What drove the large increase in 2003 net income?

Net income rose 57.0% mainly because the property casualty combined ratio improved to 94.7% from 99.7%, driven by higher premiums per policy and better underwriting. Two one-time items also helped: a $23 million pretax software vendor settlement and a $38 million pretax release of Ohio UM/UIM reserves. Together these added about 24 cents per diluted share, and realized investment losses were smaller than in 2002.

What are the 2004 targets management has set?

Management targets high single-digit growth in property casualty written and earned premiums, a property casualty combined ratio near 95% including 3.0 to 3.5 points of catastrophe losses, and investment income growth of 3.5% to 4.5%. The combined ratio target excludes any further UM/UIM reserve releases, though up to an additional $37 million of such releases may occur in coming quarters.

Is the company exposed to significant catastrophe or reserve risk?

Yes. Catastrophe losses are a major volatility source, with the company citing exposure to Gulf and Southeast hurricanes, New Madrid earthquakes, and Midwest and Southeast severe storms. Reinsurance limits the net loss from these events. Reserves are established in the upper half of the actuary's adequate range and have shown redundancies, but management acknowledges that estimation uncertainty exists, and each percentage point increase in the loss ratio would reduce pretax income by $27 million.

How well capitalized is the company, and what about the dividend?

Capital is strong. Consolidated shareholders' equity was $6.2 billion, and the property casualty insurers had a 1.0-to-1 premium-to-surplus ratio against an industry average of 1.3-to-1. The company has raised its annual dividend for 44 consecutive years, with a 10% increase to an indicated $1.10 annual rate in January 2004, and it also declared a 5% stock dividend. Debt is modest at $420 million of senior debentures, and the debt-to-net-worth ratio is 0.10-to-1.

CINF 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 2004. Cited figures are marked; the original filing is the authoritative source.

Cincinnati Financial Corporation (CINF) closed 2003 with a strong year driven by property casualty underwriting and investment performance.

Revenues rose 11.9% to $3.181 billion^a and net income rose 57.0%, lifting diluted EPS to $2.31 from $1.46. The property casualty combined ratio improved to 94.7% from 99.7%, the third consecutive year of improvement, and book value per share reached a record $38.69. Results were helped by two unusual items: a $23 million software settlement recovery and a $38 million release of Ohio UM/UIM reserves, which together added roughly 24 cents per share.

Management's 2004 targets call for high single-digit premium growth and a combined ratio near 95%. The investment portfolio remains the company's largest profit engine and its largest risk. Common equity holdings of $8.2 billion^b are concentrated in financials, with Fifth Third Bancorp alone at $4.3 billion, or 52.7% of the common stock portfolio.

A 20% decline in Fifth Third's share price would reduce shareholders' equity by about 9%. Common stocks are carried at roughly $2.2 billion^c of cost against $8.2 billion of market value, so unrealized appreciation is very large. Management also has a buy-and-hold approach, and S&P revised its outlook to negative in November 2003, citing the company's aggressive equity investing and slow homeowners recovery.

Risk factors investors should weigh include catastrophe exposure, reserve adequacy, and the homeowners line, which still carries a loss ratio of about 93%. Personal lines remained unprofitable at a $27 million^d pretax loss, while commercial lines earned $167 million pretax.

Shareholders' equity of $6.2 billion and a conservative leverage profile give the company substantial financial flexibility, and the company paid $1.00 in dividends per share for 2003. The company also faces an Equal Pay Act collective action, which it is vigorously defending.

02—Key points

Key Highlights

Net income rose 57.0% in 2003 and diluted EPS reached $2.31, versus $1.46 in 2002, aided by a $23 million software recovery and a $38 million UM/UIM reserve release.
Property casualty combined ratio improved to 94.7% from 99.7% in 2002 and 104.9% in 2001, the third straight year of underwriting improvement.
Book value per share hit a record $38.69, up 11.7%, while return on equity rose to 6.3%.
Common stock portfolio of $8.2 billion is highly concentrated: Fifth Third Bancorp represents 52.7% of common equity value and 63.8% of after-tax unrealized gains.
Investment income reached a record $465 million, and the investment segment generated 88.5% of pretax income before taxes.
Personal lines remains a drag, with a $27 million pretax loss and homeowners loss ratio of 92.7%, though improving.
Financial strength ratings remain strong (A.M. Best A, Fitch AA, Moody's Aa3, S&P AA- with negative outlook) and shareholders' equity is $6.2 billion.

03—Questions

Frequently Asked Questions

What drove the large increase in 2003 net income?
Net income rose 57.0% mainly because the property casualty combined ratio improved to 94.7% from 99.7%, driven by higher premiums per policy and better underwriting. Two one-time items also helped: a $23 million pretax software vendor settlement and a $38 million pretax release of Ohio UM/UIM reserves. Together these added about 24 cents per diluted share, and realized investment losses were smaller than in 2002.
How concentrated is the investment portfolio, and what is the risk?
The equity portfolio is highly concentrated. Fifth Third Bancorp was worth $4.3 billion at year-end 2003, about 52.7% of common stock value, and financials make up 71.7% of the large common equity holdings. A 20% decline in Fifth Third's share price would reduce shareholders' equity by about 9%, which is a significant exposure. Management argues that the company's long-term buy-and-hold strategy and strong capitalization provide a cushion, but S&P cited this concentration when it revised its outlook to negative.
What are the 2004 targets management has set?
Management targets high single-digit growth in property casualty written and earned premiums, a property casualty combined ratio near 95% including 3.0 to 3.5 points of catastrophe losses, and investment income growth of 3.5% to 4.5%. The combined ratio target excludes any further UM/UIM reserve releases, though up to an additional $37 million of such releases may occur in coming quarters.
Is the company exposed to significant catastrophe or reserve risk?
Yes. Catastrophe losses are a major volatility source, with the company citing exposure to Gulf and Southeast hurricanes, New Madrid earthquakes, and Midwest and Southeast severe storms. Reinsurance limits the net loss from these events. Reserves are established in the upper half of the actuary's adequate range and have shown redundancies, but management acknowledges that estimation uncertainty exists, and each percentage point increase in the loss ratio would reduce pretax income by $27 million.
How well capitalized is the company, and what about the dividend?
Capital is strong. Consolidated shareholders' equity was $6.2 billion, and the property casualty insurers had a 1.0-to-1 premium-to-surplus ratio against an industry average of 1.3-to-1. The company has raised its annual dividend for 44 consecutive years, with a 10% increase to an indicated $1.10 annual rate in January 2004, and it also declared a 5% stock dividend. Debt is modest at $420 million of senior debentures, and the debt-to-net-worth ratio is 0.10-to-1.

04—Continue

← View all 10-K filings