the ongoing weak pricing in the insurance
marketplace, we continue to exercise discipline for risk selection and pricing.
Our selective underwriting approach and the continued weakness in the broader
economy somewhat offset progress on growth initiatives discussed below in
Highlights of Our Strategies and Supporting Initiatives, Page 23.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
effects of targeted growth initiatives from recent years continue to mature over
time, as measured by growth in property casualty net written premiums. In the
first nine months of 2010, targeted growth highlights included $21 million
of standard commercial lines business from three new states – Texas, Colorado
and Wyoming – where we began operating in 2008 or 2009, and $15 million
from all states in total for our excess and surplus lines operation, which also
began in 2008.
·
|
Combined
ratio — We believe our underwriting philosophy and initiatives can
generate a GAAP combined ratio over any five-year period that is
consistently below 100 percent. Our GAAP combined ratio averaged
95.6 percent over the five-year period 2005 through 2009. It was
below 100 percent in each year during the period except 2008 and
2009, which averaged 102.5 percent including average catastrophe
losses that were 2.5 percentage points higher than the average for
the 10 years prior to 2008. Our statutory combined ratio averaged
95.4 percent over the five-year period 2005 through
2009 compared with an estimated 98.8 percent for the property
casualty industry.
|
For the
first nine months of 2010, our GAAP combined ratio was 104.7 percent and our
statutory combined ratio was 104.4 percent, both including 7.2 percentage
points of current accident year catastrophe losses offset by 7.9 percentage
points of favorable loss reserve development on prior accident years. A.M. Best
forecasts the industry’s full-year 2010 statutory combined ratio at
101.7 percent, including 4.0 percentage points of
catastrophe losses and a favorable impact of 2.3 percentage points
from prior accident year reserve releases. For the commercial lines industry
segment, A.M. Best forecasts a full-year 2010 statutory combined ratio at
103.7 percent, including 2.7 percentage points
of catastrophe losses and a favorable impact of 2.1 percentage
points from prior accident year reserve releases.
·
|
Investment
contribution — We believe our investment philosophy and initiatives can
drive investment income growth and lead to a total return on our equity
investment portfolio over a five-year period that exceeds the five-year
return of the Standard & Poor’s 500 Index. The compound annual return
for our equity portfolio over the five-year period 2005 through 2009 was
negative 5.8 percent compared with positive 0.4 percent for
the Index. Our equity portfolio underperformed the market for the
five-year period primarily because of the 2008 decline in the market
value of our previously large equity holdings in the financial services
sector.
|
Investment
income, 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.
For the
first nine months of 2010, pretax investment income was $388 million, up
5 percent from $370 million for the same period in 2009. The increase
reflected higher interest income from a significantly increased allocation to
fixed maturity securities during 2009. The current investment portfolio mix
provides a balance of income stability and growth with capital appreciation
potential.
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 these strategies will help us to better serve our agent customers, to
reduce volatility in our financial results and to weather difficult economic,
market or industry pricing cycles:
·
|
Manage
capital effectively – Continued focus on capital-related initiatives is
intended to manage our capital and provide financial flexibility so that
we can successfully grow our insurance business while also building
capital for the long-term benefit of shareholders. 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 profit-focused initiatives is
intended to improve pricing capabilities for our property casualty
business and improve our overall 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 supporting their
effectiveness and efficiency in serving clients and managing
expenses.
|
·
|
Drive
premium growth – Implementation of premium growth-oriented initiatives is
intended to expand our geographic footprint and diversify our premium
sources to obtain profitable growth without significant additional
infrastructure expense. Diversified growth also may reduce earnings
volatility related to regional differences for risks of weather-related
catastrophes or potential negative changes in economic, judicial or
regulatory environments.
|
We
discuss initiatives supporting each of these three strategies below, along with
metrics we use to assess our progress.
Cincinnati
Financial Third-Quarter 2010 10-Q
Manage
Capital Effectively
Our
primary capital management initiatives are:
·
|
Maintain
a diversified investment portfolio by reviewing and applying
diversification parameters and tolerances – We discuss our portfolio
strategies in greater depth in our 2009 Annual Report on Form 10-K, Item
1, Investment Segment, Page 18.
|
|
o
|
Fixed-maturity
portfolio that is diversified and exceeds total insurance reserves – At
September 30, 2010, no corporate exposure accounted for more
than 0.8 percent of our fixed-maturity portfolio and no municipal exposure
accounted for more than 0.3 percent. The $8.466 billion portfolio had
an average rating of 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 half of our bonds mature during the period 2010 through
2017. The portfolio fair value exceeded total insurance reserve liability
by approximately 37 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 relate to insurance
reserves, offsetting nearly 9 percent of that
liability.
|
|
o
|
Equity
portfolio that we diversify by minimizing concentrations in single stocks
or industries – At September 30, 2010, no single security
accounted for more than 6 percent of our portfolio of publicly traded
common stocks, and no single sector accounted for more than
17 percent. Because of the strength of our fixed-maturity portfolio,
we have the opportunity to invest for potential capital appreciation by
purchasing equity securities.
|
|
o
|
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 September 30, 2010,
we held $1.122 billion of our cash and invested assets at the
parent company level, of which $722 million, or 64.3 percent,
was invested in common stocks, and $92 million, or 8.2 percent,
was cash or cash equivalents.
|
·
|
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. We continue to
work on a comprehensive program with the objective of identifying overall
tolerances for catastrophe risk as well as regional guidelines that align
with our underwriting and reinsurance efforts. An important element of
this initiative is maintaining reinsurance coverage from highly rated
reinsurers to mitigate underwriting risk and to support our ability to
hold investments until maturity. See our 2009 Annual Report on Form 10-K,
Item 7, 2010 Reinsurance Programs, Page 79, for additional details on our
reinsurance.
|
·
|
Minimize
reliance on debt as a source of capital, maintaining the ratio of
debt-to-total-capital below 20 percent – At September 30, 2010, this
ratio at 14.3 percent was well below the target limit as capital
remained strong while debt levels were essentially unchanged from year-end
2009. Our long-term debt consists of three non-convertible, non-callable
debentures, two due in 2028 and one
in 2034.
|
·
|
Identify
tolerances for other operational risks and calibrate management decisions
accordingly – Among the areas of focus in 2010 were implications of health
care reform legislation and related income tax effects. Because our
employee benefit plans do not include subsidies related to retiree
prescription drug coverage, we have no corresponding tax effect due to the
legislation. We also continued work on managing exposure to operational
risks related to our company’s disaster recovery and business continuity.
Our enterprise risk management efforts also include evaluating emerging
risks such as potential changes in regulation at both the state and
federal levels and the potential effects of increased inflation on assets
and liabilities.
|
We
measure the overall success of our strategy to effectively manage capital
primarily by growing investment income and by achieving a total return on our
equity investment portfolio that exceeds the return of the S&P 500
Index over any five-year period. 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 for the 12 months ended
September 30, 2010, unchanged from 0.8-to-1 at year-end 2009. This
ratio is a common measure of operating leverage used in the property casualty
industry, with lower ratios indicating more capacity for a company’s premium
growth. A.M. Best estimated the industry ratio was 0.8-to-1 at year-end 2009 and
as of June 30, 2010.
Another
means of verifying our capital management strategy is our financial strength
ratings. Our parent company’s senior debt is rated by four independent ratings
firms. In addition, these firms award insurer financial strength ratings to our
property casualty and life companies based on their quantitative and qualitative
analyses. These ratings primarily assess an insurer’s ability to meet financial
obligations to policyholders and do not necessarily address all of the matters
that may be important to investors. 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.
Cincinnati
Financial Third-Quarter 2010 10-Q
As of
October 26, 2010, our insurer financial strength ratings were:
Insurer
Financial Strength Ratings
|
Rating
Agency
|
|
Standard Market Property
Casualty Insurance Subsidiary
|
|
Life Insurance
Subsidiary
|
|
Excess and Surplus
Insurance
Subsidiary
|
|
Date of Most Recent
Affirmation
or Action
|
|
|
|
|
Rating
Tier
|
|
|
|
Rating
Tier
|
|
|
|
Rating
Tier
|
|
|
A.
M. Best Co.
|
|
A+
|
Superior
|
2
of 16
|
|
A
|
Excellent
|
3
of 16
|
|
A
|
Excellent
|
3
of 16
|
|
Stable
outlook (2/18/10)
|
Fitch
Ratings
|
|
A+
|
Strong
|
5
of 21
|
|
A+
|
Strong
|
5
of 21
|
|
-
|
-
|
-
|
|
Stable
outlook (9/2/10)
|
Moody's
Investors Service
|
|
A1
|
Good
|
5
of 21
|
|
-
|
-
|
-
|
|
-
|
-
|
-
|
|
Stable
outlook (9/25/08)
|
Standard
& Poor's Ratings Services
|
|
A
|
Strong
|
6
of 21
|
|
A
|
Strong
|
6
of 21
|
|
-
|
-
|
-
|
|
Stable
outlook
(7/19/10)
|
·
|
All
of our insurance subsidiaries continue to be highly
rated.
|
On
September 2, 2010, Fitch Ratings affirmed our ratings that it had assigned in
August 2009, continuing its stable outlook. Fitch noted that ratings strengths
include conservative capitalization, moderate holding company leverage, ample
liquidity and competitive advantages from our distribution system. Fitch said
the ratings recognize our steps taken to rebalance our common stock portfolio to
reduce capital and earnings volatility. Fitch noted ratings concerns principally
related to challenges from competitive market conditions and exposure to
regional natural catastrophes and weather-related losses.
On July
19, 2010, Standard & Poor’s Ratings Services lowered the insurer financial
strength ratings to A (Strong) from A+ (Strong) on our standard market
property casualty companies and our life insurance subsidiary, raising its
outlook to stable. S&P said its actions reflected the recent decline in our
earnings and deterioration of underwriting performance from historical levels.
Standard & Poor’s noted our very strong capitalization and strong
competitive position, supported by a very loyal and productive agency force and
low-cost infrastructure. S&P also cited our improved enterprise risk
management, including a more conservative and risk-averse investment portfolio,
which supports capital stabilization.
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.
No other
ratings agency actions to our insurer financial strength ratings have occurred
in 2010.
Improve
Insurance Profitability
The main
initiatives to improve our insurance profitability include:
·
|
Improve
underwriting expertise – While most of our lines of business have
maintained underwriting profitability, we continue to work on improving
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 a team
of associates from underwriting, claims, loss control, marketing,
actuarial services and premium audit – focusing efforts toward restoring
those lines’ underwriting profitability. Progress during 2010 and future
plans for key initiatives are summarized
below.
|
|
|
Improve
pricing capabilities in each line of business – We began to use predictive
modeling tools that align individual insurance policy pricing to risk
attributes prior to 2010 for our homeowner and workers’ compensation lines
of business and expect to improve loss ratios over time. Predictive
modeling tools developed during 2010 were used in determining personal
auto rate changes effective beginning October 2010 for selected
states and similar pricing precision is being developed for additional
states. We continue to develop predictive models as a pricing tool for all
major lines of commercial insurance, with commercial auto targeted for
initial use in late 2010. Other initiatives in progress include preparing
regulatory filings for multiple price tiers supporting predictive modeling
and closer monitoring with measurements for commercial lines discretionary
rate credits applied based on risk
quality.
|
|
o
|
Improving
our business data to support accurate underwriting, pricing and decisions
– Over the next several years, we plan to 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. In the interim, new data mining and reporting tools are being
implemented for use with existing
databases.
|
Cincinnati
Financial Third-Quarter 2010 10-Q
·
|
Improve
expense management to make the best use of our resources – We continue to
invest in technology and workflow improvements to help improve efficiency
and grow our business, as insurance market conditions improve, without
proportional increases in expenses. Efficiency gains currently being
realized allowed us recently to reallocate associates, focusing resources
on more strategic activities and initiatives. During the first nine
months of 2010, our overall associate count decreased approximately 2
percent from the year-end 2009 level, largely in data entry functions
related to initial benefits from our investment in new or enhanced policy
administration systems.
|
·
|
Develop
and deploy technology – 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. Our technology
initiatives seek to make it easier for agents to do business with us while
enhancing our tradition of local decision-making by our agents and our
field representatives who live and work in their communities. Ongoing
technology development contributes to improved profitability by enhancing
internal efficiency and organization of business data used for
underwriting and pricing. Progress during 2010 and future plans for
major technology initiatives are highlighted
below.
|
|
o
|
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. During the first nine months of 2010, the
system was deployed in 14 additional states. In total those first 25
states produce approximately 90 percent of our total commercial
premium volume. We plan to deploy the system to as many as five additional
states during the remainder of 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. The response from agency staff has been
positive, and we believe the new system will further improve our position
among the go-to carriers for our agencies, having a positive impact over
the long term on growth of profitable commercial lines
business.
|
|
o
|
Personal
lines policy administration system – In early 2010, we deployed a new
version of our Diamond system to all agencies that produce our personal
lines business. In addition to handling additional data that supports
enhanced pricing sophistication, this 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
transact business with us, which we believe will significantly
benefit our objective of writing their highest quality accounts with
superior profit potential. During the first nine months of 2010, agents
continued to generate solid growth for our personal lines segment as new
business written premiums increased
22 percent.
|
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 insurance company based on premium volume in agencies that have
represented us for at least five years. We earned that rank in approximately
75 percent of these agencies, based on 2009 premiums. We are working to
increase the percentage of agencies where our premium share ranks us as No. 1 or
No. 2.
Drive
Premium Growth
Key
initiatives to drive premium growth include:
·
|
Appoint
new agencies – For 2010, we set an initial target of 65
new appointments of independent agencies writing an aggregate
$1 billion in property casualty premiums annually with all insurance
companies they represent. During the first nine months of 2010, we
appointed 71 new agencies, and we now expect that new appointments will
total approximately 80 for full-year 2010. The 71 new agencies write an
aggregate of nearly $1.2 billion in property casualty premiums
annually with various companies for an average of approximately
$16 million per agency. The smallest of the new agencies writes less
than $1 million for all represented companies and the largest writes
nearly $140 million. Since 2004, more than 25 larger agencies
that each write over $50 million for all represented companies have
been appointed to represent The Cincinnati Insurance Companies. As of
September 30, 2010, a total of 1,227 agency relationships
market our standard market insurance products from 1,524 reporting
locations.
|
We seek
to build close, long-term relationships with each agency we appoint and
carefully evaluate the marketing reach of each prospective appointment to ensure
the territory can support both current and new agencies. Our 114 field marketing
territories are staffed by marketing representatives averaging 19 years of
industry experience and nine years as a Cincinnati Insurance field marketing
representative. The team of field associates in each of their territories works
together with headquarters support associates to form our agent-centered
business model, providing local expertise, helping us better understand the
accounts we underwrite and creating market advantages for our
agents.
Cincinnati
Financial Third-Quarter 2010 10-Q
Expansion
into new states provides opportunities to replicate and leverage our highly
successful agent-centered business model through the appointment of additional
agencies. As of October 2010, our agents were actively marketing Cincinnati
Insurance policies in 38 states, and we continue to study the regulatory and
competitive environment in other states. We targeted entry during 2010 into two
new states: Connecticut and Oregon. Our first Connecticut agency appointment was
announced in October, and we expect to appoint the first Oregon agency later in
2010.
·
|
Earn
a larger share of business with currently appointed agents – We continue
to execute on growth initiatives begun in prior years, with a focus on the
key components of agent satisfaction. Important initiatives are summarized
below.
|
|
o
|
New
products and services – In early 2010 we launched a Target Markets
department intended to focus on new commercial product development and
support, including identification and promotional support for promising
classes of business. Associates with subject matter expertise in specific
industry segments are dedicated full time to those segments, engaging in
research and monitoring changes in the marketplace. We released a new
target markets product during the third quarter of 2010, the
Manufacturers’ Package Program. During the second quarter of 2010 we
released the Educational Institutions Program. Programs targeting two
additional industry segments, Home Health Care and Utility Services, are
expected to be implemented by late 2010. The target markets initiative is
expected to enable our agents to capture a greater share of the business
in their communities and to place that business with Cincinnati Insurance.
We also continue to add field associates where we can enhance service to
our agents to increase their market advantages and support new business
growth. Additions include loss control field representatives, personal
lines field marketing representatives and field specialists in surety
bonds or premium auditing.
|
|
o
|
New
states – Reaching our desired market share within an independent agency
requires several years as relationships mature. 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 our unique style of
service. In New Mexico and eastern Washington, states entered in 2007, we
appointed 13 agencies through 2009, earning an almost 5 percent share
of their total agency annual premium volume as of the end of 2009. In
Texas, entered in late 2008, our share of business is increasing as net
written premiums for the first nine months of 2010 rose to
$22 million compared with $7 million for the same period of
2009.
|
|
o
|
Excess
and surplus lines insurance – To better serve our agents and grow
profitably over time, we entered this market in 2008. We offer a variety
of coverages in 37 of the 38 states where agents market our standard
market coverages. Our agents write about $2.5 billion annually of
excess and surplus lines business with various carriers, and we plan to
earn a profitable share by bringing Cincinnati-style service to agents and
policyholders. During the second quarter of 2010, new products were
introduced for errors and omissions coverage targeting manufacturing and
staffing businesses. An important aspect of our excess and surplus lines
growth initiative is to carefully manage policy terms and conditions and
limit our exposure to any single risk to $1 million through
reinsurance. During the first nine months of 2010, net written premiums
were $43 million compared with $29 million for the same period
of 2009, an increase of
50 percent.
|
|
o
|
Personal
lines – As we refine pricing and improve ease of use for our agents, we
are benefitting from continued premium growth. Enhancement of our tiered
rating during 2009 helped to further improve our rate and credit
structures to attract and retain business for our agents’ more
quality-conscious clientele, with pricing that targets long-term
underwriting profitability. During the first nine months of 2010,
net written premiums increased 8 percent while new business
premiums increased 22 percent. In seven states where we
began writing personal lines business or significantly expanded our
product offerings and automation capabilities in 2008 or 2009, net written
premiums increased over 70 percent to a total of $30 million for the
first nine months of 2010. During the first nine months of 2010,
33 more of those agencies that formerly marketed only our
commercial lines products were activated to offer our personal lines
products, with 79 percent of our agents now marketing our personal
lines products in the 29 states where we make them
available.
|
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 the first nine months of
2010, our property casualty net written premiums increased slightly, at less
than 1 percent, compared with a full-year 2010 estimated 2 percent
decline for the industry.
Despite
near-term challenges in insurance and financial markets that are reflected in
year-to-date 2010 financial performance, we have made significant progress
on our initiatives and remain confident that our strategy can deliver long-term
value for shareholders.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
consolidated results of operations reflect the operating results of each of our
four segments along with the parent company and other activities reported as
“Other.” The four segments are:
·
|
Commercial
lines property casualty insurance
|
·
|
Personal
lines property casualty insurance
|
We report
as Other the non-investment operations of the parent company and its non-insurer
subsidiaries, CFC Investment Company and CSU Producer Resources Inc. We
also report as Other the results of The Cincinnati Specialty Underwriters
Insurance Company, as well as other income of our standard market property
casualty insurance subsidiary. See Item 1, Note 12, Segment Information, Page
17, for discussion of the calculations of segment data. Results of operations
for each of the four segments are discussed below.
Consolidated
Property Casualty Insurance Results of Operations
Consolidated
property casualty insurance results include premiums and expenses for our
standard market insurance (commercial lines and personal lines segments) as well
as our surplus lines operations.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Earned
premiums
|
|
$ |
743 |
|
|
$ |
733 |
|
|
|
1 |
|
|
$ |
2,179 |
|
|
$ |
2,198 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
561 |
|
|
|
542 |
|
|
|
3 |
|
|
|
1,575 |
|
|
|
1,553 |
|
|
|
1 |
|
Current
accident year catastrophe losses
|
|
|
31 |
|
|
|
8 |
|
|
|
271 |
|
|
|
158 |
|
|
|
183 |
|
|
|
(14 |
) |
Prior
accident years before catastrophe losses
|
|
|
(57 |
) |
|
|
(89 |
) |
|
|
36 |
|
|
|
(157 |
) |
|
|
(107 |
) |
|
|
(46 |
) |
Prior
accident years catastrophe losses
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(64 |
) |
|
|
(16 |
) |
|
|
(6 |
) |
|
|
(163 |
) |
Total
loss and loss expenses
|
|
|
532 |
|
|
|
459 |
|
|
|
16 |
|
|
|
1,560 |
|
|
|
1,623 |
|
|
|
(4 |
) |
Underwriting
expenses
|
|
|
240 |
|
|
|
238 |
|
|
|
1 |
|
|
|
722 |
|
|
|
716 |
|
|
|
1 |
|
Underwriting
(loss) profit
|
|
$ |
(29 |
) |
|
$ |
36 |
|
|
nm
|
|
|
$ |
(103 |
) |
|
$ |
(141 |
) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
75.5 |
% |
|
|
73.9 |
% |
|
|
1.6 |
|
|
|
72.3 |
% |
|
|
70.6 |
% |
|
|
1.7 |
|
Current
accident year catastrophe losses
|
|
|
4.3 |
|
|
|
1.2 |
|
|
|
3.1 |
|
|
|
7.2 |
|
|
|
8.4 |
|
|
|
(1.2 |
) |
Prior
accident years before catastrophe losses
|
|
|
(7.7 |
) |
|
|
(12.1 |
) |
|
|
4.4 |
|
|
|
(7.2 |
) |
|
|
(4.9 |
) |
|
|
(2.3 |
) |
Prior
accident years catastrophe losses
|
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
(0.7 |
) |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
Total
loss and loss expenses
|
|
|
71.6 |
|
|
|
62.7 |
|
|
|
8.9 |
|
|
|
71.6 |
|
|
|
73.8 |
|
|
|
(2.2 |
) |
Underwriting
expenses
|
|
|
32.3 |
|
|
|
32.4 |
|
|
|
(0.1 |
) |
|
|
33.1 |
|
|
|
32.6 |
|
|
|
0.5 |
|
Combined
ratio
|
|
|
103.9 |
% |
|
|
95.1 |
% |
|
|
8.8 |
|
|
|
104.7 |
% |
|
|
106.4 |
% |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio:
|
|
|
103.9 |
% |
|
|
95.1 |
% |
|
|
8.8 |
|
|
|
104.7 |
% |
|
|
106.4 |
% |
|
|
(1.7 |
) |
Contribution
from catastrophe losses and prior years reserve
development
|
|
|
(3.9 |
) |
|
|
(11.2 |
) |
|
|
7.3 |
|
|
|
(0.7 |
) |
|
|
3.2 |
|
|
|
(3.9 |
) |
Combined
ratio before catastrophe losses and prior years reserve
development
|
|
|
107.8 |
% |
|
|
106.3 |
% |
|
|
1.5 |
|
|
|
105.4 |
% |
|
|
103.2 |
% |
|
|
2.2 |
|
Our
consolidated property casualty insurance operations generated an underwriting
loss of $29 million for the three months ended September 30, 2010, compared
with an underwriting profit of $36 million for the three months ended
September 30, 2009. For the nine months ended September 30, 2010, our
property casualty insurance operations experienced an underwriting loss of
$103 million compared with an underwriting loss of $141 million for
the nine months ended September 30, 2009. The primary causes for last
year’s third-quarter underwriting profit changing to an underwriting loss
included a lower level of favorable reserve development on prior accident years
and higher weather-related catastrophe losses. The main drivers of improvement
in the 2010 year-to-date underwriting result included a higher level of
favorable reserve development on prior accident years and lower weather-related
catastrophe losses. More details of property casualty insurance results are
discussed below, including discussion of our commercial lines and personal lines
segments.
We
measure and analyze property casualty underwriting results primarily by the
combined ratio and its component ratios. The combined ratio is the
percentage of incurred losses plus all expenses per each earned premium dollar —
the lower the ratio, the better the performance. An underwriting profit results
when the combined ratio is below 100 percent. A combined ratio above
100 percent indicates that an insurance company’s losses and expenses
exceeded premiums.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
combined ratio can be affected significantly by catastrophe losses and other
large losses as discussed in detail below. The combined ratio can also be
affected by updated estimates of loss and loss expense reserves established for
claims that occurred in prior periods, referred to as prior accident years.
Development on prior accident year reserves, including reserves for catastrophe
losses, improved the combined ratio by 7.9 percentage points in the first
nine months of 2010 compared with 5.2 percentage points in the same
period of 2009. The higher amount of favorable development for the first nine
months of 2010 compared with 2009 was driven by a reversal of last year’s
development trend for the workers’ compensation line of business as discussed in
Commercial Lines Results of Operations on Page 30.
The
underwriting expense ratio was essentially flat for the third quarter and
increased for the first nine months of 2010 compared with the same periods of
2009. The nine-month increase was primarily due to first-quarter 2010 provisions
for matters involving prior years and related to Note 10, Commitments and
Contingent Liabilities, Page 16.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Agency
renewal written premiums
|
|
$ |
677 |
|
|
$ |
669 |
|
|
|
1 |
|
|
$ |
2,044 |
|
|
$ |
2,030 |
|
|
|
1 |
|
Agency
new business written premiums
|
|
|
109 |
|
|
|
107 |
|
|
|
2 |
|
|
|
307 |
|
|
|
311 |
|
|
|
(1 |
) |
Other
written premiums
|
|
|
(50 |
) |
|
|
(46 |
) |
|
|
(9 |
) |
|
|
(110 |
) |
|
|
(110 |
) |
|
|
0 |
|
Net
written premiums
|
|
|
736 |
|
|
|
730 |
|
|
|
1 |
|
|
|
2,241 |
|
|
|
2,231 |
|
|
|
0 |
|
Unearned
premium change
|
|
|
7 |
|
|
|
3 |
|
|
|
133 |
|
|
|
(62 |
) |
|
|
(33 |
) |
|
|
(88 |
) |
Earned
premiums
|
|
$ |
743 |
|
|
$ |
733 |
|
|
|
1 |
|
|
$ |
2,179 |
|
|
$ |
2,198 |
|
|
|
(1 |
) |
The
trends in net written premiums and earned premiums summarized in the table above
reflect ongoing strong competition in our markets plus economic recession
impacts on insured exposures, partially offset by the effects of the premium
growth strategies we discussed in Highlights of Our Strategies and Supporting
Initiatives, Page 23. The main drivers of trends for 2010 are discussed by
segment on Pages 30 and 34.
Consolidated
property casualty agency new business written increased $2 million for the third
quarter of 2010 while decreasing $4 million for the nine months ended
September 30, 2010, compared with the same periods of 2009. For the
quarter and nine-month periods, new business premiums grew for our personal
lines segment and for our excess and surplus lines operation while declining for
our commercial lines segment. We continued to experience new business growth
related to initiatives for geographic or product line expansion into new and
underserved areas. Agents appointed during 2009 or 2010 produced an increase in
standard lines new business of $22 million for the first nine months of
2010 compared with 2009. As we appoint new agencies who choose to move accounts
to us, we report these accounts as new business. While this business was new to
us, in many cases it was not new to the agent. We believe these seasoned
accounts tend to be priced more accurately than business that is less familiar
to our agent due to it being recently obtained from a
competing agent.
Catastrophe
losses contributed 3.8 and 6.5 percentage points to the combined ratio
in the three and nine months ended September 30, 2010, compared with
0.9 and 8.1 percentage points in the same periods
of 2009.
Cincinnati
Financial Third-Quarter 2010 10-Q
The
following table shows catastrophe losses incurred, net of reinsurance, as well
as the effect of loss development on prior period catastrophe events. We
individually list catastrophe events for which our incurred losses reach or
exceed $5 million.
(In millions, net of reinsurance)
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
Commercial
|
|
|
Personal
|
|
|
|
|
|
Commercial
|
|
|
Personal
|
|
|
|
|
Dates
|
|
Cause of loss
|
|
Region
|
|
lines
|
|
|
lines
|
|
|
Total
|
|
|
lines
|
|
|
lines
|
|
|
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan.
7-12
|
|
Freezing,
wind
|
|
South,
Midwest
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
1 |
|
|
$ |
5 |
|
Feb.
9-11
|
|
Ice,
snow, wind
|
|
East,
Midwest
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
4 |
|
|
|
1 |
|
|
|
5 |
|
Apr.
4-6
|
|
Flood,
hail, tornado, wind
|
|
South,
Midwest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
6 |
|
|
|
11 |
|
Apr. 30 - May 3
|
|
Flood,
hail, tornado, wind
|
|
South
|
|
|
(5 |
) |
|
|
- |
|
|
|
(5 |
) |
|
|
23 |
|
|
|
6 |
|
|
|
29 |
|
May
7-8
|
|
Hail,
tornado, wind
|
|
East,
Midwest
|
|
|
- |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
13 |
|
|
|
15 |
|
May
12-16
|
|
Flood,
hail, tornado, wind
|
|
South,
Midwest
|
|
|
3 |
|
|
|
- |
|
|
|
3 |
|
|
|
6 |
|
|
|
2 |
|
|
|
8 |
|
Jun.
4-6
|
|
Flood,
hail, tornado, wind
|
|
Midwest
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
3 |
|
|
|
5 |
|
Jun.
17-20
|
|
Flood,
hail, tornado, wind
|
|
Midwest,
West
|
|
|
1 |
|
|
|
(1 |
) |
|
|
- |
|
|
|
6 |
|
|
|
4 |
|
|
|
10 |
|
Jun.
21-24
|
|
Flood,
hail, tornado, wind
|
|
Midwest
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
Jun.
25-28
|
|
Flood,
hail, tornado, wind
|
|
Midwest
|
|
|
3 |
|
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
|
|
9 |
|
Jun.
30 - Jul. 1
|
|
Hail,
wind
|
|
West
|
|
|
9 |
|
|
|
3 |
|
|
|
12 |
|
|
|
12 |
|
|
|
4 |
|
|
|
16 |
|
Jul.
20-23
|
|
Flood,
hail, tornado, wind
|
|
Midwest
|
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
All
other 2010 catastrophes
|
|
|
|
|
6 |
|
|
|
5 |
|
|
|
11 |
|
|
|
19 |
|
|
|
11 |
|
|
|
30 |
|
Development
on 2009 and prior catastrophes
|
|
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(12 |
) |
|
|
(4 |
) |
|
|
(16 |
) |
Calendar
year incurred total
|
|
|
|
$ |
17 |
|
|
$ |
11 |
|
|
$ |
28 |
|
|
$ |
83 |
|
|
$ |
59 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan.
26-28
|
|
Flood,
freezing, ice, snow
|
|
South,
Midwest
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
15 |
|
|
$ |
20 |
|
Feb.
10-13
|
|
Flood,
hail, wind
|
|
East,
South, Midwest
|
|
|
(1 |
) |
|
|
1 |
|
|
|
- |
|
|
|
14 |
|
|
|
24 |
|
|
|
38 |
|
Feb.
18-19
|
|
Wind,
hail
|
|
South
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
8 |
|
|
|
9 |
|
Apr.
9-11
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
|
|
12 |
|
|
|
16 |
|
|
|
28 |
|
May
7-9
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
12 |
|
|
|
16 |
|
|
|
28 |
|
Jun.
2-6
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
|
|
4 |
|
|
|
6 |
|
|
|
10 |
|
Jun.
10-18
|
|
Flood,
hail, wind
|
|
South,
Midwest
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
14 |
|
|
|
7 |
|
|
|
21 |
|
Sep.
18-22
|
|
Flood,
hail, wind
|
|
South
|
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
All
other 2009 catastrophes
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
12 |
|
|
|
11 |
|
|
|
13 |
|
|
|
24 |
|
Development
on 2008 and prior catastrophes
|
|
|
|
|
(3 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
(10 |
) |
|
|
4 |
|
|
|
(6 |
) |
Calendar
year incurred total
|
|
|
|
$ |
(7 |
) |
|
$ |
13 |
|
|
$ |
6 |
|
|
$ |
64 |
|
|
$ |
113 |
|
|
$ |
177 |
|
Commercial
Lines Insurance Results of Operations
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
547 |
|
|
$ |
555 |
|
|
|
(1 |
) |
|
$ |
1,608 |
|
|
$ |
1,667 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
420 |
|
|
|
407 |
|
|
|
3 |
|
|
|
1,177 |
|
|
|
1,173 |
|
|
|
0 |
|
Current
accident year catastrophe losses
|
|
|
19 |
|
|
|
(4 |
) |
|
nm
|
|
|
|
95 |
|
|
|
74 |
|
|
|
29 |
|
Prior
accident years before catastrophe losses
|
|
|
(50 |
) |
|
|
(71 |
) |
|
|
30 |
|
|
|
(142 |
) |
|
|
(78 |
) |
|
|
(83 |
) |
Prior
accident years catastrophe losses
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
45 |
|
|
|
(12 |
) |
|
|
(10 |
) |
|
|
(22 |
) |
Total
loss and loss expenses
|
|
|
387 |
|
|
|
329 |
|
|
|
18 |
|
|
|
1,118 |
|
|
|
1,159 |
|
|
|
(4 |
) |
Underwriting
expenses
|
|
|
179 |
|
|
|
184 |
|
|
|
(3 |
) |
|
|
529 |
|
|
|
539 |
|
|
|
(2 |
) |
Underwriting
(loss) profit
|
|
$ |
(19 |
) |
|
$ |
42 |
|
|
nm
|
|
|
$ |
(39 |
) |
|
$ |
(31 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
76.6 |
% |
|
|
73.3 |
% |
|
|
3.3 |
|
|
|
73.1 |
% |
|
|
70.4 |
% |
|
|
2.7 |
|
Current
accident year catastrophe losses
|
|
|
3.5 |
|
|
|
(0.6 |
) |
|
|
4.1 |
|
|
|
5.9 |
|
|
|
4.4 |
|
|
|
1.5 |
|
Prior
accident years before catastrophe losses
|
|
|
(9.1 |
) |
|
|
(12.8 |
) |
|
|
3.7 |
|
|
|
(8.8 |
) |
|
|
(4.6 |
) |
|
|
(4.2 |
) |
Prior
accident years catastrophe losses
|
|
|
(0.3 |
) |
|
|
(0.6 |
) |
|
|
0.3 |
|
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
(0.1 |
) |
Total
loss and loss expenses
|
|
|
70.7 |
|
|
|
59.3 |
|
|
|
11.4 |
|
|
|
69.5 |
|
|
|
69.6 |
|
|
|
(0.1 |
) |
Underwriting
expenses
|
|
|
32.7 |
|
|
|
33.1 |
|
|
|
(0.4 |
) |
|
|
32.9 |
|
|
|
32.3 |
|
|
|
0.6 |
|
Combined
ratio
|
|
|
103.4 |
% |
|
|
92.4 |
% |
|
|
11.0 |
|
|
|
102.4 |
% |
|
|
101.9 |
% |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio:
|
|
|
103.4 |
% |
|
|
92.4 |
% |
|
|
11.0 |
|
|
|
102.4 |
% |
|
|
101.9 |
% |
|
|
0.5 |
|
Contribution
from catastrophe losses and prior years reserve
development
|
|
|
(5.9 |
) |
|
|
(14.0 |
) |
|
|
8.1 |
|
|
|
(3.6 |
) |
|
|
(0.8 |
) |
|
|
(2.8 |
) |
Combined
ratio before catastrophe losses and prior years reserve
development
|
|
|
109.3 |
% |
|
|
106.4 |
% |
|
|
2.9 |
|
|
|
106.0 |
% |
|
|
102.7 |
% |
|
|
3.3 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
Overview
Performance
highlights for the commercial lines segment include:
·
|
Premiums
– Commercial lines earned premiums and net written premiums declined
during the third quarter and first nine months of 2010, reflecting lower
insured exposure levels from the weak economy, lower pricing and continued
strong competition that caused us to decline opportunities to write new or
renewal business we considered underpriced. The premiums table below
analyzes the components of earned
premiums.
|
Both new
business and renewal premium volume reflected a weak economy in many geographic
regions, resulting in lower levels of insured exposures. Economic impacts were
relatively greater on our contractor-related business, which primarily affects
certain lines of business, as discussed in our 2009 Annual Report on Form 10-K,
Item 7, Commercial Lines Insurance Results of Operations, Page 49. These lower
exposures are reflected by the more significant decrease in written premiums
during the first nine months of 2010 for our commercial casualty and workers’
compensation business relative to most other commercial lines of business as
shown in the Commercial Lines of Business Analysis below. Premiums for these two
lines include the result of policy audits that adjust initial premium amounts
based on differences between estimated and actual sales or payroll related to a
specific policy. Audits caused $9 million of the $59 million
commercial lines earned premium decline in the first nine months of
2010.
Lower
pricing contributed to the decrease in renewal written premiums for the first
nine months of 2010. We work with our agents to retain accounts with manageable
risk characteristics that support the lower average prices prevailing in the
marketplace. Our agents, assisted by our field associates who handle
underwriting, claims, loss control or premium audit responsibilities, provide us
with insights on local market conditions. We use such insights in making
decisions intended to adequately price business to achieve target profit
margins. We measure average changes in commercial lines renewal pricing as the
rate of change in renewal premium for the new policy period compared with the
premium for the expiring policy period, assuming no change in the level of
insured exposures or policy coverage between those periods for respective
policies. Our commercial lines policies averaged an estimated price decline in
the low-single-digit range during the third quarter of 2010, with the rate of
decline trending unfavorably compared with the average for the first half of
2010. For full-year 2009 this measure averaged a decline in the low-single-digit
range. More significant declines sometimes occur, particularly for
larger accounts.
New
business written premiums for commercial lines also decreased during the first
nine months of 2010, an indication of strong competition and our intention to
avoid writing business we considered underpriced. Our three newest states for
our commercial lines operation – Texas, Colorado and Wyoming – generated an
increase in new business of $13 million for the first nine months of 2010
compared with the same period of 2009, while other states in total decreased by
$31 million or 14 percent. New business policies with annual premiums
of $100,000 or more declined over 25 percent for the first nine months of
2010 compared with the same period of 2009, reflecting significant price
competition for larger accounts.
Commercial
Lines Insurance Premiums
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Agency
renewal written premiums
|
|
$ |
479 |
|
|
$ |
489 |
|
|
|
(2 |
) |
|
$ |
1,504 |
|
|
$ |
1,535 |
|
|
|
(2 |
) |
Agency
new business written premiums
|
|
|
74 |
|
|
|
76 |
|
|
|
(3 |
) |
|
|
213 |
|
|
|
231 |
|
|
|
(8 |
) |
Other
written premiums
|
|
|
(42 |
) |
|
|
(37 |
) |
|
|
(14 |
) |
|
|
(86 |
) |
|
|
(88 |
) |
|
|
2 |
|
Net
written premiums
|
|
|
511 |
|
|
|
528 |
|
|
|
(3 |
) |
|
|
1,631 |
|
|
|
1,678 |
|
|
|
(3 |
) |
Unearned
premium change
|
|
|
36 |
|
|
|
27 |
|
|
|
33 |
|
|
|
(23 |
) |
|
|
(11 |
) |
|
|
(109 |
) |
Earned
premiums
|
|
$ |
547 |
|
|
$ |
555 |
|
|
|
(1 |
) |
|
$ |
1,608 |
|
|
$ |
1,667 |
|
|
|
(4 |
) |
·
|
Combined
ratio – The commercial lines combined ratio for the third quarter of 2010
deteriorated compared with the 2009 third quarter. Higher weather-related
catastrophe losses and a lower level of favorable reserve development on
prior accident years accounted for most of the third-quarter increase. For
the nine months ended September 30, 2010, the commercial lines
combined ratio increased slightly, driven primarily by a higher ratio for
current accident year loss and loss expenses before catastrophe losses, a
reflection of price declines discussed above combined with normal loss
cost inflation. The ratio for current accident year loss and loss expenses
before catastrophe losses of 73.1 percent for the first nine months
of 2010 increased slightly compared with the 72.5 percent accident
year 2009 ratio measured as of December 31,
2009.
|
Catastrophe
losses accounted for 3.2 percentage points and 5.2 percentage points
of the combined ratio for the three and nine months ended September 30, 2010,
compared with the most recent 10-year annual average for the commercial lines
segment of 2.7 percentage points. The relatively high catastrophe loss
ratio for the first nine months of 2010 was the primary reason for the
underwriting loss during that period.
The net effect of reserve development on prior accident years during
the third quarter and first nine months of 2010 was favorable for
commercial lines overall at $52 million and $154 million compared with
favorable development of $74 million and $88 million for the same
periods in 2009.
Cincinnati
Financial Third-Quarter 2010 10-Q
The workers’
compensation portion of commercial lines’ overall favorable development was
$12 million and $31 million compared with favorable development
of $4 million for the third quarter of 2009 and unfavorable development of
$45 million for the 2009 nine-month period. For the first nine months of
2010, approximately two-thirds of the $154 million commercial lines favorable
reserve development on prior accident years occurred in the commercial casualty
line of business for accident years 2008 and 2009. The favorable reserve
development recognized for commercial casualty is due mainly to better than
anticipated development on known claims. Reserve estimates are inherently
uncertain as described in our 2009 Annual Report on Form 10-K, Item 7, Property
Casualty Insurance Loss and Loss Expense Reserves, Page 38.
Our loss
and loss expense ratio for workers’ compensation remained high at
97.8 percent for the first nine months of 2010, contributing to
the underwriting loss. As discussed on Page 25, predictive modeling for workers’
compensation is expected to improve pricing accuracy, therefore improving
profitability and the related ratios over time. In addition to using the
predictive model in underwriting new business and renewal accounts, we are
making greater use of workers’ compensation underwriting specialists who have
extensive experience in underwriting workers’ compensation exposures. Other
actions taken to improve results for the workers’ compensation line include
assigning additional staff to specialize in workers’ compensation claims,
increasing the use of loss control risk evaluation services and promoting the
timely reporting of claims. Direct reporting of workers’ compensation claims,
implemented in early 2010, provides detailed information for prompt assignment
of claims expertise appropriate for each case. As a result, we have seen
significantly more claims reported on the same day an injury occurs. More
specialized claims handling and earlier reporting should enable our claims
representatives to more effectively manage and contain the costs of claims that
have already occurred, as well as future claims. Loss control services are
intended to help prevent worker-related accidents or lessen the severity of
injuries when accidents occur.
The
underwriting expense ratio for the third quarter declined slightly while it
increased by 0.6 percentage points for the first nine months of 2010
compared with the same periods of 2009. The nine-month increase was primarily
due to lower earned premiums.
Underwriting
results and related measures for the combined ratio are summarized in the first
table of Commercial Lines Insurance Results of Operations. The tables and
discussion below provide additional details for certain primary drivers of
underwriting results.
Commercial
Lines Insurance Losses by Size
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
New
losses greater than $4,000,000
|
|
$ |
17 |
|
|
$ |
13 |
|
|
|
30 |
|
|
$ |
34 |
|
|
$ |
43 |
|
|
|
(21 |
) |
New
losses $1,000,000-$4,000,000
|
|
|
28 |
|
|
|
33 |
|
|
|
(17 |
) |
|
|
82 |
|
|
|
96 |
|
|
|
(15 |
) |
New
losses $250,000-$1,000,000
|
|
|
37 |
|
|
|
44 |
|
|
|
(15 |
) |
|
|
117 |
|
|
|
129 |
|
|
|
(10 |
) |
Case
reserve development above $250,000
|
|
|
62 |
|
|
|
49 |
|
|
|
27 |
|
|
|
123 |
|
|
|
163 |
|
|
|
(24 |
) |
Total
large losses incurred
|
|
|
144 |
|
|
|
139 |
|
|
|
4 |
|
|
|
356 |
|
|
|
431 |
|
|
|
(17 |
) |
Other
losses excluding catastrophe losses
|
|
|
151 |
|
|
|
124 |
|
|
|
20 |
|
|
|
471 |
|
|
|
449 |
|
|
|
5 |
|
Catastrophe
losses
|
|
|
17 |
|
|
|
(7 |
) |
|
|
352 |
|
|
|
84 |
|
|
|
64 |
|
|
|
31 |
|
Total
losses incurred
|
|
$ |
312 |
|
|
$ |
256 |
|
|
|
21 |
|
|
$ |
911 |
|
|
$ |
944 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt.
Change
|
|
|
|
|
|
|
|
|
|
|
Pt.
Change
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
losses greater than $4,000,000
|
|
|
3.1 |
% |
|
|
2.4 |
% |
|
|
0.7 |
|
|
|
2.1 |
% |
|
|
2.6 |
% |
|
|
(0.5 |
) |
New
losses $1,000,000-$4,000,000
|
|
|
5.1 |
|
|
|
6.1 |
|
|
|
(1.0 |
) |
|
|
5.1 |
|
|
|
5.8 |
|
|
|
(0.7 |
) |
New
losses $250,000-$1,000,000
|
|
|
6.7 |
|
|
|
7.8 |
|
|
|
(1.1 |
) |
|
|
7.3 |
|
|
|
7.8 |
|
|
|
(0.5 |
) |
Case
reserve development above $250,000
|
|
|
11.4 |
|
|
|
8.8 |
|
|
|
2.6 |
|
|
|
7.7 |
|
|
|
9.8 |
|
|
|
(2.1 |
) |
Total
large loss ratio
|
|
|
26.3 |
|
|
|
25.1 |
|
|
|
1.2 |
|
|
|
22.2 |
|
|
|
26.0 |
|
|
|
(3.8 |
) |
Other
losses excluding catastrophe losses
|
|
|
27.6 |
|
|
|
22.3 |
|
|
|
5.3 |
|
|
|
29.3 |
|
|
|
26.9 |
|
|
|
2.4 |
|
Catastrophe
losses
|
|
|
3.2 |
|
|
|
(1.2 |
) |
|
|
4.4 |
|
|
|
5.2 |
|
|
|
3.8 |
|
|
|
1.4 |
|
Total
loss ratio
|
|
|
57.1 |
% |
|
|
46.2 |
% |
|
|
10.9 |
|
|
|
56.7 |
% |
|
|
56.7 |
% |
|
|
0.0 |
|
We
continue to monitor new losses and case reserve increases greater than $250,000
for trends in factors such as initial reserve levels, loss cost inflation and
settlement expenses. Our analysis continues to indicate no unexpected
concentration of these large losses and case reserve increases by risk category,
geographic region, policy inception, agency or field marketing territory. In the
third quarter of 2010, the ratio for total large losses including case reserve
increases was 1.2 percentage points higher compared with last year’s third
quarter, primarily due to a higher number of claims and incurred losses for our
workers’ compensation line of business. Lower large losses for liability
coverages accounted for most of the 3.8 percentage-point reduction in the large
loss ratio for the nine months ended September 30, 2010, compared with the same
period a year ago. We believe results for the three-month and nine-month periods
largely reflected normal fluctuations in loss patterns and normal variability in
large case reserves for claims above $250,000.
Cincinnati
Financial Third-Quarter 2010 10-Q
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 premium and loss trends
separately for each line.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Commercial
casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
161 |
|
|
$ |
168 |
|
|
|
(4 |
) |
|
$ |
520 |
|
|
$ |
548 |
|
|
|
(5 |
) |
Earned
premiums
|
|
|
182 |
|
|
|
180 |
|
|
|
1 |
|
|
|
518 |
|
|
|
546 |
|
|
|
(5 |
) |
Loss
and loss expenses incurred
|
|
|
104 |
|
|
|
81 |
|
|
|
27 |
|
|
|
282 |
|
|
|
281 |
|
|
|
0 |
|
Loss
and loss expense ratio
|
|
|
56.5 |
% |
|
|
45.0 |
% |
|
|
|
|
|
|
54.4 |
% |
|
|
51.5 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(18.5 |
) |
|
|
(28.8 |
) |
|
|
|
|
|
|
(18.9 |
) |
|
|
(19.9 |
) |
|
|
|
|
Commercial
property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
122 |
|
|
$ |
124 |
|
|
|
(1 |
) |
|
$ |
375 |
|
|
$ |
370 |
|
|
|
2 |
|
Earned
premiums
|
|
|
123 |
|
|
|
122 |
|
|
|
1 |
|
|
|
365 |
|
|
|
362 |
|
|
|
1 |
|
Loss
and loss expenses incurred
|
|
|
87 |
|
|
|
52 |
|
|
|
67 |
|
|
|
282 |
|
|
|
241 |
|
|
|
17 |
|
Loss
and loss expense ratio
|
|
|
70.8 |
% |
|
|
42.8 |
% |
|
|
|
|
|
|
77.3 |
% |
|
|
66.6 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
9.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
18.0 |
|
|
|
10.4 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
0.0 |
|
|
|
(10.1 |
) |
|
|
|
|
|
|
(2.4 |
) |
|
|
(2.8 |
) |
|
|
|
|
Commercial
auto:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
91 |
|
|
$ |
92 |
|
|
|
(2 |
) |
|
$ |
293 |
|
|
$ |
296 |
|
|
|
(1 |
) |
Earned
premiums
|
|
|
96 |
|
|
|
99 |
|
|
|
(2 |
) |
|
|
287 |
|
|
|
296 |
|
|
|
(3 |
) |
Loss
and loss expenses incurred
|
|
|
59 |
|
|
|
67 |
|
|
|
(12 |
) |
|
|
187 |
|
|
|
187 |
|
|
|
0 |
|
Loss
and loss expense ratio
|
|
|
61.3 |
% |
|
|
67.9 |
% |
|
|
|
|
|
|
65.1 |
% |
|
|
63.4 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(5.3 |
) |
|
|
(8.9 |
) |
|
|
|
|
|
|
(4.4 |
) |
|
|
(4.3 |
) |
|
|
|
|
Workers'
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
68 |
|
|
$ |
69 |
|
|
|
(2 |
) |
|
$ |
235 |
|
|
$ |
252 |
|
|
|
(7 |
) |
Earned
premiums
|
|
|
77 |
|
|
|
82 |
|
|
|
(5 |
) |
|
|
230 |
|
|
|
253 |
|
|
|
(9 |
) |
Loss
and loss expenses incurred
|
|
|
86 |
|
|
|
90 |
|
|
|
(4 |
) |
|
|
225 |
|
|
|
302 |
|
|
|
(25 |
) |
Loss
and loss expense ratio
|
|
|
112.2 |
% |
|
|
110.2 |
% |
|
|
|
|
|
|
97.8 |
% |
|
|
119.5 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(15.3 |
) |
|
|
(4.5 |
) |
|
|
|
|
|
|
(13.5 |
) |
|
|
18.0 |
|
|
|
|
|
Specialty
packages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
37 |
|
|
$ |
38 |
|
|
|
(2 |
) |
|
$ |
112 |
|
|
$ |
110 |
|
|
|
2 |
|
Earned
premiums
|
|
|
38 |
|
|
|
37 |
|
|
|
1 |
|
|
|
112 |
|
|
|
110 |
|
|
|
2 |
|
Loss
and loss expenses incurred
|
|
|
33 |
|
|
|
13 |
|
|
|
168 |
|
|
|
98 |
|
|
|
89 |
|
|
|
11 |
|
Loss
and loss expense ratio
|
|
|
89.1 |
% |
|
|
33.5 |
% |
|
|
|
|
|
|
87.9 |
% |
|
|
81.0 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
18.7 |
|
|
|
(18.2 |
) |
|
|
|
|
|
|
13.4 |
|
|
|
21.5 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
9.4 |
|
|
|
(7.1 |
) |
|
|
|
|
|
|
5.3 |
|
|
|
(2.8 |
) |
|
|
|
|
Surety
and executive risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
23 |
|
|
$ |
28 |
|
|
|
(19 |
) |
|
$ |
70 |
|
|
$ |
78 |
|
|
|
(10 |
) |
Earned
premiums
|
|
|
22 |
|
|
|
27 |
|
|
|
(17 |
) |
|
|
71 |
|
|
|
77 |
|
|
|
(7 |
) |
Loss
and loss expenses incurred
|
|
|
17 |
|
|
|
23 |
|
|
|
(28 |
) |
|
|
38 |
|
|
|
48 |
|
|
|
(20 |
) |
Loss
and loss expense ratio
|
|
|
73.9 |
% |
|
|
85.6 |
% |
|
|
|
|
|
|
53.2 |
% |
|
|
61.7 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(17.3 |
) |
|
|
21.1 |
|
|
|
|
|
|
|
(10.2 |
) |
|
|
0.6 |
|
|
|
|
|
Machinery
and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
9 |
|
|
$ |
9 |
|
|
|
7 |
|
|
$ |
26 |
|
|
$ |
24 |
|
|
|
7 |
|
Earned
premiums
|
|
|
9 |
|
|
|
8 |
|
|
|
7 |
|
|
|
25 |
|
|
|
23 |
|
|
|
6 |
|
Loss
and loss expenses incurred
|
|
|
1 |
|
|
|
3 |
|
|
|
(67 |
) |
|
|
6 |
|
|
|
11 |
|
|
|
(45 |
) |
Loss
and loss expense ratio
|
|
|
11.9 |
% |
|
|
38.4 |
% |
|
|
|
|
|
|
23.4 |
% |
|
|
45.6 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
(1.7 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
1.8 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(6.8 |
) |
|
|
(7.6 |
) |
|
|
|
|
|
|
(7.3 |
) |
|
|
3.0 |
|
|
|
|
|
As
discussed above, the loss and loss expense ratio component of the combined ratio
is an important measure of underwriting profit and performance. Catastrophe
losses are volatile and can distort short-term profitability trends,
particularly for certain lines of business. Development of loss and loss expense
reserves on prior accident years can also distort trends in measures of
profitability for recently written business. To illustrate these effects, we
separate their impact on the ratios shown in the table above. For the three and
nine months ended September 30, 2010, the commercial line of business
with the most significant profitability challenge is workers’ compensation. As
discussed above, our actions to improve pricing and reduce loss costs for
workers’ compensation are expected to benefit future profitability
trends.
Cincinnati
Financial Third-Quarter 2010 10-Q
Personal
Lines Insurance Results of Operations
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
premiums
|
|
$ |
182 |
|
|
$ |
170 |
|
|
|
7 |
|
|
$ |
535 |
|
|
$ |
513 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
128 |
|
|
|
130 |
|
|
|
(2 |
) |
|
|
364 |
|
|
|
366 |
|
|
|
(1 |
) |
Current
accident year catastrophe losses
|
|
|
12 |
|
|
|
12 |
|
|
|
0 |
|
|
|
63 |
|
|
|
109 |
|
|
|
(42 |
) |
Prior
accident years before catastrophe losses
|
|
|
(7 |
) |
|
|
(18 |
) |
|
|
61 |
|
|
|
(16 |
) |
|
|
(29 |
) |
|
|
45 |
|
Prior
accident years catastrophe losses
|
|
|
(1 |
) |
|
|
1 |
|
|
nm
|
|
|
|
(4 |
) |
|
|
4 |
|
|
nm
|
|
Total
loss and loss expenses
|
|
|
132 |
|
|
|
125 |
|
|
|
6 |
|
|
|
407 |
|
|
|
450 |
|
|
|
(10 |
) |
Underwriting
expenses
|
|
|
56 |
|
|
|
49 |
|
|
|
14 |
|
|
|
180 |
|
|
|
159 |
|
|
|
13 |
|
Underwriting
loss
|
|
$ |
(6 |
) |
|
$ |
(4 |
) |
|
|
(50 |
) |
|
$ |
(52 |
) |
|
$ |
(96 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
accident year before catastrophe losses
|
|
|
70.0 |
% |
|
|
76.1 |
% |
|
|
(6.1 |
) |
|
|
68.1 |
% |
|
|
71.3 |
% |
|
|
(3.2 |
) |
Current
accident year catastrophe losses
|
|
|
6.9 |
|
|
|
7.3 |
|
|
|
(0.4 |
) |
|
|
11.6 |
|
|
|
21.2 |
|
|
|
(9.6 |
) |
Prior
accident years before catastrophe losses
|
|
|
(3.7 |
) |
|
|
(10.7 |
) |
|
|
7.0 |
|
|
|
(3.1 |
) |
|
|
(5.8 |
) |
|
|
2.7 |
|
Prior
accident years catastrophe losses
|
|
|
(0.9 |
) |
|
|
0.6 |
|
|
|
(1.5 |
) |
|
|
(0.6 |
) |
|
|
0.8 |
|
|
|
(1.4 |
) |
Total
loss and loss expenses
|
|
|
72.3 |
|
|
|
73.3 |
|
|
|
(1.0 |
) |
|
|
76.0 |
|
|
|
87.5 |
|
|
|
(11.5 |
) |
Underwriting
expenses
|
|
|
31.1 |
|
|
|
29.0 |
|
|
|
2.1 |
|
|
|
33.8 |
|
|
|
31.2 |
|
|
|
2.6 |
|
Combined
ratio
|
|
|
103.4 |
% |
|
|
102.3 |
% |
|
|
1.1 |
|
|
|
109.8 |
% |
|
|
118.7 |
% |
|
|
(8.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio:
|
|
|
103.4 |
% |
|
|
102.3 |
% |
|
|
1.1 |
|
|
|
109.8 |
% |
|
|
118.7 |
% |
|
|
(8.9 |
) |
Contribution
from catastrophe losses and prior years reserve
development
|
|
|
2.3 |
|
|
|
(2.8 |
) |
|
|
5.1 |
|
|
|
7.9 |
|
|
|
16.2 |
|
|
|
(8.3 |
) |
Combined
ratio before catastrophe losses and prior years reserve
development
|
|
|
101.1 |
% |
|
|
105.1 |
% |
|
|
(4.0 |
) |
|
|
101.9 |
% |
|
|
102.5 |
% |
|
|
(0.6 |
) |
Overview
Performance
highlights for the personal lines segment include:
·
|
Premiums
– Personal lines earned premiums and net written premiums increased for
the three and nine months ended September 30, 2010, due to
higher renewal and new business premiums that reflected improved
pricing.
|
Agency
renewal written premiums increased 7 percent in the third quarter and
6 percent in the first nine months of 2010 because of rate increases,
strong policy retention rates and premium growth initiatives. Pricing changes
during 2009 included an expansion of pricing points and pricing
sophistication, incorporating insurance scores and credits for policies on
above-average quality risks. Various rate changes were implemented beginning in
October 2009, including increases for the homeowner line of business
averaging approximately 6 percent, with some individual policy rate
increases in the double-digit range. Similar rate changes, with a slightly
higher average rate increase, are expected to be implemented beginning in the
fourth quarter of 2010 for states representing the majority of our personal
lines business. Rate changes for our personal auto line of business that are
being implemented during the fourth quarter of 2010 reflect enhanced pricing
precision enabled by the deployment of predictive models. Predictive modeling
tools influenced policy pricing and various rate changes during 2008 through
2010 for our homeowner line of business.
We
continue to earn a larger share of business in newer states for our personal
lines operation where we already had a well-established position for commercial
lines. In seven states where we began writing personal lines business or
significantly expanded our product offerings and automation capabilities in 2008
or 2009, personal lines net written premiums grew $13 million for the first
nine months of 2010 over the same period of 2009, while other states in total
increased by $30 million or 6 percent.
Personal
lines new business written premiums continued a strong growth trend, increasing
at rates of 19 percent and 22 percent for the three and nine months
ended September 30, 2010. We continue to believe we are successful in
attracting more of our agents’ preferred business as the average quality of our
book of business has improved as measured by the mix of business by insurance
score. Significant new business growth occurred in states where we have
operated for decades as well as the seven states where we significantly expanded
our personal lines product offerings and automation capabilities beginning in
2008. Some of what we report as new business came from accounts that were not
new to our agents. We believe their seasoned accounts tend to be priced
more accurately than business that is less familiar to our agents.
Cincinnati
Financial Third-Quarter 2010 10-Q
We
continue to implement strategies discussed in our 2009 Annual Report on
Form 10-K, Item 1, Our Business and Our Strategy, Page 9, to enhance
our response to marketplace changes and help achieve our long-term objectives
for personal lines growth and profitability. These strategies include expansion
during recent years into four western states with historical industry
catastrophe loss ratios that are significantly better than our historical ratios
for states where we operated prior to that expansion.
Personal
Lines Insurance Premiums
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Agency
renewal written premiums
|
|
$ |
189 |
|
|
$ |
177 |
|
|
|
7 |
|
|
$ |
519 |
|
|
$ |
490 |
|
|
|
6 |
|
Agency
new business written premiums
|
|
|
25 |
|
|
|
21 |
|
|
|
19 |
|
|
|
67 |
|
|
|
55 |
|
|
|
22 |
|
Other
written premiums
|
|
|
(6 |
) |
|
|
(8 |
) |
|
|
25 |
|
|
|
(19 |
) |
|
|
(21 |
) |
|
|
10 |
|
Net
written premiums
|
|
|
208 |
|
|
|
190 |
|
|
|
9 |
|
|
|
567 |
|
|
|
524 |
|
|
|
8 |
|
Unearned
premium change
|
|
|
(26 |
) |
|
|
(20 |
) |
|
|
(30 |
) |
|
|
(32 |
) |
|
|
(11 |
) |
|
|
(191 |
) |
Earned
premiums
|
|
$ |
182 |
|
|
$ |
170 |
|
|
|
7 |
|
|
$ |
535 |
|
|
$ |
513 |
|
|
|
4 |
|
·
|
Combined
ratio – The personal lines combined ratio increased 1.1 percentage points
for the third quarter of 2010 compared with the same period of 2009,
reflecting a lower level of favorable reserve development on prior
accident years. The ratio decreased 8.9 percentage points for the
nine months ended September 30, 2010, primarily due to lower
weather-related catastrophe losses. The 68.1 percent ratio for current
accident year loss and loss expenses before catastrophe losses for the
first nine months of 2010 improved 2.8 percentage points compared
with the 70.9 percent accident year 2009 ratio measured as of
December 31, 2009. Pricing changes and lower large losses
were the primary drivers of the improvement. New losses greater than
$250,000, shown in the table below, had a ratio effect of
7.9 percentage points for the first nine months ended
September 30, 2010 compared with 10.1 percentage
points for full-year 2009, accounting for 2.1 percentage points of
the improvement.
|
In
addition to the rate increases discussed above, we continue to refine our
pricing to better match premiums to the risk of loss on individual policies. We
also continue to increase our pricing sophistication by incorporating insurance
scores and other attributes of risk that characterize the insured exposure. The
results of improved pricing per risk and broad-based rate increases are expected
to improve the combined ratio over the next several quarters. In addition,
greater geographic diversification is expected over time to reduce the
volatility of homeowner loss ratios attributable to weather-related catastrophe
losses.
Catastrophe
losses accounted for 6.0 percentage points and 11.0 percentage points
of the combined ratio for the three and nine months ended September 30, 2010,
compared with the most recent 10-year annual average for the personal lines
segment of 8.5 percentage points. The relatively high catastrophe loss
ratio for the first nine months of 2010 contributed to the underwriting loss
during that period.
Personal
lines reserve development on prior accident years continued to trend favorably
during the third quarter and first nine months of 2010, although at a slower
rate than during the same periods of 2009. Most of the favorable reserve
development on prior accident years recognized during 2010 occurred in the other
personal line of business, mainly due to umbrella liability coverages, which
continued to benefit from a moderation in paid loss cost inflation. Reserve
estimates are inherently uncertain as described in our 2009 Annual Report on
Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations
and Reserves, Page 71.
The
underwriting expense ratio for the third quarter and first nine months of 2010
increased compared with the same periods of 2009. The third-quarter increase was
primarily due to higher technology related costs. The nine-month increase was
primarily due to first-quarter 2010 provisions for matters involving prior years
and related to Note 10, Commitments and Contingent Liabilities, Page
16.
Cincinnati
Financial Third-Quarter 2010 10-Q
Personal
Lines Insurance Losses by Size
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
New
losses greater than $4,000,000
|
|
$ |
- |
|
|
$ |
5 |
|
|
|
(100 |
) |
|
$ |
- |
|
|
$ |
5 |
|
|
|
(100 |
) |
New
losses $1,000,000-$4,000,000
|
|
|
5 |
|
|
|
10 |
|
|
|
(46 |
) |
|
|
15 |
|
|
|
15 |
|
|
|
9 |
|
New
losses $250,000-$1,000,000
|
|
|
7 |
|
|
|
12 |
|
|
|
(39 |
) |
|
|
27 |
|
|
|
34 |
|
|
|
(23 |
) |
Case
reserve development above $250,000
|
|
|
4 |
|
|
|
2 |
|
|
|
55 |
|
|
|
8 |
|
|
|
14 |
|
|
|
(43 |
) |
Total
large losses incurred
|
|
|
16 |
|
|
|
29 |
|
|
|
(44 |
) |
|
|
50 |
|
|
|
68 |
|
|
|
(26 |
) |
Other
losses excluding catastrophe losses
|
|
|
88 |
|
|
|
65 |
|
|
|
44 |
|
|
|
250 |
|
|
|
215 |
|
|
|
16 |
|
Catastrophe
losses
|
|
|
11 |
|
|
|
13 |
|
|
|
(37 |
) |
|
|
59 |
|
|
|
113 |
|
|
|
(48 |
) |
Total
losses incurred
|
|
$ |
115 |
|
|
$ |
107 |
|
|
|
7 |
|
|
$ |
359 |
|
|
$ |
396 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
|
|
|
|
|
Pt. Change
|
|
Ratios
as a percent of earned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
losses greater than $4,000,000
|
|
|
0.0 |
% |
|
|
2.9 |
% |
|
|
(2.9 |
) |
|
|
0.0 |
% |
|
|
1.0 |
% |
|
|
(1.0 |
) |
New
losses $1,000,000-$4,000,000
|
|
|
2.8 |
|
|
|
5.7 |
|
|
|
(2.9 |
) |
|
|
2.9 |
|
|
|
2.8 |
|
|
|
0.1 |
|
New
losses $250,000-$1,000,000
|
|
|
4.0 |
|
|
|
7.0 |
|
|
|
(3.0 |
) |
|
|
5.0 |
|
|
|
6.7 |
|
|
|
(1.7 |
) |
Case
reserve development above $250,000
|
|
|
2.0 |
|
|
|
1.3 |
|
|
|
0.7 |
|
|
|
1.5 |
|
|
|
2.7 |
|
|
|
(1.2 |
) |
Total
large losses incurred
|
|
|
8.8 |
|
|
|
16.9 |
|
|
|
(8.1 |
) |
|
|
9.4 |
|
|
|
13.2 |
|
|
|
(3.8 |
) |
Other
losses excluding catastrophe losses
|
|
|
48.4 |
|
|
|
38.3 |
|
|
|
10.1 |
|
|
|
46.6 |
|
|
|
41.9 |
|
|
|
4.7 |
|
Catastrophe
losses
|
|
|
6.0 |
|
|
|
7.9 |
|
|
|
(1.9 |
) |
|
|
11.0 |
|
|
|
22.0 |
|
|
|
(11.0 |
) |
Total
loss ratio
|
|
|
63.2 |
% |
|
|
63.1 |
% |
|
|
0.1 |
|
|
|
67.0 |
% |
|
|
77.1 |
% |
|
|
(10.1 |
) |
We
continue to monitor new losses and case reserve increases greater than $250,000
for trends in factors such as initial reserve levels, loss cost inflation and
settlement expenses. Our analysis continues to indicate no unexpected
concentration of these large losses and case reserve increases by risk category,
geographic region, policy inception, agency or field marketing territory. In the
third quarter of 2010, the ratio for these losses and case reserve increases
improved 8.1 percentage points compared with last year’s third quarter, while
the nine-month result improved 3.8 percentage points from the same period a
year ago. The lower ratio for both 2010 periods was primarily due to a
lower number of claims and incurred losses for both our personal auto and
homeowner lines of business. We believe results for the three-month and
nine-month periods largely reflected normal fluctuations in loss patterns and
normal variability in large case reserves for claims
above $250,000.
Personal
Lines of Business Analysis
We prefer
to write personal lines coverages on an account basis that includes both auto
and homeowner coverages as well as coverages from the other personal business
line. As a result, we believe that the personal lines segment is best measured
and evaluated on a segment basis. However, we provide the line of business data
to summarize premium and loss trends separately for each line.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Personal
auto:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
98 |
|
|
$ |
90 |
|
|
|
9 |
|
|
$ |
268 |
|
|
$ |
246 |
|
|
|
9 |
|
Earned
premiums
|
|
|
86 |
|
|
|
80 |
|
|
|
7 |
|
|
|
250 |
|
|
|
239 |
|
|
|
5 |
|
Loss
and loss expenses incurred
|
|
|
59 |
|
|
|
52 |
|
|
|
12 |
|
|
|
167 |
|
|
|
163 |
|
|
|
2 |
|
Loss
and loss expense ratio
|
|
|
68.1 |
% |
|
|
64.9 |
% |
|
|
|
|
|
|
66.7 |
% |
|
|
68.1 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
|
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(0.4 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
(2.1 |
) |
|
|
(0.9 |
) |
|
|
|
|
Homeowner:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
83 |
|
|
$ |
75 |
|
|
|
10 |
|
|
$ |
224 |
|
|
$ |
208 |
|
|
|
8 |
|
Earned
premiums
|
|
|
72 |
|
|
|
68 |
|
|
|
7 |
|
|
|
214 |
|
|
|
207 |
|
|
|
3 |
|
Loss
and loss expenses incurred
|
|
|
61 |
|
|
|
65 |
|
|
|
(6 |
) |
|
|
203 |
|
|
|
261 |
|
|
|
(22 |
) |
Loss
and loss expense ratio
|
|
|
84.5 |
% |
|
|
96.4 |
% |
|
|
|
|
|
|
94.9 |
% |
|
|
126.0 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
13.4 |
|
|
|
18.0 |
|
|
|
|
|
|
|
24.5 |
|
|
|
49.4 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(3.0 |
) |
|
|
(4.3 |
) |
|
|
|
|
|
|
(0.7 |
) |
|
|
2.4 |
|
|
|
|
|
Other
personal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
premiums
|
|
$ |
27 |
|
|
$ |
25 |
|
|
|
8 |
|
|
$ |
75 |
|
|
$ |
70 |
|
|
|
7 |
|
Earned
premiums
|
|
|
24 |
|
|
|
22 |
|
|
|
7 |
|
|
|
71 |
|
|
|
67 |
|
|
|
6 |
|
Loss
and loss expenses incurred
|
|
|
12 |
|
|
|
8 |
|
|
|
59 |
|
|
|
37 |
|
|
|
26 |
|
|
|
44 |
|
Loss
and loss expense ratio
|
|
|
50.3 |
% |
|
|
33.8 |
% |
|
|
|
|
|
|
51.6 |
% |
|
|
38.0 |
% |
|
|
|
|
Contribution
from catastrophe losses
|
|
|
4.3 |
|
|
|
3.4 |
|
|
|
|
|
|
|
4.2 |
|
|
|
11.0 |
|
|
|
|
|
Contribution
from prior period reserve development
|
|
|
(24.5 |
) |
|
|
(49.1 |
) |
|
|
|
|
|
|
(18.2 |
) |
|
|
(42.6 |
) |
|
|
|
|
As
discussed above, the loss and loss expense ratio component of the combined ratio
is an important measure of underwriting profit and performance. Catastrophe
losses are volatile and can distort short-term profitability trends,
particularly for certain lines of business. Development of loss and loss expense
reserves on prior accident years can also distort trends in measures of
profitability for recently written business. To illustrate these effects, we
separate their impact on the ratios shown in the table above. For the nine
months
Cincinnati
Financial Third-Quarter 2010 10-Q
ended
September 30, 2010, the personal line of business with the most
significant profitability challenge was homeowner. As discussed above, we
continue actions to improve pricing per risk and overall rates, which are
expected to improve future profitability. In addition we anticipate that the
long-term future average for the catastrophe loss ratio would improve due to
gradual geographic diversification into states less prone to catastrophe
losses.
Life
Insurance Results of Operations
Life
Insurance Results
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Earned
premiums
|
|
$ |
41 |
|
|
$ |
33 |
|
|
|
24 |
|
|
$ |
120 |
|
|
$ |
103 |
|
|
|
17 |
|
Separate
account investment management fees
|
|
|
- |
|
|
|
- |
|
|
nm
|
|
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
Total
revenues
|
|
|
41 |
|
|
|
33 |
|
|
|
24 |
|
|
|
121 |
|
|
|
104 |
|
|
|
16 |
|
Contract
holders' benefits incurred
|
|
|
44 |
|
|
|
40 |
|
|
|
10 |
|
|
|
129 |
|
|
|
118 |
|
|
|
9 |
|
Investment
interest credited to contract holders
|
|
|
(21 |
) |
|
|
(17 |
) |
|
|
(24 |
) |
|
|
(60 |
) |
|
|
(50 |
) |
|
|
(20 |
) |
Operating
expenses incurred
|
|
|
19 |
|
|
|
9 |
|
|
|
111 |
|
|
|
51 |
|
|
|
34 |
|
|
|
50 |
|
Total
benefits and expenses
|
|
|
42 |
|
|
|
32 |
|
|
|
31 |
|
|
|
120 |
|
|
|
102 |
|
|
|
18 |
|
Life
insurance segment profit (loss)
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
nm
|
|
|
$ |
1 |
|
|
$ |
2 |
|
|
|
(50 |
) |
Overview
Performance
highlights for the life insurance segment include:
·
|
Revenues
– Revenues were higher for the three and nine months ended
September 30, 2010, driven by an earned premium increase largely
due to growth from term life insurance products and universal life
insurance products.
|
Gross
in-force life insurance policy face amounts increased to $73.134 billion at
September 30, 2010, from $69.815 billion at year-end
2009.
Fixed
annuity deposits received for three and nine months ended September 30, 2010,
were $37 million and $153 million compared with $70 million and
$113 million for the same periods of 2009. Fixed annuity deposits have a
minimal impact to earned premiums because deposits received are initially
recorded as liabilities with a portion representing profit subsequently earned
over time. We do not write variable or equity indexed annuities.
Life
Insurance Premiums
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Term
life insurance
|
|
$ |
25 |
|
|
$ |
22 |
|
|
|
14 |
|
|
$ |
72 |
|
|
$ |
63 |
|
|
|
14 |
|
Universal
life insurance
|
|
|
10 |
|
|
|
5 |
|
|
|
100 |
|
|
|
29 |
|
|
|
20 |
|
|
|
45 |
|
Other
life insurance, annuity, and disability income products
|
|
|
6 |
|
|
|
6 |
|
|
|
0 |
|
|
|
19 |
|
|
|
20 |
|
|
|
(5 |
) |
Net
earned premiums
|
|
$ |
41 |
|
|
$ |
33 |
|
|
|
24 |
|
|
$ |
120 |
|
|
$ |
103 |
|
|
|
17 |
|
·
|
Profitability
– Our life insurance segment typically reports a small profit or loss on a
GAAP basis because most of its investment income is included in our
investment segment results. We include only investment income credited to
contract holders (interest assumed in life insurance policy reserve
calculations) in our life insurance segment results. Profit of
$1 million for our life insurance segment in the first nine months of
2010 compared unfavorably with a $2 million profit for the first nine
months of 2009 primarily due to the unlocking of actuarial
assumptions for our universal life
contracts.
|
Although
we exclude most of our life insurance company investment income from our life
insurance 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 $8 million and $24 million in the
three and nine months ended September 30, 2010, compared with a net profit of
$8 million and $5 million for the same periods of 2009. The life
insurance company portfolio had after-tax realized investment gains of
$1 million in the third quarter of 2010 and after-tax realized investment
losses of less than $1 million for the nine months ended September 30, 2010,
compared with after-tax realized investment gains of $1 million and
after-tax realized investment losses of $21 million for the same periods of
2009.
Life
segment benefits and expenses consist principally of contract holders’
(policyholders’) benefits incurred related to traditional life and
interest-sensitive products and operating expenses incurred, net of deferred
acquisition costs. Total benefits rose in the first nine months of 2010 due
to increased levels of policy reserves associated with growth in earned life
insurance premiums. Net death claims remained
Cincinnati
Financial Third-Quarter 2010 10-Q
within
our range of pricing expectations. Operating expenses increased principally
because of the level of commission and underwriting expenses associated with new
term life insurance and fixed annuity policies. The unlocking of actuarial
assumptions for our universal life contracts resulted in accelerated
amortization of deferred acquisition costs balances, which also contributed to
higher expenses.
Investments
Results of Operations
Overview
The
investment segment contributes investment income and realized gains and losses
to results of operations. Investments traditionally are our primary source of
pretax and after-tax profits.
Investment
Income
Pretax
investment income increased 1 percent and 5 percent for the three and
nine months ended September 30, 2010. For the third quarter of 2010,
interest and dividends were generally flat compared with the third quarter of
2009. For the nine months ended September 30, 2010, dividend income was
essentially flat compared with the same period of 2009 while interest income
increased, reflecting a significantly increased allocation to fixed maturity
securities during 2009. In our 2009 Form 10-K, Item 1,
Investments Segment, Page 18 and Item 7, Investments Outlook, Page 67,
we discussed our portfolio strategies. We discuss risks related to our
investment income and our fixed-maturity and equity investment portfolios in
Item 3, Quantitative and Qualitative Disclosures About Market Risk, Page
45.
We
continue to position our portfolio with consideration to both the challenges
presented by the current low interest rate environment and the risks presented
by potential future inflation. As bonds in our generally laddered portfolio
mature over the near term, we will be challenged to replace their current yield
and continue our trend of improving investment income. While our bond portfolio
more than covers our insurance reserve liabilities, we believe our diversified
common stock portfolio of mainly blue chip, dividend-paying companies represents
one of our best investment opportunities for the long term.
Investment
Results
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Total
investment income, net of expenses, pre-tax
|
|
$ |
128 |
|
|
$ |
127 |
|
|
|
1 |
|
|
$ |
388 |
|
|
$ |
370 |
|
|
|
5 |
|
Investment
interest credited to contract holders
|
|
|
(21 |
) |
|
|
(17 |
) |
|
|
(24 |
) |
|
|
(60 |
) |
|
|
(50 |
) |
|
|
(20 |
) |
Realized
investment gains and losses summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains and losses, net
|
|
|
151 |
|
|
|
106 |
|
|
|
42 |
|
|
|
170 |
|
|
|
180 |
|
|
|
(6 |
) |
Change
in fair value of securities with embedded derivatives
|
|
|
5 |
|
|
|
15 |
|
|
|
(67 |
) |
|
|
6 |
|
|
|
23 |
|
|
|
(74 |
) |
Other-than-temporary
impairment charges
|
|
|
(1 |
) |
|
|
(11 |
) |
|
|
91 |
|
|
|
(36 |
) |
|
|
(113 |
) |
|
|
68 |
|
Total
realized investment gains and losses, net
|
|
|
155 |
|
|
|
110 |
|
|
|
41 |
|
|
|
140 |
|
|
|
90 |
|
|
|
56 |
|
Investment
operations income
|
|
$ |
262 |
|
|
$ |
220 |
|
|
|
19 |
|
|
$ |
468 |
|
|
$ |
410 |
|
|
|
14 |
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
104 |
|
|
$ |
104 |
|
|
|
0 |
|
|
$ |
318 |
|
|
$ |
296 |
|
|
|
7 |
|
Dividends
|
|
|
25 |
|
|
|
24 |
|
|
|
4 |
|
|
|
73 |
|
|
|
74 |
|
|
|
(1 |
) |
Other
|
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
|
|
3 |
|
|
|
6 |
|
|
|
(50 |
) |
Investment
expenses
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
0 |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
0 |
|
Total
investment income, net of expenses, pre-tax
|
|
|
128 |
|
|
|
127 |
|
|
|
1 |
|
|
|
388 |
|
|
|
370 |
|
|
|
5 |
|
Income
taxes
|
|
|
(31 |
) |
|
|
(31 |
) |
|
|
0 |
|
|
|
(95 |
) |
|
|
(87 |
) |
|
|
(9 |
) |
Total
investment income, net of expenses, after-tax
|
|
$ |
97 |
|
|
$ |
96 |
|
|
|
1 |
|
|
$ |
293 |
|
|
$ |
283 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
24.3 |
% |
|
|
24.0 |
% |
|
|
|
|
|
|
24.4 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
invested assets
|
|
$ |
11,554 |
|
|
$ |
10,419 |
|
|
|
|
|
|
$ |
11,475 |
|
|
$ |
10,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
yield pre-tax
|
|
|
4.4 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
4.5 |
% |
|
|
4.7 |
% |
|
|
|
|
Average
yield after-tax
|
|
|
3.4 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
3.4 |
% |
|
|
3.6 |
% |
|
|
|
|
Net
Realized Gains and Losses
We
reported net realized investment gains of $155 million and
$140 million in the three and nine months ended September 30, 2010, as
net gains from investment sales and bond calls offset other-than-temporary
impairment charges. During the third quarter of 2010, Verisk Analytics Inc.
(Verisk) executed a secondary offering that allowed us to convert and sell into
the market the remainder of our previously restricted Class B shares. This
netted a $128 million pre-tax gain that was the primary driver of both
third-quarter and nine-month net realized gains and losses. Since Verisk did not
pay a dividend, selling our holding was consistent with our equity investing
approach of generally investing in common stocks of companies with
strong
Cincinnati
Financial Third-Quarter 2010 10-Q
indications
of paying and growing their dividends. We reported net realized investment gains
of $110 million and $90 million in the three and nine months ended
September 30, 2009, as net gains from investment sales and bond calls
and the change in fair value of securities with embedded derivatives were
partially offset by other-than-temporary impairment charges.
Investment
gains or losses are recognized upon the sales of investments or as otherwise
required under GAAP. The timing of realized gains or losses from sales can have
a material effect on results in any quarter. However, such gains or losses
usually have little, if any, effect on total shareholders’ equity because most
equity and fixed-maturity investments are carried at fair value, with the
unrealized gain or loss included as a component of other comprehensive income.
Accounting requirements for other-than-temporary impairment charges for the
fixed-maturity portfolio are disclosed in Item 1, Note 2, Investments on Page
8.
The total
net realized investment gains for the first nine months of 2010
include:
·
|
$169 million
in gains from the sale of various common stock holdings, including $128
million from the sale
of Verisk.
|
·
|
$3 million
in net gains from fixed-maturity sales and
calls.
|
·
|
$6 million
in gains from changes in fair value of securities with embedded
derivatives.
|
·
|
$36 million
in other-than-temporary impairment charges to write down holdings of
equities and fixed maturities.
|
The
$3 million in net gains included a $1 million gain in short-term
investments due to the final receipt from the Reserve Primary Fund that exceeded
the impaired basis. The net losses also included $12 million in losses due
to sales of all of the remaining holdings of collateralized mortgage
obligations, which occurred during the first quarter of 2010.
Of the
2,635 securities in the portfolio, none were trading below 70 percent
of book value at September 30, 2010. Our asset impairment
committee regularly monitors the portfolio. We believe that if the improving
liquidity in the markets were to reverse, or the economic recovery were to
significantly stall, we could experience declines in portfolio values and
possible additional other-than-temporary-impairment charges.
The table
below provides additional detail for other-than-temporary impairment
charges.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Fixed
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
23 |
|
Services
cyclical
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
14 |
|
Real
estate
|
|
|
- |
|
|
|
4 |
|
|
|
1 |
|
|
|
11 |
|
Consumer
cyclical
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
4 |
|
Other
|
|
|
1 |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
Total
fixed maturities
|
|
|
1 |
|
|
|
11 |
|
|
|
3 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
6 |
|
Industrial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26 |
|
Consumer
discretionary
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
Material
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
Information
technology
|
|
|
- |
|
|
|
- |
|
|
|
12 |
|
|
|
- |
|
Total
common equities
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
Total
preferred equities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
36 |
|
|
$ |
113 |
|
Other
We report
as Other the non-investment operations of the parent company and its non-insurer
subsidiaries, CFC Investment Company and CSU Producer Resources Inc. We
also report as Other the results of The Cincinnati Specialty Underwriters
Insurance Company, as well as other income of our standard market property
casualty insurance subsidiary.
Losses
before income taxes for Other were largely driven by interest expense from debt
of the parent company. Loss and loss expenses and underwriting expenses for
Other are from our excess and surplus lines operation and, for the third quarter
and first nine months of 2010, were partially offset by excess and surplus lines
earned premiums.
Cincinnati
Financial Third-Quarter 2010 10-Q
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change %
|
|
Interest
and fees on loans and leases
|
|
$ |
3 |
|
|
$ |
2 |
|
|
|
50 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
|
20 |
|
Earned
premiums
|
|
|
13 |
|
|
|
8 |
|
|
|
63 |
|
|
|
35 |
|
|
|
18 |
|
|
|
94 |
|
Other
revenues
|
|
|
2 |
|
|
|
2 |
|
|
|
0 |
|
|
|
3 |
|
|
|
3 |
|
|
|
0 |
|
Total
revenues
|
|
|
18 |
|
|
|
12 |
|
|
|
50 |
|
|
|
44 |
|
|
|
26 |
|
|
|
69 |
|
Interest
expense
|
|
|
13 |
|
|
|
14 |
|
|
|
(7 |
) |
|
|
40 |
|
|
|
42 |
|
|
|
(5 |
) |
Losses
and loss expenses
|
|
|
14 |
|
|
|
6 |
|
|
|
133 |
|
|
|
36 |
|
|
|
14 |
|
|
|
157 |
|
Underwriting
expenses
|
|
|
4 |
|
|
|
4 |
|
|
|
0 |
|
|
|
12 |
|
|
|
17 |
|
|
|
(29 |
) |
Operating
expenses
|
|
|
2 |
|
|
|
3 |
|
|
|
(33 |
) |
|
|
7 |
|
|
|
11 |
|
|
|
(36 |
) |
Total
expenses
|
|
|
33 |
|
|
|
27 |
|
|
|
22 |
|
|
|
95 |
|
|
|
84 |
|
|
|
13 |
|
Pre-tax
loss
|
|
$ |
(15 |
) |
|
$ |
(15 |
) |
|
|
0 |
|
|
$ |
(51 |
) |
|
$ |
(58 |
) |
|
|
12 |
|
Taxes
We had
$65 million and $76 million of income tax expense in the three and
nine months ended September 30, 2010, compared with $73 million
and $40 million for the same periods of 2009. The effective tax rate for
the three and nine months ended September 30, 2010, was 29.4 percent and
23.2 percent compared with 29.9 percent and 17.5 percent for the
same periods last year.
The
change in our effective tax rate was primarily due to changes in pretax income
from underwriting results, changes in investment income and the amount of
realized investment gains and losses. Modest changes to tax-exempt interest and
the dividend received deduction in the current year compared with the prior year
also contributed to the change.
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 46 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 no tax-advantaged
fixed-maturity investments. For our insurance subsidiaries, the dividend
received deduction, after the dividend proration of the 1986 Tax Reform Act,
exempts approximately 60 percent of dividends from qualified equities from
federal tax. For our non-insurance subsidiaries, the dividend received deduction
exempts 70 percent of dividends from qualified equities. Details about our
effective tax rate are found in our 2009 Annual Report on Form 10-K, Item 8,
Note 11, Income Taxes, Page 108.
Cincinnati
Financial Third-Quarter 2010 10-Q
Liquidity
and Capital Resources
At
September 30, 2010, shareholders’ equity was $5.010 billion compared with
$4.760 billion at December 31, 2009. Total debt was
$839 million at September 30, 2010 and at December 31, 2009.
At September 30, 2010, cash and cash equivalents totaled
$445 million compared with $557 million at
December 31, 2009.
Sources
of Liquidity
Subsidiary
Dividends
Our lead
insurance subsidiary declared dividends of $170 million to the parent
company during the first nine months of 2010 compared with none for the
first nine months of 2009. For the full-year 2009, subsidiary dividends declared
totaled $50 million. State of Ohio regulatory requirements restrict the
dividends our insurance subsidiary can pay. During 2010, total dividends that
our insurance subsidiary could pay to our parent company without regulatory
approval are approximately $365 million.
Investing
Activities
Investment
income is a source of liquidity for both the parent company and its insurance
subsidiary. We continue to focus on portfolio strategies to balance
near-term income generation and long-term book value growth.
Parent
company obligations can be funded with income on investments held at the parent
company level or through realized gains on that portfolio, although we prefer to
follow an investment philosophy seeking to compound cash flows over the long
term. These sources of capital can help minimize subsidiary dividends to the
parent company, protecting insurance subsidiary capital.
See our
2009 Annual Report on Form 10-K, Item 1, Investment Segment, Page 18, for a
discussion of our historic investment strategy, portfolio allocation and
quality.
Insurance
Underwriting
Our
property casualty and life insurance underwriting operations provide liquidity
because we generally receive premiums before paying losses under the policies
purchased with those premiums. After satisfying our cash requirements, we use
excess cash flows for investment, increasing future investment
income.
Historically,
cash receipts from property casualty and life insurance premiums, along with
investment income, have been more than sufficient to pay claims, operating
expenses and dividends to the parent company. While first-year life
insurance expenses normally exceed first-year premiums, subsequent premiums are
used to generate investment income until the time the policy benefits are
paid.
The table
below shows a summary of cash flow for property casualty insurance (direct
method):
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Premiums
collected
|
|
$ |
755 |
|
|
$ |
760 |
|
|
$ |
2,200 |
|
|
$ |
2,244 |
|
Loss
and loss expenses paid
|
|
|
(505 |
) |
|
|
(473 |
) |
|
|
(1,372 |
) |
|
|
(1,448 |
) |
Commissions
and other underwriting expenses paid
|
|
|
(232 |
) |
|
|
(225 |
) |
|
|
(743 |
) |
|
|
(740 |
) |
Insurance
subsidiary cash flow from underwriting
|
|
|
18 |
|
|
|
62 |
|
|
|
85 |
|
|
|
56 |
|
Investment
income received
|
|
|
97 |
|
|
|
93 |
|
|
|
272 |
|
|
|
244 |
|
Insurance
operating cash flow
|
|
$ |
115 |
|
|
$ |
155 |
|
|
$ |
357 |
|
|
$ |
300 |
|
Collected
premiums for property casualty insurance are down $44 million for the first
nine months of 2010, but the decline was offset by a $76 million decrease
in loss and loss expenses paid, largely due to lower catastrophe paid
losses.
Our life
insurance subsidiary underwriting cash flow was $132 million for the nine
months ended September 30, 2010, up $1 million from underwriting
cash flow reported in the first nine months of 2009.
We discuss
our future obligations for claims payments and for underwriting expenses in our
2009 Annual Report on Form 10-K, Item 7, Contractual Obligations,
Page 71, and Other Commitments, also on Page 71.
Capital
Resources
At
September 30, 2010, our debt-to-total-capital ratio improved to
14.3 percent, with $790 million in long-term debt and $49 million
in borrowing on our revolving short-term lines of credit. There was no change in
the amount of the $49 million short-term debt during the first nine months of
2010 or all of 2009. Based on our present capital requirements, we do not
anticipate a material increase in debt levels during 2010. As a result, we
expect changes in our debt-to-total-capital ratio to continue to be largely a
function of the contribution of unrealized investment gains or losses to
shareholders’ equity.
We
provide details of our three long-term notes in our 2009 Annual Report on Form
10-K, Item 8, Note 8, Senior Debt, Page 106. None of the notes are encumbered by
rating triggers.
Cincinnati
Financial Third-Quarter 2010 10-Q
On July
19, 2010, Standard & Poor’s lowered its counterparty credit rating on
Cincinnati Financial Corporation to BBB from BBB+. No other ratings agency
changes to our debt ratings have occurred in 2010. Our debt ratings are
discussed in our 2009 Annual Report on Form 10-K, Item 7, Additional
Sources of Liquidity, Page 69.
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.
Uses
of Liquidity
Our
parent company and insurance subsidiary have contractual obligations and other
commitments. In addition, one of our primary uses of cash is to enhance
shareholder return.
Contractual
Obligations
In our
2009 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 71, we
estimated our future contractual obligations as of December 31, 2009. There have
been no material changes to our estimates of future contractual
obligations.
Other
Commitments
In
addition to our contractual obligations, we have other property casualty
operational commitments.
·
|
Commissions
– Commissions paid were $437 million in the first nine months of
2010. Commission payments generally track with written
premiums.
|
·
|
Other
underwriting expenses – Many of our underwriting expenses are not
contractual obligations, but reflect the ongoing expenses of our business.
Non-commission underwriting expenses paid were $306 million in the
first nine months of 2010.
|
·
|
In
addition to contractual obligations for hardware and software, we
anticipate capitalizing approximately $8 million in spending for key
technology initiatives in 2010. Capitalized development costs related to
key technology initiatives were $7 million in the first nine
months of 2010. These activities are conducted at our discretion, and
we have no material contractual obligations for activities planned as part
of these projects.
|
We
contributed $25 million to our qualified pension plan during the third
quarter of 2010. We do not anticipate further contributions during the remainder
of 2010.
Investing
Activities
After
fulfilling operating requirements, we invest cash flows from underwriting,
investment and other corporate activities in fixed-maturity and equity
securities on an ongoing basis to help achieve our portfolio objectives. See
Progress Toward Long-Term Value Creation, Page 22, for a discussion of current
refinements to our investment strategies that reflect our risk management
activities. We discuss certain portfolio attributes in Item 3, Quantitative and
Qualitative Disclosures about Market Risk, Page 45.
Uses
of Capital
Uses of
cash to enhance shareholder return include dividends to shareholders. In
February and May 2010, the board of directors declared a regular
quarterly cash dividend of 39.5 cents per share. In
August 2010, a regular quarterly cash dividend was declared at
40 cents per share for an indicated annual rate of $1.60 per
share. During the first nine months of 2010, we used $189 million to pay
cash dividends to shareholders and $10 million to repurchase
0.4 million shares of our common stock at an average price of $26.49.
The repurchase was intended to offset the issuance of shares through equity
compensation plans, primarily due to vesting of service-based restricted stock
units of equity awards granted in the past. The details of 2010 repurchase
activity and repurchase authorizations are described in Part II, Item 2,
Unregistered Sales of Equity Securities and Use of Proceeds,
Page 50.
Property
Casualty Insurance Reserves
For the
business lines in the commercial and personal lines insurance segments, the
following tables show the breakout of gross reserves among case, IBNR and loss
expense reserves, net of salvage and subrogation reserves. Reserving practices
are discussed in our 2009 Annual Report on Form 10-K, Item 7,
Property Casualty Insurance Loss and Loss Expense Reserves, Page
38.
The rise
in total gross reserves was primarily due to higher case reserves for our
commercial property line of business. Catastrophe and non-catastrophe
weather losses accounted for most of the increase.
Cincinnati
Financial Third-Quarter 2010 10-Q
Commercial
Lines Insurance Segment Gross Reserves
|
|
Loss reserves
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
expense
|
|
|
gross
|
|
|
Percent
|
|
(In millions)
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
of total
|
|
At
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
casualty
|
|
$ |
1,012 |
|
|
$ |
299 |
|
|
$ |
529 |
|
|
$ |
1,840 |
|
|
|
48.9 |
% |
Commercial
property
|
|
|
130 |
|
|
|
13 |
|
|
|
33 |
|
|
|
176 |
|
|
|
4.7 |
|
Commercial
auto
|
|
|
272 |
|
|
|
46 |
|
|
|
63 |
|
|
|
381 |
|
|
|
10.1 |
|
Workers'
compensation
|
|
|
475 |
|
|
|
465 |
|
|
|
146 |
|
|
|
1,086 |
|
|
|
28.9 |
|
Specialty
packages
|
|
|
89 |
|
|
|
3 |
|
|
|
11 |
|
|
|
103 |
|
|
|
2.7 |
|
Surety
and executive risk
|
|
|
116 |
|
|
|
(1 |
) |
|
|
55 |
|
|
|
170 |
|
|
|
4.5 |
|
Machinery
and equipment
|
|
|
2 |
|
|
|
3 |
|
|
|
1 |
|
|
|
6 |
|
|
|
0.2 |
|
Total
|
|
$ |
2,096 |
|
|
$ |
828 |
|
|
$ |
838 |
|
|
$ |
3,762 |
|
|
|
100.0 |
% |
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 |
% |
Personal
Lines Insurance Segment Gross Reserves
|
|
Loss reserves
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
expense
|
|
|
gross
|
|
|
Percent
|
|
(In millions)
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
reserves
|
|
|
of total
|
|
At
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
auto
|
|
$ |
125 |
|
|
$ |
0 |
|
|
$ |
28 |
|
|
$ |
153 |
|
|
|
43.2 |
% |
Homeowner
|
|
|
69 |
|
|
|
24 |
|
|
|
17 |
|
|
|
110 |
|
|
|
31.0 |
|
Other
personal
|
|
|
39 |
|
|
|
44 |
|
|
|
9 |
|
|
|
92 |
|
|
|
25.8 |
|
Total
|
|
$ |
233 |
|
|
$ |
68 |
|
|
$ |
54 |
|
|
$ |
355 |
|
|
|
100.0 |
% |
At
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
auto
|
|
$ |
130 |
|
|
$ |
(4 |
) |
|
$ |
28 |
|
|
$ |
154 |
|
|
|
44.2 |
% |
Homeowner
|
|
|
56 |
|
|
|
26 |
|
|
|
17 |
|
|
|
99 |
|
|
|
28.4 |
|
Other
personal
|
|
|
45 |
|
|
|
42 |
|
|
|
9 |
|
|
|
96 |
|
|
|
27.4 |
|
Total
|
|
$ |
231 |
|
|
$ |
64 |
|
|
$ |
54 |
|
|
$ |
349 |
|
|
|
100.0 |
% |
Life
Insurance Reserves
Gross
life policy reserves were $1.968 billion at September 30, 2010, compared
with $1.783 billion at year-end 2009, reflecting continued growth in fixed
annuities and life insurance policies in force. We discuss our life insurance
reserving practices in our 2009 Annual Report on Form 10-K, Item 7, Life
Insurance Policy Reserves, Page 42.
Other
Matters
Significant
Accounting Policies
Our
significant accounting policies are discussed in our 2009 Annual Report on
Form 10-K, Item 8, Note 1, Summary Of Significant Accounting Policies, Page
94, and updated in Item 1, Note 1, Accounting Policies, beginning on Page
7.
In
conjunction with those discussions, in the Management’s Discussion and Analysis
in the 2009 Annual Report on Form 10-K, management reviewed the estimates
and assumptions used to develop reported amounts related to the most significant
policies. Management discussed the development and selection of those accounting
estimates with the audit committee of the board of directors.
Cincinnati
Financial Third-Quarter 2010 10-Q
Fair
Value Measurements
Valuation
of Financial Instruments
Valuation
of financial instruments, primarily securities held in our investment portfolio,
is a critical component of our interim financial statement preparation. Fair
Value Measurements and Disclosures, ASC 820-10, defines fair value as the
exit price or the amount that would be 1) received to sell an asset or
2) paid to transfer a liability in an orderly transaction between
marketplace participants at the measurement date. When determining an exit
price, we must, whenever possible, rely upon observable market
data.
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 condensed consolidated balance sheets are
categorized based on the inputs to the valuation techniques as described in Item
1, Note 3, Fair Value Measurements, Page 10.
Level
1 and Level 2 Valuation Techniques
Over
99 percent of the $11.223 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.
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 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 those securities for which we were unable to obtain the
pricing methodology or we could not consider the price provided as binding.
Pricing for securities classified as Level 3 could not be corroborated by
similar securities priced using observable inputs.
Management
ultimately determined the pricing for each Level 3 security that we considered
to be the best exit price valuation. As of September 30, 2010, 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 have generally
obtained two non-binding quotes from brokers and, after evaluating, our
investment professionals typically selected the more conservative price for fair
value.
Cincinnati
Financial Third-Quarter 2010 10-Q
Item
3.
|
Quantitative
and Qualitative Disclosures about
Market Risk
|
Our
greatest exposure to market risk is through our investment portfolio. Market
risk is the potential for a decrease in securities value resulting from broad
yet uncontrollable forces such as: inflation, economic growth or recession,
interest rates, world political conditions or other widespread unpredictable
events. It is comprised of many individual risks that, when combined, create a
macroeconomic impact.
Our view
of potential risks and our sensitivity to such risks is discussed in our 2009
Annual Report on Form 10-K, Item 7a, Quantitative and Qualitative
Disclosures about Market Risk, Page 82.
The fair
value of our investment portfolio was $11.223 billion at September 30,
2010, compared with $10.562 billion at year-end 2009.
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
(In millions)
|
|
Book value
|
|
|
% of BV
|
|
|
Fair value
|
|
|
% of FV
|
|
|
Book value
|
|
|
% of BV
|
|
|
Fair value
|
|
|
% of FV
|
|
Taxable
fixed maturities
|
|
$ |
4,938 |
|
|
|
49.9 |
% |
|
$ |
5,480 |
|
|
|
48.8 |
% |
|
$ |
4,644 |
|
|
|
48.6 |
% |
|
$ |
4,863 |
|
|
|
46.0 |
% |
Tax-exempt
fixed maturities
|
|
|
2,780 |
|
|
|
28.1 |
|
|
|
2,986 |
|
|
|
26.6 |
|
|
|
2,870 |
|
|
|
30.1 |
|
|
|
2,992 |
|
|
|
28.3 |
|
Common
equities
|
|
|
2,102 |
|
|
|
21.2 |
|
|
|
2,656 |
|
|
|
23.7 |
|
|
|
1,941 |
|
|
|
20.4 |
|
|
|
2,608 |
|
|
|
24.7 |
|
Preferred
equities
|
|
|
75 |
|
|
|
0.8 |
|
|
|
101 |
|
|
|
0.9 |
|
|
|
75 |
|
|
|
0.8 |
|
|
|
93 |
|
|
|
0.9 |
|
Short-term
investments
|
|
|
- |
|
|
|
0.0 |
|
|
|
- |
|
|
|
0.0 |
|
|
|
6 |
|
|
|
0.1 |
|
|
|
6 |
|
|
|
0.1 |
|
Total
|
|
$ |
9,895 |
|
|
|
100.0 |
% |
|
$ |
11,223 |
|
|
|
100.0 |
% |
|
$ |
9,536 |
|
|
|
100.0 |
% |
|
$ |
10,562 |
|
|
|
100.0 |
% |
Our
consolidated investment portfolio contains $32 million of assets for which
values are based on prices or valuation techniques that require management
judgment (Level 3 assets). We generally obtain at least two outside
valuations for these assets and generally use the more conservative calculation.
These investments include private placements, small issues and various
thinly traded securities.
At
September 30, 2010, total Level 3 assets were less than 1 percent of
investment portfolio assets measured at fair value. See Item 1, Note
3, Fair Value Measurements, Page 10, for additional discussion of our
valuation techniques.
In
addition to our investment portfolio, the total investments amount reported in
our condensed consolidated balance sheets includes Other invested assets. Other
invested assets included $39 million of life policy loans and liens,
$27 million of venture capital fund investments and $16 million of
other assets as of September 30, 2010.
Fixed-Maturity
Investments
By
maintaining a well-diversified fixed-maturity portfolio, we attempt to reduce
overall risk. We invest new money in the bond market on a continuous basis,
targeting what we believe to be optimal risk-adjusted after-tax yields. Risk, in
this context, includes interest rate, call, reinvestment rate, credit and
liquidity risk. We do not make a concerted effort to alter duration on a
portfolio basis in response to anticipated movements in interest rates. By
continuously investing in the bond market, we build a broad, diversified
portfolio that we believe mitigates the impact of adverse economic
factors.
In the
first nine months of 2010, both the corporate and municipal bond markets
performed to levels that exceeded their historical averages, leading to an
increase in fair value of our bond portfolio. At September 30, 2010,
our bond portfolio was at 109.7 percent of its book value compared
with 104.5 percent at December 31, 2009.
Credit
ratings as of September 30, 2010, compared with December 31, 2009, for the
fixed-maturity and short-term portfolios were:
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
|
|
Fair
|
|
|
Percent
|
|
|
Fair
|
|
|
Percent
|
|
(In millions)
|
|
value
|
|
|
to total
|
|
|
value
|
|
|
to total
|
|
Moody's
Ratings and Standard & Poor's Ratings combined
|
|
Aaa,
Aa, A, AAA, AA, A
|
|
$ |
5,304 |
|
|
|
62.7 |
% |
|
$ |
4,967 |
|
|
|
63.2 |
% |
Baa,
BBB
|
|
|
2,633 |
|
|
|
31.1 |
|
|
|
2,302 |
|
|
|
29.3 |
|
Ba,
BB
|
|
|
250 |
|
|
|
3.0 |
|
|
|
279 |
|
|
|
3.5 |
|
B,
B
|
|
|
44 |
|
|
|
0.5 |
|
|
|
44 |
|
|
|
0.6 |
|
Caa,
CCC
|
|
|
19 |
|
|
|
0.2 |
|
|
|
29 |
|
|
|
0.4 |
|
Ca,
CC
|
|
|
- |
|
|
|
0.0 |
|
|
|
3 |
|
|
|
0.0 |
|
Non-rated
|
|
|
216 |
|
|
|
2.5 |
|
|
|
237 |
|
|
|
3.0 |
|
Total
|
|
$ |
8,466 |
|
|
|
100.0
|
% |
|
$ |
7,861 |
|
|
|
100.0 |
% |
Cincinnati
Financial Third-Quarter 2010 10-Q
Attributes
of the fixed-maturity portfolio include:
|
|
At September 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Weighted
average yield-to-book value
|
|
|
5.5
% |
|
|
|
5.9 %
|
|
Weighted
average maturity
|
|
6.8
yrs
|
|
|
7.5 yrs
|
|
Effective
duration
|
|
5.0
yrs
|
|
|
5.3 yrs
|
|
We
discuss maturities of our fixed-maturity portfolio in our 2009 Annual Report on
Form 10-K, Item 8, Note 2, Investments, Page 100.
Taxable
Fixed Maturities
At
September 30, 2010, our $5.480 billion taxable fixed-maturity portfolio
included:
·
|
$124 million
in U.S. agency paper that is rated Aaa/AAA by Moody’s and Standard &
Poor’s, respectively.
|
·
|
$4.775 billion
in investment-grade corporate bonds that have Moody's ratings at or above
Baa3 or a Standard & Poor's rating at or above
BBB-.
|
·
|
$279 million
in high-yield corporate bonds that have Moody's ratings below Baa3 and a
Standard & Poor's rating below
BBB-.
|
·
|
$231 million
in taxable municipal bonds that have average ratings of Aa3/AA by Moody’s
and Standard & Poor’s,
respectively.
|
·
|
$71 million
in convertible bonds and redeemable preferred
stocks.
|
Our
strategy typically is to buy and hold fixed-maturity investments to maturity,
but we monitor credit profiles and fair value movements when determining holding
periods for individual securities.
The
largest non-financial sectors in our investment-grade corporate bond portfolio,
based on fair value at September 30, 2010, are energy and utilities,
representing 10.6 percent and 9.9 percent, respectively, compared with
11.9 percent and 10.4 percent at year-end 2009.
The financial-related sectors of banks, brokerage, finance and investment
and insurance companies represented 28.0 percent of fair value of our
investment-grade corporate bond portfolio at September 30, 2010, compared with
25.3 percent at year-end 2009. We believe our weighting in
financial-related sectors is below the average for the corporate bond market as
a whole.
Tax-Exempt
Fixed Maturities
At
September 30, 2010, we had $2.986 billion of tax-exempt fixed-maturity
securities with an average rating of Aa2/AA+ by Moody’s and Standard &
Poor’s, respectively. We traditionally have purchased municipal bonds focusing
on general obligation and essential services issues, such as water, waste
disposal and others. While no single municipal issuer accounted for more
than 0.7 percent of the tax-exempt municipal bond portfolio at September
30, 2010, there are higher concentrations within individual states. Holdings in
our two most concentrated states, Texas and Indiana, together accounted for
30.7 percent of the municipal bond portfolio
at September 30, 2010, compared with 31.9 percent at
year-end 2009.
Interest
Rate Sensitivity Analysis
Because
of our strong surplus, long-term investment horizon and ability to hold most
fixed-maturity investments until maturity, we believe the company is adequately
positioned if interest rates were to rise. Although the fair values of our
existing holdings may suffer, a higher rate environment would provide the
opportunity to invest cash flow in higher yielding securities, while reducing
the likelihood of untimely redemptions of currently callable securities. While
higher interest rates would be expected to continue to increase the number of
fixed-maturity holdings trading below 100 percent of book value, we believe
lower fixed-maturity security values due solely to interest rate changes would
not signal a decline in credit quality. We continue to explore ways to
reduce exposure to risks related to a rise in interest rates.
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 (bps)
|
|
(In millions)
|
|
-200 bps
|
|
|
-100 bps
|
|
|
0 bps
|
|
|
100 bps
|
|
|
200 bps
|
|
At
September 30, 2010
|
|
$ |
9,344 |
|
|
$ |
8,898 |
|
|
$ |
8,466 |
|
|
$ |
8,041 |
|
|
$ |
7,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009
|
|
$ |
8,705 |
|
|
$ |
8,279 |
|
|
$ |
7,855 |
|
|
$ |
7,428 |
|
|
$ |
7,024 |
|
Cincinnati
Financial Third-Quarter 2010 10-Q
The
effective duration of the fixed-maturity portfolio as of September 30, 2010, was
5.0 years compared with 5.3 years at year-end 2009. A 100 basis
point movement in interest rates would result in an approximately
5.0 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 our
dynamic financial planning model, the selected interest rate change of 100 to
200 basis points represents our view of a shift in rates that is quite
possible over a one-year period. The rates modeled should not be considered
a prediction of future events as interest rates may be much more volatile in the
future. The analysis is not intended to provide a precise forecast of the effect
of changes in rates on our results or financial condition, nor does it take
into account any actions that we might take to reduce exposure to such
risks.
Equity
Investments
Our
common stock investments generally are securities of companies with strong
indications of paying and growing their dividends. Other criteria we evaluate
include increasing sales and earnings, proven management and a favorable
outlook. We believe our equity investment style is an appropriate long-term
strategy. While our long-term financial position would be affected by prolonged
changes in the market valuation of our investments, we believe our strong
surplus position and cash flow provide a cushion against short-term fluctuations
in valuation. Continued payment of cash dividends by the issuers of the common
equities we hold can provide a floor to their valuation. A $100 million
unrealized change in the value of the common stocks owned at period end would
cause a change of $65 million, or approximately 40 cents per share, in
our shareholders’ equity.
At
September 30, 2010, two holdings had a fair value equal to or greater than
5 percent of our publicly-traded common stock portfolio, similar to
year-end 2009. Procter & Gamble is our largest single common stock
investment, comprising 5.3 percent of the publicly traded common
stock portfolio and 1.3 percent of the investment portfolio. The
second common stock with a fair value greater than 5 percent of our
publicly-traded common stock portfolio is Pepsico Inc. (NYSE:PEP), comprising
5.0 percent of the publicly traded common stock portfolio and
1.2 percent of the investment portfolio.
Common
Stock Portfolio Industry Sector Distribution
|
|
Percent of Publicly Traded Common Stock Portfolio
|
|
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
|
|
Cincinnati
Financial
|
|
|
S&P 500 Industry
Weightings
|
|
|
Cincinnati
Financial
|
|
|
S&P 500 Industry
Weightings
|
|
Sector:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
staples
|
|
|
16.5
|
% |
|
|
11.3
|
% |
|
|
15.5
|
% |
|
|
11.4
|
% |
Healthcare
|
|
|
15.4 |
|
|
|
11.7 |
|
|
|
18.0 |
|
|
|
12.6 |
|
Financial
|
|
|
12.3 |
|
|
|
15.6 |
|
|
|
10.2 |
|
|
|
14.4 |
|
Energy
|
|
|
12.3 |
|
|
|
10.9 |
|
|
|
11.0 |
|
|
|
11.5 |
|
Information
technology
|
|
|
11.8 |
|
|
|
18.8 |
|
|
|
11.0 |
|
|
|
19.8 |
|
Industrials
|
|
|
10.4 |
|
|
|
10.8 |
|
|
|
9.2 |
|
|
|
10.2 |
|
Consumer
discretionary
|
|
|
7.9 |
|
|
|
10.4 |
|
|
|
9.6 |
|
|
|
9.6 |
|
Materials
|
|
|
5.1 |
|
|
|
3.6 |
|
|
|
5.1 |
|
|
|
3.6 |
|
Utilities
|
|
|
4.8 |
|
|
|
3.7 |
|
|
|
6.7 |
|
|
|
3.7 |
|
Telecomm
services
|
|
|
3.5 |
|
|
|
3.2 |
|
|
|
3.7 |
|
|
|
3.2 |
|
Total
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
Short-Term
Investments
At
September 30, 2010, we had no short-term investments compared with
$6 million at year-end 2009. Our short-term investments consisted primarily
of commercial paper, demand notes or bonds purchased within one year of
maturity.
Unrealized
Investment Gains and Losses
At
September 30, 2010, unrealized investment gains before taxes for the
consolidated investment portfolio totaled $1.369 billion and unrealized
investment losses amounted to $41 million.
The
unrealized investment gains at September 30, 2010, were due to a pre-tax net
gain position in our fixed-maturity portfolio of $748 million and a net
gain position in our equity portfolio of $580 million. The net gain
position in our fixed-maturity portfolio has grown since year-end 2007 due
largely to a declining interest rate environment in recent years. The net gain
position for our current fixed-maturity holdings will naturally decline over
time as individual securities mature. In addition, changes in interest rates can
cause rapid,
Cincinnati
Financial Third-Quarter 2010 10-Q
significant
changes in fair values of fixed-maturity securities and the net gain position,
as discussed on pages 45 to 47. The two primary contributors to
our equity portfolio net gain position were Procter & Gamble and ExxonMobil
common stocks, which had a combined net gain position of
$210 million.
Unrealized
Investment Losses
We expect
the number of securities trading below book value to fluctuate as interest rates
rise or fall and credit spreads expand or contract due to prevailing economic
conditions. Further, book values for some securities are revised through
impairment charges recognized in prior periods. At September 30, 2010, 53 of the
2,635 securities we owned were trading below book value compared with
355 of the 2,505 securities we owned at year-end 2009. The 53 holdings
trading below book value at September 30, 2010, represented
5.8 percent of fair value of our investment portfolio and $41 million
in unrealized losses.
·
|
50
of these holdings were trading between 90 percent and
100 percent of book value at September 30, 2010. Eleven of
these are equity securities that may be subject to other-than-temporary
impairment should they not recover by the recovery dates we determined.
The remaining 39 securities primarily consists of fixed-maturity
securities whose current valuation is largely the result of interest rate
factors. The fair value of these 50 securities was $545 million,
and they accounted for $25 million in unrealized
losses.
|
·
|
Three
of these holdings were trading between 70 percent and 90 percent
of book value at September 30, 2010. Two of these securities are
equity securities that may be subject to other-than-temporary impairment
should they not recover by the recovery date we determined. The remaining
one is a fixed-maturity security that we believe will continue to pay
interest and ultimately principal upon maturity. The fair value of these
three securities was $110 million, and they accounted for
$16 million in unrealized
losses.
|
·
|
None
of these holdings were trading below 70 percent of book value at
September 30, 2010.
|
The table
below reviews fair values and unrealized losses by investment category and by
the overall duration of the securities’ continuous unrealized loss
position.
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
At September 30, 2010
|
|
Fixed
maturities:
|
|
States,
municipalities and political subdivisions
|
|
$ |
6 |
|
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
- |
|
|
$ |
16 |
|
|
$ |
- |
|
Government-sponsored
enterprises
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
- |
|
Corporate
bonds
|
|
|
25 |
|
|
|
- |
|
|
|
83 |
|
|
|
3 |
|
|
|
108 |
|
|
|
3 |
|
Total
|
|
|
46 |
|
|
|
- |
|
|
|
93 |
|
|
|
3 |
|
|
|
139 |
|
|
|
3 |
|
Equity
securities
|
|
|
449 |
|
|
|
37 |
|
|
|
67 |
|
|
|
1 |
|
|
|
516 |
|
|
|
38 |
|
Total
|
|
$ |
495 |
|
|
$ |
37 |
|
|
$ |
160 |
|
|
$ |
4 |
|
|
$ |
655 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2010, 28 fixed-maturity securities with a total unrealized
loss of $3 million had been in an unrealized loss position for 12 months or
more. Of that total, no fixed-maturity securities were trading under
70 percent of book value; one fixed-maturity security with a fair
value of $6 million was trading from 70 percent to less than
90 percent of book value and accounted for $1 million in unrealized
losses; and 27 fixed-maturity securities with a fair value of
$87 million were trading from 90 percent to less than 100 percent
of book value and accounted for $2 million in unrealized
losses.
At
September 30, 2010, four equity securities with a total unrealized loss of
$1 million had been in an unrealized loss position for 12 months or more.
Of that total, none were trading under 70 percent of book value; no equity
securities were trading from 70 percent to less than 90 percent of
book value; and four equity securities with a fair value of $67 million
were trading from 90 percent to less than 100 percent of book value
and accounted for $1 million in unrealized losses.
As of
September 30, 2010, applying our invested asset impairment policy, we determined
that the $4 million in unrealized losses described above were not
other-than-temporarily impaired.
During
the third quarter of 2010, five securities were written down through
impairment charges for a total of 15 during the nine months ended September 30,
2010. Other-than-temporarily impairments resulted in pretax, non-cash charges of
$1 million and $36 million for the three-month and nine-month periods
ended September 30, 2010. During the same periods of 2009, we impaired
securities resulting in $11 million and $113 million
other-than-temporary impairment charges.
Cincinnati
Financial Third-Quarter 2010 10-Q
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.
The
following table summarizes the investment portfolio by severity of
decline:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
Number
|
|
|
Book
|
|
|
Fair
|
|
|
unrealized
|
|
|
investment
|
|
(In millions)
|
|
of issues
|
|
|
value
|
|
|
value
|
|
|
gain/loss
|
|
|
income
|
|
At
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Fair
value at 70% to less than 100% of book value
|
|
|
31 |
|
|
|
127 |
|
|
|
124 |
|
|
|
(3 |
) |
|
|
5 |
|
Fair
value at 100% and above book value
|
|
|
1,244 |
|
|
|
4,811 |
|
|
|
5,356 |
|
|
|
545 |
|
|
|
207 |
|
Securities
sold in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Total
|
|
|
1,275 |
|
|
|
4,938 |
|
|
|
5,480 |
|
|
|
542 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value at 70% to less than 100% of book value
|
|
|
9 |
|
|
|
15 |
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
Fair
value at 100% and above book value
|
|
|
1,259 |
|
|
|
2,765 |
|
|
|
2,971 |
|
|
|
206 |
|
|
|
90 |
|
Securities
sold in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Total
|
|
|
1,268 |
|
|
|
2,780 |
|
|
|
2,986 |
|
|
|
206 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value at 70% to less than 100% of book value
|
|
|
10 |
|
|
|
530 |
|
|
|
493 |
|
|
|
(37 |
) |
|
|
15 |
|
Fair
value at 100% and above book value
|
|
|
58 |
|
|
|
1,572 |
|
|
|
2,163 |
|
|
|
591 |
|
|
|
50 |
|
Securities
sold in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Total
|
|
|
68 |
|
|
|
2,102 |
|
|
|
2,656 |
|
|
|
554 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value at 70% to less than 100% of book value
|
|
|
3 |
|
|
|
24 |
|
|
|
23 |
|
|
|
(1 |
) |
|
|
1 |
|
Fair
value at 100% and above book value
|
|
|
21 |
|
|
|
51 |
|
|
|
78 |
|
|
|
27 |
|
|
|
4 |
|
Securities
sold in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Total
|
|
|
24 |
|
|
|
75 |
|
|
|
101 |
|
|
|
26 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value at 70% to less than 100% of book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value at 100% and above book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Securities
sold in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Total
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fair
value at 70% to less than 100% of book value
|
|
|
53 |
|
|
|
696 |
|
|
|
655 |
|
|
|
(41 |
) |
|
|
21 |
|
Fair
value at 100% and above book value
|
|
|
2,582 |
|
|
|
9,199 |
|
|
|
10,568 |
|
|
|
1,369 |
|
|
|
351 |
|
Securities
sold in current year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19 |
|
Total
|
|
|
2,635 |
|
|
$ |
9,895 |
|
|
$ |
11,223 |
|
|
$ |
1,328 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value below 70% of book value
|
|
|
9 |
|
|
$ |
8 |
|
|
$ |
5 |
|
|
$ |
(3 |
) |
|
$ |
1 |
|
Fair
value at 70% to less than 100% of book value
|
|
|
346 |
|
|
|
1,862 |
|
|
|
1,781 |
|
|
|
(81 |
) |
|
|
79 |
|
Fair
value at 100% and above book value
|
|
|
2,150 |
|
|
|
7,666 |
|
|
|
8,776 |
|
|
|
1,110 |
|
|
|
391 |
|
Securities
sold in current year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31 |
|
Total
|
|
|
2,505 |
|
|
$ |
9,536 |
|
|
$ |
10,562 |
|
|
$ |
1,026 |
|
|
$ |
502 |
|
See our
2009 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Asset
Impairment, Page 42.
Cincinnati Financial Third-Quarter 2010 10-Q
Item
4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures – The company maintains disclosure
controls and procedures (as that term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange
Act)).
Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
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
September 30, 2010. 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
|
·
|
that
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
September 30, 2010, there were no changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Part
II – Other Information
Item
1.
|
Legal
Proceedings
|
Neither
the company nor any of our subsidiaries is involved in any litigation believed
to be material other than ordinary, routine litigation incidental to the nature
of its business.
Our risk
factors have not changed materially since they were described in our 2009 Annual
Report on Form 10-K filed February 26, 2010.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
We did
not sell any of our shares that were not registered under the Securities Act
during the first nine months of 2010. The board of directors has authorized
share repurchases since 1996. We discuss the board authorization in our 2009
Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Parent
Company Liquidity, Page 68. The board gives management discretion to purchase
shares at reasonable prices in light of circumstances at the time of purchase,
subject to SEC regulations. In the first nine months of 2010, we repurchased a
total of 377,748 shares.
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
|
|
July
1-31, 2010
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
8,666,349 |
|
August
1-31, 2010
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,666,349 |
|
September
1-30, 2010
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
8,666,349 |
|
Totals
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
|
|
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. Neither the 2005 nor 1999 program had an
expiration date, but no further repurchases will occur under the 1999
program.
Cincinnati
Financial Third-Quarter 2010 10-Q
Item
3.
|
Defaults
upon Senior Securities
|
We have
not defaulted on any interest or principal payment, and no arrearage in the
payment of dividends has occurred.
Item
4.
|
(Removed
and Reserved)
|
Item
5.
|
Other
Information
|
None.
Exhibit No.
|
|
Exhibit Description
|
3.1A
|
|
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)
|
3.1B
|
|
Amendment
to Article Fourth of Amended Articles of Incorporation of Cincinnati
Financial Corporation (incorporated by reference to Exhibit 3(i) filed
with the company’s Current Report on Form 8-K dated
July 15, 2005)
|
3.1C
|
|
Amendment
to Article Sixth of Amended Articles of Incorporation of Cincinnati
Financial Corporation (incorporated by reference to Exhibit 3.1(c) filed
with the company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2010)
|
3.2
|
|
Regulations
of Cincinnati Financial Corporation, as amended through May 1, 2010
(incorporated by reference to Exhibit 3.2 to the company’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
2010)
|
10.1
|
|
Letter
Agreement by and among Cincinnati Financial Corporation, CFC Investment
Company and PNC Bank, National Association, dated August 27, 2010 renewing
$75 Million committed line of credit (incorporated by reference to the
Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated
August 27, 2010).
|
11
|
|
Statement
re: Computation of per share earnings for the nine months ended
September 30, 2010, contained in Exhibit 11 of this
report
|
31A
|
|
Certification
pursuant to Section 302 of the Sarbanes Oxley Act of 2002 –
Chief Executive Officer
|
31B
|
|
Certification
pursuant to Section 302 of the Sarbanes Oxley Act of 2002 –
Chief Financial Officer
|
32
|
|
Certification
pursuant to Section 906 of the Sarbanes Oxley Act of
2002
|
Cincinnati
Financial Third-Quarter 2010 10-Q
Signature
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CINCINNATI
FINANCIAL CORPORATION
Date:
October 27, 2010
/S/
Eric N. Mathews
|
Eric
N. Mathews, CPCU, AIAF
|
Vice
President, Assistant Secretary and Assistant Treasurer
|
(Principal
Accounting Officer)
|
Cincinnati
Financial Third-Quarter 2010 10-Q