10-QPeriod: Q3 FY2006

CINCINNATI FINANCIAL CORP Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 1, 2006For Securities:CINF

Summary

Cincinnati Financial Corporation (CINF) reported solid performance for the nine months ended September 30, 2006, with a significant increase in net income driven primarily by a large realized investment gain from the sale of ALLTEL Corporation stock. Total revenues saw a substantial jump due to this gain. Earned premiums across property casualty segments showed modest growth. Investment income also increased, reflecting growth in the fixed-maturity and equity portfolios. However, the property casualty insurance segment experienced challenges, particularly in the nine-month period, with underwriting profits declining. This was attributed to rising loss severity, increased catastrophe losses, and higher underwriting expenses, partly due to the adoption of new accounting standards for stock-based payments. While the company is actively managing these trends through pricing adjustments and operational efficiencies, investors should monitor the combined ratio and loss trends closely. The company also reaffirmed its strong financial strength ratings from major agencies, highlighting its stable outlook.

Key Highlights

  • 1Net income for the nine months ended September 30, 2006, surged by 90.7% to $800 million, largely due to a $647 million realized investment gain from the sale of ALLTEL Corporation stock.
  • 2Total revenues increased by 27.0% to $3,556 million for the first nine months of 2006, driven by the aforementioned investment gain.
  • 3Earned premiums in the property casualty segments showed consistent growth, up 3.6% for the three months and 3.5% for the nine months ended September 30, 2006.
  • 4Pretax investment income grew by 7.5% for the three months and 9.0% for the nine months ended September 30, 2006, reflecting portfolio growth and rising interest rates.
  • 5The property casualty underwriting profit decreased by 33.4% for the nine months ended September 30, 2006, impacted by rising loss severity and increased catastrophe losses.
  • 6The company's GAAP combined ratio for the nine months was 94.2%, compared to 91.0% in the prior year, indicating a deterioration in underwriting performance.
  • 7Cincinnati Financial maintained strong financial strength ratings from A.M. Best, Fitch, Moody's, and Standard & Poor's, with a stable outlook from Standard & Poor's.

Frequently Asked Questions

The primary driver was a $647 million realized investment gain from the sale of the company's holdings in ALLTEL Corporation common stock.

The decline in underwriting profit for the nine months is primarily due to rising loss severity (including more losses over $1 million), an increase in catastrophe losses compared to the prior year, and higher underwriting expenses. The adoption of SFAS No. 123(R) requiring stock option expensing also contributed to increased expenses.

The company is addressing these issues through various strategies, including implementing rate changes to improve competitiveness, focusing on underwriting selectivity, carefully managing rate levels, and evaluating risks individually. For catastrophe losses, the company utilizes reinsurance programs for protection.

The company anticipates pretax investment income growth to be in the range of 8.0% to 8.5% for the full year 2006, driven by strong cash flows from insurance operations, a higher allocation to fixed-maturity securities, and an increase in general interest rates.