Cincinnati Financial Corporation — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are included where provided. Cincinnati Financial is an Ohio-based insurer whose principal business is property and casualty insurance distributed through independent agencies in 39 states, alongside life insurance, investments, and agency financing.
Financial performance
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Total revenue | $3.772 billion | $3.903 billion | Down 3% |
| Net income | $377 million | $432 million | Down 13%; diluted EPS was $2.31 versus $2.65 |
| Earned premiums | $3.082 billion | $3.054 billion | Up 1% |
| Net investment income, pretax | $518 million | $501 million | Up 3% |
| Net realized investment gains | $159 million | $336 million | Down 53% |
| Cash flow from operations | $531 million | $525 million | Up modestly |
| Total assets | $15.095 billion | $14.440 billion | Up 5% |
| Shareholders’ equity | $5.032 billion | $4.760 billion | Up 6%; book value per share rose to $30.91 from $29.25 |
The net income decline primarily reflected $114 million less in after-tax realized investment gains, partly offset by improved property-casualty underwriting and higher investment income. The 2010 gains included $128 million from the sale of Verisk Analytics shares. Other-than-temporary impairment charges fell to $36 million from $131 million in 2009 and $510 million in 2008.
Insurance margins: Consolidated property-casualty earned premiums were $2.924 billion. The GAAP combined ratio improved to 101.7% from 104.5%, but remained above 100%, resulting in a $47 million underwriting loss. Favorable prior-year reserve development contributed $304 million. By segment, commercial lines recorded a 99.4% combined ratio and $15 million pretax underwriting profit; personal lines recorded 107.7% and a $54 million loss; excess and surplus lines recorded 115.4% and an $8 million loss. Life insurance reported $7 million segment profit.
Liquidity and debt: Year-end cash and cash equivalents were $385 million, down from $557 million. Parent-level cash and marketable securities totaled $1.042 billion. Total debt was $839 million ($790 million long-term and $49 million short-term); debt-to-total-capital was 14.3%, versus 15.0% in 2009. The company reported $225 million of bank credit facilities, with $49 million drawn. The declared annual dividend was $1.59 per share, and the company reported 50 consecutive years of dividend increases.
Fourth quarter: Revenue was $936 million versus $1.133 billion in fourth-quarter 2009; net income was $126 million versus $245 million, and diluted EPS was $0.77 versus $1.50.
Material changes and management outlook
- Property-casualty net written premiums rose 2% after declines in both 2008 and 2009. Personal lines earned premiums grew 5%, excess and surplus lines grew 81% from a small base, while commercial lines declined 2% amid intense price competition.
- Management said softer pricing and normal loss-cost inflation continued to pressure current-year underwriting results. Catastrophe losses were lower than in 2009, and large losses also declined; favorable prior-year reserve development was a major contributor to the combined-ratio improvement.
- For 2011, management expected the commercial market to remain soft for much of the year, with profitability still under pressure; it anticipated some commercial pricing firming by year-end. It expected personal-lines growth to exceed the industry’s projected approximately 3%, supported by rate actions and new business. These are expectations, not guarantees.
- The company’s 2010 value creation ratio was 11.1%, below its 12%–15% annual-average target for 2010–2014. Management cautioned that 2011 could also fall below target, citing market volatility, soft insurance pricing, a slow economic recovery, claims inflation, and continuing investments in technology and growth initiatives.
- Key initiatives include predictive pricing models, agency-level profitability planning, process automation, small-business growth, and approximately 120 targeted agency appointments in 2011.
- The filing reports an S&P downgrade in July 2010: insurer financial-strength ratings for standard property-casualty and life subsidiaries fell to A from A+, with a stable outlook; senior-debt rating fell to BBB from BBB+. Other cited agency outlooks were stable. The filing also identifies geographic concentration, catastrophe exposure, competitive pricing, investment-market risk, reserve estimation, reinsurance recoverability, and agency-channel dependence as material risks.
Contingencies and unusual items
- Management reported $36 million of 2010 investment impairment charges and substantial favorable prior-year claims reserve development. Net property-casualty reserves were $3.811 billion, within management’s stated reasonable range of $3.571 billion to $3.952 billion; actual ultimate claims may fall outside that range.
- A first-quarter provision for matters involving prior years increased non-commission underwriting expenses; the filing text provided here does not give a clear amount. The company also disclosed ongoing ordinary-course claims and other legal matters, but stated that accrued probable and estimable losses were not material. It could not reasonably estimate a potential loss or range for certain other matters where loss risk was more than remote.
- Florida regulatory subpoenas issued in 2007 remained outstanding but inactive at year-end 2010. The company reported no other material litigation beyond routine business proceedings.
- Management stated that recent accounting pronouncements had no material effect, and the independent auditor issued an unqualified opinion on the financial statements and internal controls; management assessed internal control over financial reporting as effective.
Important facts for investors to verify
- Whether underwriting improvement persists without relying on favorable reserve development, particularly in personal lines and workers’ compensation.
- Whether rate increases and predictive pricing offset claims-cost inflation and soft-market competition, and whether commercial pricing firms as management expects.
- The adequacy and development of loss reserves, including the uncertainty around long-tail claims and the stated reserve range.
- The sustainability of investment income, equity-market gains, and the dividend given the investment portfolio’s market exposure and parent-company reliance on subsidiary dividends.
- Reinsurance protection, reinsurer credit quality, catastrophe exposure, and the impact of the Florida regulatory matter or other contingencies.