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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Ohio (State of incorporation) | 31-0746871 (I.R.S. Employer Identification No.) |
Fairfield, Ohio 45014-5141
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
None
Securities registered pursuant to Section 12(g) of the Act:
$2.00 par, common stock
(Title of Class)
6.125% Senior Notes due 2034
(Title of Class)
6.9% Senior Debentures due 2028
(Title of Class)
6.92% Senior Debentures due 2028
(Title of Class)
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• | We cultivate relationships with the independent insurance agents who market our policies and we make our decisions at the local level |
• | We achieve claims excellence, covering the spectrum from our response to reported claims to our approach to establishing reserves for not-yet-paid claims |
• | We invest for long-term total return, using available cash flow to purchase equity securities after covering insurance liabilities by purchasing fixed-maturity securities |
• | choose to sell a limited product line or only one type of insurance (monoline carrier) |
• | target a certain segment of the market (for example, personal insurance) |
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• | focus on one or more states or regions (regional carrier) |
• | independent agents, who represent multiple carriers, |
• | captive agents, who represent one carrier exclusively, or |
• | direct marketing through the mail or Internet |
(Dollars in millions) | Earned | Percent | Reporting | Avg premium | ||||||||||||||||
premium | of total | Change % | agency locations | per location | ||||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||||||
Ohio | $ | 737 | 23.1 | % | 2.2 | 224 | $ | 3.3 | ||||||||||||
Illinois | 299 | 9.4 | 1.7 | 112 | 2.7 | |||||||||||||||
Indiana | 238 | 7.4 | 0.9 | 99 | 2.4 | |||||||||||||||
Pennsylvania | 192 | 6.0 | 8.0 | 63 | 3.0 | |||||||||||||||
Michigan | 173 | 5.4 | (1.2 | ) | 88 | 2.0 | ||||||||||||||
Georgia | 141 | 4.4 | 9.5 | 59 | 2.4 | |||||||||||||||
Virginia | 134 | 4.2 | 4.8 | 53 | 2.5 | |||||||||||||||
North Carolina | 130 | 4.1 | 10.7 | 68 | 1.9 | |||||||||||||||
Wisconsin | 125 | 3.9 | 6.4 | 49 | 2.6 | |||||||||||||||
Kentucky | 102 | 3.2 | 5.0 | 38 | 2.7 | |||||||||||||||
All other states | 923 | 28.9 | 8.9 | 400 | 2.3 | |||||||||||||||
Total | $ | 3,194 | 100.0 | % | 5.1 | 1,253 | 2.5 | |||||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||
Ohio | $ | 722 | 23.7 | % | 7.1 | 224 | $ | 3.2 | ||||||||||||
Illinois | 294 | 9.7 | 7.7 | 113 | 2.6 | |||||||||||||||
Indiana | 235 | 7.7 | 5.5 | 96 | 2.5 | |||||||||||||||
Pennsylvania | 177 | 5.8 | 14.8 | 63 | 2.8 | |||||||||||||||
Michigan | 175 | 5.8 | 12.2 | 83 | 2.1 | |||||||||||||||
Georgia | 129 | 4.2 | 10.1 | 56 | 2.3 | |||||||||||||||
Virginia | 127 | 4.2 | 12.8 | 51 | 2.5 | |||||||||||||||
Wisconsin | 118 | 3.9 | 10.4 | 49 | 2.4 | |||||||||||||||
North Carolina | 117 | 3.9 | 15.8 | 66 | 1.8 | |||||||||||||||
Kentucky | 97 | 3.2 | 10.3 | 35 | 2.8 | |||||||||||||||
All other states | 849 | 27.9 | 14.9 | 377 | 2.2 | |||||||||||||||
Total | $ | 3,040 | 100.0 | % | 10.8 | 1,213 | 2.5 | |||||||||||||
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• | Web-based quoting and policy processing systems that allow our agencies and our field and headquarters associates to collaborate more efficiently on new and renewal business and that give our agencies choice and control |
• | Systems that automate our internal processes so our associates can spend more time serving agents and policyholders |
• | WinCPP® is an online commercial lines rate quoting system for businessowners, commercial package, commercial auto and workers compensation policies. WinCPP is available in all 32 states and used by all of our reporting agency locations. During 2006, we will add data sharing capabilities with agency systems and roll out quoting for small specialty programs for metalworkers, professional artisan contractors and garage owners. (A businessowners policy combines property, liability and business interruption coverages for small businesses.) |
• | e-CLAS™ is a commercial lines policy processing system. e-CLAS will make it easier and more efficient for our agencies to issue and administer our commercial lines policies. In 2005, we introduced e-CLAS to all of our agencies in Ohio to process new and renewal businessowners policies. |
Our primary long-term technology objectives are to: |
o | complete development of e-CLAS for all of our commercial lines of business and | ||
o | roll out the system to agencies in all of the states in which we do business |
During 2006, we expect to roll out businessowners policy processing to four additional states and provide dentists package policy processing in all five e-CLAS states. We also will begin developing commercial auto and commercial package policy processing capabilities. |
• | CinciBond™ is an automated system to process license and permit surety bonds. CinciBond enables agents to issue and print bonds at their offices. CinciBond was delivered to all Ohio agencies and initial groups of Indiana and Illinois agencies in 2005. During 2006, we will continue to deploy CinciBond in Indiana and Illinois. |
• | Diamond is a real-time personal lines policy processing system, supporting all six of our personal lines of business and allowing once and done processing. After its introduction in Kansas in 2002, we began full deployment of Diamond in 2004. At year-end, Diamond was in use in agencies representing approximately 70 percent of our 2005 personal lines premium volume, including those in Alabama, Florida, Kansas, Illinois, Indiana, Michigan and Ohio. In 2005, $417 million of our $786 million of personal lines written premium was issued through Diamond. During 2005, we improved the system’s stability and speed and made additional enhancements requested by our agencies. Training for agents in six states that represent another 21.5 percent of our premium volume is scheduled for 2006. Agents in Georgia, Kentucky and Wisconsin began using Diamond in early 2006 with Minnesota, Missouri and Tennessee roll-outs planned for later in the year. |
• | CMS™ is a claims file management system. CMS, initially deployed in late 2003, allows simultaneous access to claim files by headquarters and field claims associates. Field and headquarters claims associates use CMS to process all reported claims in a virtual claim file. We continue to refine the system |
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to add capabilities to make our associates more effective. Agent access to selected information is planned for 2006. |
• | i-View™ is a commercial lines policy imaging and workflow system. This system’s online policy viewing capability should speed the delivery and booking of policies as well as help expedite the claims process. We began rolling out i-View in 2004 and it was in use by approximately 50 percent of commercial lines underwriting teams at year-end 2005. Enhancements and infrastructure updates were completed in late 2005. Roll-out to the remaining teams began in January 2006 and we expect it will be completed during 2006. |
Property Casualty | ||||||||||||
Parent Company | Insurance | Life Insurance | ||||||||||
Senior Debt | Subsidiaries | Subsidiary | ||||||||||
Financial Strength Ratings: | ||||||||||||
A. M. Best Co. | aa- | A++ | A+ | |||||||||
Fitch Ratings | A+ | AA | AA | |||||||||
Moody’s Investors Services | A2 | Aa3 | — | |||||||||
Standard & Poor’s Ratings Services | A | AA- | AA- | |||||||||
Property Casualty Statutory Ratings: | ||||||||||||
Risk-Based Capital (RBC) | $ | 4,254 | ||||||||||
Authorized control level risk-based capital | 635 | |||||||||||
Property casualty statutory surplus | 4,194 | |||||||||||
Property casualty written premium-surplus ratio | 0.7 | x | ||||||||||
Life Statutory Ratings: | ||||||||||||
Risk-Based Capital (RBC) | $ | 511 | ||||||||||
Authorized control level risk-based capital | 52 | |||||||||||
Life statutory surplus | 451 | |||||||||||
Life statutory risk-based adjusted surplus-liabilities ratio | 37.3 | % |
• | A.M. Best – In June 2005, A.M. Best affirmed its top A++ (Superior) financial strength ratings and stable outlook for our property casualty subsidiaries. Less than 2 percent of the 1,064 insurer groups A.M. Best reviews annually qualify for the A++ rating. |
A.M. Best cited our superior risk-based capitalization, successful business position developed through building a network of independent agents, very strong financial flexibility and liquidity, excellent interest coverage measures and modest financial leverage. A.M. Best said its ratings take into account our high common stock leverage, elevated investment concentration and somewhat geographically concentrated market profile. A.M. Best stated that it expects the property casualty group’s overall operating results and |
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capitalization will remain strong in the near term due to our focused underwriting strategy, strong agency relations and consistently sound loss reserving practices. |
Also in June 2005, A.M. Best affirmed its A+ (Superior) rating for The Cincinnati Life Insurance Company. A.M. Best cited our life insurance subsidiary’s strategic position within Cincinnati Financial Corporation, our continuing focus on growth with a broad portfolio of life insurance products, expanding geographical presence, emphasis on full-time life insurance specialists, consistently positive statutory operating performance and adequate level of capitalization to manage our risks. A.M. Best said its rating considered the life subsidiary’s significant exposure to common stocks, lower operating profitability due to losses from accident and health business and the effect on surplus of acquisition costs related to writing increased amounts of new business. |
• | Fitch Ratings – In August 2005, Fitch affirmed its AA (Very Strong) insurer financial strength ratings and stable outlook for our property casualty subsidiaries and life insurance subsidiary. Fitch cited the strong financial condition of our operating subsidiaries, excellent financial flexibility, successful total return investment strategy and competitive advantage derived from long-term relationships with independent agents who distribute our products. |
Fitch said its ratings consider the property casualty group’s significant investment concentration in a small number of common stocks, geographic concentration that contributes to sizable catastrophe exposure and regulatory concentration and underperforming homeowner line of business. Fitch stated that it expects that financial leverage will remain at or near its current level over the intermediate term. |
• | Moody’s Investors Service – Following our announcement of third-quarter 2005 results, Moody’s commented that the company’s strong balance sheet and conservative financial and operating leverage metrics continue to support the property casualty subsidiaries’ Aa3 ratings. Moody’s said that its ratings took into account the increased volatility risk to capital and surplus presented by our equity exposure, along with its potential liabilities. |
Moody’s noted that the company was on track to achieve growth and profitability targets in line with Moody’s expectations for the current ratings. Moody’s said it expects the company will maintain our commercial pricing discipline along with our commitment to agency relationships, an integral filter in the underwriting process. Further, Moody’s expects full deployment of our policy processing system will simplify the process to introduce rate and product changes within our personal lines market. |
• | Standard & Poor’s Ratings Services – In October 2005, Standard & Poor’s issued a corporate ratings report with the rationale for its AA- (Very Strong) ratings of the property casualty subsidiaries and its negative outlook. Standard & Poor’s based the ratings, affirmed in September 2004, on the group’s strong competitive position afforded by its extremely loyal and productive independent agency force, high business persistency, extremely strong capitalization and high degree of financial flexibility. Standard & Poor’s said its outlook took into account the company’s underperformance in our homeowner business; very aggressive investment strategies; slow, deliberate response to changing markets, and volatility related to geographic concentration. |
Standard & Poor’s stated that it expects that the company should continue to perform well in its largest business segment, commercial lines, while lagging peers in personal lines profitability over the near term. Although progress could be tempered by slower growth, the sizeable equity position, adverse regulatory or judicial decisions or catastrophes, Standard & Poor’s said, it expects capitalization and growth will remain extremely strong and growth will be solid as new agency appointments and territory subdivisions partially offset possible weakening in industry pricing. |
A December 2005 corporate ratings report gave the rationale for Standard & Poor’s AA- (Very Strong) rating of The Cincinnati Life Insurance Company. Standard & Poor’s based the rating, affirmed in September 2004, on the life subsidiary’s strategic position within our group of companies, an extraordinarily superior capital position, extremely strong liquidity and the strength of its marketing position among independent agents. Standard & Poor’s said its rating considered the modest but growing penetration of our property casualty customer base, a narrow but growing product line and asset/liability management in the early stage of development. Standard & Poor’s outlook included expectations for premium growth of 9 percent, continued broadening of our product portfolio, improved asset/liability management, continued extremely strong capital and liquidity, as well as improved benchmarks for tracking penetration of the property casualty customer base. |
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• | At our headquarters, we conduct roundtables for agency principals, as well as our regular schedule of commercial lines, personal lines and life insurance agent schools and seminars. These generally focus on Cincinnati product and underwriting information and sales tips. In addition to schools for agents, we have opened seats for agents in our structured classroom training for new underwriting associates. Agency staff may return to their agencies after the class or stay and become fully grounded in Cincinnati philosophy by serving as an associate for a few years before returning to the agency. |
• | Associates travel to regional and agency locations to instruct classes and provide a variety of educational support services. Teams conduct personal lines customer service representative training and marketing seminars to promote cross-serving and sales of bonds, leasing services, life worksite marketing, inland marine coverages and our program for dentists. Other teams help agencies learn to use our new systems or get the most from their own agency management systems. Cincinnati associates even co-host client seminars with our agencies on the benefits of worksite marketing or risk management and risk transfer techniques, with customized programs that address liability issues specific to contractor or dentist audiences. |
• | We now bring courses to agency desktops, where at any time agency staff can access the Agency Learning Center through CinciLink, our secure agency-only Web site. The Learning Center offers convenient, online courses and Web conferences, including Cincinnati product information, Microsoft® Office topics and general business subjects. Our new producer and customer service representative curricula guide students through a progression of online courses and classroom instruction. |
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• | Commercial lines property casualty insurance |
• | Personal lines property casualty insurance |
• | Life insurance |
• | Investments |
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• | Commercial multi-peril coverage is a combination of property and liability coverages. Property insurance covers damages such as those caused by fire, wind, hail, water, theft, vandalism and business interruption resulting from a covered loss. Liability coverage insures businesses against third-party liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold. |
• | Workers compensation coverages protect employers against specified benefits payable under state or federal law for workplace injuries to employees. In some of our active states, including Ohio, workers compensation coverage is a state monopoly, provided solely by the state instead of by private insurers. |
• | Commercial auto coverages protect businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. |
• | Other liability coverages include commercial umbrella, commercial general liability and most executive risk policies, which cover liability exposures including bodily injury, directors and officers and employment practices, property damage arising from products sold and general business operations. |
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(Dollars in millions) | Earned | Percent | Reporting | Avg premium | ||||||||||||||||
premium | of total | Change % | agency locations | per location | ||||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||||||
Ohio | $ | 432 | 18.2 | % | 4.0 | 224 | $ | 1.9 | ||||||||||||
Illinois | 241 | 10.1 | 2.8 | 112 | 2.1 | |||||||||||||||
Pennsylvania | 174 | 7.3 | 7.9 | 63 | 2.8 | |||||||||||||||
Indiana | 164 | 6.9 | 2.9 | 99 | 1.7 | |||||||||||||||
Michigan | 130 | 5.5 | 0.2 | 88 | 1.5 | |||||||||||||||
North Carolina | 125 | 5.3 | 11.1 | 68 | 1.8 | |||||||||||||||
Virginia | 112 | 4.7 | 4.6 | 53 | 2.1 | |||||||||||||||
Wisconsin | 98 | 4.1 | 8.7 | 49 | 2.0 | |||||||||||||||
Iowa | 82 | 3.4 | 6.6 | 45 | 1.8 | |||||||||||||||
Georgia | 79 | 3.3 | 13.6 | 59 | 1.3 | |||||||||||||||
All other states | 739 | 31.2 | 10.5 | 393 | 1.9 | |||||||||||||||
Total | $ | 2,376 | 100.0 | % | 6.8 | 1,253 | 1.9 | |||||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||
Ohio | $ | 415 | 18.7 | % | 8.1 | 224 | $ | 1.9 | ||||||||||||
Illinois | 234 | 10.5 | 7.7 | 113 | 2.1 | |||||||||||||||
Pennsylvania | 162 | 7.3 | 14.4 | 63 | 2.6 | |||||||||||||||
Indiana | 160 | 7.2 | 6.8 | 96 | 1.7 | |||||||||||||||
Michigan | 130 | 5.8 | 11.3 | 83 | 1.6 | |||||||||||||||
North Carolina | 112 | 5.0 | 15.9 | 66 | 1.7 | |||||||||||||||
Virginia | 107 | 4.8 | 13.5 | 51 | 2.1 | |||||||||||||||
Wisconsin | 90 | 4.1 | 11.1 | 49 | 1.8 | |||||||||||||||
Iowa | 77 | 3.4 | 12.4 | 44 | 1.7 | |||||||||||||||
Tennessee | 72 | 3.2 | 14.4 | 30 | 2.4 | |||||||||||||||
All other states | 666 | 30.0 | 16.2 | 393 | 1.7 | |||||||||||||||
Total | $ | 2,225 | 100.0 | % | 12.0 | 1,212 | 1.8 | |||||||||||||
• | Personal auto coverages protect against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many |
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states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage. |
• | Homeowner coverages protect against losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. The company also offers coverage for condominium unit owners and renters. |
(Dollars in millions) | Earned | Percent | Reporting | Avg premium | ||||||||||||||||
premium | of total | Change % | agency locations | per location | ||||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||||||
Ohio | $ | 305 | 37.4 | % | (0.3 | ) | 211 | $ | 1.4 | |||||||||||
Indiana | 74 | 9.0 | (3.1 | ) | 65 | 1.1 | ||||||||||||||
Illinois | 59 | 7.2 | (2.5 | ) | 78 | 0.8 | ||||||||||||||
Georgia | 62 | 7.6 | 4.8 | 46 | 1.4 | |||||||||||||||
Michigan | 43 | 5.2 | (5.3 | ) | 66 | 0.6 | ||||||||||||||
Alabama | 40 | 4.9 | 4.3 | 24 | 1.7 | |||||||||||||||
Kentucky | 37 | 4.6 | 5.3 | 33 | 1.1 | |||||||||||||||
Wisconsin | 27 | 3.3 | (1.2 | ) | 30 | 0.9 | ||||||||||||||
Florida | 26 | 3.2 | 6.9 | 10 | 2.6 | |||||||||||||||
Virginia | 21 | 2.6 | 5.8 | 23 | 0.9 | |||||||||||||||
All other states | 123 | 15.0 | 1.1 | 209 | 0.6 | |||||||||||||||
Total | $ | 818 | 100.0 | % | 0.4 | 795 | 1.0 | |||||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||
Ohio | $ | 306 | 37.6 | % | 5.7 | 202 | $ | 1.5 | ||||||||||||
Indiana | 76 | 9.3 | 2.7 | 67 | 1.1 | |||||||||||||||
Illinois | 61 | 7.4 | 7.7 | 80 | 0.8 | |||||||||||||||
Georgia | 60 | 7.3 | 5.9 | 44 | 1.3 | |||||||||||||||
Michigan | 45 | 5.5 | 14.9 | 60 | 0.8 | |||||||||||||||
Alabama | 38 | 4.7 | 2.9 | 25 | 1.5 | |||||||||||||||
Kentucky | 36 | 4.4 | 13.3 | 31 | 1.1 | |||||||||||||||
Wisconsin | 28 | 3.4 | 8.2 | 30 | 0.9 | |||||||||||||||
Florida | 25 | 3.0 | 4.7 | 10 | 2.5 | |||||||||||||||
Virginia | 20 | 2.5 | 9.1 | 22 | 0.9 | |||||||||||||||
All other states | 120 | 14.9 | 12.9 | 207 | 0.6 | |||||||||||||||
Total | $ | 815 | 100.0 | % | 7.4 | 778 | 1.0 | |||||||||||||
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• | Term insurance – policies under which the benefit is payable only if the insured dies during a specified period of time or term; no benefit is payable if the insured survives to the end of the term. While premiums are fixed, they must be paid as scheduled. The proposed insured is evaluated using normal underwriting standards. |
• | Whole life insurance – policies that provide life insurance for the entire lifetime of the insured; the death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that are available to withdrawing policyholders. The proposed insured is evaluated using normal underwriting standards. |
• | Universal life insurance – long-duration life insurance policies. Contract premiums are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. Premiums are not fixed and may be varied by the contract owner. The cash values available to withdrawing policyholders are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments. The proposed insured is evaluated using normal underwriting standards. |
• | Worksite products – term insurance, whole life insurance, universal life and disability insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Polices are issued using a simplified underwriting approach and for smaller face amounts than similar, regularly underwritten policies. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts. Agents report that offering worksite marketing to employees of their commercial accounts provides a benefit to the employees at low cost to the employer. Worksite marketing also connects agents with new customers who may not have previously benefited from receiving the services of a professional independent insurance agent. |
• | Disability income insurance — provides monthly benefits to offset the loss of income when the insured person is unable to work due to accident or illness. |
• | Deferred annuities — provide regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any. |
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• | Immediate annuities — provide some combination of regular income and lump sum payments in exchange for a single premium. Most of the immediate annuities written by our life insurance segment are purchased by our property casualty companies to settle casualty claims. |
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• | Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks | |
• | Equity investments – Includes common and nonreedemable preferred stocks | |
• | Short-term investments – Primarily commercial paper |
(In millions) | At December 31, | |||||||||||||||
2005 | 2004 | |||||||||||||||
Book value | Fair value | Book value | Fair value | |||||||||||||
Taxable fixed maturities | $ | 3,304 | $ | 3,359 | $ | 3,161 | $ | 3,376 | ||||||||
Tax-exempt fixed maturities | 2,083 | 2,117 | 1,622 | 1,694 | ||||||||||||
Common equities | 1,961 | 6,936 | 1,918 | 7,466 | ||||||||||||
Preferred equities | 167 | 170 | 27 | 32 | ||||||||||||
Short-term investments | 75 | 75 | 71 | 71 | ||||||||||||
Total | $ | 7,590 | $ | 12,657 | $ | 6,799 | $ | 12,639 | ||||||||
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• | $973 million in U.S. agency paper, which is rated AAA by both Moody’s and Standard & Poor’s. | |
• | $1.750 billion in investment-grade corporate bonds that have a Moody’s rating at or above Baa 3 or a Standard & Poor’s rating at or above BBB-. | |
• | $358 million in high-yield corporate bonds that have a Moody’s rating below Baa 3 or a Standard & Poor’s rating below BBB-. | |
• | $278 million in convertible bonds and redeemable preferred stocks. |
(Dollars in millions) | 2005 | 2004 | ||||||||||||||
Fair | Percent | Fair | Percent | |||||||||||||
value | to total | value | to total | |||||||||||||
Moody’s Ratings | ||||||||||||||||
Aaa, Aa, A | $ | 3,651 | 65.8 | % | $ | 3,101 | 60.3 | % | ||||||||
Baa | 1,094 | 19.7 | 1,069 | 20.8 | ||||||||||||
Ba | 324 | 5.8 | 363 | 7.1 | ||||||||||||
B | 110 | 2.0 | 125 | 2.4 | ||||||||||||
Caa | 13 | 0.2 | 23 | 0.5 | ||||||||||||
Ca | 0 | 0.0 | 11 | 0.2 | ||||||||||||
C | 0 | 0.0 | 0 | 0.0 | ||||||||||||
Non-rated | 359 | 6.5 | 449 | 8.7 | ||||||||||||
Total | $ | 5,551 | 100.0 | % | $ | 5,141 | 100.0 | % | ||||||||
Standard & Poor’s Ratings | ||||||||||||||||
AAA, AA, A | $ | 3,233 | 58.3 | % | $ | 2,865 | 55.7 | % | ||||||||
BBB | 1,112 | 20.0 | 1,095 | 21.3 | ||||||||||||
BB | 354 | 6.4 | 340 | 6.6 | ||||||||||||
B | 117 | 2.1 | 154 | 3.0 | ||||||||||||
CCC | 2 | 0.0 | 5 | 0.1 | ||||||||||||
CC | 0 | 0.0 | 11 | 0.2 | ||||||||||||
D | 0 | 0.0 | 4 | 0.1 | ||||||||||||
Non-rated | 733 | 13.2 | 667 | 13.0 | ||||||||||||
Total | $ | 5,551 | 100.0 | % | $ | 5,141 | 100.0 | % | ||||||||
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Years ended December 31, | ||||||||
2005 | 2004 | |||||||
Weighted average yield-to-book value | 5.4 | % | 5.8 | % | ||||
Weighted average maturity | 9.5 | yrs | 9.4 | yrs | ||||
Weighted average duration to worst | 5.4 | yrs | 4.8 | yrs | ||||
Weighted average modified duration | 7.1 | yrs | 6.9 | yrs |
(Dollars in millions) | As of and for the year ended December 31, 2005 | |||||||||||||||||||
Earned | Earned | |||||||||||||||||||
Actual | Fair | Percent of | dividend | dividend to | ||||||||||||||||
cost | value | fair value | income | fair value | ||||||||||||||||
Fifth Third Bancorp | $ | 283 | $ | 2,745 | 39.6 | % | $ | 106 | 3.9 | % | ||||||||||
ALLTEL Corporation | 117 | 801 | 11.6 | 20 | 2.5 | |||||||||||||||
ExxonMobil Corporation | 133 | 503 | 7.3 | 10 | 2.0 | |||||||||||||||
The Procter & Gamble Company | 105 | 335 | 4.8 | 6 | 1.8 | |||||||||||||||
National City Corporation | 171 | 329 | 4.7 | 14 | 4.3 | |||||||||||||||
PNC Financial Services Group, Inc. | 62 | 291 | 4.2 | 10 | 3.2 | |||||||||||||||
Wyeth | 62 | 204 | 2.9 | 4 | 2.0 | |||||||||||||||
Alliance Capital Management Holding L.P. | 53 | 179 | 2.6 | 9 | 5.0 | |||||||||||||||
U.S. Bancorp | 113 | 172 | 2.5 | 7 | 4.1 | |||||||||||||||
Wells Fargo & Company | 66 | 139 | 2.0 | 5 | 3.2 | |||||||||||||||
FirstMerit Corporation | 54 | 139 | 2.0 | 6 | 4.2 | |||||||||||||||
Johnson & Johnson | 115 | 139 | 2.0 | 3 | 2.0 | |||||||||||||||
Piedmont Natural Gas Company, Inc. | 62 | 134 | 1.9 | 4 | 2.9 | |||||||||||||||
Sky Financial Group, Inc. | 91 | 130 | 1.9 | 4 | 3.2 | |||||||||||||||
All other common stock holdings | 474 | 696 | 10.0 | 22 | 3.2 | |||||||||||||||
Total | $ | 1,961 | $ | 6,936 | 100.0 | % | $ | 230 | 3.3 | |||||||||||
2005 10-K Page 17
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• | Insurance Holding Company Regulation – Our subsidiaries primarily engage in the property casualty insurance business and secondarily in the life insurance business, both subject to regulation as an insurance holding company system by the State of Ohio. These regulations require that we annually furnish financial and other information about the operations of the individual companies within the holding company system. All transactions within a holding company affecting insurers must be fair and equitable. Notice to the state insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and prior to certain material transactions between an insurer and any person or entity in its holding company. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval. | |
• | Subsidiary Dividends — The dividend-paying capacity of our insurance subsidiaries is regulated by the laws of Ohio, the domiciliary state. This regulation requires an insurance subsidiary to provide a 10-day advance informational notice to the Ohio insurance department prior to payment of any dividend or distribution to its shareholders (all of our smaller insurance subsidiaries are 100 percent owned by The Cincinnati Insurance Company, which is 100 percent owned by Cincinnati Financial Corporation). Ordinary dividends must be paid from earned surplus, which is the amount of unassigned funds set forth in an insurance subsidiary’s most recent statutory financial statement. |
• | Insurance Operations – All of our insurance subsidiaries are subject to licensing and supervision by departments of insurance in the states in which they do business. The nature and extent of such regulations vary, but generally have their source in statutes that delegate regulatory, supervisory and administrative powers to state insurance departments. Such regulations, supervision and administration of the insurance subsidiaries include, among others, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature and limitations on investments; deposits of securities for the benefit of policyholders; regulation of policy forms and premium rates; policy cancellations and non-renewals; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; and the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers compensation insurance. |
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• | Insurance Guaranty Associations — Each state has insurance guaranty association laws under which the associations may assess life and property casualty insurers doing business in the state for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the insurer’s proportionate share of business written by all member insurers in the state. In 2005, our insurance subsidiaries incurred a negative $3 million for guaranty associations. In 2004, our insurance subsidiaries incurred $2 million. We cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws. | |
• | Shared Market and Joint Underwriting Plans — State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most commonly instituted for automobile and workers compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans, which provide basic property coverages. Participation is based upon the amount of a company’s voluntary market share in a particular state for the classes of insurance involved. Underwriting results related to these organizations, which tend to be adverse to our company, have been immaterial to our results of operations. | |
• | Statutory Accounting — For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. |
• | Insurance Reserves — State insurance laws require that property casualty and life insurance subsidiaries analyze the adequacy of reserves annually. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses. | |
• | Risk-Based Capital Requirements — The NAIC’s risk-based capital (RBC) requirements for property casualty and life insurers serve as an early warning tool for the NAIC and the state regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest rate risks. |
• | The Terrorism Risk Insurance Act of 2002 (TRIA) – TRIA was signed into law on November 26, 2002, and extended on December 22, 2005, in a revised form. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. TRIA now is scheduled to expire December 31, 2007. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft, surety and workers compensation. In the event of a terrorism event defined by TRIA, the federal government will reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible was $328 million (15 percent of 2004 subject premiums) in 2005, $199 million in 2004 (10 percent of 2003 subject premiums) and $136 million in 2003 (7 percent of 2002 subject premiums). For 2006, the deductible is an estimated $318 million (17.5 percent of 2005 subject premiums). | |
• | Health Insurance Portability and Accountability Act of 1996 (HIPAA) – We protect consumer health information pursuant to regulations promulgated under HIPAA. Regulations effective April 14, 2003, require health care providers such as doctors and hospitals, as well as health and long-term care insurers and health care clearinghouses, to institute physical and procedural safeguards to protect the health records of patients and insureds. Effective October 16, 2003, additional regulations required health plans to electronically transmit and receive standardized health care information. These rules and regulations have had a minimal effect on us, as our health insurance writings are limited to our self-funded health plan for our associates and a small number of run-off medical and hospital expense insurance policies. We do not actively market health, medical and hospital expense insurance policies. |
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• | Office on Foreign Asset Control (OFAC) — Subject to an Executive Order signed on September 24, 2001, intended to thwart financing of terrorists and sponsors of terrorism, financial institutions were required to block and report transactions and attempted transactions between their organization and persons and organizations named in a list published by OFAC. We currently use a combination of software, third-party vendor and manual searches to accomplish our transaction blocking and reporting activities. | |
• | Investment Advisers Act of 1940 — Our subsidiary, CinFin Capital Management Company, operates an investment advisory business and is therefore subject to regulation by the SEC as a registered investment adviser under the Investment Advisers Act of 1940. This law imposes certain annual reporting, recordkeeping, client disclosure and compliance obligations on CinFin Capital Management. |
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• | Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular the A++ rating from A.M. Best of our property casualty insurance subsidiaries, are an important competitive advantage. Only 16 other insurance groups, or 1.7 percent of all insurance groups, qualify for the A++, A.M. Best’s highest rating. If our property casualty ratings were downgraded, our agents might find it more difficult to market our products or might choose to emphasize the products of other carriers, which could adversely affect our results of operations. | |
• | Concerns that doing business with us is difficult or perceptions that our level of service is no longer a distinguishing characteristic in the marketplace. If agents or policyholders believed that we were no longer providing the prompt, reliable personal service that has long been a distinguishing characteristic of our insurance operations, our results of operations could be adversely affected. | |
• | Delays in the development, implementation, performance and benefits of technology projects and enhancements or independent agent perceptions that our technology solutions are inadequate to match their needs. |
• | Competitiveness of premiums charged | |
• | Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks | |
• | Underwriting discipline | |
• | Terms and conditions of insurance coverage | |
• | Rate at which products are brought to market |
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• | Technological innovation | |
• | Ability to control expenses | |
• | Adequacy of financial strength ratings by independent ratings agencies such as A.M. Best | |
• | Quality of services provided to agents and policyholders |
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• | Hurricanes in the gulf and southeastern coastal regions. | |
• | Earthquakes in the New Madrid fault zone, which lies within the central Mississippi valley, extending from northeast Arkansas through southeast Missouri, western Tennessee and western Kentucky to southern Illinois, southern Indiana and parts of Ohio. | |
• | Tornado, wind and hail in the Midwest, Southeast, mid-Atlantic and Western regions. |
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• | Disposal of otherwise desirable investment securities, possibly under undesirable conditions. Such dispositions could result in a lower return on investment, loss of investment income, and if we were unable to manage the timing of the dispositions, we also might realize unnecessary capital gains, which would increase our annual tax payment. | |
• | Limited opportunities to purchase equity securities that hold the potential for market value appreciation, which could hamper book value growth over the long term. | |
• | Maintenance of a greater portion of our portfolio of equity securities at the insurance subsidiary, which would cause the parent to be more reliant on its subsidiaries for cash to fund parent-company obligations, including shareholder dividends and interest on long-term debt. |
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Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(Source: Nasdaq National Market) | 2005 | 2004 | ||||||||||||||||||||||||||||||
Quarter: | 1st | 2nd | 3rd | 4th | 1st | 2nd | 3rd | 4th | ||||||||||||||||||||||||
High | $ | 43.92 | $ | 43.12 | $ | 42.64 | $ | 45.95 | $ | 41.61 | $ | 41.78 | $ | 41.70 | $ | 43.52 | ||||||||||||||||
Low | 40.84 | 38.38 | 39.00 | 39.91 | 37.02 | 37.90 | 37.46 | 36.57 | ||||||||||||||||||||||||
Period-end close | 41.53 | 39.56 | 41.89 | 44.68 | 39.41 | 41.45 | 39.26 | 42.15 | ||||||||||||||||||||||||
Cash dividends declared | 0.290 | 0.305 | 0.305 | 0.305 | 0.250 | 0.262 | 0.262 | 0.262 |
Total number of shares | Maximum number of | |||||||||||||||
purchased as part of | shares that may yet be | |||||||||||||||
Total number of | Average price | publicly announced | purchased under the | |||||||||||||
Month | shares purchased | paid per share | plans or programs | plans or programs | ||||||||||||
January 1 -31, 2005 | 0 | $ | 0.00 | 0 | 3,705,977 | |||||||||||
February 1-28, 2005 | 0 | 0.00 | 0 | 3,705,977 | ||||||||||||
March 1-31, 2005 | 115,000 | 45.54 | 115,000 | 3,590,977 | ||||||||||||
April 1-30, 2005 | 162,728 | 39.58 | 162,728 | 3,428,249 | ||||||||||||
May 1-31, 2005 | 379,172 | 39.26 | 379,172 | 3,049,077 | ||||||||||||
June 1-30, 2005 | 308,100 | 39.41 | 308,100 | 2,740,977 | ||||||||||||
July 1-31, 2005 | 0 | 0.00 | 0 | 2,740,977 | ||||||||||||
August 1-31, 2005 | 1,035 | 39.95 | 1,035 | 2,739,942 | ||||||||||||
September 1-30, 2005 | 159,157 | 41.74 | 159,157 | 9,840,843 | ||||||||||||
October 1-31, 2005 | 0 | 0.00 | 0 | 9,840,843 | ||||||||||||
November 1-30, 2005 | 0 | 0.00 | 0 | 9,840,843 | ||||||||||||
December 1-31, 2005 | 374,808 | 45.13 | 374,808 | 9,466,035 | ||||||||||||
Totals | 1,500,000 | 41.54 | 1,500,000 | |||||||||||||
a) | The current repurchase program became effective on September 1, 2005. It replaced a program announced on February 6, 1999, which replaced a program approved in 1996 and updated in 1998. | |
b) | The share amount approved for repurchase in 2005 was 10 million shares and the share amount approved for repurchase in 1999 was 17 million shares. | |
c) | The current repurchase program has no expiration date. | |
d) | No repurchase program has expired during the period covered by the above table. | |
e) | The program approved in 1999 was terminated prior to the expiration date when the board approved the current program in August 2005. The program approved in 1996 and updated in 1998 was terminated prior to expiration when the board approved a program in February 1999. There have been no programs for which the issuer has not intended to make further purchases. |
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(In millions except per share data) | Years ended December 31, | |||||||||||||||
2005 | 2004 | 2003 | 2002 | |||||||||||||
Consolidated Income Statement Data | ||||||||||||||||
Earned premiums | $ | 3,164 | $ | 3,020 | $ | 2,748 | $ | 2,478 | ||||||||
Investment income, net of expenses | 526 | 492 | 465 | 445 | ||||||||||||
Gross realized investment gains and losses | 61 | 91 | (41 | ) | (94 | ) | ||||||||||
Total revenues | 3,767 | 3,614 | 3,181 | 2,843 | ||||||||||||
Net income | 602 | 584 | 374 | 238 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 3.44 | $ | 3.30 | $ | 2.11 | $ | 1.33 | ||||||||
Diluted | 3.40 | 3.28 | 2.10 | 1.32 | ||||||||||||
Cash dividends per common share: | ||||||||||||||||
Declared | 1.205 | 1.04 | 0.90 | 0.81 | ||||||||||||
Paid | 1.162 | 1.02 | 0.89 | 0.80 | ||||||||||||
Shares outstanding | ||||||||||||||||
Weighted average, diluted | 177 | 178 | 178 | 180 | ||||||||||||
Consolidated Balance Sheet Data | ||||||||||||||||
Invested assets | $ | 12,702 | $ | 12,677 | $ | 12,485 | $ | 11,226 | ||||||||
Deferred policy acquisition costs | 429 | 400 | 372 | 343 | ||||||||||||
Total assets | 16,003 | 16,107 | 15,509 | 14,122 | ||||||||||||
Loss and loss expense reserves | 3,661 | 3,549 | 3,415 | 3,176 | ||||||||||||
Life policy reserves | 1,343 | 1,194 | 1,025 | 917 | ||||||||||||
Long-term debt | 791 | 791 | 420 | 420 | ||||||||||||
Shareholders’ equity | 6,086 | 6,249 | 6,204 | 5,598 | ||||||||||||
Book value per share | 34.88 | 35.60 | 35.10 | 31.43 | ||||||||||||
Property Casualty Insurance Operations | ||||||||||||||||
Earned premiums | $ | 3,058 | $ | 2,919 | $ | 2,653 | $ | 2,391 | ||||||||
Unearned premiums | 1,557 | 1,537 | 1,444 | 1,317 | ||||||||||||
Loss and loss expense reserves | 3,629 | 3,514 | 3,386 | 3,150 | ||||||||||||
Investment income, net of expenses | 338 | 289 | 245 | 234 | ||||||||||||
Loss ratio | 49.2 | % | 49.8 | % | 56.1 | % | 61.5 | % | ||||||||
Loss expense ratio | 10.0 | 10.3 | 11.6 | 11.4 | ||||||||||||
Expense ratio | 30.0 | 29.7 | 27.0 | 26.8 | ||||||||||||
Combined ratio | 89.2 | % | 89.8 | % | 94.7 | % | 99.7 | % |
Per share data adjusted to reflect all stock splits and dividends prior to December 31, 2005. |
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2001 | 2000 | 1999 | 1998 | 1997 | 1996 | 1995 | ||||||||||||||||||||
$ 2,152 | $ | 1,907 | $ | 1,732 | $ | 1,613 | $ | 1,516 | $ | 1,423 | $ | 1,314 | ||||||||||||||
421 | 415 | 387 | 368 | 349 | 327 | 300 | ||||||||||||||||||||
(25 | ) | (2 | ) | 0 | 65 | 69 | 48 | 31 | ||||||||||||||||||
2,561 | 2,331 | 2,128 | 2,054 | 1,942 | 1,809 | 1,656 | ||||||||||||||||||||
193 | 118 | 255 | 242 | 299 | 224 | 227 | ||||||||||||||||||||
$ 1.10 | $ | 0.67 | $ | 1.40 | $ | 1.31 | $ | 1.64 | $ | 1.21 | $ | 1.24 | ||||||||||||||
1.07 | 0.67 | 1.37 | 1.28 | 1.61 | 1.17 | 1.19 | ||||||||||||||||||||
0.76 | 0.69 | 0.62 | 0.55 | 0.50 | 0.44 | 0.39 | ||||||||||||||||||||
0.74 | 0.67 | 0.60 | 0.54 | 0.49 | 0.43 | 0.38 | ||||||||||||||||||||
179 | 181 | 186 | 190 | 188 | 191 | 191 | ||||||||||||||||||||
$11,534 | $ | 11,276 | $ | 10,156 | $ | 10,296 | $ | 8,778 | $ | 6,340 | $ | 5,525 | ||||||||||||||
286 | 259 | 226 | 143 | 135 | 128 | 120 | ||||||||||||||||||||
13,964 | 13,274 | 11,795 | 11,484 | 9,867 | 7,397 | 6,439 | ||||||||||||||||||||
2,887 | 2,473 | 2,154 | 2,055 | 1,937 | 1,881 | 1,744 | ||||||||||||||||||||
724 | 641 | 885 | 536 | 482 | 440 | 403 | ||||||||||||||||||||
426 | 449 | 456 | 472 | 58 | 80 | 80 | ||||||||||||||||||||
5,998 | 5,995 | 5,421 | 5,621 | 4,717 | 3,163 | 2,658 | ||||||||||||||||||||
33.62 | 33.80 | 30.35 | 30.58 | 25.71 | 17.19 | 14.33 | ||||||||||||||||||||
$ 2,073 | $ | 1,828 | $ | 1,658 | $ | 1,543 | $ | 1,454 | $ | 1,367 | $ | 1,263 | ||||||||||||||
1,060 | 920 | 835 | 458 | 442 | 424 | 407 | ||||||||||||||||||||
2,894 | 2,416 | 2,093 | 1,979 | 1,889 | 1,824 | 1,691 | ||||||||||||||||||||
223 | 223 | 208 | 204 | 199 | 190 | 180 | ||||||||||||||||||||
66.6 | % | 71.1 | % | 61.6 | % | 65.4 | % | 58.3 | % | 61.6 | % | 57.6 | % | |||||||||||||
10.1 | 11.3 | 10.0 | 9.3 | 10.1 | 13.8 | 14.7 | ||||||||||||||||||||
28.2 | 30.4 | 28.6 | 29.6 | 30.0 | 28.2 | 27.8 | ||||||||||||||||||||
104.9 | % | 112.8 | % | 100.2 | % | 104.3 | % | 98.4 | % | 103.6 | % | 100.1 | % |
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10-K Page | ||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Introduction | 31 | |||
Executive Summary | 31 | |||
Critical Accounting Estimates | 35 | |||
Results of Operations | 39 | |||
Consolidated Property Casualty Insurance Results of Operations | 40 | |||
Commercial Lines Insurance Results of Operations | 41 | |||
Personal Lines Insurance Results of Operations | 47 | |||
Life Insurance Results of Operations | 52 | |||
Investments Results of Operations | 54 | |||
Liquidity and Capital Resources | 57 | |||
Sources of Liquidity | 57 | |||
Uses of Liquidity | 59 | |||
Property Casualty Insurance Reserves | 61 | |||
Life Insurance Reserves | 67 | |||
2006 Reinsurance Programs | 68 | |||
Safe Harbor Statement | 69 | |||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | ||||
Introduction | 70 | |||
Fixed-maturity Investments | 71 | |||
Short-term Investments | 72 | |||
Equity Investments | 72 | |||
Unrealized Investment Gains and Losses | 74 |
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• | We cultivate relationships with the independent insurance agents who market our policies and we make our decisions at the local level |
• | We achieve claims excellence, covering the spectrum from our response to reported claims to our approach to establishing reserves for not-yet-paid claims |
• | We invest for long-term total return, using available cash flow to purchase equity securities after covering insurance liabilities by purchasing fixed-maturity securities |
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(Dollars in millions except share data) | 2005-2004 | 2004-2003 | ||||||||||||||||||
2005 | 2004 | 2003 | Change % | Change % | ||||||||||||||||
Income statement data | ||||||||||||||||||||
Earned premiums | $ | 3,164 | $ | 3,020 | $ | 2,748 | 4.8 | 9.9 | ||||||||||||
Investment income, net of expenses | 526 | 492 | 465 | 6.9 | 5.7 | |||||||||||||||
Net realized gains and losses (pretax) | 61 | 91 | (41 | ) | (33.1 | ) | 321.7 | |||||||||||||
Total revenues | 3,767 | 3,614 | 3,181 | 4.2 | 13.6 | |||||||||||||||
Net income | 602 | 584 | 374 | 3.1 | 56.0 | |||||||||||||||
Per share data (diluted) | ||||||||||||||||||||
Net income | 3.40 | 3.28 | 2.10 | 3.7 | 56.4 | |||||||||||||||
Cash dividends declared | 1.205 | 1.04 | 0.90 | 16.1 | 14.4 | |||||||||||||||
Weighted average shares outstanding | 177,116,126 | 178,376,848 | 178,292,248 | (0.7 | ) | 0.0 |
• | The consolidated property casualtyunderwriting profitimproved substantially in 2004 and we sustained healthy profitability in 2005. The factors behind the improvement are discussed in the Results of Operations. |
• | Realized investment gains and lossesare integral to our financial results over the long term. We have substantial discretion in the timing of investment sales and, therefore, the gains or losses that will be recognized in any period. That discretion generally is independent of the insurance underwriting process. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses. Security sales led to realized gains in 2005 and 2004 while write-downs of impaired assets led to realized losses in 2003. |
o | 2005 — Realized investment gains raised net income by $40 million, or 23 cents per share, after tax | ||
o | 2004 — Realized investment gains raised net income by $60 million, or 34 cents per share, after tax | ||
o | 2003 — Realized investment losses reduced net income by $27 million, or 15 cents per share, after tax |
• | Weighted average shares outstandingmay fluctuate from period to period because we regularly repurchase shares under board authorizations and we issue shares when associates exercise stock options. At year-end 2005, weighted average shares outstanding on a diluted basis had declined 1.3 million from year-end 2004. |
• | In 2003, we recovered $23 million pretax from a settlement negotiated with a vendor. The recovery added $15 million, or 8 cents per share, to net income. The negotiated settlement related to the $39 million one-time, pretax charge incurred in 2000 to write off previously capitalized software development costs. |
(Dollars in millions except per share data) | 2005-2004 | 2004-2003 | ||||||||||||||||||
2005 | 2004 | 2003 | Change % | Change % | ||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Invested assets | $ | 12,702 | $ | 12,677 | $ | 12,485 | 0.2 | 1.5 | ||||||||||||
Total assets | 16,003 | 16,107 | 15,509 | (0.6 | ) | 3.9 | ||||||||||||||
Long-term debt | 791 | 791 | 420 | 0.0 | 88.4 | |||||||||||||||
Shareholders’ equity | 6,086 | 6,249 | 6,204 | (2.6 | ) | 0.7 | ||||||||||||||
Book value per share | 34.88 | 35.60 | 35.10 | (2.0 | ) | 1.4 | ||||||||||||||
Performance measures | ||||||||||||||||||||
Comprehensive income | $ | 99 | $ | 287 | $ | 815 | (65.8 | ) | (64.8 | ) | ||||||||||
Return on equity | 9.8 | % | 9.4 | % | 6.3 | % | ||||||||||||||
Return on equity, based on comprehensive income | 1.6 | 4.6 | 13.8 | |||||||||||||||||
Debt-to-capital ratio | 11.5 | 11.2 | 8.9 |
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(Dollars in millions) | 2005-2004 | 2004-2003 | ||||||||||||||||||
2005 | 2004 | 2003 | Change % | Change % | ||||||||||||||||
Property casualty highlights | ||||||||||||||||||||
Written premiums | $ | 3,076 | $ | 2,997 | $ | 2,815 | 2.6 | 6.5 | ||||||||||||
Underwriting profit | 330 | 298 | 140 | 10.8 | 113.3 | |||||||||||||||
GAAP combined ratio | 89.2 | % | 89.8 | % | 94.7 | % | ||||||||||||||
Statutory combined ratio | 89.0 | 89.4 | 94.2 |
• | Maintaining our strong relationships with our established agencies, writing a significant portion of each agency’s business and attracting new agencies– In 2006, we expect to continue to rank No. 1 or No. 2 by premium volume in at least 74 percent or more of the locations that have marketed our products for more than five years. We expect to subdivide three field territories in 2006 and we are targeting 50 new agency appointments. |
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In 2006, we expect to make further progress in our efforts to improve service to and communication with our agencies through our expanding portfolio of software. In particular, we will continue to deploy our commercial lines and personal lines quoting and policy processing systems that allow our agencies and our field and headquarters associates to collaborate on new and renewal business more efficiently and give our agencies choice and control. We discuss our technology plans for 2006 in Item 1, Technology Solutions, Page 4. |
• | Achieving above-industry-average growth in property casualty statutory net written premiums and maintaining industry-leading profitability by leveraging our regional franchise and proven agency-centered business strategy— We believe our consolidated property casualty written premiums will be flat to slightly up in 2006 compared with the 2.6 percent increase in 2005. We may not achieve our objective of above-industry-average growth in 2006 because the modest growth we anticipate in commercial lines written premiums, despite increasing competition, may be offsetting the rate-driven declines we anticipate in personal lines written premiums. In addition, the overall industry premium growth is estimated at 3.3 percent in 2006, which includes an estimated 18.6 percent reinsurance sector growth rate. The 2006 industry growth rate for the commercial lines sector is estimated at 2.3 percent and the personal lines sector is estimated at 2.9 percent. |
Our combined ratio estimate for 2006 is 92 percent to 94 percent on either a GAAP or statutory basis compared with 89.2 percent on a GAAP basis in 2005. We believe the most significant difference will be a lower level of savings from favorable loss reserve development from prior accident years. In 2006, we believe that savings is likely to reduce the combined ratio in the range of 2 to 3 percentage points. Higher-than-normal savings, particularly for liability coverages, reduced the 2005 combined ratio by 5.2 percentage points and the 2004 combined ratio by 6.7 percentage points. | |
We also have raised slightly our estimate of the impact to the 2006 combined ratio from catastrophe losses to the range of 4.0 and 4.5 percentage points from our historic range of 3.0 to 3.5 percentage points. We are taking into account the potential for severe weather, as we’ve seen in the past two years, and the higher retention on our new catastrophe reinsurance treaty. Both the loss and loss expense ratio and underwriting expense ratio trends could affect the combined ratios for our commercial lines and personal lines segments: |
o | The degree of price softening in the commercial lines marketplace will affect the 2006 loss and loss expense ratio for that business area, as that ratio may move up slightly as pricing becomes more competitive. | ||
o | The personal lines 2006 loss and loss expense ratio primarily will reflect our ability to offer competitive prices for our personal lines products in that changing marketplace. We believe we have taken the appropriate actions to maintain that ratio near the improved level we achieved in 2005. | ||
o | For both commercial lines and personal lines, lower growth rates could lead to further unfavorable year-over-year comparisons in the ratios of deferred acquisition costs and other underwriting expenses to earned premiums. Continued investment in technology also may contribute to an increase in other underwriting expenses. |
The estimated industry average 2006 combined ratio is 98.7 percent. |
• | Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation- In 2006, we are estimating pretax investment income growth to again be in the range of 6.5 percent to 7.0 percent. This outlook is based on the higher anticipated level of dividend income from equity holdings, the investment of insurance operations cash flow and the higher-than-historical allocation of new cash flow to fixed-maturity securities over the past 18 months. | |
We do not establish annual capital appreciation targets. Over the long term, our target is to have the equity portfolio outperform the Standard & Poor’s 500 Index. Over the five years ended December 31, 2005, our compound annual equity portfolio return was a negative 0.8 percent compared with a compound annual total return of 0.5 percent for the Index. In 2005, our compound annual equity portfolio was a negative 4.2 percent, compared with a compound annual total return of 4.9 percent for the Index. Our equity portfolio underperformed the market for these periods because of the decline in the market value of our holdings of Fifth Third common stock over the past five years. |
• | Increasing the total return to shareholders through a combination of higher earnings per share, growth in book value and increasing dividends- We do not announce annual targets for earnings per share or book value. Earnings results in 2006 will be tempered by the first quarter adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R) “Share-Based Payments,” which requires expensing the cost of associate options on our income statement. Our estimate of pro forma option expense, as detailed in Item 8, Note 1 to the Consolidated Financial Statements, Page 84, would have reduced earnings per share by 7 cents to 8 cents in each of the past three years. |
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Over the long term, we look for our earnings per share growth to outpace that of a peer group of national and regional property casualty insurance companies. Long-term book value growth should approximate that of our equity portfolio. | ||
The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. In February 2006, the board increased the indicated annual dividend rate 9.8 percent, marking the 46th consecutive year of increases in our indicated dividend rate. We believe our record of dividend increases is matched by only 11 other publicly traded corporations. | ||
Over the long-term, we seek to increase earnings per share, book value and dividends at a rate that would allow long-term total return to our shareholders to exceed that of the Standard & Poor’s Composite 1500 Property Casualty Insurance Index. Over the past five years, our total return to shareholders of 40.9 percent matched the return on that Index. |
• | Maintaining financial strength by keeping the ratio of debt to capital below 15 percent and purchasing reinsurance to provide investment flexibility- Based on our present capital requirements, we do not anticipate a material increase in debt levels during 2006. As a result, we believe our debt-to-capital ratio will remain in the range of 11 percent to 12 percent. | |
In December 2005, we finalized our reinsurance program for 2006, updating it to maintain the balance between the cost of the program and the level of risk we retain. Under the new program, our 2006 reinsurance premiums are expected to be $7 million lower than 2005, without taking into account the reinstatement premium incurred in 2005. We provide more detail on our reinsurance programs in 2006 Reinsurance Programs, Page 68. |
• | Court decisions or legislation that result in unanticipated coverage expansions on past and existing policies |
• | Changes in medical inflation and mortality rates that affect workers compensation claims |
• | Changes in claim cost trends, including the effects of general economic and tort cost inflation, not reflected in the historical data used to estimate loss reserves |
• | Changes in reinsurance coverage, not reflected in reserving data, that affect the company’s net payments and net case reserves |
• | Payment and reporting pattern changes attributable to the implementation of a new claims management system |
• | Reporting pattern changes attributable to changes in case reserving practices, particularly with respect to umbrella liability claims |
• | Absence of cost-effective methods for accurately assessing asbestos and environmental claim liabilities (see Property Casualty Insurance Reserves, Asbestos and Environmental Reserves, Page 63, for discussion of related reserve levels and trends) |
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• | The Case Incurred Development Method |
• | The Paid Development Method |
• | The Bornhuetter-Ferguson Method |
• | Probability Trend Family Methods |
• | Industry loss frequency and severity and premium trends |
• | Past, present and anticipated product pricing |
• | Anticipated premium growth |
• | Other quantifiable trends |
• | Projected ultimate loss ratios |
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• | Commercial lines property casualty insurance |
• | Personal lines property casualty insurance |
• | Life insurance |
• | Investments operations |
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(Dollars in millions) | 2005-2004 | 2004-2003 | ||||||||||||||||||
2005 | 2004 | 2003 | Change % | Change % | ||||||||||||||||
Written premiums | $ | 3,076 | $ | 2,997 | $ | 2,815 | 2.6 | 6.5 | ||||||||||||
Earned premiums | $ | 3,058 | $ | 2,919 | $ | 2,653 | 4.8 | 10.0 | ||||||||||||
Loss and loss expenses excluding catastrophes | 1,685 | 1,605 | 1,700 | 5.0 | (5.6 | ) | ||||||||||||||
Catastrophe loss and loss expenses | 127 | 148 | 97 | (14.8 | ) | 53.4 | ||||||||||||||
Commission expenses | 592 | 583 | 507 | 1.6 | 15.0 | |||||||||||||||
Underwriting expenses | 319 | 274 | 194 | 16.3 | 40.6 | |||||||||||||||
Policyholder dividends | 5 | 11 | 15 | (52.3 | ) | (25.0 | ) | |||||||||||||
Underwriting profit | $ | 330 | $ | 298 | $ | 140 | 10.8 | 113.3 | ||||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 55.1 | % | 55.0 | % | 64.1 | % | ||||||||||||||
Catastrophe loss and loss expenses | 4.1 | 5.1 | 3.6 | |||||||||||||||||
Loss and loss expenses | 59.2 | 60.1 | 67.7 | |||||||||||||||||
Commission expenses | 19.4 | 20.0 | 19.1 | |||||||||||||||||
Underwriting expenses | 10.4 | 9.4 | 7.3 | |||||||||||||||||
Policyholder dividends | 0.2 | 0.3 | 0.6 | |||||||||||||||||
Combined ratio | 89.2 | % | 89.8 | % | 94.7 | % | ||||||||||||||
• | New business written directly by agencies – New business written directly by agencies was $314 million, $330 million and $328 million in 2005, 2004 and 2003, respectively. New business levels reflect market conditions for commercial and personal lines. |
• | Reinsurance reinstatement premiums – To restore affected layers of property catastrophe reinsurance programs, we incurred $8 million and $11 million in reinsurance reinstatement premiums in 2005 and 2004. |
• | 2003 — We released $38 million pretax of previously established UM/UIM reserves, adding $25 million, or 14 cents per share, to net income in 2003. |
• | 2004 — In 2004, we reviewed outstanding UM/UIM claims for which litigation was pending. Those claims represented approximately $37 million in previously established case reserves. During the first quarter of 2004, we filed motions for dismissal in various jurisdictions for specific claims and released an additional $32 million in related case reserves. The reserve releases in 2004 added $21 million, or 12 cents per share, to net income. |
• | 2005 — In 2005, we stopped separately reporting on UM/UIM-related reserve actions. |
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• | Premiums – As competition in our commercial markets continues to increase, our written premium growth rate has slowed because of the more competitive pricing environment and the underwriting discipline we have maintained for both renewal and new business. The primary source of growth in the past three years has been higher pricing on new and renewal commercial business aided by property insurance-to-value initiatives and more accurate risk classification. These more than offset our deliberate decisions not to write or renew certain business and the loss of some smaller accounts due to competition. We believe that our written premium growth rate continues to exceed the average for the overall commercial lines industry, which was estimated at 2.7 percent for 2005 and 2.3 percent for 2004. Earned premium growth has slowed because of the declining growth rate of written premiums. Reinsurance reinstatement premiums allocated to commercial lines reduced earned premium growth by 0.2 and 0.3 percentage points in 2005 and 2004, respectively. |
• | Combined ratio – Our commercial lines combined ratio was very strong in 2005 and 2004 largely due to our programs to obtain more adequate premiums per policy and our underwriting efforts. The 3.3 percentage point increase in the 2005 ratio primarily was due to a rise in the loss and loss expense ratio. The increase reflected a single large loss in 2005 that increased the ratio by 1.1 percentage points and savings from favorable loss reserve development below the 2004 level. We discuss large losses and other factors affecting the combined ratio beginning on Page 42. We discuss the savings from favorable loss reserve development by commercial lines of business on Page 45. | |
Our commercial lines statutory combined ratio was 87.1 percent in 2005 compared with 83.7 percent in 2004 and 91.6 percent in 2003. By comparison, the estimated industry commercial lines combined ratio was 99.1 percent in 2005, 102.5 percent in 2004 and 100.2 percent in 2003. |
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(Dollars in millions) | 2005-2004 | 2004-2003 | ||||||||||||||||||
2005 | 2004 | 2003 | Change % | Change % | ||||||||||||||||
Written premiums | $ | 2,290 | $ | 2,186 | $ | 2,031 | 4.7 | 7.6 | ||||||||||||
Earned premiums | $ | 2,254 | $ | 2,126 | $ | 1,908 | 6.0 | 11.4 | ||||||||||||
Loss and loss expenses excluding catastrophes | 1,222 | 1,083 | 1,176 | 12.9 | (7.9 | ) | ||||||||||||||
Catastrophe loss and loss expenses | 76 | 71 | 42 | 6.0 | 68.9 | |||||||||||||||
Commission expenses | 438 | 423 | 361 | 3.6 | 17.1 | |||||||||||||||
Underwriting expenses | 228 | 200 | 147 | 13.5 | 36.8 | |||||||||||||||
Policyholder dividends | 5 | 11 | 15 | (52.3 | ) | (25.0 | ) | |||||||||||||
Underwriting profit | $ | 285 | $ | 338 | $ | 167 | (15.6 | ) | 102.3 | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 54.2 | % | 50.9 | % | 61.6 | % | ||||||||||||||
Catastrophe loss and loss expenses | 3.4 | 3.4 | 2.2 | |||||||||||||||||
Loss and loss expenses | 57.6 | 54.3 | 63.8 | |||||||||||||||||
Commission expenses | 19.5 | 19.9 | 18.9 | |||||||||||||||||
Underwriting expenses | 10.1 | 9.4 | 7.7 | |||||||||||||||||
Policyholder dividends | 0.2 | 0.5 | 0.8 | |||||||||||||||||
Combined ratio | 87.4 | % | 84.1 | % | 91.2 | % | ||||||||||||||
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(Dollars in millions) | 2005-2004 | 2004-2003 | ||||||||||||||||||
2005 | 2004 | 2003 | Change % | Change % | ||||||||||||||||
Losses $1 million or more | $ | 124 | $ | 80 | $ | 89 | 54.3 | (9.5 | ) | |||||||||||
Losses $250 thousand to $1 million | 105 | 103 | 117 | 1.2 | (11.9 | ) | ||||||||||||||
Development and case reserve increases of $250 thousand or more | 149 | 133 | 121 | 12.7 | 9.9 | |||||||||||||||
Other losses | 596 | 536 | 608 | 11.1 | (11.8 | ) | ||||||||||||||
Total losses incurred excluding catastrophe losses | 974 | 852 | 935 | 14.2 | (8.8 | ) | ||||||||||||||
Catastrophe losses | 76 | 71 | 42 | 6.0 | 68.9 | |||||||||||||||
Total losses incurred | $ | 1,050 | $ | 923 | $ | 977 | 13.6 | (5.4 | ) | |||||||||||
As a percent of earned premiums: | ||||||||||||||||||||
Losses $1 million or more | 5.5 | % | 3.8 | % | 4.6 | % | ||||||||||||||
Losses $250 thousand to $1 million | 4.7 | 4.9 | 6.2 | |||||||||||||||||
Development and case reserve increases of $250 thousand or more | 6.6 | 6.2 | 6.3 | |||||||||||||||||
Other losses | 26.4 | 25.1 | 31.9 | |||||||||||||||||
Loss ratio excluding catastrophe losses | 43.2 | 40.0 | 49.0 | |||||||||||||||||
Catastrophe loss ratio | 3.4 | 3.4 | 2.2 | |||||||||||||||||
Total loss ratio | 46.6 | % | 43.4 | % | 51.2 | % | ||||||||||||||
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(In millions, net of reinsurance) | Incurred in calendar year ended December 31, | |||||||||||||||
Occurence year | Cause of loss | Region | 2005 | 2004 | 2003 | |||||||||||
2005 | ||||||||||||||||
May | Wind, hail | Midwest | $ | 4 | ||||||||||||
July | Hurricane Dennis | South | 5 | |||||||||||||
August | Hurricane Katrina | South | 36 | |||||||||||||
September | Hurricane Rita | South | 3 | |||||||||||||
October | Hurricane Wilma | South | 13 | |||||||||||||
November | Wind, hail | Midwest | 2 | |||||||||||||
November | Wind | Midwest, South | 2 | |||||||||||||
Total | 65 | |||||||||||||||
2004 | ||||||||||||||||
May | Wind, hail | Midwest, Mid-Atlantic | 0 | $ | 1 | |||||||||||
May | Wind, hail | Midwest, Mid-Atlantic, South | 0 | 11 | ||||||||||||
July | Wind, hail | Midwest, Mid-Atlantic, South | 8 | 7 | ||||||||||||
August | Hurricane Charley | South | 0 | 16 | ||||||||||||
September | Hurricane Frances | South | 1 | 4 | ||||||||||||
September | Hurricane Jeanne | Mid-Atlantic, South | 1 | 4 | ||||||||||||
September | Hurricane Ivan | Midwest, Mid-Atlantic, South | 1 | 21 | ||||||||||||
December | Wind, ice, snow | Midwest, South | 0 | 5 | ||||||||||||
Others | 0 | 3 | ||||||||||||||
Total | 11 | 72 | ||||||||||||||
2003 and prior | ||||||||||||||||
April | Wind, hail | Midwest, South | 0 | (2 | ) | $ | 5 | |||||||||
May | Wind, hail | Midwest, South | 1 | 0 | 17 | |||||||||||
July | Wind, hail | Midwest, Mid-Atlantic, South | 0 | 2 | 2 | |||||||||||
July | Wind, hail | Midwest, Mid-Atlantic, South | (1 | ) | 0 | 6 | ||||||||||
September | Wind | Mid-Atlantic, South | 0 | 0 | 5 | |||||||||||
November | Wind | Midwest, Mid-Atlantic, South | 0 | (1 | ) | 6 | ||||||||||
Others | 0 | 0 | 1 | |||||||||||||
Total | 0 | (1 | ) | 42 | ||||||||||||
Calendar year total | $ | 76 | $ | 71 | $ | 42 | ||||||||||
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(Dollars in millions) | 2005-2004 | 2004-2003 | ||||||||||||||||||
Calendar year | 2005 | 2004 | 2003 | Change % | Change % | |||||||||||||||
Commercial multi-peril: | ||||||||||||||||||||
Written premium | $ | 809 | $ | 767 | $ | 713 | 5.4 | 7.6 | ||||||||||||
Earned premium | 796 | 751 | 673 | 5.9 | 11.6 | |||||||||||||||
Loss and loss expenses incurred | 443 | 469 | 442 | (5.5 | ) | 6.1 | ||||||||||||||
Loss and loss expenses ratio | 55.7 | % | 62.4 | % | 65.6 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 47.5 | 54.9 | 59.9 | |||||||||||||||||
Workers compensation: | ||||||||||||||||||||
Written premium | $ | 338 | $ | 320 | $ | 304 | 5.5 | 5.2 | ||||||||||||
Earned premium | 328 | 313 | 293 | 5.1 | 6.8 | |||||||||||||||
Loss and loss expenses incurred | 300 | 251 | 235 | 19.4 | 6.6 | |||||||||||||||
Loss and loss expenses ratio | 91.3 | % | 80.3 | % | 80.5 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 91.3 | 80.3 | 80.5 | |||||||||||||||||
Commercial auto: | ||||||||||||||||||||
Written premium | $ | 447 | $ | 458 | $ | 434 | (2.4 | ) | 5.5 | |||||||||||
Earned premium | 456 | 450 | 419 | 1.4 | 7.4 | |||||||||||||||
Loss and loss expenses incurred | 273 | 236 | 240 | 15.7 | (1.8 | ) | ||||||||||||||
Loss and loss expenses ratio | 59.8 | % | 52.4 | % | 57.3 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 59.7 | 52.1 | 56.5 | |||||||||||||||||
Other liability: | ||||||||||||||||||||
Written premium | $ | 458 | $ | 424 | $ | 377 | 7.9 | 12.5 | ||||||||||||
Earned premium | 442 | 402 | 342 | 9.8 | 17.6 | |||||||||||||||
Loss and loss expenses incurred | 187 | 116 | 183 | 61.7 | (36.8 | ) | ||||||||||||||
Loss and loss expenses ratio | 42.4 | % | 28.8 | % | 53.6 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 42.4 | 28.8 | 53.6 |
Accident year | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
Loss and loss expenses incurred: | ||||||||||||||||||||
Commercial multi-peril | $ | 504 | $ | 459 | $ | 411 | $ | 408 | $ | 403 | ||||||||||
Workers compensation | 256 | 245 | 231 | 236 | 230 | |||||||||||||||
Commercial auto | 297 | 268 | 261 | 251 | 242 | |||||||||||||||
Other liability | 269 | 210 | 193 | 156 | 123 | |||||||||||||||
Loss and loss expenses ratio: | ||||||||||||||||||||
Commercial multi-peril | 63.4 | % | 61.2 | % | 61.1 | % | 67.2 | % | 75.3 | % | ||||||||||
Workers compensation | 78.0 | 78.3 | 78.9 | 80.2 | 91.2 | |||||||||||||||
Commercial auto | 65.1 | 59.6 | 62.3 | 65.4 | 75.6 | |||||||||||||||
Other liability | 60.8 | 52.3 | 56.5 | 56.8 | 57.1 |
• | 2005 – Favorable development lowered the loss and loss expense ratio by 7.7 percentage points. The favorable development largely was due to lower commercial multi-peril exposures because of |
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prior-year transfers of business to non-discounted policies and to the benefits of changes made in 2002 to our general liability terms and conditions. |
• | 2004 – Reserve strengthening added 0.6 percentage points to the loss and loss expense ratio. Additions to reserves for environment claims were offset by favorable development of case reserves for non-environmental claims due to our headquarters claims department’s initiative to establish higher initial case reserves on severe injury claims. |
• | 2003 – Reserve strengthening added 2.0 percentage points to the loss and loss expense ratio because we added to our reserves for environmental claims. |
• | 2005 – Reserve strengthening added 13.3 percentage points to the loss and loss expense ratio. The reserve strengthening primarily was due to medical cost inflation and longer estimated payout periods compared with our original projections. |
• | 2004 – Reserve strengthening added 4.9 percentage points to the loss and loss expense ratio, which also was due to longer estimated payout periods. |
• | 2003 – Reserve strengthening added 4.3 percentage points to the loss and loss expense ratio, which also was due to medical cost inflation. |
• | 2005 – Favorable development lowered the loss and loss expense ratio by 5.3 percentage points. The savings largely were due to moderating frequency and severity trends. |
• | 2004 – Favorable development lowered the loss and loss expense ratio by 10.5 percentage points, including 4.6 percentage points due to the release of UM/UIM reserves. The remainder of the savings largely was due to moderating frequency and severity trends. |
• | 2003 – Favorable development lowered the loss and loss expense ratio by 8.8 percentage points, including 6.9 percentage points due to the release of UM/UIM case reserves. The release of UM/UIM-related IBNR reserves also contributed. |
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• | 2005 – Favorable development lowered the loss and loss expense ratio by 18.4 percentage points. Enforcement of stricter underwriting standards and a preference for lower limit policies contributed to favorable development for our commercial umbrella coverages. |
• | 2004 – Favorable development lowered the loss and loss expense ratio by 32.5 percentage points, including 2.0 percentage points due to the release of UM/UIM reserves. |
• | 2003 – Favorable development lowered the loss and loss expense ratio by 23.0 percentage points, including 2.6 percentage points due to the release of UM/UIM reserves. |
• | Premiums – During the past three years, we have been working to address personal lines profitability. Because of our actions, the 2005 personal lines combined ratio was below 100 percent for the first time since 1999. However, as other carriers refined their pricing models , our pricing was less competitive and written premiums declined in 2005 after slowing in 2004. Industry average written premium growth was estimated at 3.5 percent for 2005 and 6.6 percent for 2004. Our earned premium growth has slowed as a result of the written premium trend. Reinsurance reinstatement premiums allocated to personal lines reduced our premium growth by 0.3 and 0.8 percentage points for 2005 and 2004, respectively. |
• | Combined ratio – The substantial improvement in the 2005 combined ratio reflected our progress in lowering the homeowner loss and loss expense ratio and our lower catastrophe losses offset by higher |
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noncommission underwriting expenses. The 2004 personal lines combined ratio was slightly above the prior year’s level. Higher catastrophe losses and underwriting expenses offset the improvement in the homeowner and personal auto loss and loss expense ratios excluding catastrophe losses. | ||
Our personal lines statutory combined ratio was 94.3 percent in 2005 compared with 104.6 percent in 2004 and 102.9 percent in 2003. By comparison, the estimated industry personal lines combined ratio was 97.3 percent in 2005, 94.9 percent in 2004 and 98.4 percent in 2003. |
2005-2004 | 2004-2003 | |||||||||||||||||||
(Dollars in millions) | 2005 | 2004 | 2003 | Change % | Change % | |||||||||||||||
Written premiums | $ | 786 | $ | 811 | $ | 784 | (3.0 | ) | 3.4 | |||||||||||
Earned premiums | $ | 804 | $ | 793 | $ | 745 | 1.4 | 6.4 | ||||||||||||
Loss and loss expenses excluding catastrophes | 463 | 522 | 524 | (11.3 | ) | (0.4 | ) | |||||||||||||
Catastrophe loss and loss expenses | 51 | 77 | 55 | (34.2 | ) | 41.4 | ||||||||||||||
Commission expenses | 154 | 160 | 146 | (3.6 | ) | 9.7 | ||||||||||||||
Underwriting expenses | 91 | 74 | 47 | 24.0 | 52.1 | |||||||||||||||
Underwriting profit(loss) | $ | 45 | $ | (40 | ) | $ | (27 | ) | 214.0 | 45.8 | ||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 57.6 | % | 65.9 | % | 70.3 | % | ||||||||||||||
Catastrophe loss and loss expenses | 6.3 | 9.7 | 7.3 | |||||||||||||||||
Loss and loss expenses | 63.9 | 75.6 | 77.6 | |||||||||||||||||
Commission expenses | 19.2 | 20.1 | 19.5 | |||||||||||||||||
Underwriting expenses | 11.3 | 9.3 | 6.5 | |||||||||||||||||
Combined ratio | 94.4 | % | 105.0 | % | 103.6 | % | ||||||||||||||
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2005-2004 | 2004-2003 | |||||||||||||||||||
(Dollars in millions) | 2005 | 2004 | 2003 | Change % | Change % | |||||||||||||||
Losses $1 million or more | $ | 13 | $ | 17 | $ | 15 | (26.0 | ) | 14.6 | |||||||||||
Losses $250 thousand to $1 million | 34 | 43 | 41 | (19.9 | ) | 4.9 | ||||||||||||||
Development and case reserve increases of $250 thousand or more | 19 | 21 | 11 | (7.7 | ) | 83.7 | ||||||||||||||
Other losses | 339 | 371 | 391 | (8.5 | ) | (5.2 | ) | |||||||||||||
Total losses incurred excluding catastrophe losses | 405 | 452 | 458 | (10.2 | ) | (1.4 | ) | |||||||||||||
Catastrophe losses | 51 | 77 | 55 | (34.2 | ) | 41.4 | ||||||||||||||
Total losses incurred | $ | 456 | $ | 529 | $ | 513 | (13.7 | ) | 3.1 | |||||||||||
As a percent of earned premiums: | ||||||||||||||||||||
Losses $1 million or more | 1.5 | % | 2.2 | % | 2.0 | % | ||||||||||||||
Losses $250 thousand to $1 million | 4.3 | 5.4 | 5.5 | |||||||||||||||||
Development and case reserve increases of $250 thousand or more | 2.4 | 2.6 | 1.5 | |||||||||||||||||
Other losses | 42.2 | 46.8 | 52.5 | |||||||||||||||||
Loss ratio excluding catastrophe losses | 50.4 | 57.0 | 61.5 | |||||||||||||||||
Catastrophe loss ratio | 6.3 | 9.7 | 7.3 | |||||||||||||||||
Total loss ratio | 56.7 | % | 66.7 | % | 68.8 | % | ||||||||||||||
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(In millions, net of reinsurance) | Incurred in calendar year ended December 31, | |||||||||||||||
Occurence year | Cause of loss | Region | 2005 | 2004 | 2003 | |||||||||||
2005 | ||||||||||||||||
January | Wind, ice snow, freezing | Midwest, Mid-Atlantic | $ | 1 | ||||||||||||
May | Wind, hail | Midwest | 8 | |||||||||||||
July | Hurricane Dennis | South | 2 | |||||||||||||
August | Hurricane Katrina | South | 11 | |||||||||||||
October | Hurricane Wilma | South | 12 | |||||||||||||
November | Wind, hail | Midwest | 9 | |||||||||||||
November | Wind | Midwest, South | 10 | |||||||||||||
Total | 53 | |||||||||||||||
2004 | ||||||||||||||||
May | Wind, hail | Midwest, Mid-Atlantic | 0 | $ | 9 | |||||||||||
May | Wind, hail | Midwest, Mid-Atlantic, South | 0 | 20 | ||||||||||||
July | Wind, hail | Midwest, Mid-Atlantic, South | (1 | ) | 5 | |||||||||||
August | Hurricane Charley | South | 0 | 10 | ||||||||||||
September | Hurricane Frances | South | 1 | 7 | ||||||||||||
September | Hurricane Jeanne | Mid-Atlantic, South | 0 | 2 | ||||||||||||
September | Hurricane Ivan | Midwest, Mid-Atlantic, South | 1 | 18 | ||||||||||||
December | Wind, ice, snow | Midwest, South | (3 | ) | 8 | |||||||||||
Others | 0 | 2 | ||||||||||||||
Total | (2 | ) | 81 | |||||||||||||
2003 and prior | ||||||||||||||||
April | Wind, hail | Midwest, South | 0 | (2 | ) | $ | 31 | |||||||||
May | Wind, hail | Midwest, South | 0 | 0 | 17 | |||||||||||
July | Wind, hail | Midwest, Mid-Atlantic, South | 0 | (1 | ) | 5 | ||||||||||
July | Wind, hail | Midwest, Mid-Atlantic, South | 0 | 0 | 1 | |||||||||||
September | Wind | Mid-Atlantic, South | 0 | (1 | ) | 4 | ||||||||||
November | Wind | Midwest, Mid-Atlantic, South | 0 | 0 | 1 | |||||||||||
Others | 0 | 0 | (4 | ) | ||||||||||||
Total | 0 | (4 | ) | 55 | ||||||||||||
Calendar year total | $ | 51 | $ | 77 | $ | 55 | ||||||||||
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(Dollars in millions) | 2005-2004 | 2004-2003 | ||||||||||||||||||
Calendar year | 2005 | 2004 | 2003 | Change % | Change % | |||||||||||||||
Personal auto: | ||||||||||||||||||||
Written premium | $ | 410 | $ | 453 | $ | 447 | (9.4 | ) | 1.2 | |||||||||||
Earned premium | 433 | 451 | 428 | (4.0 | ) | 5.4 | ||||||||||||||
Loss and loss expenses incurred | 261 | 298 | 304 | (12.5 | ) | (2.1 | ) | |||||||||||||
Loss and loss expenses ratio | 60.2 | % | 66.1 | % | 71.1 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 59.7 | 65.1 | 70.1 | |||||||||||||||||
Homeowner: | ||||||||||||||||||||
Written premium | $ | 290 | $ | 273 | $ | 254 | 6.3 | 7.3 | ||||||||||||
Earned premium | 285 | 259 | 239 | 10.2 | 8.2 | |||||||||||||||
Loss and loss expenses incurred | 212 | 249 | 222 | (14.6 | ) | 12.2 | ||||||||||||||
Loss and loss expenses ratio | 74.5 | % | 96.1 | % | 92.7 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 58.4 | 69.3 | 72.8 |
Accident year | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
Loss and loss expenses incurred: | ||||||||||||||||||||
Personal auto | $ | 267 | $ | 297 | $ | 305 | $ | 289 | $ | 259 | ||||||||||
Homeowner | 215 | 254 | 227 | 207 | 193 | |||||||||||||||
Loss and loss expenses ratio: | ||||||||||||||||||||
Personal auto | 61.8 | % | 66.0 | % | 71.2 | % | 74.3 | % | 71.9 | % | ||||||||||
Homeowner | 75.4 | 98.1 | 95.0 | 98.6 | 101.4 |
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• | Competitive rates – We are working on a number of rate setting initiatives to make our personal auto and homeowner rates competitive in all of our territories. We work with our agents to establish rates that are attractive to our agencies’ quality accounts. In mid-2006, we will introduce a limited program of rate segments incorporating insurance scores into rates for our personal auto and homeowner policies to further improve our pricing for our agents’ quality accounts. We believe the opportunity exists to work with our agents to market the advantages of our personal lines products to their clients, which would help us resume growing in this business area. |
• | Policy characteristics – In keeping with industry practices, most of our homeowner products no longer automatically cover guaranteed replacement costs. We add specific charges for some optional coverages previously included at no charge, such as limited replacement cost and water damage coverages. Policyholders who need the water damage protection now can select the amount of coverage that meets their needs. However, these changes and our transition to one-year homeowner policies may have diminished the factors that distinguished our products. |
• | Diamond introduction – The use of the Diamond system by agencies writing approximately 70 percent of personal lines volume is a significant accomplishment. We believe the system ultimately will make it easier for agents to place personal auto, homeowner and other personal lines business with us, while greatly increasing policy-issuance and policy-renewal efficiencies and providing direct-bill capabilities. Agents using Diamond chose direct bill for 37 percent and headquarters printing for 75 percent of policy transactions in 2005, options that generally were not available on our previous system. |
• | New agencies – The availability of Diamond should help us increase the number of agencies that offer our personal lines products, which also should contribute to personal lines growth. We currently market both homeowner and personal auto insurance products through 773 of our 1,253 reporting agency locations in 22 of the 32 states in which we market commercial lines insurance. We market homeowner products through 22 locations in three additional states (Maryland, North Carolina and West Virginia.) |
• | Revenues – Revenue growth has accelerated over the past three years as gross in-force policy face amounts increased to $51.493 billion at year-end 2005 from $44.921 billion at year-end 2004 and $38.492 billion at year-end 2003. |
• | Profitability – The life insurance segment reports a small GAAP profit because investment income is included in investment segment results, except investment income credited to contract holders (interest assumed in life insurance policy reserve calculations). Results improved in 2005 and 2004 because operating expenses remained level and mortality experience remained within pricing guidelines as premiums continued to rise. | |
At the same time, we recognize assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life |
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products. For that reason, we also evaluate GAAP data including all investment activities on life insurance-related assets. | ||
GAAP net income on that basis grew 23.8 percent in 2005 to $47 million and 74.1 percent in 2004 to $38 million. The life insurance portfolio had pretax realized investment gains of $17 million in 2005 compared with $9 million of gains in 2004 and $10 million of pretax realized investment losses in 2003. |
2005-2004 | 2004-2003 | |||||||||||||||||||
(In millions) | 2005 | 2004 | 2003 | Change % | Change % | |||||||||||||||
Written premiums | $ | 205 | $ | 193 | $ | 143 | 6.5 | 34.7 | ||||||||||||
Earned premiums | $ | 106 | $ | 101 | $ | 95 | 5.7 | 5.5 | ||||||||||||
Separate account investment management fees | 4 | 3 | 2 | 18.5 | 31.9 | |||||||||||||||
Total revenues | 110 | 104 | 97 | 6.0 | 6.1 | |||||||||||||||
Contract holders benefits incurred | 102 | 95 | 91 | 7.2 | 3.5 | |||||||||||||||
Investment interest credited to contract holders | (51 | ) | (46 | ) | (43 | ) | 12.9 | 5.7 | ||||||||||||
Expenses incurred | 52 | 53 | 52 | (0.3 | ) | 0.2 | ||||||||||||||
Total expenses | 103 | 102 | 100 | 0.8 | 0.9 | |||||||||||||||
Life insurance segment profit (loss) | $ | 7 | $ | 2 | $ | (3 | ) | 334.2 | 147.5 | |||||||||||
• | Premiums from traditional products, principally term insurance, which contributed 71.3 percent |
• | Fee income from interest-sensitive products, principally universal life insurance, which contributed 25.5 percent |
• | Separate account investment management fee income, which contributed 3.2 percent |
• | Insurance benefits paid and reserve increases related to traditional life and interest-sensitive products, which accounted for 66.0 percent of 2005 expenses and 64.3 percent of 2004 expenses |
• | Commissions, general and other business expenses, net of deferred acquisition costs, which accounted for 34.0 percent of 2005 expenses and 35.7 percent of 2004 expenses |
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• | Investment income – Pretax investment income reached a new record in 2005, rising 6.9 percent from the prior record in 2004. Growth in investment income over the past two years has been driven by strong cash flow for new investments, higher interest income from the growing fixed-maturity portfolio and increased dividend income from the common stock portfolio. |
• | Realized gains and losses – We reported realized gains in 2005 and 2004 largely due to investment sales. The realized loss in 2003 was due to other-than-temporary impairment charges. |
2005-2004 | 2004-2003 | |||||||||||||||||||
(In millions) | 2005 | 2004 | 2003 | Change % | Change % | |||||||||||||||
Investment income: | ||||||||||||||||||||
Interest | $ | 280 | $ | 252 | $ | 235 | 11.2 | 7.2 | ||||||||||||
Dividends | 244 | 239 | 227 | 2.1 | 5.0 | |||||||||||||||
Other | 8 | 6 | 8 | 29.4 | (23.0 | ) | ||||||||||||||
Investment expenses | (6 | ) | (5 | ) | (5 | ) | (22.3 | ) | (13.0 | ) | ||||||||||
Total net investment income | 526 | 492 | 465 | 6.9 | 5.6 | |||||||||||||||
Investment interest credited to contract holders | (51 | ) | (46 | ) | (43 | ) | 12.9 | 5.7 | ||||||||||||
Net realized investment gains and losses: | ||||||||||||||||||||
Realized investment gains and losses | 69 | 87 | 30 | (20.7 | ) | 189.9 | ||||||||||||||
Change in valuation of embedded derivatives | (7 | ) | 10 | 9 | (167.2 | ) | 7.9 | |||||||||||||
Other-than-temporary impairment charges | (1 | ) | (6 | ) | (80 | ) | 78.5 | 92.0 | ||||||||||||
Net realized investment gains (losses) | 61 | 91 | (41 | ) | (33.1 | ) | 321.7 | |||||||||||||
Investment operations income | $ | 536 | $ | 537 | $ | 381 | (0.4 | ) | 40.6 | |||||||||||
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• | 2005 – one auto-related convertible preferred security for $1 million |
• | 2004 – two airline-related tax-exempt municipal bonds totaling $5 million |
• | 2003 – 31 high-yield corporate bonds written down $39 million and 10 convertible securities written down $26 million. Market value declines in 2003 largely related to events specific to the issuer rather than industry issues, although $58 million of the $80 million write-downs were concentrated in the utility/merchant energy trading, airline and healthcare industries. |
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Years ended December 31, | ||||||||||||
(Dollars in millions) | 2005 | 2004 | 2003 | |||||||||
Taxable fixed maturities: | ||||||||||||
Number of securities impaired | 2 | 1 | 42 | |||||||||
Percent to total owned | 0 | % | 1 | % | 6 | % | ||||||
Impairment amount | $ | (1 | ) | $ | 0 | $ | (66 | ) | ||||
New book value | 1 | 2 | 36 | |||||||||
Percent to total owned | 0 | % | 1 | % | 1 | % | ||||||
Tax-exempt fixed maturities: | ||||||||||||
Number of securities impaired | 0 | 2 | 5 | |||||||||
Percent to total owned | 0 | % | 0 | % | 1 | % | ||||||
Impairment amount | $ | 0 | $ | (5 | ) | $ | (6 | ) | ||||
New book value | 0 | 9 | 3 | |||||||||
Percent to total owned | 0 | % | 1 | % | 0 | % | ||||||
Common equities: | ||||||||||||
Number of securities impaired | 0 | 1 | 2 | |||||||||
Percent to total owned | 0 | % | 2 | % | 4 | % | ||||||
Impairment amount | $ | 0 | $ | (1 | ) | $ | (8 | ) | ||||
New book value | 0 | 0 | 5 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Preferred equities: | ||||||||||||
Number of securities impaired | 0 | 0 | 0 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Impairment amount | $ | 0 | $ | 0 | $ | 0 | ||||||
New book value | 0 | 0 | 0 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Short-term investments: | ||||||||||||
Number of securities impaired | 0 | 0 | 0 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Impairment amount | $ | 0 | $ | 0 | $ | 0 | ||||||
New book value | 0 | 0 | 0 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Total: | ||||||||||||
Number of securities impaired | 2 | 4 | 49 | |||||||||
Percent to total owned | 0 | % | 0 | % | 3 | % | ||||||
Impairment amount | $ | (1 | ) | $ | (6 | ) | $ | (80 | ) | |||
New book value | $ | 1 | $ | 11 | $ | 44 | ||||||
Percent to total owned | 0 | % | 0 | % | 1 | % |
Years ended December 31, | ||||||||||||
(Dollars in millions) | 2005 | 2004 | 2003 | |||||||||
Automotive | $ | (1 | ) | $ | 0 | $ | (1 | ) | ||||
Airline | 0 | (5 | ) | (18 | ) | |||||||
Utility/merchant energy/trading | 0 | 0 | (30 | ) | ||||||||
Healthcare | 0 | 0 | (10 | ) | ||||||||
Other | 0 | (1 | ) | (21 | ) | |||||||
Total | $ | (1 | ) | $ | (6 | ) | $ | (80 | ) | |||
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Years ended December 31, | ||||||||||||
(In millions) | 2005 | 2004 | 2003 | |||||||||
Written premiums | $ | 3,187 | $ | 3,055 | $ | 2,771 | ||||||
Loss and loss expenses paid | 1,752 | 1,694 | 1,617 | |||||||||
Commissions and other underwriting expenses paid | 951 | 889 | 774 | |||||||||
Insurance subsidiary cash flow from underwriting | 484 | 472 | 380 | |||||||||
Investment income received | 427 | 362 | 332 | |||||||||
Insurance subsidiary operating cash flow | $ | 911 | $ | 834 | $ | 712 | ||||||
• | Sales of fixed-maturity investments – We prefer to hold fixed-maturity securities until maturity. Any decision to sell or to reduce a holding reflects our perception of a change in the underlying fundamentals of the security and our preference to allocate those funds to investments that more closely meet our established parameters for long-term stability and growth. |
• | Call or maturity of fixed-maturity investments – Calls and maturities of fixed-maturity investments are a function of the yield curve. The pace of calls of fixed maturities declined in 2005 because of a stabilization of interest rates. In the past several years, we have purchased U.S. agency paper with higher coupons and shorter call protection features. |
• | Sales of equity securities investments – In 2005, we continued to sell equity positions previously identified. We also recorded the initial ALLTEL sales in 2005. Sales of equity securities rose in 2004 due to the sale of $356 million in equity holdings as part of our program to support the financial strength ratings of our property casualty insurance operations. Holdings to be sold were selected primarily based on the investment committee’s and management’s belief that these securities would have a lower dividend growth rate over the next several years when compared with other holdings in the portfolio. We also considered the potential tax effect of any unrealized gains. |
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• | Paid off $183 million in short-term debt. |
• | Are financing the construction of an estimated $100 million office building and parking garage to be situated at the headquarters located in Fairfield beginning in 2005, as announced in August 2004. |
• | Are available for general corporate purposes. |
Payment due by period | |||||||||||||||||||||||
Within | Years | Years | More than | ||||||||||||||||||||
(In millions) | 1 year | 2-3 | 4-5 | 5 years | Total | ||||||||||||||||||
Contractual obligations: | |||||||||||||||||||||||
Net property casualty claims payments | $ | 1,009 | $ | 1,054 | $ | 474 | $ | 574 | $ | 3,111 | |||||||||||||
Net life claims payments | 6 | 0 | 0 | 0 | 6 | ||||||||||||||||||
Interest on long-term debt | 52 | 104 | 104 | 1,048 | 1,308 | ||||||||||||||||||
Long-term debt | 0 | 0 | 0 | 795 | 795 | ||||||||||||||||||
Annuitization obligations | 15 | 45 | 30 | 104 | 194 | ||||||||||||||||||
Headquarters building expansion | 20 | 63 | 0 | 0 | 83 | ||||||||||||||||||
Computer hardware and software | 10 | 2 | 1 | 1 | 14 | ||||||||||||||||||
Other invested assets | 9 | 10 | 1 | 0 | 20 | ||||||||||||||||||
Total | $ | 1,121 | $ | 1,278 | $ | 610 | $ | 2,522 | $ | 5,531 | |||||||||||||
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• | Dividends to shareholders – Over the past 10 years, the company has paid an average of 42 percent of net income as dividends, with the remaining 58 percent available to reinvest for future growth and for share repurchases. The ability of the company to continue paying cash dividends is subject to factors the board of directors may deem relevant. | |
In February 2006, the board of directors authorized a 9.8 percent increase in the regular quarterly cash dividend to an indicated annual rate of $1.34 per share. In 2005, 2004 and 2003, we paid cash dividends of $204 million, $177 million and $156 million. |
• | Common stock repurchase – Our board believes that stock repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares. Common stock repurchases for treasury have continued at a steady pace over the last several years and occur when we believe that stock prices on the open market are favorable for such repurchases. At a minimum, we would expect the repurchase to offset dilution of option exercises. In 2005, 2004 and 2003, we used $63 million, $66 million and $55 million for share repurchase. | |
In 2005, the board authorized a 10 million share repurchase program to replace a program authorized in 1999. At year-end 2005, 9.5 million shares remained authorized for repurchase under the 2005 program. | ||
The details of the repurchase activity are described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, Page 27. Between February 1999 and year-end 2005, we have repurchased 14.8 million shares at a total cost to the company of $543 million. We do not adjust number of shares repurchased and average price per repurchased share for stock dividends. |
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• | Increases in coverage in force in selected business lines |
• | New business |
• | Higher initial case reserves on liability claims |
• | Judicial decisions and mass tort claims |
• | Loss cost inflation in selected lines |
• | Section Ashows our total property casualty loss and loss expense reserves recorded at the balance sheet date for each of the indicated calendar years on a gross and net basis. Those reserves represent the estimated amount of loss and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported to the company. |
• | Section Bshows the cumulative net amount paid with respect to the previously recorded reserve as of the end of each succeeding year. For example, as of December 31, 2005, we had paid $1.053 billion of loss and loss expenses in calendar years 1996 through 2005, for losses that occurred in accident years 1995 and prior. An estimated $130 million of losses remain unpaid as of year-end 2005 (net re-estimated reserves of $1.183 billion less cumulative paid loss and loss expenses of $1.053 billion). |
• | Section Cshows the re-estimated amount of the previously reported reserves based on experience as of the end of each succeeding year. The estimate is increased or decreased as we learn more about the frequency and severity of claims. |
• | Section D, cumulative net redundancy, represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, reserves established at December 31, 1995, had developed a $398 million redundancy over 10 years, net of reinsurance, which has been reflected in income over the 10 years. The effects on income in 2005, 2004 and 2003 of changes in estimates of the reserves for loss and loss expenses for all accident years are shown in the reconciliation below. |
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Calendar year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
(In millions) | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |||||||||||||||||||||||||||||||||
A. Originally reported reserves for unpaid loss and loss expenses: | ||||||||||||||||||||||||||||||||||||||||||||
Gross of reinsurance | $ | 1,690 | $ | 1,824 | $ | 1,889 | $ | 1,978 | $ | 2,093 | $ | 2,401 | $ | 2,865 | $ | 3,150 | $ | 3,386 | $ | 3,514 | $ | 3,629 | ||||||||||||||||||||||
Reinsurance recoverable | 109 | 122 | 112 | 138 | 161 | 219 | 513 | 542 | 541 | 537 | 518 | |||||||||||||||||||||||||||||||||
Net of reinsurance | $ | 1,581 | $ | 1,702 | $ | 1,777 | $ | 1,840 | $ | 1,932 | $ | 2,182 | $ | 2,352 | $ | 2,608 | $ | 2,845 | $ | 2,977 | $ | 3,111 | ||||||||||||||||||||||
B. Cumulative net paid as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 453 | $ | 499 | $ | 522 | $ | 591 | $ | 697 | $ | 758 | $ | 799 | $ | 817 | $ | 817 | $ | 907 | ||||||||||||||||||||||||
Two years later | 732 | 761 | 853 | 943 | 1,116 | 1,194 | 1,235 | 1,235 | 1,293 | |||||||||||||||||||||||||||||||||||
Three years later | 884 | 965 | 1,067 | 1,195 | 1,378 | 1,455 | 1,455 | 1,519 | ||||||||||||||||||||||||||||||||||||
Four years later | 992 | 1,075 | 1,207 | 1,327 | 1,526 | 1,526 | 1,614 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,049 | 1,152 | 1,283 | 1,412 | 1,412 | 1,623 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,093 | 1,205 | 1,333 | 1,333 | 1,464 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,123 | 1,146 | 1,239 | 1,366 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,146 | 1,045 | 1,260 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,045 | 1,159 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,053 | |||||||||||||||||||||||||||||||||||||||||||
C. Net reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 1,429 | $ | 1,582 | $ | 1,623 | $ | 1,724 | $ | 1,912 | $ | 2,120 | $ | 2,307 | $ | 2,528 | $ | 2,649 | $ | 2,817 | ||||||||||||||||||||||||
Two years later | 1,380 | 1,470 | 1,551 | 1,728 | 1,833 | 2,083 | 2,263 | 2,377 | 2,546 | |||||||||||||||||||||||||||||||||||
Three years later | 1,279 | 1,405 | 1,520 | 1,636 | 1,802 | 2,052 | 2,178 | 2,336 | ||||||||||||||||||||||||||||||||||||
Four years later | 1,236 | 1,380 | 1,465 | 1,615 | 1,771 | 2,010 | 2,153 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,227 | 1,326 | 1,466 | 1,608 | 1,757 | 1,999 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,189 | 1,333 | 1,463 | 1,602 | 1,733 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,205 | 1,333 | 1,460 | 1,577 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,210 | 1,332 | 1,435 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,208 | 1,305 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,183 | |||||||||||||||||||||||||||||||||||||||||||
D. Cumulative net redundancy as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 152 | $ | 120 | $ | 154 | $ | 116 | $ | 20 | $ | 62 | $ | 45 | $ | 80 | $ | 196 | $ | 160 | ||||||||||||||||||||||||
Two years later | 201 | 232 | 226 | 112 | 99 | 99 | 89 | 231 | 299 | |||||||||||||||||||||||||||||||||||
Three years later | 302 | 297 | 257 | 204 | 130 | 130 | 174 | 272 | ||||||||||||||||||||||||||||||||||||
Four years later | 345 | 322 | 312 | 225 | 161 | 172 | 199 | |||||||||||||||||||||||||||||||||||||
Five years later | 354 | 376 | 311 | 232 | 175 | 183 | ||||||||||||||||||||||||||||||||||||||
Six years later | 392 | 369 | 314 | 238 | 199 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 376 | 369 | 317 | 263 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 371 | 370 | 342 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 373 | 397 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 398 | |||||||||||||||||||||||||||||||||||||||||||
Net liability re-estimated—latest | $ | 1,208 | $ | 1,332 | $ | 1,460 | $ | 1,602 | $ | 1,757 | $ | 2,010 | $ | 2,178 | $ | 2,377 | $ | 2,649 | $ | 2,817 | ||||||||||||||||||||||||
Re-estimated recoverable—latest | 180 | 172 | 182 | 209 | 216 | 243 | 504 | 542 | 532 | 539 | ||||||||||||||||||||||||||||||||||
Gross liability re-estimated—latest | $ | 1,388 | $ | 1,504 | $ | 1,642 | $ | 1,811 | $ | 1,973 | $ | 2,253 | $ | 2,682 | $ | 2,919 | $ | 3,181 | $ | 3,356 | ||||||||||||||||||||||||
Cummulative gross redundancy | $ | 302 | $ | 320 | $ | 247 | $ | 167 | $ | 120 | $ | 148 | $ | 183 | $ | 231 | $ | 205 | $ | 158 | ||||||||||||||||||||||||
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Loss reserves | Loss | Total | ||||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
(In millions) | reserves | reserves | reserves | reserves | of total | |||||||||||||||
At December 31, 2005 | ||||||||||||||||||||
Commercial multi-peril | $ | 505 | $ | 101 | $ | 228 | $ | 834 | 26.3 | % | ||||||||||
Workers compensation | 283 | 333 | 79 | 695 | 21.9 | |||||||||||||||
Commercial auto | 267 | 56 | 65 | 388 | 12.2 | |||||||||||||||
Other liability | 312 | 368 | 140 | 820 | 25.9 | |||||||||||||||
All other lines of business | 277 | 24 | 135 | 436 | 13.7 | |||||||||||||||
Total | $ | 1,644 | $ | 882 | $ | 647 | $ | 3,173 | 100.0 | % | ||||||||||
At December 31, 2004 | ||||||||||||||||||||
Commercial multi-peril | $ | 465 | $ | 123 | $ | 227 | $ | 815 | 27.0 | % | ||||||||||
Workers compensation | 258 | 278 | 75 | 611 | 20.3 | |||||||||||||||
Commercial auto | 254 | 58 | 64 | 376 | 12.5 | |||||||||||||||
Other liability | 288 | 377 | 111 | 776 | 25.7 | |||||||||||||||
All other lines of business | 289 | 19 | 130 | 438 | 14.5 | |||||||||||||||
Total | $ | 1,554 | $ | 855 | $ | 607 | $ | 3,016 | 100.0 | % | ||||||||||
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Commercial | Workers | Commercial | Other | ||||||||||||||||||||
(Dollars in millions) | multi-peril | compensation | auto | liability | |||||||||||||||||||
As of December 31, 2005 | |||||||||||||||||||||||
2004 accident year | $ | 5 | $ | (9 | ) | $ | 16 | $ | 36 | ||||||||||||||
2003 accident year | 22 | (13 | ) | 5 | 32 | ||||||||||||||||||
2002 accident year | 9 | (8 | ) | 2 | 6 | ||||||||||||||||||
2001 accident year | 7 | (3 | ) | 1 | 1 | ||||||||||||||||||
2000 accident year | 0 | (3 | ) | 0 | (8 | ) | |||||||||||||||||
1999 accident year | 2 | (3 | ) | 0 | 0 | ||||||||||||||||||
1998 and prior accident years | 16 | (4 | ) | 10 | (17 | ) | |||||||||||||||||
Redundancy/(deficiency) | $ | 61 | $ | (43 | ) | $ | 34 | $ | 50 | ||||||||||||||
Reserves as originally estimated | $ | 760 | $ | 557 | $ | 372 | $ | 599 | |||||||||||||||
Reserves re-estimated as of December 31, 2005 | 699 | 600 | 338 | 549 | |||||||||||||||||||
Redundancy/(deficiency) | $ | 61 | $ | (43 | ) | $ | 34 | $ | 50 | ||||||||||||||
Impact on loss and loss expense ratio | 7.7 | % | (13.3 | )% | 7.4 | % | 11.2 | % | |||||||||||||||
As of December 31, 2004 | |||||||||||||||||||||||
2003 accident year | $ | (5 | ) | $ | 5 | $ | 11 | $ | 36 | ||||||||||||||
2002 accident year | 2 | (1 | ) | 10 | 41 | ||||||||||||||||||
2001 accident year | 5 | (6 | ) | 4 | 27 | ||||||||||||||||||
2000 accident year | 4 | (3 | ) | 4 | 13 | ||||||||||||||||||
1999 accident year | 0 | (2 | ) | 7 | 2 | ||||||||||||||||||
1998 accident year | 1 | (1 | ) | 3 | 0 | ||||||||||||||||||
1997 and prior accident years | (11 | ) | (7 | ) | 8 | 12 | |||||||||||||||||
Redundancy/(deficiency) | $ | (4 | ) | $ | (15 | ) | $ | 47 | $ | 131 | |||||||||||||
Reserves as originally estimated | $ | 691 | $ | 514 | $ | 381 | $ | 635 | |||||||||||||||
Reserves re-estimated as of December 31, 2004 | 695 | 529 | 334 | 504 | |||||||||||||||||||
Redundancy/(deficiency) | $ | (4 | ) | $ | (15 | ) | $ | 47 | $ | 131 | |||||||||||||
Impact on loss and loss expense ratio | (0.6 | )% | (4.9 | )% | 10.5 | % | 32.5 | % | |||||||||||||||
As of December 31, 2003 | |||||||||||||||||||||||
2002 accident year | $ | (3 | ) | $ | (1 | ) | $ | 11 | $ | 36 | |||||||||||||
2001 accident year | 2 | (3 | ) | 2 | 15 | ||||||||||||||||||
2000 accident year | (10 | ) | (2 | ) | 7 | 5 | |||||||||||||||||
1999 accident year | 5 | (1 | ) | 11 | 6 | ||||||||||||||||||
1998 accident year | (2 | ) | 0 | 2 | 3 | ||||||||||||||||||
1997 accident year | (2 | ) | (1 | ) | 1 | 5 | |||||||||||||||||
1996 and prior accident years | (3 | ) | (5 | ) | 3 | 9 | |||||||||||||||||
Redundancy/(deficiency) | $ | (13 | ) | $ | (13 | ) | $ | 37 | $ | 79 | |||||||||||||
Reserves as originally estimated | $ | 609 | $ | 477 | $ | 383 | $ | 580 | |||||||||||||||
Reserves re-estimated as of December 31, 2003 | 622 | 490 | 346 | 501 | |||||||||||||||||||
Redundancy/(deficiency) | $ | (13 | ) | $ | (13 | ) | $ | 37 | $ | 79 | |||||||||||||
Impact on loss and loss expense ratio | (2.0 | )% | (4.3 | )% | 8.8 | % | 23.0 | % |
• | The initiative, begun in 2001, to establish higher initial case reserves on liability claims in the period in which the claim is reported. |
• | Higher than expected medical inflation affecting the workers compensation line |
• | Settlements that differed from the established case reserves |
• | Changes in case reserves based on new information for specific claims or classes of claims |
• | Differences in the timing of actual settlements compared with the payout patterns assumed in the accident year IBNR reductions |
• | Lower risk profile after 2001 due to commercial lines underwriting initiatives |
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Loss reserves | Loss | Total | ||||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
(In millions) | reserves | reserves | reserves | reserves | of total | |||||||||||||||
At December 31, 2005 | ||||||||||||||||||||
Personal auto | $ | 175 | $ | 4 | $ | 34 | $ | 213 | 46.9 | % | ||||||||||
Homeowners | 70 | 21 | 18 | 109 | 23.8 | |||||||||||||||
All other lines of business | 55 | 67 | 12 | 134 | 29.3 | |||||||||||||||
Total | $ | 300 | $ | 92 | $ | 64 | $ | 456 | 100.0 | % | ||||||||||
At December 31, 2004 | ||||||||||||||||||||
Personal auto | $ | 181 | $ | 15 | $ | 35 | $ | 231 | 46.4 | % | ||||||||||
Homeowners | 81 | 21 | 23 | 125 | 25.1 | |||||||||||||||
All other lines of business | 57 | 73 | 12 | 142 | 28.5 | |||||||||||||||
Total | $ | 319 | $ | 109 | $ | 70 | $ | 498 | 100.0 | % | ||||||||||
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Personal | ||||||||
(Dollars in millions) | auto | Homeowners | ||||||
As of December 31, 2005 | ||||||||
2004 accident year | $ | 2 | $ | 1 | ||||
2003 accident year | 0 | 2 | ||||||
2002 accident year | 2 | 0 | ||||||
2001 accident year | 4 | 1 | ||||||
2000 accident year | 1 | 0 | ||||||
1999 accident year | 1 | (1 | ) | |||||
1998 and prior accident years | 2 | 0 | ||||||
Redundancy/(deficiency) | $ | 12 | $ | 3 | ||||
Reserves as originally estimated | $ | 231 | $ | 114 | ||||
Reserves re-estimated as of December 31, 2005 | 219 | 111 | ||||||
Redundancy/(deficiency) | $ | 12 | $ | 3 | ||||
Impact on loss and loss expense ratio | 2.7 | % | 1.0 | % | ||||
As of December 31, 2004 | ||||||||
2003 accident year | $ | (9 | ) | $ | 0 | |||
2002 accident year | (1 | ) | 1 | |||||
2001 accident year | 3 | 4 | ||||||
2000 accident year | 3 | 1 | ||||||
1999 accident year | 1 | 0 | ||||||
1998 accident year | 1 | 0 | ||||||
1997 and prior accident years | 1 | 0 | ||||||
Redundancy/(deficiency) | $ | (1 | ) | $ | 6 | |||
Reserves as originally estimated | $ | 224 | $ | 89 | ||||
Reserves re-estimated as of December 31, 2004 | 225 | 83 | ||||||
Redundancy/(deficiency) | $ | (1 | ) | $ | 6 | |||
Impact on loss and loss expense ratio | (0.2 | )% | 2.2 | % | ||||
As of December 31, 2003 | ||||||||
2002 accident year | $ | (8 | ) | $ | 2 | |||
2001 accident year | (4 | ) | 5 | |||||
2000 accident year | 0 | 0 | ||||||
1999 accident year | 2 | 1 | ||||||
1998 accident year | 0 | 0 | ||||||
1997 accident year | 1 | 0 | ||||||
1996 and prior accident years | 0 | 0 | ||||||
Redundancy/(deficiency) | $ | (9 | ) | $ | 8 | |||
Reserves as originally estimated | $ | 201 | $ | 96 | ||||
Reserves re-estimated as of December 31, 2003 | 210 | 88 | ||||||
Redundancy/(deficiency) | $ | (9 | ) | $ | 8 | |||
Impact on loss and loss expense ratio | (2.1 | )% | 3.1 | % |
• | Settlements that differed from the established case reserves |
• | Changes in case reserves based on new information for specific claims or classes of claims |
• | Differences in the timing of actual settlements compared with the payout patterns assumed in the accident year IBNR reductions |
• | Recognition of favorable case reserve development |
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• | Property per risk treaty – The primary purpose of the property treaty is to provide excess limits capacity up to $25 million, supplying adequate capacity for the majority of the risks we write and also includes protection for extra-contractual liability coverage losses. The ceded premium is estimated to be $30 million for 2006, compared with $29 million in 2005 and $27 million in 2004. In 2006, we are retaining the first $4 million of each loss. Losses between $4 million and $25 million are reinsured at 100 percent. The $4 million base retention is new for 2006. Last year, we retained the first $3 million of every property loss. Losses in excess of $3 million were reinsured at 100 percent up to $25 million in 2005. | |
• | Casualty per occurrence treaty – The casualty treaty provides excess limits capacity up to $25 million. Similar to the property treaty, this provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. The ceded premium is estimated to be $47 million in 2006, compared with $64 million in 2005 and $61 million in 2004. In 2006, we are changing to a flat $4 million retention. Previously, we retained the first $2 million of each casualty loss, and 60 percent of the next $2 million of loss. Losses in excess of $4 million are reinsured at 100 percent up to $25 million. | |
In mid-2005, we modified our casualty per occurrence treaty for director and officer policies for five Fortune 1000 companies and one financial services company. For three of the six companies, our retention per policy could be as high as $15 million rather than the $4 million for a typical policy; for one of the other companies, our retention per policy could be as high as $14 million; for the other two companies, our retention per policy could be as high as $5 million. We believe the additional risk undertaken with these selected policies remains at an acceptable level based on our financial strength. We arranged for this exception for this small group of companies to maintain business relationships with key agencies and insureds. We intend to review this element of our working treaties on an ongoing basis. | ||
• | Casualty excess treaties – We purchase a casualty reinsurance treaty that provides an additional $25 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $50 million of protection for workers compensation, extra-contractual liability coverage and clash coverage losses, which is used when there is a single occurrence involving multiple |
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policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded premium is estimated to be $2 million in 2006 up only slightly from 2005 and 2004. |
We purchase another casualty excess treaty, which provides an additional $20 million in casualty loss coverage. This treaty also provides catastrophic coverage for workers compensation and extra-contractual liability coverage losses. The ceded premium is estimated to be $1 million for 2006, similar to the premium paid in 2005. |
• | Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchase property catastrophe reinsurance, with a limit up to $500 million. For the 2006 treaty, ceded premiums are estimated to be $38 million, up from $29 million in 2005, excluding the reinstatement premium, and $27 million in 2004, excluding the reinstatement premium. The premium increase for 2006 primarily is due to the difficult market conditions brought on in part by the record catastrophe losses experienced by reinsurance companies in 2005. We increased our retention on this program to $45 million and we will retain 5 percent of losses between $45 million and $500 million. In 2005, we retained the first $25 million of losses arising out of a single event, 40 percent of losses from $25 million to $45 million and 5 percent of all losses in excess of $45 million, up to $500 million. |
• | Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes | |
• | Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased and financial strength of reinsurers | |
• | Increased frequency and/or severity of claims |
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• | Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as: |
o | Downgrade of the company’s financial strength ratings, | ||
o | Concerns that doing business with the company is too difficult or | ||
o | Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace |
• | Increased competition that could result in a significant reduction in the company’s premium growth rate | |
• | Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly price risks, which could decrease our competitive advantages | |
• | Insurance regulatory actions, legislation or court decisions or legal actions that increase expenses or place us at a disadvantage in the marketplace | |
• | Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements | |
• | Inaccurate estimates or assumptions used for critical accounting estimates, including loss reserves | |
• | Events that reduce the company’s ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 in the future | |
• | Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products | |
• | Sustained decline in overall stock market values negatively affecting the company’s equity portfolio; in particular a sustained decline in the market value of Fifth Third shares, a significant equity holding | |
• | Events that lead to a significant decline in the value of a particular security and impairment of the asset | |
• | Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income | |
• | Adverse outcomes from litigation or administrative proceedings | |
• | Effect on the insurance industry as a whole, and thus on the company’s business, of the actions undertaken by the Attorney General of the State of New York and other regulators against participants in the insurance industry, as well as any increased regulatory oversight that might result | |
• | Investment activities or market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940 |
• | Political – the potential for a decrease in market value due to the real or perceived impact of governmental policies or conditions | |
• | Regulatory – the potential for a decrease in market value due to the impact of legislative proposals or changes in laws or regulations | |
• | Economic – the potential for a decrease in value due to changes in general economic factors (recession, inflation, deflation, etc.) |
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• | Revaluation – the potential for a decrease in market value due to a change in relative value (change in market multiple) of the market brought on by general economic factors | |
• | Interest-rate – the potential for a decrease in market value of a security or portfolio due to its sensitivity to changes (increases or decreases) in the general level of interest rates |
• | Fraud – the potential for a negative impact on an issuer’s performance due to actual or alleged illegal or improper activity of individuals it employs | |
• | Credit – the potential for deterioration in an issuer’s financial profile due to specific company issues, problems it faces in the course of its operations or industry-related issues | |
• | Default – the possibility that an issuer will not make a required payment (interest payment or return of principal) on its debt. Generally this occurs after its financial profile has deteriorated (credit risk) and it no longer has the means to make its payments |
Taxable | Tax-exempt | Preferred | Short-term | |||||||||||||||||
fixed maturities | fixed maturities | Common equities | equities | investments | ||||||||||||||||
Political | A | H | A | A | L | |||||||||||||||
Regulatory | A | A | A | A | L | |||||||||||||||
Economic | A | A | H | A | L | |||||||||||||||
Revaluation | A | A | H | A | L | |||||||||||||||
Interest rate | H | H | A | H | L | |||||||||||||||
Fraud | A | L | A | A | L | |||||||||||||||
Credit | A | L | A | A | L | |||||||||||||||
Default | A | L | A | A | L |
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Fair value | Modified duration | Duration to worst | ||||||||||||||||||
of fixed | 100 basis | 100 basis | 100 basis | 100 basis | ||||||||||||||||
maturity | point spread | point spread | point spread | point spread | ||||||||||||||||
(In millions) | portfolio | decrease | increase | decrease | increase | |||||||||||||||
At December 31, 2005 | $ | 5,476 | $ | 5,868 | $ | 5,084 | $ | 5,779 | $ | 5,173 | ||||||||||
At December 31, 2004 | 5,070 | 5,445 | 4,695 | 5,326 | 4,814 |
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Years ended December 31, | ||||||||||||
(In Millions except market price data) | 2005 | 2004 | 2003 | |||||||||
Fifth Third Bancorp common stock holding: | ||||||||||||
Dividends earned | $ | 106 | $ | 95 | $ | 82 | ||||||
Percent of total investment income | 20.2 | % | 19.4 | % | 17.7 | % | ||||||
At December 31, | ||||||||||||
2005 | 2004 | |||||||||||
Shares held | 73 | 73 | ||||||||||
Closing market price of Fifth Third | $ | 37.72 | $ | 47.30 | ||||||||
Book value of holding | 283 | 283 | ||||||||||
Fair value of holding | 2,745 | 3,443 | ||||||||||
After-tax unrealized gain | 1,600 | 2,054 | ||||||||||
Market value as a percent of total equity investments | 38.6 | % | 45.9 | % | ||||||||
Market value as a percent of invested assets | 21.6 | 27.2 | ||||||||||
Market value as a percent of total shareholders’ equity | 45.1 | 55.1 | ||||||||||
After-tax unrealized gain as a percent of total shareholders’ equity | 26.3 | 32.9 |
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• | 714 of these holdings were trading between 90 percent and 100 percent of book value. The value of these securities fluctuates primarily because of changes in interest rates. The fair value of these 714 securities was $2.717 billion at December 31, 2005, and they accounted for $57 million in unrealized losses. | |
• | 18 of these holdings were trading below 90 percent of book value at December 31, 2005. The fair value of these holdings was $111 million, and they accounted for the remaining $21 million in unrealized losses. These holdings are being monitored for credit- and industry-related risk factors. Of these securities, seven are bonds or convertible preferred stocks of auto industry-related issuers and one is a common stock of a pharmaceutical company. These eight securities account for $69 million of the fair value of holdings trading below 90 percent of book value. The remaining ten are smaller positions in a variety of industries. |
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6 Months or less | > 6-12 Months | > 12-24 Months | > 24-36 Months | |||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Number | unrealized | Number | unrealized | Number | unrealized | Number | unrealized | |||||||||||||||||||||||||
(Dollars in millions) | of issues | gain/loss | of issues | gain/loss | of issues | gain/loss | of issues | gain/loss | ||||||||||||||||||||||||
Taxable fixed maturities: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 2 | $ | (4 | ) | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||||||
Trading at 70% to less than 100% of book value | 185 | (22 | ) | 57 | (17 | ) | 46 | (12 | ) | 5 | (1 | ) | ||||||||||||||||||||
Trading at 100% and above of book value | 37 | 3 | 14 | 1 | 35 | 5 | 346 | 102 | ||||||||||||||||||||||||
Total | 224 | (23 | ) | 71 | (16 | ) | 81 | (7 | ) | 351 | 101 | |||||||||||||||||||||
Tax-exempt fixed maturities: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 357 | (8 | ) | 32 | (3 | ) | 32 | (3 | ) | 3 | 0 | |||||||||||||||||||||
Trading at 100% and above of book value | 51 | 1 | 43 | 1 | 105 | 3 | 384 | 43 | ||||||||||||||||||||||||
Total | 408 | (7 | ) | 75 | (2 | ) | 137 | 0 | 387 | 43 | ||||||||||||||||||||||
Common equities: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 1 | 0 | 1 | 0 | 2 | (5 | ) | 0 | 0 | |||||||||||||||||||||||
Trading at 100% and above of book value | 5 | 3 | 1 | 1 | 4 | 8 | 35 | 4,968 | ||||||||||||||||||||||||
Total | 6 | 3 | 2 | 1 | 6 | 3 | 35 | 4,968 | ||||||||||||||||||||||||
Preferred equities: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 8 | (2 | ) | 0 | 0 | 0 | 0 | 1 | (1 | ) | ||||||||||||||||||||||
Trading at 100% and above of book value | 11 | 1 | 4 | 1 | 3 | 0 | 2 | 4 | ||||||||||||||||||||||||
Total | 19 | (1 | ) | 4 | 1 | 3 | 0 | 3 | 3 | |||||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 100% and above of book value | 2 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total | 2 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Summary: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 2 | (4 | ) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 551 | (32 | ) | 90 | (20 | ) | 80 | (20 | ) | 9 | (2 | ) | ||||||||||||||||||||
Trading at 100% and above of book value | 106 | 8 | 62 | 4 | 147 | 16 | 767 | 5,117 | ||||||||||||||||||||||||
Total | 659 | $ | (28 | ) | 152 | $ | (16 | ) | 227 | $ | (4 | ) | 776 | $ | 5,115 | |||||||||||||||||
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Gross | Gross | |||||||||||||||||||
Number | unrealized | investment | ||||||||||||||||||
(Dollars in millions) | of issues | Book value | Fair value | gain/loss | income | |||||||||||||||
At December 31, 2005 | ||||||||||||||||||||
Taxable fixed maturities: | ||||||||||||||||||||
Trading below 70% of book value | 2 | $ | 12 | $ | 8 | $ | (4 | ) | $ | 1 | ||||||||||
Trading at 70% to less than 100% of book value | 293 | 1,839 | 1,787 | (52 | ) | 84 | ||||||||||||||
Trading at 100% and above of book value | 432 | 1,453 | 1,564 | 111 | 99 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 15 | |||||||||||||||
Total | 727 | 3,304 | 3,359 | 55 | 199 | |||||||||||||||
Tax-exempt fixed maturities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 424 | 941 | 927 | (14 | ) | 32 | ||||||||||||||
Trading at 100% and above of book value | 583 | 1,142 | 1,190 | 48 | 55 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 3 | |||||||||||||||
Total | 1,007 | 2,083 | 2,117 | 34 | 90 | |||||||||||||||
Common equities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 4 | 51 | 46 | (5 | ) | 1 | ||||||||||||||
Trading at 100% and above of book value | 45 | 1,910 | 6,890 | 4,980 | 229 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total | 49 | 1,961 | 6,936 | 4,975 | 230 | |||||||||||||||
Preferred equities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 9 | 63 | 60 | (3 | ) | 1 | ||||||||||||||
Trading at 100% and above of book value | 20 | 104 | 110 | 6 | 3 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total | 29 | 167 | 170 | 3 | 4 | |||||||||||||||
Short-term investments: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 100% and above of book value | 2 | 75 | 75 | 0 | 1 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total | 2 | 75 | 75 | 0 | 1 | |||||||||||||||
Portfolio summary: | ||||||||||||||||||||
Trading below 70% of book value | 2 | 12 | 8 | (4 | ) | 1 | ||||||||||||||
Trading at 70% to less than 100% of book value | 730 | 2,894 | 2,820 | (74 | ) | 118 | ||||||||||||||
Trading at 100% and above of book value | 1,082 | 4,684 | 9,829 | 5,145 | 387 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 18 | |||||||||||||||
Total | 1,814 | $ | 7,590 | $ | 12,657 | $ | 5,067 | $ | 524 | |||||||||||
At December 31, 2004 | ||||||||||||||||||||
Portfolio summary: | ||||||||||||||||||||
Trading below 70% of book value | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
Trading at 70% to less than 100% of book value | 208 | 900 | 883 | (17 | ) | 32 | ||||||||||||||
Trading at 100% and above of book value | 1,385 | 5,899 | 11,756 | 5,857 | 427 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 32 | |||||||||||||||
Total | 1,593 | $ | 6,799 | $ | 12,639 | $ | 5,840 | $ | 491 | |||||||||||
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1. | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and | |
3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Chairman, President and Chief Executive Officer
Chief Financial Officer, Senior Vice President, Secretary and Treasurer
(Principal Accounting Officer)
Table of Contents
Cincinnati, Ohio
March 6, 2006
Table of Contents
At December 31, | ||||||||
(Dollars in millions except per share data) | 2005 | 2004 | ||||||
ASSETS | ||||||||
Investments | ||||||||
Fixed maturities, at fair value (amortized cost: 2005—$5,387; 2004—$4,783) | $ | 5,476 | $ | 5,070 | ||||
Equity securities, at fair value (cost: 2005—$2,128; 2004—$1,945) | 7,106 | 7,498 | ||||||
Short-term investments, at fair value (cost: 2005—$75; 2004—$71) | 75 | 71 | ||||||
Other invested assets | 45 | 38 | ||||||
Cash and cash equivalents | 119 | 306 | ||||||
Investment income receivable | 117 | 107 | ||||||
Finance receivable | 105 | 95 | ||||||
Premiums receivable | 1,116 | 1,119 | ||||||
Reinsurance receivable | 681 | 680 | ||||||
Prepaid reinsurance premiums | 14 | 15 | ||||||
Deferred policy acquisition costs | 429 | 400 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: 2005—$232; 2004—$206) | 168 | 156 | ||||||
Other assets | 66 | 75 | ||||||
Separate accounts | 486 | 477 | ||||||
Total assets | $ | 16,003 | $ | 16,107 | ||||
LIABILITIES | ||||||||
Loss and loss expense reserves | ||||||||
Loss and loss expense reserves | $ | 3,661 | $ | 3,549 | ||||
Life policy reserves | 1,343 | 1,194 | ||||||
Unearned premiums | 1,559 | 1,539 | ||||||
Other liabilities | 455 | 474 | ||||||
Deferred income tax | 1,622 | 1,834 | ||||||
6.125% senior notes due 2034 | 371 | 371 | ||||||
6.9% senior debentures due 2028 | 28 | 420 | ||||||
6.92% senior debenture due 2028 | 392 | 0 | ||||||
Separate accounts | 486 | 477 | ||||||
Total liabilities | 9,917 | 9,858 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, par value-$2 per share; authorized: 2005-500 million shares, 2004- 200 million shares; issued: 2005-194 million shares, 2004-185 million shares | 389 | 370 | ||||||
Paid-in capital | 969 | 618 | ||||||
Retained earnings | 2,088 | 2,057 | ||||||
Accumulated other comprehensive income—unrealized gains on investments and derivatives | 3,284 | 3,787 | ||||||
Treasury stock at cost (2005—20 million shares, 2004—18 million shares) | (644 | ) | (583 | ) | ||||
Total shareholders’ equity | 6,086 | 6,249 | ||||||
Total liabilities and shareholders’ equity | $ | 16,003 | $ | 16,107 | ||||
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Years ended December 31, | ||||||||||||
(In millions except per share data) | 2005 | 2004 | 2003 | |||||||||
REVENUES | ||||||||||||
Earned premiums | ||||||||||||
Property casualty | $ | 3,058 | $ | 2,919 | $ | 2,653 | ||||||
Life | 106 | 101 | 95 | |||||||||
Investment income, net of expenses | 526 | 492 | 465 | |||||||||
Realized investment gains and losses | 61 | 91 | (41 | ) | ||||||||
Other income | 16 | 11 | 9 | |||||||||
Total revenues | 3,767 | 3,614 | 3,181 | |||||||||
BENEFITS AND EXPENSES | ||||||||||||
Insurance losses and policyholder benefits | 1,911 | 1,846 | 1,887 | |||||||||
Commissions | 627 | 615 | 536 | |||||||||
Other operating expenses | 290 | 260 | 204 | |||||||||
Taxes, licenses and fees | 72 | 75 | 67 | |||||||||
Increase in deferred policy acquisition costs | (19 | ) | (30 | ) | (42 | ) | ||||||
Interest expense | 51 | 38 | 34 | |||||||||
Other expenses | 12 | 10 | 15 | |||||||||
Total benefits and expenses | 2,944 | 2,814 | 2,701 | |||||||||
INCOME BEFORE INCOME TAXES | 823 | 800 | 480 | |||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||
Current | 188 | 171 | 130 | |||||||||
Deferred | 33 | 45 | (24 | ) | ||||||||
Total provision for income taxes | 221 | 216 | 106 | |||||||||
NET INCOME | $ | 602 | $ | 584 | $ | 374 | ||||||
PER COMMON SHARE | ||||||||||||
Net income—basic | $ | 3.44 | $ | 3.30 | $ | 2.11 | ||||||
Net income—diluted | $ | 3.40 | $ | 3.28 | $ | 2.10 |
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At December 31, | ||||||||||||
(In millions) | 2005 | 2004 | 2003 | |||||||||
COMMON STOCK — NUMBER OF SHARES | ||||||||||||
Beginning of year | 167 | 160 | 162 | |||||||||
5% stock dividend | 9 | 8 | 0 | |||||||||
Purchase of treasury shares | (2 | ) | (1 | ) | (2 | ) | ||||||
End of year | 174 | 167 | 160 | |||||||||
COMMON STOCK | ||||||||||||
Beginning of year | $ | 370 | $ | 352 | $ | 352 | ||||||
5% stock dividend | 18 | 18 | 0 | |||||||||
Stock options exercised | 1 | 0 | 0 | |||||||||
End of year | 389 | 370 | 352 | |||||||||
PAID-IN CAPITAL | ||||||||||||
Beginning of year | 618 | 306 | 300 | |||||||||
5% stock dividend | 341 | 312 | 0 | |||||||||
Stock loan | 0 | (3 | ) | 0 | ||||||||
Stock options exercised | 9 | 3 | 6 | |||||||||
Other | 1 | 0 | 0 | |||||||||
End of year | 969 | 618 | 306 | |||||||||
RETAINED EARNINGS | ||||||||||||
Beginning of year | 2,057 | 1,986 | 1,772 | |||||||||
Net income | 602 | 584 | 374 | |||||||||
5% stock dividend | (359 | ) | (330 | ) | 0 | |||||||
Dividends declared | (212 | ) | (183 | ) | (160 | ) | ||||||
End of year | 2,088 | 2,057 | 1,986 | |||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME | ||||||||||||
Beginning of year | 3,787 | 4,084 | 3,643 | |||||||||
Change in accumulated other comprehensive income, net | (503 | ) | (297 | ) | 441 | |||||||
End of year | 3,284 | 3,787 | 4,084 | |||||||||
TREASURY STOCK | ||||||||||||
Beginning of year | (583 | ) | (524 | ) | (469 | ) | ||||||
Purchase | (63 | ) | (66 | ) | (55 | ) | ||||||
Reissued for stock options | 2 | 7 | 0 | |||||||||
End of year | (644 | ) | (583 | ) | (524 | ) | ||||||
Total shareholders’ equity | $ | 6,086 | $ | 6,249 | $ | 6,204 | ||||||
COMPREHENSIVE INCOME | ||||||||||||
Net income | $ | 602 | $ | 584 | $ | 374 | ||||||
Change in accumulated other comprehensive income, net | (503 | ) | (297 | ) | 441 | |||||||
Total comprehensive income | $ | 99 | $ | 287 | $ | 815 | ||||||
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Years ended December 31, | ||||||||||||
(In millions) | 2005 | 2004 | 2003 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 602 | $ | 584 | $ | 374 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 33 | 28 | 30 | |||||||||
Realized (gains) losses on investments | (61 | ) | (91 | ) | 41 | |||||||
Negotiated settlement-software cost recovery | 0 | 0 | (23 | ) | ||||||||
Interest credited to contract holders | 28 | 24 | 23 | |||||||||
Changes in: | ||||||||||||
Investment income receivable | (10 | ) | (8 | ) | (1 | ) | ||||||
Premiums and reinsurance receivable | 2 | (118 | ) | (97 | ) | |||||||
Deferred policy acquisition costs | (19 | ) | (30 | ) | (42 | ) | ||||||
Other assets | 5 | (13 | ) | 17 | ||||||||
Loss and loss expense reserves | 112 | 134 | 239 | |||||||||
Life policy reserves | 84 | 109 | 75 | |||||||||
Unearned premiums | 20 | 93 | 127 | |||||||||
Other liabilities | (17 | ) | 83 | 14 | ||||||||
Deferred income tax | 33 | 45 | (24 | ) | ||||||||
Current income tax | (7 | ) | (17 | ) | 63 | |||||||
Net cash provided by operating activities | 805 | 823 | 816 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Sale of fixed maturities investments | 243 | 175 | 192 | |||||||||
Call or maturity of fixed maturities investments | 466 | 664 | 457 | |||||||||
Sale of equity securities investments | 104 | 536 | 217 | |||||||||
Collection of finance receivables | 34 | 32 | 25 | |||||||||
Purchase of fixed maturities investments | (1,297 | ) | (1,718 | ) | (1,143 | ) | ||||||
Purchase of equity securities investments | (219 | ) | (148 | ) | (335 | ) | ||||||
Change in short-term investments, net | (4 | ) | (71 | ) | 3 | |||||||
Investment in buildings and equipment, net | (44 | ) | (33 | ) | (38 | ) | ||||||
Investment in finance receivables | (45 | ) | (46 | ) | (33 | ) | ||||||
Collection of negotiated settlement-software cost recovery | 0 | 9 | 14 | |||||||||
Change in other invested assets, net | (9 | ) | (1 | ) | (1 | ) | ||||||
Net cash used in investing activities | (771 | ) | (601 | ) | (642 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from 6.125% senior notes | 0 | 371 | 0 | |||||||||
Debt issuance costs from 6.125% senior notes | 0 | (4 | ) | 0 | ||||||||
Payment of cash dividends to shareholders | (204 | ) | (177 | ) | (156 | ) | ||||||
Purchase/issuance of treasury shares | (61 | ) | (59 | ) | (55 | ) | ||||||
Decrease in notes payable | 0 | (183 | ) | 0 | ||||||||
Proceeds from stock options exercised | 11 | 3 | 6 | |||||||||
Contract holder funds deposited | 87 | 93 | 45 | |||||||||
Contract holder funds withdrawn | (54 | ) | (51 | ) | (35 | ) | ||||||
Net cash used in financing activities | (221 | ) | (7 | ) | (195 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (187 | ) | 215 | (21 | ) | |||||||
Cash and cash equivalents at beginning of year | 306 | 91 | 112 | |||||||||
Cash and cash equivalents at end of year | $ | 119 | $ | 306 | $ | 91 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Interest paid | $ | 51 | $ | 34 | $ | 34 | ||||||
Income taxes paid | 195 | 188 | 65 | |||||||||
Conversion of fixed maturity to equity security and fixed maturity investments | 42 | 23 | 51 |
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Years ended December 31, | ||||||||||||||||
(In millions except per share data) | 2005 | 2004 | 2003 | |||||||||||||
Net income | As reported | $ | 602 | $ | 584 | $ | 374 | |||||||||
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 13 | 12 | 12 | |||||||||||||
Pro forma | $ | 589 | $ | 572 | $ | 362 | ||||||||||
Net income per common share—basic | As reported | $ | 3.44 | $ | 3.30 | $ | 2.11 | |||||||||
Pro forma | 3.36 | 3.24 | 2.04 | |||||||||||||
Net income per common share—diluted | As reported | $ | 3.40 | $ | 3.28 | $ | 2.10 | |||||||||
Pro forma | 3.32 | 3.21 | 2.03 |
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(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Investment income summarized by investment category: | ||||||||||||
Interest on fixed maturities | $ | 280 | $ | 252 | $ | 235 | ||||||
Dividends on equity securities | 244 | 239 | 227 | |||||||||
Other investment income | 8 | 6 | 7 | |||||||||
Total | 532 | 497 | 469 | |||||||||
Less investment expenses | 6 | 5 | 4 | |||||||||
Total | $ | 526 | $ | 492 | $ | 465 | ||||||
Realized investment gains and losses summarized by investment category: | ||||||||||||
Fixed maturities: | ||||||||||||
Gross realized gains | $ | 36 | $ | 36 | $ | 35 | ||||||
Gross realized losses | (1 | ) | (20 | ) | (25 | ) | ||||||
Other-than-temporary impairments | (1 | ) | (5 | ) | (73 | ) | ||||||
Equity securities: | ||||||||||||
Gross realized gains | 40 | 101 | 37 | |||||||||
Gross realized losses | (6 | ) | (30 | ) | (17 | ) | ||||||
Other-than-temporary impairments | 0 | (1 | ) | (7 | ) | |||||||
Embedded derivatives | (7 | ) | 10 | 9 | ||||||||
Total | $ | 61 | $ | 91 | $ | (41 | ) | |||||
Change in unrealized investment gains and losses summarized by investment category: | ||||||||||||
Fixed maturities | $ | (198 | ) | $ | (6 | ) | $ | 211 | ||||
Equity securities | (575 | ) | (448 | ) | 488 | |||||||
Adjustment to deferred acquisition costs and life policy reserves | 6 | 3 | (13 | ) | ||||||||
Other | 18 | (6 | ) | (9 | ) | |||||||
Income taxes on above | 246 | 160 | (236 | ) | ||||||||
Total | $ | (503 | ) | $ | (297 | ) | $ | 441 | ||||
(In millions) | Amortized | Fair | % of Fair | |||||||||
cost | value | value | ||||||||||
Maturity dates occuring: | ||||||||||||
Less than one year | $ | 154 | $ | 156 | 2.8 | % | ||||||
One year through five years | 602 | 613 | 11.0 | |||||||||
After five years through ten years | 2,900 | 2,919 | 52.6 | |||||||||
After ten years through twenty years | 1,550 | 1,599 | 28.8 | |||||||||
Over twenty years | 256 | 264 | 4.8 | |||||||||
Total | $ | 5,462 | $ | 5,551 | 100.0 | % | ||||||
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(In millions) | Cost or | Gross unrealized | Fair | |||||||||||||
At December 31, | amortized cost | gains | losses | value | ||||||||||||
2005 | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
States, municipalities and political subdivisions | $ | 2,083 | $ | 48 | $ | 14 | $ | 2,117 | ||||||||
Convertibles and bonds with warrants attached | 269 | 17 | 8 | 278 | ||||||||||||
Public utilities | 139 | 6 | 1 | 144 | ||||||||||||
United States government and government agencies and authorities | 1,000 | 0 | 20 | 980 | ||||||||||||
All other corporate bonds and short-term investments | 1,971 | 88 | 27 | 2,032 | ||||||||||||
Total | $ | 5,462 | $ | 159 | $ | 70 | $ | 5,551 | ||||||||
Equity securities | $ | 2,128 | $ | 4,986 | $ | 8 | $ | 7,106 | ||||||||
2004 | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
States, municipalities and political subdivisions | $ | 1,622 | $ | 75 | $ | 3 | $ | 1,694 | ||||||||
Convertibles and bonds with warrants attached | 368 | 56 | 2 | 422 | ||||||||||||
Public utilities | 134 | 13 | 1 | 146 | ||||||||||||
United States government and government agencies and authorities | 1,076 | 4 | 4 | 1,076 | ||||||||||||
All other corporate bonds and short-term investments | 1,654 | 151 | 2 | 1,803 | ||||||||||||
Total | $ | 4,854 | $ | 299 | $ | 12 | $ | 5,141 | ||||||||
Equity securities | $ | 1,945 | $ | 5,558 | $ | 5 | $ | 7,498 | ||||||||
(In millions) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
At December 31, | value | losses | value | losses | value | losses | ||||||||||||||||||
2005: | ||||||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
States, municipalities and political subdivisions | $ | 754 | $ | 8 | $ | 173 | $ | 6 | $ | 927 | $ | 14 | ||||||||||||
Convertibles and bonds with warrants attached | 73 | 3 | 39 | 6 | 112 | 9 | ||||||||||||||||||
Public utilities | 44 | 1 | 6 | 0 | 50 | 1 | ||||||||||||||||||
United States government and government agencies and authorities | 608 | 8 | 354 | 11 | 962 | 19 | ||||||||||||||||||
All other corporate bonds and short-term investments | 387 | 11 | 284 | 16 | 671 | 27 | ||||||||||||||||||
Total | 1,866 | 31 | 856 | 39 | 2,722 | 70 | ||||||||||||||||||
Equity securities: | 59 | 2 | 47 | 6 | 106 | 8 | ||||||||||||||||||
Total | $ | 1,925 | $ | 33 | $ | 903 | $ | 45 | $ | 2,828 | $ | 78 | ||||||||||||
2004: | ||||||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
States, municipalities and political subdivisions | $ | 194 | $ | 2 | $ | 59 | $ | 1 | $ | 253 | $ | 3 | ||||||||||||
Convertibles and bonds with warrants attached | 26 | 1 | 27 | 1 | 53 | 2 | ||||||||||||||||||
Public utilities | 10 | 0 | 5 | 1 | 15 | 1 | ||||||||||||||||||
United States government and government agencies and authorities | 295 | 3 | 70 | 1 | 365 | 4 | ||||||||||||||||||
All other corporate bonds and short-term investments | 101 | 1 | 14 | 1 | 115 | 2 | ||||||||||||||||||
Total | 626 | 7 | 175 | 5 | 801 | 12 | ||||||||||||||||||
Equity securities: | 59 | 4 | 23 | 1 | 82 | 5 | ||||||||||||||||||
Total | $ | 685 | $ | 11 | $ | 198 | $ | 6 | $ | 883 | $ | 17 | ||||||||||||
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(In millions) | 2005 | 2004 | ||||||||||||||
Cost | Fair value | Cost | Fair value | |||||||||||||
Issuers: | ||||||||||||||||
Fifth Third Bancorp common stock | $ | 283 | $ | 2,745 | $ | 283 | $ | 3,443 | ||||||||
ALLTEL Corporation common stock and fixed maturity | 122 | 807 | 137 | 794 |
(In millions) | At December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Deferred policy acquisition costs asset beginning of year | $ | 400 | $ | 372 | $ | 343 | ||||||
Capitalized deferred policy acquisition costs | 683 | 657 | 615 | |||||||||
Amortized deferred policy acquisition costs | (664 | ) | (626 | ) | (573 | ) | ||||||
Amortized shadow deferred policy acquisition costs | 10 | (3 | ) | (13 | ) | |||||||
Deferred policy acquisition costs asset end of year | $ | 429 | $ | 400 | $ | 372 | ||||||
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Gross loss and loss expense reserves, January 1 | $ | 3,514 | $ | 3,386 | $ | 3,150 | ||||||
Less reinsurance receivable | 537 | 541 | 542 | |||||||||
Net loss and loss expense reserves, January 1 | 2,977 | 2,845 | 2,608 | |||||||||
Net incurred loss and loss expenses related to: | ||||||||||||
Current accident year | 1,972 | 1,949 | 1,877 | |||||||||
Prior accident years | (160 | ) | (196 | ) | (80 | ) | ||||||
Total incurred | 1,812 | 1,753 | 1,797 | |||||||||
Net paid loss and loss expenses related to: | ||||||||||||
Current accident year | 772 | 804 | 762 | |||||||||
Prior accident years | 906 | 817 | 799 | |||||||||
Total paid | 1,678 | 1,621 | 1,561 | |||||||||
Net loss and loss expense reserves, December 31 | 3,111 | 2,977 | 2,845 | |||||||||
Plus reinsurance receivable | 518 | 537 | 541 | |||||||||
Gross loss and loss expense reserves, December 31 | $ | 3,629 | $ | 3,514 | $ | 3,386 | ||||||
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(In millions) | At December 31, | |||||||
2005 | 2004 | |||||||
Ordinary/traditional life | $ | 419 | $ | 378 | ||||
Universal life | 376 | 358 | ||||||
Annuities | 523 | 435 | ||||||
Other | 25 | 23 | ||||||
Total | $ | 1,343 | $ | 1,194 | ||||
(In millions) | ||||||||||||||||
Interest | Year of | At December 31, | ||||||||||||||
rate | issue | 2005 | 2004 | |||||||||||||
6.125% | 2004 | Senior notes, due 2034 | $ | 375 | $ | 375 | ||||||||||
6.92% | 2005 | Senior debentures, due 2028 | 392 | 0 | ||||||||||||
6.90% | 1998 | Senior debentures, due 2028 | 28 | 420 | ||||||||||||
Total | $ | 795 | $ | 795 | ||||||||||||
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(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Unrealized holding investment gains and losses on securities and derivatives | $ | (694 | ) | $ | (369 | ) | $ | 649 | ||||
Reclassification adjustment: | ||||||||||||
Adjustment to deferred acquisition costs and life policy reserves | 6 | 3 | (13 | ) | ||||||||
Net realized (gain) loss on investments and derivatives | (61 | ) | (91 | ) | 41 | |||||||
Income taxes on above | 246 | 160 | (236 | ) | ||||||||
Total | $ | (503 | ) | $ | (297 | ) | $ | 441 | ||||
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Direct written premiums | $ | 3,231 | $ | 3,141 | $ | 2,949 | ||||||
Assumed written premiums | 23 | 33 | 44 | |||||||||
Ceded written premiums | (178 | ) | (177 | ) | (178 | ) | ||||||
Net written premiums | $ | 3,076 | $ | 2,997 | $ | 2,815 | ||||||
Direct earned premiums | $ | 3,209 | $ | 3,062 | $ | 2,808 | ||||||
Assumed earned premiums | 28 | 32 | 56 | |||||||||
Ceded earned premiums | (179 | ) | (175 | ) | (211 | ) | ||||||
Net earned premiums | $ | 3,058 | $ | 2,919 | $ | 2,653 | ||||||
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Direct incurred loss and loss expenses | $ | 1,898 | $ | 1,870 | $ | 1,856 | ||||||
Assumed incurred loss and loss expenses | 40 | 17 | 44 | |||||||||
Ceded incurred loss and loss expenses | (126 | ) | (134 | ) | (103 | ) | ||||||
Net incurred loss and loss expenses | $ | 1,812 | $ | 1,753 | $ | 1,797 | ||||||
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(In millions) | At December 31, | |||||||
2005 | 2004 | |||||||
Deferred tax liabilities: | ||||||||
Unrealized gains on investments and derivatives | $ | 1,788 | $ | 2,033 | ||||
Deferred acquisition costs | 135 | 129 | ||||||
Other | 32 | 38 | ||||||
Total | 1,955 | 2,200 | ||||||
Deferred tax assets: | ||||||||
Loss and loss expense reserves | 179 | 180 | ||||||
Unearned premiums | 108 | 107 | ||||||
Life policy reserves | 26 | 28 | ||||||
Capital loss carryforward | 0 | 19 | ||||||
Other | 20 | 32 | ||||||
Total | 333 | 366 | ||||||
Net deferred tax liability | $ | 1,622 | $ | 1,834 | ||||
Years ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (decrease) resulting from: | ||||||||||||
Tax-exempt municipal bonds | (3.2 | ) | (2.5 | ) | (3.8 | ) | ||||||
Dividend exclusion | (5.7 | ) | (5.7 | ) | (8.6 | ) | ||||||
Other | 0.7 | 0.2 | (0.6 | ) | ||||||||
Effective rate | 26.8 | % | 27.0 | % | 22.0 | % | ||||||
(Dollars in millions except share data) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Numerator: | ||||||||||||
Net income—basic and diluted | $ | 602 | $ | 584 | $ | 374 | ||||||
Denominator: | ||||||||||||
Weighted-average common shares outstanding | 175,062,669 | 176,476,722 | 177,119,594 | |||||||||
Effect of stock options | 2,053,457 | 1,900,126 | 1,172,654 | |||||||||
Adjusted weighted-average shares | 177,116,126 | 178,376,848 | 178,292,248 | |||||||||
Earnings per share: | ||||||||||||
Basic | $ | 3.44 | $ | 3.30 | $ | 2.11 | ||||||
Diluted | $ | 3.40 | $ | 3.28 | $ | 2.10 |
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(In millions) | Years ended December 31, | |||||||
2005 | 2004 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 199 | $ | 167 | ||||
Service cost | 13 | 11 | ||||||
Interest cost | 12 | 10 | ||||||
Actuarial loss | 18 | 14 | ||||||
Benefits paid | (7 | ) | (3 | ) | ||||
Benefit obligation at end of year | $ | 235 | $ | 199 | ||||
Accumulated benefit obligation | $ | 165 | $ | 142 | ||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 158 | $ | 138 | ||||
Actual return on plan assets | 12 | 15 | ||||||
Employer contributions | 10 | 8 | ||||||
Benefits paid | (7 | ) | (3 | ) | ||||
Fair value of plan assets at end of year | $ | 173 | $ | 158 | ||||
Funded status: | ||||||||
Funded status at end of year | $ | (62 | ) | $ | (41 | ) | ||
Unrecognized net actuarial gain | 52 | 34 | ||||||
Unrecognized net transitional asset | (1 | ) | (1 | ) | ||||
Unrecognized prior service cost | 7 | 7 | ||||||
Accrued pension cost | $ | (4 | ) | $ | (1 | ) | ||
Years ended December 31, | ||||||||
2005 | 2004 | |||||||
Discount rate | 5.50 | % | 5.75 | % | ||||
Rate of compensation increase | 5-7 | 5-7 |
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Service cost | $ | 13 | $ | 11 | $ | 9 | ||||||
Interest cost | 12 | 10 | 9 | |||||||||
Expected return on plan assets | (13 | ) | (12 | ) | (13 | ) | ||||||
Amortization of actuarial gain | 1 | 0 | (1 | ) | ||||||||
Net pension expense | $ | 13 | $ | 9 | $ | 4 | ||||||
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Years ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Discount rate | 5.75 | % | 6.00 | % | 6.50 | % | ||||||
Expected return on plan assets | 8.00 | 8.00 | 8.00 | |||||||||
Rate of compensation increase | 5-7 | 5-7 | 5-7 |
(In millions) | At December 31, | |||||||
2005 | 2004 | |||||||
Asset category: | ||||||||
Equity securities | 93 | % | 91 | % | ||||
Fixed maturities | 5 | 7 | ||||||
Cash and cash equivalents | 2 | 2 | ||||||
Total | 100 | % | 100 | % | ||||
(In millions) | Pension | |||
For the years ended December 31, | benefits | |||
2006 | $ | 5 | ||
2007 | 7 | |||
2008 | 10 | |||
2009 | 10 | |||
2010 | 9 | |||
Years 2011-2015 | 84 |
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Consolidated net income per GAAP | $ | 602 | $ | 584 | $ | 374 | ||||||
Adjustments: | ||||||||||||
Deferred policy acquisition costs | (19 | ) | (30 | ) | (42 | ) | ||||||
Deferred income taxes | 13 | 73 | (13 | ) | ||||||||
Income from derivatives | 19 | (10 | ) | (9 | ) | |||||||
Elimination of intercompany realized gain | (2 | ) | 88 | 0 | ||||||||
Parent company and undistributed net income of non insurance subsidiaries | (41 | ) | (84 | ) | (67 | ) | ||||||
Other | (19 | ) | 6 | 10 | ||||||||
Insurance subsidiaries net income per SAP | $ | 553 | $ | 627 | $ | 253 | ||||||
Balances by major business type: | ||||||||||||
Property casualty insurance | $ | 532 | $ | 599 | $ | 233 | ||||||
Life insurance | 21 | 28 | 20 | |||||||||
Total | $ | 553 | $ | 627 | $ | 253 | ||||||
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(In millions) | At December 31, | |||||||
2005 | 2004 | |||||||
Consolidated shareholders’ equity per GAAP | $ | 6,086 | $ | 6,249 | ||||
Adjustments: | ||||||||
Deferred policy acquisition costs | (429 | ) | (400 | ) | ||||
Investments at fair value | (102 | ) | (272 | ) | ||||
Deferred income taxes | 172 | 238 | ||||||
Parent company and undistributed net income of non-insurance subsidiaries | (1,439 | ) | (1,550 | ) | ||||
Reserves and non-admitted assets | (13 | ) | (11 | ) | ||||
Other | (81 | ) | (63 | ) | ||||
Insurance subsidiaries shareholders’ equity per SAP | $ | 4,194 | $ | 4,191 | ||||
Balances by major business type: | ||||||||
Property casualty insurance | $ | 3,743 | $ | 3,752 | ||||
Life insurance | 451 | 439 | ||||||
Total | $ | 4,194 | $ | 4,191 | ||||
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• | A need to dispose of otherwise desirable investment securities, possibly under undesirable conditions. Such dispositions could result in a lower return on investment because of market value fluctuations. Dispositions also could result in loss of investment income that we may be unable to replace in a timely fashion. If we were unable to manage the timing of the dispositions, we also might realize unnecessary capital gains, which would increase our annual tax payment. | ||
• | Limited opportunities to purchase equity securities that hold the potential for market value appreciation. Historically, the holding company has successfully invested in equity securities that provided both income and capital appreciation, contributing to long-term growth in book value. Constraining our ability to pursue this strategy and invest in equity securities could hamper book value growth over the long term. | ||
• | Maintenance of a greater portion of our portfolio of equity securities at our insurance subsidiary. As a result of the transfer of assets to ensure compliance with the 40 percent threshold, the holding company now is more reliant on that subsidiary for cash to fund parent-company obligations, including shareholder dividends and interest on long-term debt. |
(Shares in thousands) | �� | Weighted-average | ||||||
Years ended December 31, | Shares | exercise price | ||||||
2005 | ||||||||
Outstanding at beginning of year | 9,698 | $ | 32.05 | |||||
Granted/reinstated | 1,504 | 41.62 | ||||||
Exercised | (467 | ) | 24.18 | |||||
Forfeited/revoked | (146 | ) | 35.89 | |||||
Outstanding at end of year | 10,589 | 33.70 | ||||||
Options exercisable at end of year | 7,794 | $ | 31.69 | |||||
Weighted-average fair value of options granted during the year | 12.49 | |||||||
2004 | ||||||||
Outstanding at beginning of year | 8,791 | $ | 30.63 | |||||
Granted/reinstated | 1,439 | 38.81 | ||||||
Exercised | (397 | ) | 24.02 | |||||
Forfeited/revoked | (135 | ) | 34.29 | |||||
Outstanding at end of year | 9,698 | 32.05 | ||||||
Options exercisable at end of year | 7,050 | $ | 30.50 | |||||
Weighted-average fair value of options granted during the year | 11.18 | |||||||
2003 | ||||||||
Outstanding at beginning of year | 7,845 | $ | 29.96 | |||||
Granted/reinstated | 1,366 | 32.47 | ||||||
Exercised | (295 | ) | 20.47 | |||||
Forfeited/revoked | (125 | ) | 32.79 | |||||
Outstanding at end of year | 8,791 | 30.63 | ||||||
Options exercisable at end of year | 6,303 | $ | 29.57 | |||||
Weighted-average fair value of options granted during the year | 9.82 |
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Options outstanding | Options exercisable | |||||||||||||||||||||||
Weighted-average | ||||||||||||||||||||||||
remaining | Weighted-average | Weighted-average | ||||||||||||||||||||||
Range of exercise prices | Shares | contractual life | exercise price | Shares | exercise price | |||||||||||||||||||
$17.07 to 19.34 | 474 | 0.36 | yrs | $ | 18.50 | 474 | $ | 18.50 | ||||||||||||||||
$20.37 to 24.14 | 309 | 1.28 | yrs | 20.70 | 309 | 20.70 | ||||||||||||||||||
$26.63 to 29.92 | 1,066 | 4.00 | yrs | 27.07 | 1,066 | 27.07 | ||||||||||||||||||
$30.60 to 35.00 | 4,938 | 5.16 | yrs | 32.65 | 4,515 | 32.67 | ||||||||||||||||||
$36.17 to 38.87 | 2,065 | 6.28 | yrs | 38.46 | 1,162 | 38.20 | ||||||||||||||||||
$41.14 to 41.62 | 1,737 | 7.97 | yrs | 41.55 | 268 | 41.15 | ||||||||||||||||||
Total | 10,589 | 5.40 | yrs | 33.70 | 7,794 | 31.69 | ||||||||||||||||||
• | Commercial lines property casualty insurance | ||
• | Personal lines property casualty insurance | ||
• | Life insurance | ||
• | Investment operations |
• | All three insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include fees from separate account investment management fees. | ||
• | Our investment operations’ revenues are pretax net investment income plus realized investment gains and losses. | ||
• | Other revenues are primarily finance/lease income. |
• | Income before income taxes for the insurance segments is defined as underwriting income or loss. | ||
• | For commercial lines and personal lines insurance segments, we calculate underwriting income or loss by recording premiums earned minus loss and loss expenses and underwriting expenses incurred. | ||
• | For the life insurance segment, we determine underwriting income or loss by taking premiums earned and separate account investment management fees, minus contract holder benefits and expenses incurred, plus investment interest credited to contract holders. | ||
• | Income before income taxes for the investment operations segment is net investment income plus realized investment gains and losses for all fixed-maturity and equity security investments of the entire company, minus investment interest credited to contract holders of the life insurance segment. | ||
• | Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters. |
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(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Revenues: | ||||||||||||
Commercial lines insurance | ||||||||||||
Commercial multi-peril | $ | 796 | $ | 751 | $ | 673 | ||||||
Workers compensation | 328 | 313 | 293 | |||||||||
Commercial auto | 456 | 450 | 419 | |||||||||
Other liability | 442 | 402 | 342 | |||||||||
Other commercial lines | 232 | 210 | 181 | |||||||||
Total commercial lines insurance | 2,254 | 2,126 | 1,908 | |||||||||
Personal lines insurance | ||||||||||||
Personal auto | 433 | 451 | 428 | |||||||||
Homeowner | 285 | 259 | 239 | |||||||||
Other personal lines | 86 | 83 | 78 | |||||||||
Total personal lines insurance | 804 | 793 | 745 | |||||||||
Life insurance | 110 | 104 | 97 | |||||||||
Investment operations | 587 | 583 | 424 | |||||||||
Other | 12 | 8 | 7 | |||||||||
Total | $ | 3,767 | $ | 3,614 | $ | 3,181 | ||||||
Income (loss) before income taxes: | ||||||||||||
Insurance underwriting results: | ||||||||||||
Commercial lines insurance | $ | 285 | $ | 338 | $ | 167 | ||||||
Personal lines insurance | 45 | (40 | ) | (27 | ) | |||||||
Life insurance | 7 | 2 | (3 | ) | ||||||||
Investment operations | 536 | 537 | 381 | |||||||||
Other | (50 | ) | (37 | ) | (38 | ) | ||||||
Total | $ | 823 | $ | 800 | $ | 480 | ||||||
Identifiable assets: | ||||||||||||
Property casualty insurance | $ | 2,167 | $ | 2,317 | ||||||||
Life insurance | 845 | 837 | ||||||||||
Investment operations | 12,774 | 12,746 | ||||||||||
Other | 217 | 207 | ||||||||||
Total | $ | 16,003 | $ | 16,107 | ||||||||
(Dollars in millions except per share data) | Quarter | |||||||||||||||||||
1st | 2nd | 3rd | 4th | Full year | ||||||||||||||||
2005 | ||||||||||||||||||||
Revenues | $ | 916 | $ | 940 | $ | 944 | $ | 967 | $ | 3,767 | ||||||||||
Income before income taxes | 195 | 215 | 151 | 261 | 823 | |||||||||||||||
Net income | 144 | 158 | 117 | 183 | 602 | |||||||||||||||
Net income per common share—basic | 0.82 | 0.90 | 0.67 | 1.04 | 3.44 | |||||||||||||||
Net income per common share—diluted | 0.81 | 0.89 | 0.66 | 1.03 | 3.40 | |||||||||||||||
2004 | ||||||||||||||||||||
Revenues | $ | 870 | $ | 923 | $ | 879 | $ | 942 | $ | 3,614 | ||||||||||
Income before income taxes | 201 | 214 | 113 | 272 | 800 | |||||||||||||||
Net income | 146 | 155 | 90 | 192 | 584 | |||||||||||||||
Net income per common share—basic | 0.83 | 0.88 | 0.51 | 1.10 | 3.30 | |||||||||||||||
Net income per common share—diluted | 0.82 | 0.87 | 0.50 | 1.09 | 3.28 |
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• | that information required to be disclosed in the company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and | |
• | that such information is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. |
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2005 10-K Page 101
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Cincinnati Financial Corporation and Subsidiaries | ||||||||||||
Summary of Investments - Other than Investments in Related Parties | ||||||||||||
(In millions) | At December 31, 2005 | |||||||||||
Cost or amortized | Balance sheet | |||||||||||
Type of investment | cost | Fair value | amount | |||||||||
Fixed maturities: | ||||||||||||
United States government and government agencies and authorities: | ||||||||||||
The Cincinnati Insurance Company | $ | 623 | $ | 610 | $ | 610 | ||||||
The Cincinnati Casualty Company | 6 | 7 | 7 | |||||||||
The Cincinnati Indemnity Company | 2 | 2 | 2 | |||||||||
The Cincinnati Life Insurance Company | 369 | 362 | 362 | |||||||||
Total | 1,000 | 981 | 981 | |||||||||
States, municipalities and political subdivisions: | ||||||||||||
The Cincinnati Insurance Company | 1,927 | 1,958 | 1,958 | |||||||||
The Cincinnati Casualty Company | 117 | 118 | 118 | |||||||||
The Cincinnati Indemnity Company | 34 | 34 | 34 | |||||||||
The Cincinnati Life Insurance Company | 5 | 7 | 7 | |||||||||
Total | 2,083 | 2,117 | 2,117 | |||||||||
Public utilities: | ||||||||||||
The Cincinnati Insurance Company | 53 | 54 | 54 | |||||||||
The Cincinnati Casualty Company | 4 | 4 | 4 | |||||||||
The Cincinnati Indemnity Company | 1 | 1 | 1 | |||||||||
The Cincinnati Life Insurance Company | 80 | 83 | 83 | |||||||||
Cincinnati Financial Corporation | 1 | 1 | 1 | |||||||||
Total | 139 | 143 | 143 | |||||||||
Convertibles and bonds with warrants attached: | ||||||||||||
The Cincinnati Insurance Company | 221 | 229 | 229 | |||||||||
The Cincinnati Casualty Company | 0 | 0 | 0 | |||||||||
The Cincinnati Indemnity Company | 1 | 1 | 1 | |||||||||
The Cincinnati Life Insurance Company | 42 | 43 | 43 | |||||||||
CinFin Capital Management Company | 0 | 0 | 0 | |||||||||
Cincinnati Financial Corporation | 5 | 5 | 5 | |||||||||
Total | 269 | 278 | 278 | |||||||||
All other corporate bonds: | ||||||||||||
The Cincinnati Insurance Company | 933 | 958 | 958 | |||||||||
The Cincinnati Casualty Company | 30 | 31 | 31 | |||||||||
The Cincinnati Indemnity Company | 13 | 14 | 14 | |||||||||
The Cincinnati Life Insurance Company | 805 | 837 | 837 | |||||||||
Cincinnati Financial Corporation | 115 | 117 | 117 | |||||||||
Total | 1,896 | 1,957 | 1,957 | |||||||||
Total fixed maturities | $ | 5,387 | $ | 5,476 | $ | 5,476 | ||||||
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Cincinnati Financial Corporation and Subsidiaries | ||||||||||||
Summary of Investments - Other than Investments in Related Parties | ||||||||||||
(In millions) | At December 31, 2005 | |||||||||||
Cost or amortized | Balance sheet | |||||||||||
(In millions) Type of investment | cost | Fair value | amount | |||||||||
Equity securities: | ||||||||||||
Common stocks: | ||||||||||||
Public utilities: | ||||||||||||
The Cincinnati Insurance Company | $ | 120 | $ | 372 | $ | 372 | ||||||
The Cincinnati Casualty Company | 5 | 14 | 14 | |||||||||
The Cincinnati Life Insurance Company | 14 | 67 | 67 | |||||||||
CinFin Capital Management Company | 0 | 0 | ||||||||||
Cincinnati Financial Corporation | 82 | 559 | 559 | |||||||||
Total | 221 | 1,012 | 1,012 | |||||||||
Banks, trust and insurance companies: | ||||||||||||
The Cincinnati Insurance Company | 431 | 2,228 | 2,228 | |||||||||
The Cincinnati Casualty Company | 16 | 77 | 77 | |||||||||
The Cincinnati Indemnity Company | 0 | 0 | 0 | |||||||||
The Cincinnati Life Insurance Company | 56 | 162 | 162 | |||||||||
CinFin Capital Management Company | 1 | 1 | 1 | |||||||||
Cincinnati Financial Corporation | 433 | 1,603 | 1,603 | |||||||||
Total | 937 | 4,071 | 4,071 | |||||||||
Industrial, miscellaneous and all other: | ||||||||||||
The Cincinnati Insurance Company | 526 | 1,304 | 1,304 | |||||||||
The Cincinnati Casualty Company | 19 | 58 | 58 | |||||||||
The Cincinnati Indemnity Company | 6 | 15 | 15 | |||||||||
The Cincinnati Life Insurance Company | 90 | 198 | 198 | |||||||||
CinFin Capital Management Company | 3 | 3 | 3 | |||||||||
Cincinnati Financial Corporation | 159 | 275 | 275 | |||||||||
Total | 803 | 1,853 | 1,853 | |||||||||
Nonredeemable preferred stocks: | ||||||||||||
The Cincinnati Insurance Company | 128 | 132 | 132 | |||||||||
The Cincinnati Casualty Company | 0 | 0 | 0 | |||||||||
The Cincinnati Indemnity Company | 0 | 0 | 0 | |||||||||
The Cincinnati Life Insurance Company | 31 | 30 | 30 | |||||||||
CinFin Capital Management Company | 0 | 0 | 0 | |||||||||
Cincinnati Financial Corporation | 8 | 8 | 8 | |||||||||
Total | 167 | 170 | 170 | |||||||||
Total equity securities | $ | 2,128 | $ | 7,106 | $ | 7,106 | ||||||
Short-term investments: | ||||||||||||
The Cincinnati Insurance Company | $ | 75 | $ | 75 | $ | 75 | ||||||
Other invested assets: | ||||||||||||
Real estate: | XXXX | |||||||||||
The Cincinnati Life Insurance Company | $ | 3 | XXXX | $ | 3 | |||||||
Policy loans: | XXXX | |||||||||||
The Cincinnati Life Insurance Company | 29 | XXXX | 29 | |||||||||
Notes receivable: | XXXX | |||||||||||
Cincinnati Financial Corporation | 13 | XXXX | 13 | |||||||||
Total other invested assets | $ | 45 | XXXX | $ | 45 | |||||||
Total investments | $ | 7,635 | XXXX | $ | 12,702 | |||||||
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Condensed Balance Sheets
(In millions) | At December 31, | |||||||
2005 | 2004 | |||||||
ASSETS | ||||||||
Investments | ||||||||
Fixed maturities, at fair value | $ | 123 | $ | 129 | ||||
Equity securities, at fair value | 2,444 | 2,680 | ||||||
Short-term investments, at fair value | 0 | 21 | ||||||
Other invested assets | 13 | 7 | ||||||
Cash and cash equivalents | 7 | 28 | ||||||
Equity in net assets of subsidiaries | 4,685 | 4,732 | ||||||
Investment income receivable | 17 | 17 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: 2005—$61; 2004—$51) | 98 | 77 | ||||||
Prepaid federal income tax | 32 | 21 | ||||||
Other assets | 17 | 14 | ||||||
Due from subsidiaries | 144 | 63 | ||||||
Total assets | $ | 7,580 | $ | 7,789 | ||||
LIABILITIES | ||||||||
Dividends declared but unpaid | $ | 53 | $ | 46 | ||||
Deferred federal income tax | 635 | 688 | ||||||
6.125% senior notes due 2034 | 371 | 371 | ||||||
6.9% senior debentures due 2028 | 28 | 420 | ||||||
6.92% senior debentures due 2028 | 392 | 0 | ||||||
Other liabilities | 15 | 15 | ||||||
Total liabilities | 1,494 | 1,540 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock | 389 | 370 | ||||||
Paid-in capital | 969 | 618 | ||||||
Retained earnings | 2,088 | 2,057 | ||||||
Accumulated other comprehensive income—unrealized gains on investments and derivatives | 3,284 | 3,787 | ||||||
Treasury stock at cost | (644 | ) | (583 | ) | ||||
Total shareholders’ equity | 6,086 | 6,249 | ||||||
Total liabilities and shareholders’ equity | $ | 7,580 | $ | 7,789 | ||||
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 77. |
Table of Contents
Condensed Statements of Income
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
REVENUES | ||||||||||||
Dividends from subsidiaries | $ | 275 | $ | 175 | $ | 50 | ||||||
Investment income, net of expenses | 89 | 110 | 131 | |||||||||
Realized gains (losses) on investments | 2 | 18 | (23 | ) | ||||||||
Other revenue | 10 | 9 | 7 | |||||||||
Total revenues | 376 | 312 | 165 | |||||||||
EXPENSES | ||||||||||||
Interest expense | 52 | 36 | 33 | |||||||||
Depreciation expense | 3 | 3 | 4 | |||||||||
Other expenses | 16 | 14 | 15 | |||||||||
Total expenses | 71 | 53 | 52 | |||||||||
INCOME BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES | 305 | 259 | 113 | |||||||||
Income tax provision (benefit) | (7 | ) | 3 | (1 | ) | |||||||
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES | 312 | 256 | 114 | |||||||||
Increase in undistributed earnings of subsidiaries | 290 | 328 | 260 | |||||||||
NET INCOME | $ | 602 | $ | 584 | $ | 374 | ||||||
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 77. |
Table of Contents
Condensed Statements of Cash Flows
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 602 | $ | 584 | $ | 374 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 3 | 3 | 4 | |||||||||
Realized (gains) losses on investments | (2 | ) | (18 | ) | 23 | |||||||
Changes in: | ||||||||||||
Investment income receivable | 0 | 10 | 1 | |||||||||
Current federal income taxes | (12 | ) | (30 | ) | (2 | ) | ||||||
Deferred income taxes | 19 | 20 | (10 | ) | ||||||||
Other assets | (3 | ) | (2 | ) | (1 | ) | ||||||
Other liabilities | 0 | 6 | 2 | |||||||||
Undistributed earnings of subsidiaries | (290 | ) | (328 | ) | (260 | ) | ||||||
Net cash provided by operating activities | 317 | 245 | 131 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Sale of fixed-maturity investments | 8 | 193 | 50 | |||||||||
Maturity of fixed-maturity investments | 2 | 50 | 71 | |||||||||
Sale of equity security investments | 18 | 36 | 8 | |||||||||
Purchase of fixed-maturity investments | (9 | ) | (95 | ) | (47 | ) | ||||||
Purchase of equity security investments | (12 | ) | (196 | ) | (33 | ) | ||||||
Change in short-term investments, net | 21 | (21 | ) | 0 | ||||||||
Investment in buildings and equipment, net | (24 | ) | (1 | ) | (1 | ) | ||||||
Change in other invested assets, net | (8 | ) | (1 | ) | 2 | |||||||
Net cash (used in) provided by investing activities | (4 | ) | (35 | ) | 50 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from 6.125% senior notes | 0 | 371 | 0 | |||||||||
Debt issuance costs from 6.125% senior notes | 0 | (4 | ) | 0 | ||||||||
Decrease in notes payable | 0 | (152 | ) | 0 | ||||||||
Payment of cash dividends to shareholders | (204 | ) | (177 | ) | (156 | ) | ||||||
Purchase/issuance of treasury shares | (61 | ) | (59 | ) | (55 | ) | ||||||
Proceeds from stock options exercised | 11 | 3 | 6 | |||||||||
Net transfers to subsidiaries | (80 | ) | (170 | ) | 28 | |||||||
Net cash used in financing activities | (334 | ) | (188 | ) | (177 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (21 | ) | 22 | 4 | ||||||||
Cash and cash equivalents at beginning of year | 28 | 6 | 2 | |||||||||
Cash and cash equivalents at end of year | $ | 7 | $ | 28 | $ | 6 | ||||||
This condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes included in Part II, Item 8, Page 77. |
Table of Contents
Supplementary Insurance Information
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 226 | $ | 218 | $ | 207 | ||||||
Personal lines insurance | 85 | 88 | 80 | |||||||||
Total property casualty insurance | 311 | 306 | 287 | |||||||||
Life insurance | 118 | 94 | 85 | |||||||||
Total | $ | 429 | $ | 400 | $ | 372 | ||||||
Future policy benefits, losses, claims and expense losses: | ||||||||||||
Commercial lines insurance | $ | 3,173 | $ | 3,016 | $ | 2,933 | ||||||
Personal lines insurance | 456 | 498 | 453 | |||||||||
Total property casualty insurance | 3,629 | 3,514 | 3,386 | |||||||||
Life insurance | 1,362 | 1,213 | 1,040 | |||||||||
Total (1) | $ | 4,991 | $ | 4,727 | $ | 4,426 | ||||||
Unearned premiums: | ||||||||||||
Commercial lines insurance | $ | 1,150 | $ | 1,112 | $ | 1,037 | ||||||
Personal lines insurance | 407 | 425 | 407 | |||||||||
Total property casualty insurance | 1,557 | 1,537 | 1,444 | |||||||||
Life insurance | 2 | 2 | 2 | |||||||||
Total (1) | $ | 1,559 | $ | 1,539 | $ | 1,446 | ||||||
Other policy claims and benefits payable: | ||||||||||||
Commercial lines insurance | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance | 0 | 0 | 0 | |||||||||
Total property casualty insurance | 0 | 0 | 0 | |||||||||
Life insurance | 13 | 16 | 14 | |||||||||
Total (1) | $ | 13 | $ | 16 | $ | 14 | ||||||
Premium revenues: | ||||||||||||
Commercial lines insurance | $ | 2,254 | $ | 2,126 | $ | 1,908 | ||||||
Personal lines insurance | 804 | 793 | 745 | |||||||||
Total property casualty insurance | 3,058 | 2,919 | 2,653 | |||||||||
Life insurance | 106 | 101 | 95 | |||||||||
Total | $ | 3,164 | $ | 3,020 | $ | 2,748 | ||||||
Table of Contents
Supplementary Insurance Information
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Investment income, net of expenses: | ||||||||||||
Commercial lines insurance | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance | 0 | 0 | 0 | |||||||||
Total property casualty insurance (3) | 338 | 289 | 245 | |||||||||
Life insurance | 99 | 91 | 89 | |||||||||
Total | $ | 437 | $ | 380 | $ | 334 | ||||||
Benefits, claims losses and settlement expenses: | ||||||||||||
Commercial lines insurance | $ | 1,298 | $ | 1,154 | $ | 1,218 | ||||||
Personal lines insurance | 514 | 599 | 579 | |||||||||
Total property casualty insurance | 1,812 | 1,753 | 1,797 | |||||||||
Life insurance | 102 | 95 | 91 | |||||||||
Total | $ | 1,914 | $ | 1,848 | $ | 1,888 | ||||||
Amortization of deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 473 | $ | 448 | $ | 398 | ||||||
Personal lines insurance | 168 | 162 | 160 | |||||||||
Total property casualty insurance | 641 | 610 | 558 | |||||||||
Life insurance | 23 | 16 | 15 | |||||||||
Total (2) | $ | 664 | $ | 626 | $ | 573 | ||||||
Other operating expenses: | ||||||||||||
Commercial lines insurance | $ | 198 | $ | 186 | $ | 125 | ||||||
Personal lines insurance | 77 | 72 | 33 | |||||||||
Total property casualty insurance | 275 | 258 | 158 | |||||||||
Life insurance | 29 | 37 | 37 | |||||||||
Total (2) | $ | 304 | $ | 295 | $ | 195 | ||||||
Written premiums: | ||||||||||||
Commercial lines insurance | $ | 2,290 | $ | 2,186 | $ | 2,031 | ||||||
Personal lines insurance | 786 | 811 | 784 | |||||||||
Total property casualty insurance | 3,076 | 2,997 | 2,815 | |||||||||
Accident health insurance | 3 | 3 | 3 | |||||||||
Total | $ | 3,079 | $ | 3,000 | $ | 2,818 | ||||||
Notes to Schedule III: | ||
(1) | The sum of future policy benefits, losses, claims and expense losses, unearned premium and other policy claims and other policy claims and benefits payable is equal to the sum of loss and loss expense, life policy reserves and unearned premiums reported in the company’s consolidated balance sheets. | |
(2) | The sum of amortization of deferred policy acquisition costs and other operating expenses is equal to the sum of Commissions; Other operating expenses; Taxes, licenses and fees; Increase in deferred acquisition costs; and Other expenses shown in the consolidated statements of income, less other expenses not applicable to the above insurance segments. | |
(3) | This segment information is not regularly allocated to segments and reviewed by company management in making decisions about resources to be allocated to the segments or to assess their performance. |
Table of Contents
Reinsurance
(Dollars in millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Gross premiums: | ||||||||||||
Life insurance in force | $ | 51,488 | $ | 44,916 | $ | 38,486 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 2,386 | $ | 2,246 | $ | 2,046 | ||||||
Personal lines insurance | 823 | 816 | 762 | |||||||||
Total property casualty insurance | 3,209 | 3,062 | 2,808 | |||||||||
Life insurance | 150 | 138 | 125 | |||||||||
Total | $ | 3,359 | $ | 3,200 | $ | 2,933 | ||||||
Ceded to other companies: | ||||||||||||
Life insurance in force | $ | 30,705 | $ | 28,196 | $ | 23,296 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 157 | $ | 148 | $ | 193 | ||||||
Personal lines insurance | 22 | 27 | 18 | |||||||||
Total property casualty insurance | 179 | 175 | 211 | |||||||||
Life insurance | 44 | 37 | 30 | |||||||||
Total | $ | 223 | $ | 212 | $ | 241 | ||||||
Assumed from other companies: | ||||||||||||
Life insurance in force | $ | 5 | $ | 5 | $ | 6 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 25 | $ | 28 | $ | 55 | ||||||
Personal lines insurance | 3 | 4 | 1 | |||||||||
Total property casualty insurance | 28 | 32 | 56 | |||||||||
Life insurance | 0 | 0 | 0 | |||||||||
Total | $ | 28 | $ | 32 | $ | 56 | ||||||
Net premiums: | ||||||||||||
Life insurance in force | $ | 20,788 | $ | 16,725 | $ | 15,196 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 2,254 | $ | 2,126 | $ | 1,908 | ||||||
Personal lines insurance | 804 | 793 | 745 | |||||||||
Total property casualty insurance | 3,058 | 2,919 | 2,653 | |||||||||
Life insurance | 106 | 101 | 95 | |||||||||
Total | $ | 3,164 | $ | 3,020 | $ | 2,748 | ||||||
Percentage of amount assumed to net: | ||||||||||||
Life insurance in force | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | 1.1 | % | 1.3 | % | 2.9 | % | ||||||
Personal lines insurance | 0.4 | 0.5 | 0.2 | |||||||||
Total property casualty insurance | 0.9 | 1.1 | 2.1 | |||||||||
Life insurance | 0.0 | 0.1 | 0.1 | |||||||||
Total | 0.9 | 1.1 | 2.0 |
Table of Contents
Valuation and Qualifying Accounts
(In millions) | At December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Allowance for doubtful receivables: | ||||||||||||
Balance at beginning of period | $ | 0 | $ | 0 | $ | 1 | ||||||
Additions charged to costs and expenses | 1 | 0 | 0 | |||||||||
Other additions | 0 | 0 | 0 | |||||||||
Deductions | 0 | 0 | (1 | ) | ||||||||
Balance at end of period | $ | 1 | $ | 0 | $ | 0 | ||||||
Table of Contents
Supplementary Information Concerning Property Casualty Insurance Operations
(In millions) | Years ended December 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 226 | $ | 218 | $ | 207 | ||||||
Personal lines insurance | 85 | 88 | 80 | |||||||||
Total | $ | 311 | $ | 306 | $ | 287 | ||||||
Reserves for unpaid claims and claim adjustment expenses: | ||||||||||||
Commercial lines insurance | $ | 3,173 | $ | 3,016 | $ | 2,933 | ||||||
Personal lines insurance | 456 | 498 | 453 | |||||||||
Total | $ | 3,629 | $ | 3,514 | $ | 3,386 | ||||||
Reserve discount deducted | $ | 0 | $ | 0 | $ | 0 | ||||||
Unearned premiums: | ||||||||||||
Commercial lines insurance | $ | 1,150 | $ | 1,112 | $ | 1,037 | ||||||
Personal lines insurance | 407 | 425 | 407 | |||||||||
Total | $ | 1,557 | $ | 1,537 | $ | 1,444 | ||||||
Earned premiums: | ||||||||||||
Commercial lines insurance | $ | 2,254 | $ | 2,126 | $ | 1,908 | ||||||
Personal lines insurance | 804 | 793 | 745 | |||||||||
Total | $ | 3,058 | $ | 2,919 | $ | 2,653 | ||||||
Investment income: | ||||||||||||
Commercial lines insurance (1) | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance (1) | 0 | 0 | 0 | |||||||||
Total | $ | 338 | $ | 289 | $ | 245 | ||||||
Loss and loss expenses incurred related to current accident year: | ||||||||||||
Commercial lines insurance (1) | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance (1) | 0 | 0 | 0 | |||||||||
Total | $ | 1,972 | $ | 1,949 | $ | 1,877 | ||||||
Loss and loss expenses incurred related to prior accident years: | ||||||||||||
Commercial lines insurance (1) | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance (1) | 0 | 0 | 0 | |||||||||
Total | $ | (160 | ) | $ | (196 | ) | $ | (80 | ) | |||
Amortization of deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 473 | $ | 448 | $ | 398 | ||||||
Personal lines insurance | 168 | 162 | 160 | |||||||||
Total | $ | 641 | $ | 610 | $ | 558 | ||||||
Paid loss and loss expenses: | ||||||||||||
Commercial lines insurance | $ | 1,126 | $ | 1,062 | $ | 1,003 | ||||||
Personal lines insurance | 552 | 559 | 558 | |||||||||
Total | $ | 1,678 | $ | 1,621 | $ | 1,561 | ||||||
Written premiums: | ||||||||||||
Commercial lines insurance | $ | 2,290 | $ | 2,186 | $ | 2,031 | ||||||
Personal lines insurance | 786 | 811 | 784 | |||||||||
Total | $ | 3,076 | $ | 2,997 | $ | 2,815 | ||||||
Note to Schedule VI: | ||
(1) | This segment information is not regularly allocated to segments and not reviewed by company management in making decisions about resources to be allocated to the segments or to assess their performance. |
Table of Contents
/S/ Kenneth W. Stecher | ||||
By: | Kenneth W. Stecher | |||
Title: | Chief Financial Officer, Senior Vice President, Secretary and Treasurer | |||
Date: | March 10, 2006 |
Signature | Title | Date | ||
/S/ John J. Schiff, Jr. | Chairman, President, Chief Executive Officer and | March 6, 2006 | ||
John J. Schiff, Jr. | Director | |||
/S/ Kenneth W. Stecher | Chief Financial Officer, Senior Vice President, | March 10, 2006 | ||
Kenneth W. Stecher | Secretary and Treasurer (Principal Accounting Officer) | |||
/S/ William F. Bahl | Director | February 28, 2006 | ||
William F. Bahl | ||||
/S/ James E. Benoski | Vice Chairman, Chief Insurance Officer and | March 1, 2006 | ||
James E. Benoski | Director | |||
/S/ Michael Brown | Director | March 1, 2006 | ||
Michael Brown | ||||
/S/ Dirk J. Debbink | Director | March 2, 2006 | ||
Dirk J. Debbink | ||||
/S/ Kenneth C. Lichtendahl | Director | March 2, 2006 | ||
Kenneth C. Lichtendahl | ||||
/S/ W. Rodney McMullen | Director | March 1, 2006 | ||
W. Rodney McMullen | ||||
/S/ Gretchen W. Price | Director | March 2, 2006 | ||
Gretchen W. Price | ||||
/S/ Thomas R. Schiff | Director | March 2, 2006 | ||
Thomas R. Schiff | ||||
/S/ John M. Shepherd | Director | February 28, 2006 | ||
John M. Shepherd | ||||
/S/ Douglas S. Skidmore | Director | March 1, 2006 | ||
Douglas S. Skidmore | ||||
/S/ John F. Steele, Jr. | Director | March 1, 2006 | ||
John F. Steele, Jr. | ||||
/S/ Larry R. Webb | Director | March 2, 2006 | ||
Larry R. Webb | ||||
/S/ E. Anthony Woods | Director | March 2, 2006 | ||
E. Anthony Woods |
Table of Contents
Exhibit No. | Exhibit Description | |
3.1A | Amended Articles of Incorporation of Cincinnati Financial Corporation (1) | |
3.1B | Amendment to Article Fourth of Amended Articles of Incorporation of Cincinnati Financial Corporation (2) | |
3.2 | Regulations of Cincinnati Financial Corporation (3) | |
4.1 | Indenture with The Bank of New York Trust Company (4) | |
4.2 | Supplemental Indenture with The Bank of New York Trust Company (4) | |
4.3 | Second Supplemental Indenture with The Bank of New York Trust Company (5) | |
4.4 | Form of 6.125% Exchange Note Due 2034 (included in Exhibit 4.2) | |
4.5 | Form of 6.92% Debentures Due 2028 (included in Exhibit 4.3) | |
4.6 | Indenture with the First National Bank of Chicago (subsequently assigned to The Bank of New York Trust Company)(6) | |
4.7 | Form of 6.90% Debentures Due 2028 (included in Exhibit 4.6) | |
10.1 | Agreement with Messer Construction (7) | |
10.2 | Stock Repurchase Agreement dated November 12, 2004 with Robert C. Schiff, Trustee, Robert C. Schiff Revocable Trust (7) | |
10.3 | Purchase Agreement with J.P. Morgan Securities Inc. and UBS Securities LLC (8) | |
10.4 | 2003 Non-Employee Directors’ Stock Plan (9) | |
10.5 | Cincinnati Financial Corporation Stock Option Plan No. V (10) | |
10.6 | Cincinnati Financial Corporation Stock Option Plan No. VI (11) | |
10.7 | Cincinnati Financial Corporation Stock Option Plan No. VII (12) | |
10.8 | Standard Form of Nonqualified and Incentive Option Agreements for Stock Option Plan No. V (7) | |
10.9 | Standard Form of Nonqualified and Incentive Option Agreements for Stock Option Plan No. VI (7) | |
10.10 | Standard Form of Nonqualified and Incentive Option Agreements for Stock Option Plan No. VII (7) | |
10.11 | Cincinnati Financial Corporation Stock Option Plan No. VIII (9) | |
10.12 | Registration Rights Agreement with J.P. Morgan Securities Inc. and UBS Securities LLC (4) | |
10.13 | Form of Dealer Manager Agreement between Cincinnati Financial and UBS Securities LLC (13) | |
10.14 | Standard Form of Incentive Stock Option Agreement for Stock Option Plan VIII (14) | |
10.15 | Standard Form of Nonqualified Stock Option Agreement for Stock Option Plan VIII (15) | |
10.16 | Standard Form of Combined Incentive/Nonqualified Stock Option for Stock Option Plan VI (16) | |
10.17 | 364-Day Credit Agreement by and among Cincinnati Financial Corporation and CFC Investment Company, as Borrowers, and Fifth Third Bank, as Lender (17) | |
10.18 | Director and Named Executive Officer Compensation Summary (18) | |
10.19 | Executive Compensation Plan (19) | |
11 | Statement re: Computation of per share earnings for the years ended December 31, 2005, 2004 and 2003, contained in Note 11 to the Consolidated Financial Statements included in Part II, Item 8 of this report, Page 93 | |
14 | Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers (20) | |
21 | Cincinnati Financial Corporation Subsidiaries contained in Part I, Item 1 of this report, Page 1 | |
23 | Consent of Independent Registered Public Accounting Firm, Page 114 | |
31.1 | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Executive Officer, Page 115 | |
31.2 | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 – Chief Financial Officer, Page 116 | |
32 | Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, Page 117 |
1 | Incorporated by reference to the company’s 1999 Annual Report on Form 10-K dated March 23, 2000 (File No. 000-04604). | |
2 | Incorporated by reference to Exhibit 3(i) filed with the company’s Current Report on Form 8-K dated July 15, 2005. | |
3 | Incorporated by reference to the company’s Definitive Proxy Statement dated March 2, 1992, Exhibit 2 (File No. 000-04604). | |
4 | Incorporated by reference to the company’s Current Report on Form 8-K dated November 2, 2004, filed with respect to the issuance of the company’s 6.125% Senior Notes due November 1, 2034. | |
5 | Incorporated by reference to the company’s Current Report on Form 8-K dated May 9, 2005, filed with respect to the completion of the company’s exchange offer and rescission offer for its 6.90% senior debentures due 2028. | |
6 | Incorporated by reference to the company’s registration statement on Form S-3 effective May 22, 1998 (File No. 333-51677). | |
7 | Incorporated by reference to the company’s 2004 Annual Report on Form 10-K dated March 11, 2005. | |
8 | Incorporated by reference to the company’s Current Report on Form 8-K dated November 1, 2004, filed with respect to the issuance of the company’s 6.125% Senior Notes due November 1, 2034. | |
9 | Incorporated by reference to the company’s Definitive Proxy Statement dated March 21, 2005. | |
10 | Incorporated by reference to the company’s Definitive Proxy Statement dated March 2, 1996 (File No. 000-04604). | |
11 | Incorporated by reference to the company’s Definitive Proxy Statement dated March 1, 1999 (File No. 000-04604). | |
12 | Incorporated by reference to the company’s Definitive Proxy Statement dated March 8, 2002. | |
13 | Incorporated by reference to the company’s Registration Statement on Form S-4 filed March 21, 2005 (File No. 333-123471). | |
14 | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated July 15, 2005. | |
15 | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated July 15, 2005. | |
16 | Incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated July 15, 2005. | |
17 | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated May 31, 2005. | |
18 | Incorporated by reference to the company’s Definitive Proxy Statement to be filed no later than April 14, 2006. | |
19 | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated November 23, 2005. | |
20 | Incorporated by reference to the company’s Definitive Proxy Statement dated March 18, 2004. |