10-QPeriod: Q3 FY2008

CINCINNATI FINANCIAL CORP Quarterly Report for Q3 Ended Sep 30, 2008

Filed October 29, 2008For Securities:CINF

Summary

Cincinnati Financial Corporation (CINF) reported its third-quarter and year-to-date results for the period ending September 30, 2008. The company faced a challenging operating environment, marked by significant market volatility and increased catastrophe losses. Despite these headwinds, CINF demonstrated resilience, particularly in its property casualty insurance segments. Investment income saw a decline, largely due to dividend reductions from financial sector holdings, a direct consequence of the broader financial crisis. The company's balance sheet reflects a decrease in total assets and shareholders' equity, primarily driven by declines in the market value of its investment portfolio. Operationally, the property casualty segments experienced underwriting losses, with the combined ratio exceeding 100%, largely attributable to a substantial increase in catastrophe losses, notably Hurricane Ike. However, favorable development on prior year reserves provided some offset. The personal lines segment was particularly impacted by elevated catastrophe losses. The life insurance segment also reported a net loss. Despite these challenges, CINF maintained its commitment to shareholder returns, increasing cash dividends per share and continuing its share repurchase program, albeit with a moderated pace to conserve capital amid market uncertainty.

Key Highlights

  • 1Net income for the three months ended September 30, 2008, increased by 99.5% to $1.51 per diluted share, primarily due to higher realized investment gains compared to the prior year.
  • 2However, for the nine months ended September 30, 2008, net income decreased by 57.5% to $1.64 per diluted share, driven by lower realized investment gains and significantly higher catastrophe losses.
  • 3Total revenues for the nine months ended September 30, 2008, decreased by 14.5% to $2.806 billion, largely due to substantially lower realized investment gains.
  • 4Invested assets decreased to $10.160 billion from $12.261 billion at the end of 2007, reflecting declines in market values, particularly in equity securities.
  • 5Shareholders' equity declined to $4.687 billion from $5.929 billion at the end of 2007, impacted by market fluctuations and other comprehensive income losses.
  • 6The GAAP combined ratio for the consolidated property casualty insurance operations worsened to 101.1% for the nine months ended September 30, 2008, compared to 91.8% in the prior year, driven by a significant increase in catastrophe losses (9.7% of earned premiums vs. 1.2% in 2007).
  • 7The company made a significant investment in its excess and surplus lines operations, expanding marketing into new states.
  • 8Cincinnati Financial Corporation terminated its securities lending program during the third quarter of 2008.

Frequently Asked Questions

The primary driver for the 99.5% increase in net income for the three months ended September 30, 2008, was significantly higher realized investment gains compared to the same period in the previous year. This offset lower earned premiums and investment income.

The challenging market conditions led to a decline in the market value of Cincinnati Financial's investment portfolio. Invested assets decreased to $10.160 billion from $12.261 billion at year-end 2007. Equity securities, in particular, saw a significant decrease in fair value. The company also experienced reduced dividend income from financial sector holdings and recognized substantial other-than-temporary impairment charges, particularly on equity securities.

Catastrophe losses significantly increased, contributing 9.7 percentage points to the combined ratio for the nine months ended September 30, 2008, compared to 1.2 percentage points in the prior year. Hurricane Ike was the single largest catastrophe in the company's history and heavily impacted the commercial lines segment. This elevated catastrophe activity resulted in underwriting losses for both the commercial and personal lines segments, pushing their combined ratios above 100%.

Despite the challenging environment, the company continued to increase cash dividends per share by 9.9% for both the three and nine-month periods. While the share repurchase program continued, its pace was moderated in the second half of 2008 to conserve capital. The company also implemented new internal guidelines and portfolio parameters to manage risk more effectively, including diversifying its equity portfolio and reducing financial sector holdings.