01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Cincinnati Financial Corporation's 2008 results were sharply weaker than prior years.
Net income fell 49.9% to $429 milliona ($2.62 diluted EPS) from $855 million, driven by a three-year decline in realized gains, a first-ever decline in investment income (down 11.6%, mainly from dividend cuts by financial holdings), and an underwriting loss of $17 million in property casualty operations. The GAAP combined ratio rose to 100.6% from 90.3%, largely because of record catastrophe losses (Hurricane Ike alone was the company's largest catastrophe ever at $129 million gross) and a pension settlement charge. Book value per share fell to $25.75 from $35.70, and the value creation ratio was negative 23.5%.
Other-than-temporary impairments of $510 millionb, concentrated in financial-sector stocks, weighed heavily on results. The balance sheet remains conservative. The company ended 2008 with $1.0 billion in cash, a debt-to-capital ratio of 16.7% (up from 12.7%), and property casualty premiums-to-surplus of 0.9-to-1.
Insurer financial strength ratings were downgraded by several agencies, with A.M. Best lowering the standard market group to A+ (Superior), S&P to A+ with a negative outlook, and Fitch to AA- with a negative outlook. Management repositioned the equity portfolio away from financials, which fell from 56.2%c of common stocks at year-end 2007 to 12.4% at year-end 2008, and it repurchased 3.8 million shares early in the year before halting buybacks to preserve capital.
For investors, the key tension is between a strong capital position and weak near-term earnings. Management expects 2009 to remain difficult, citing soft commercial pricing, a weak economy, and continued investment in technology.
The board stated that its first priority is financial strength, leaving its 49th consecutive year of dividend increases under consideration rather than committed. The company's long-term value creation target of 12%d to 15% annually (2010 to 2014) is at risk if the assumed firming of commercial pricing and economic recovery do not materialize.
02—Key points
Key Highlights
- Net income fell 49.9% to $429 million ($2.62 diluted EPS) from $855 million in 2007, as realized gains dropped and investment income declined for the first time in company history.
- Property casualty underwriting swung to a $17 million loss from a $304 million profit in 2007; the GAAP combined ratio rose to 100.6% from 90.3%, with catastrophe losses contributing 6.8 points, the highest since 1991.
- Other-than-temporary impairment charges totaled $510 million across 126 securities, concentrated in financial-sector bonds and stocks; the equity portfolio's 2008 return was -31.5% versus -36.9% for the S&P 500.
- Book value per share declined to $25.75 from $35.70, and the value creation ratio was -23.5%, well below the company's long-term target.
- Capital position remains strong: P&C premiums-to-surplus of 0.9-to-1, $1.0 billion in cash entering 2009, and debt-to-capital rose to 16.7% (target below 20%) with $791 million in long-term debt.
- Insurer financial strength ratings were lowered by several agencies (A.M. Best A+ stable, S&P A+ negative, Fitch AA- negative, Moody's A1 stable), though the company remains highly rated.
- Management's 2009 outlook is cautious: continued soft commercial pricing, weak economy, and a possible dividend-increase streak pause, with the board prioritizing financial strength.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
| Revenue | $3.82B |
| Interest Expense | $53.00M |
| Net Income | $429.00M |
| EPS (Basic) | $2.63 |
| EPS (Diluted) | $2.62 |
05—Questions
Frequently Asked Questions
Why did Cincinnati Financial's net income drop so sharply in 2008?
Three factors drove the decline: realized investment gains fell from $382 million to $138 million after $510 million of impairment charges; dividend income from equity holdings fell 30.5%, cutting total investment income 11.6%; and the property casualty underwriting result swung to a $17 million loss, as record catastrophe losses (including Hurricane Ike) and higher current-year losses pushed the combined ratio above 100%.
Is Cincinnati Financial's capital base still strong enough to support the business?
Management says yes. Statutory capital ratios far exceed regulatory requirements, the property casualty premium-to-surplus ratio of 0.9-to-1 matches the industry average, and the company held about $1.0 billion of cash at year-end. Debt is modest at $791 million of long-term debt, though the debt-to-capital ratio rose to 16.7%. Ratings agencies have cited strong capitalization even as they lowered some ratings.
Will Cincinnati Financial continue its record of increasing dividends?
Uncertain. The company has increased its indicated annual cash dividend for 48 consecutive years, but in February 2009 the board said its first priority is financial strength and it would only consider a 49th year of increase over the course of 2009. The 2008 dividend declared was $1.56 per share, up 9.9%.
What is the outlook for the company's insurance operations in 2009?
Management expects commercial lines pricing to remain under pressure, though it anticipates declines to slow and firming of pricing during 2009. Personal lines are expected to grow slower than the industry as the company addresses pricing and homeowner losses. The company is also investing in technology, new states such as Texas, and surplus lines, which may pressure near-term profitability.
How exposed is the company's investment portfolio to further losses?
Exposure has been reduced but not eliminated. Financial-sector common stocks fell from 56.2% of the public equity portfolio at year-end 2007 to 12.4% at year-end 2008, and the Fifth Third holding was sold in January 2009. However, 944 fixed-maturity and equity holdings were trading below book value at year-end 2008, with $596 million in unrealized losses, and management warns that further economic deterioration could bring more impairments.
06—Continue