01—Abstract
Summary
Summary of the 10-K filed March 23, 2000. Cited figures are marked; the original filing is the authoritative source.
Cincinnati Financial Corporation's 1999 10-K shows a company at a high point in operating results but with a sharply weaker balance sheet, driven by the bond market.
Net income rose 5% to $254.7 milliona ($1.55 per share basic, $1.52 diluted), and net operating income (excluding realized gains) reached a record $255.1 million, up 28%. The improvement came from lower catastrophe losses ($36.8 million versus $93.5 million in 1998), a statutory combined ratio that improved to 100.0% from 103.6%, and the first $302.9 million single-premium Bank Owned Life Insurance (BOLI) policy, which boosted premiums and operating cash flow. Revenue rose 4% to $2.13 billion.
Net written premiums grew 7.9% to $1.68 billionb, and the company reported 2,920 associates and 977 independent agencies across 30 states. The key investor concern is the balance sheet. Shareholders' equity fell to $5.42 billion from $5.62 billion, and book value per share slipped to $33.46 from $33.72, because unrealized gains on the portfolio declined as interest rates rose and bond values dropped by about $195 million.
Equity remains heavily concentrated in common stocks, which were 70% of portfolio market value. The largest holdings are Fifth Third Bancorp (fair value $3.54 billionc) and Alltel ($1.06 billion). Reserve development was favorable, with a $116 million redundancy in prior-year loss reserves, though management notes that reserve estimates always carry uncertainty.
The company also repurchased $217 milliond of its stock (6.1 million shares) and increased its dividend 11.8% to an indicated $0.76 annual rate, its 39th consecutive annual increase. Short-term notes payable rose to $118 million, and a second headquarters tower costing about $60 million was under construction. Investors should weigh the strong 1999 earnings and operating momentum against the reliance on equity market appreciation and on a single large BOLI sale that may not recur.
02—Key points
Key Highlights
- Record net operating income of $255.1 million (up 28%) and net income of $254.7 million ($1.55 basic EPS), with a $0.4 million realized capital loss in 1999 compared with $42.5 million of gains in 1998.
- Statutory combined ratio improved to 100.0% from 103.6% in 1998, helped by catastrophe losses falling to $36.8 million from $93.5 million.
- Revenue rose 4% to $2.13 billion, and gross written premiums grew 7% to $1.77 billion, although the total was inflated by the $302.9 million single-premium BOLI policy at Cincinnati Life.
- Favorable reserve development produced a $116.1 million pre-tax reduction in prior-year loss reserves, after reductions of $153.3 million in 1998 and $119.7 million in 1997.
- Shareholders' equity declined to $5.42 billion from $5.62 billion, and book value per share fell to $33.46 from $33.72, because unrealized equity gains were offset by a $195 million decline in bond values.
- The company repurchased 6.1 million shares for $217.1 million, and the Board raised the quarterly dividend 11.8% to an indicated annual rate of $0.76, the 39th consecutive annual increase.
- Equity portfolio concentration is high: common stocks were 70.2% of portfolio market value, led by Fifth Third Bancorp ($3.54 billion fair value) and Alltel ($1.06 billion).
03—Questions
Frequently Asked Questions
How did Cincinnati Financial perform in 1999 compared with 1998?
Net income rose 5% to $254.7 million, or $1.55 per basic share, from $241.6 million, or $1.45, in 1998. Net operating income excluding realized gains rose 28% to $255.1 million, a record. Revenue increased 4% to $2.13 billion. Results were helped by lower catastrophe losses and an improved statutory combined ratio of 100.0% versus 103.6% in 1998.
Why did shareholders' equity and book value decline in 1999?
Shareholders' equity fell to $5.42 billion from $5.62 billion, and book value per share fell to $33.46 from $33.72. The main cause was a drop in accumulated other comprehensive income, which fell to $3.53 billion from $3.68 billion, as the bond portfolio lost about $195 million in value when interest rates rose. Share repurchases of $217 million also reduced equity.
How much of the 1999 premium growth came from the BOLI policy?
The single-premium Bank Owned Life Insurance policy written by The Cincinnati Life Insurance Company contributed $302.9 million, which accounts for most of the growth in life premium. Life and accident and health gross written premiums rose to $420.7 million from $114.7 million. Management stated that the company could again reach $2.0 billion in direct written premiums in 2000 without additional BOLI sales, which suggests the one-time contribution is not expected to recur.
Is the company's loss reserving considered adequate?
Management reported that the 1999 reserve estimates reflected a $116.1 million redundancy in the prior-year liability, meaning reserves were set higher than the claims ultimately required. The company does not discount its property and casualty reserves. The 10-year development table shows a cumulative net redundancy of $116 million on the 1998 liability, and management notes that estimates remain subject to trends in claim severity and frequency. The filing also states that environmental reserves are considered adequate.
What are the company's dividend and capital return policies?
The Board raised the quarterly dividend 11.8% in February 2000 to an indicated annual rate of $0.76 per share. Cincinnati Financial has increased its cash dividend for 39 consecutive years. Over the past ten years it has paid an average of 30 to 35% of net income as dividends and reinvested the remainder. During 1999 it repurchased 6.1 million shares for $217.1 million, and 10.3 million shares remained authorized under the 17 million share program.
04—Continue