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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.) |
6200 S. Gilmore Road Fairfield, Ohio | 45014-5141 | |
(Address of principal executive offices) | (Zip Code) |
None
(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 |
Earned | Percent of | Reporting | Avg premium | |||||||||||||
(Dollars in millions) | premiums | total earned | agency locations | per location | ||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Ohio | $ | 695 | 22.0 | % | 220 | $ | 3.2 | |||||||||
Illinois | 291 | 9.2 | 116 | 2.5 | ||||||||||||
Indiana | 225 | 7.1 | 98 | 2.3 | ||||||||||||
Pennsylvania | 190 | 6.0 | 75 | 2.5 | ||||||||||||
Michigan | 160 | 5.1 | 92 | 1.7 | ||||||||||||
Georgia | 147 | 4.6 | 62 | 2.4 | ||||||||||||
North Carolina | 144 | 4.5 | 70 | 2.1 | ||||||||||||
Virginia | 142 | 4.5 | 55 | 2.6 | ||||||||||||
Wisconsin | 119 | 3.8 | 51 | 2.3 | ||||||||||||
Kentucky | 103 | 3.2 | 38 | 2.7 | ||||||||||||
Year ended December 31, 2005 | ||||||||||||||||
Ohio | $ | 687 | 22.5 | % | 224 | $ | 3.1 | |||||||||
Illinois | 281 | 9.2 | 112 | 2.5 | ||||||||||||
Indiana | 222 | 7.3 | 99 | 2.2 | ||||||||||||
Pennsylvania | 182 | 5.9 | 63 | 2.9 | ||||||||||||
Michigan | 164 | 5.4 | 88 | 1.9 | ||||||||||||
Georgia | 133 | 4.3 | 59 | 2.3 | ||||||||||||
Virginia | 126 | 4.1 | 53 | 2.4 | ||||||||||||
North Carolina | 121 | 3.9 | 68 | 1.8 | ||||||||||||
Wisconsin | 119 | 3.9 | 49 | 2.4 | ||||||||||||
Kentucky | 98 | 3.2 | 38 | 2.6 |
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• | allow our agencies and our field and headquarters associates to collaborate more efficiently, | |
• | provide our agencies the ability to access our systems and client data to process business transactions from their offices, | |
• | automate our internal processes so our associates can spend more time serving agents and policyholders, and | |
• | reduce duplication and make our processes more effective to reduce company and agency costs. |
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• | At our headquarters, we conduct agency management 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 seminars on a variety of topics, such as marketing seminars to promote cross-marketing of our products. Cincinnati associates also co-host client seminars with our agencies on a |
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variety of topics such as risk transfer techniques. These customized programs address liability issues specific to classes of business, such as contractors or dentists. | ||
• | 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. |
Parent Company | Property Casualty Insurance | Life Insurance | ||||||||||||||||||||||||||
Senior Debt | Subsidiaries Financial | Subsidiary Financial | ||||||||||||||||||||||||||
Rating | Strength Ratings | Strength Ratings | Outlook | |||||||||||||||||||||||||
Rating | Rating | |||||||||||||||||||||||||||
Tier | Tier | |||||||||||||||||||||||||||
A. M. Best Co. | aa- | A++ Superior | 1 of 16 | A+ Superior | 2 of 16 | Stable | ||||||||||||||||||||||
Fitch Ratings | A+ | AA Very Strong | 4 of 21 | AA Very Strong | 4 of 21 | Stable | ||||||||||||||||||||||
Moody’s Investors Services | A2 | Aa3 Excellent | 4 of 12 | - - | - | Stable | ||||||||||||||||||||||
Standard & Poor’s Ratings Services | A | AA- Very Strong | 4 of 21 | AA- Very Strong | 4 of 21 | Stable | ||||||||||||||||||||||
• | A.M. Best Co. — On April 28, 2006, A.M. Best affirmed its financial strength rating (FSR) of A++ (Superior) for our property casualty group, citing its superior risk-adjusted capitalization, very strong operating performance, network of independent agents and strong overall underwriting results despite challenges to achieve profitability in its personal lines business. Concurrently, A.M. Best downgraded its issuer credit ratings for our property casualty insurance companies to aa+ from aaa, reflecting the company’s investment and geographic risk concentrations at current rating levels. Additionally, A.M. Best affirmed the FSR of A+ (Superior) and the issuer credit rating of aa- of The Cincinnati Life Insurance Company. The outlook for all ratings is stable. | |
• | Fitch Ratings- On September 15, 2006, Fitch affirmed the AA insurer financial strength ratings of our three property casualty companies and The Cincinnati Life Insurance Company. Fitch said the ratings are based on the strong financial condition of our operating subsidiaries, excellent financial flexibility and successful total return investment strategy. The ratings consider the property casualty group’s investment concentration in a small number of common stocks and geographic concentration in Ohio and Midwestern states. | |
• | Moody’s Investors Service—In July 2006, Moody’s issued its Analysis, stating that overall, its Top 10 ratio metrics suggest that our property casualty group continues to be appropriately positioned within the Aa insurance financial strength rating category. Further, in its November 2006 comment after our third-quarter earnings announcements, Moody’s said the stable outlook is supported by our conservative financial and operational leverage profiles and by Moody’s belief that our operating model will enable us to continue to compete effectively in our core markets. Moody’s noted that challenges include the increasingly competitive environment in small and middle market commercial lines, lagging technology systems, a concentrated portfolio and payment of sizable common stock dividends that reduce our fixed charge coverage levels. | |
• | Standard & Poor’s Ratings Services- On July 25, 2006, Standard & Poor’s Ratings Services affirmed its AA- (Very Strong) financial strength and counterparty credit ratings on the property casualty group and The Cincinnati Life Insurance Company. At the same time, Standard & Poor’s revised its outlook on the company, our property casualty operating companies and Cincinnati Life to stable from negative. |
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Standard & Poor’s said the revised outlook reflected the improved results on our homeowner book of business, as well as its view of our ability to benefit from corrective actions we have effected over recent years. Standard & Poor’s said it believes our unique approach to agency relationships should drive profitable growth even in a softer pricing environment. |
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• | Commercial lines property casualty insurance | |
• | Personal lines property casualty insurance | |
• | Life insurance | |
• | Investments |
• | Commercial casualty — Commercial casualty insurance provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including liability coverage for injuries sustained from products sold as well as coverage for professional services, such as dentistry. Specialized casualty policies may include liability coverage for employment practices liability (EPLI), which protects businesses against claims by employees that their legal rights as employees of the company have been violated, and other acts or failures to act under specified circumstances as well as excess insurance and umbrella liability, including personal umbrella written as an endorsement to commercial umbrella coverages. The commercial casualty business line includes liability coverage written |
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• | Commercial property — Commercial property insurance provides coverage for loss or damage to buildings, inventory and equipment caused by fire, wind, hail, water, theft and vandalism as well as business interruption resulting from a covered loss. Commercial property also includes crime insurance, which provides coverage for losses due to embezzlement or misappropriation of funds by an employee, and inland marine insurance, which provides coverage for a variety of mobile equipment, such as builder’s risk, contractor’s equipment, cargo and electronic data processing equipment. Various property coverages can be written as stand-alone policies or can be added to a package policy. The commercial property business line includes property coverage written on both a non-discounted and discounted basis as part of commercial package policies. | |
• | Commercial auto — 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. | |
• | Workers’ compensation — Workers’ compensation coverage protects employers against specified benefits payable under state or federal law for workplace injuries to employees. We write workers’ compensation coverage in all of our active states except North Dakota, Ohio and West Virginia, where coverage is provided solely by the state instead of by private insurers. | |
• | Specialty packages — Specialty packages include coverages for property, liability and business interruption tailored to meet the needs of specific industry classes, such as artisan contractors, dentists, garage operators, financial institutions, metalworkers, printers, religious institutions, or smaller, main street businesses. Businessowner policies, which combine property, liability and business interruption coverages for small businesses, are included in specialty packages. | |
• | Surety and executive risk — This business line includes: |
o | Contract and commercial surety bonds, which guarantee a payment or reimbursement for financial losses resulting from dishonesty, failure to perform and other acts. | ||
o | Fidelity bonds, which cover losses that policyholders incur as a result of fraudulent acts by specified individuals or dishonest acts by employees. | ||
o | Director and officer liability insurance, which covers liability for alleged errors in judgment, breaches of duty and wrongful acts related to activities of for-profit or nonprofit organizations. Our director and officer liability policy can optionally include EPLI coverage. |
• | Machinery and equipment — Specialized machinery and equipment coverage can provide protection for loss or damage to boilers and machinery, including production and computer equipment, from sudden and accidental mechanical breakdown, steam explosion, or artificially generated electrical current. |
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Earned | Percent of | Reporting | Avg premium | |||||||||||||
(Dollars in millions) | premiums | total earned | agency locations | per location | ||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Ohio | $ | 410 | 17.1 | % | 219 | $ | 1.9 | |||||||||
Illinois | 238 | 9.9 | 116 | 2.1 | ||||||||||||
Pennsylvania | 172 | 7.2 | 75 | 2.3 | ||||||||||||
Indiana | 160 | 6.7 | 98 | 1.6 | ||||||||||||
North Carolina | 136 | 5.7 | 70 | 1.9 | ||||||||||||
Michigan | 124 | 5.2 | 92 | 1.3 | ||||||||||||
Virginia | 120 | 5.0 | 55 | 2.2 | ||||||||||||
Wisconsin | 96 | 4.0 | 51 | 1.9 | ||||||||||||
Georgia | 84 | 3.5 | 62 | 1.4 | ||||||||||||
Tennessee | 81 | 3.4 | 37 | 2.2 | ||||||||||||
Year ended December 31, 2005 | ||||||||||||||||
Ohio | $ | 389 | 17.2 | % | 224 | $ | 1.7 | |||||||||
Illinois | 224 | 10.0 | 112 | 2.0 | ||||||||||||
Pennsylvania | 164 | 7.3 | 63 | 2.6 | ||||||||||||
Indiana | 151 | 6.7 | 99 | 1.5 | ||||||||||||
Michigan | 122 | 5.4 | 88 | 1.4 | ||||||||||||
North Carolina | 115 | 5.1 | 68 | 1.7 | ||||||||||||
Virginia | 105 | 4.7 | 53 | 2.0 | ||||||||||||
Wisconsin | 92 | 4.1 | 49 | 1.9 | ||||||||||||
Iowa | 76 | 3.4 | 45 | 1.7 | ||||||||||||
Tennessee | 73 | 3.2 | 32 | 2.3 | ||||||||||||
• | Personal auto — This business line includes personal auto coverages that protect against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, |
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physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage. | ||
• | Homeowners — This business line includes homeowner coverages that 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. | |
• | Other personal lines — This includes the variety of other types of insurance products we offer to individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages. |
Earned | Percent of | Reporting | Avg premium | |||||||||||||
(Dollars in millions) | premiums | total earned | agency locations | per location | ||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Ohio | $ | 285 | 37.4 | % | 204 | $ | 1.4 | |||||||||
Indiana | 65 | 8.5 | 65 | 1.0 | ||||||||||||
Georgia | 63 | 8.3 | 52 | 1.2 | ||||||||||||
Illinois | 53 | 6.9 | 76 | 0.7 | ||||||||||||
Alabama | 39 | 5.1 | 25 | 1.6 | ||||||||||||
Kentucky | 38 | 5.0 | 33 | 1.2 | ||||||||||||
Michigan | 36 | 4.7 | 64 | 0.6 | ||||||||||||
Wisconsin | 23 | 3.1 | 28 | 0.8 | ||||||||||||
Florida | 22 | 2.9 | 10 | 2.2 | ||||||||||||
Virginia | 22 | 2.8 | 19 | 1.2 | ||||||||||||
Year ended December 31, 2005 | ||||||||||||||||
Ohio | $ | 299 | 37.2 | % | 211 | $ | 1.4 | |||||||||
Indiana | 71 | 8.8 | 65 | 1.1 | ||||||||||||
Georgia | 60 | 7.5 | 46 | 1.3 | ||||||||||||
Illinois | 57 | 7.0 | 78 | 0.7 | ||||||||||||
Michigan | 42 | 5.3 | 66 | 0.6 | ||||||||||||
Kentucky | 38 | 4.7 | 33 | 1.2 | ||||||||||||
Alabama | 36 | 4.4 | 24 | 1.5 | ||||||||||||
Wisconsin | 27 | 3.3 | 30 | 0.9 | ||||||||||||
Virginia | 21 | 2.6 | 23 | 0.9 | ||||||||||||
Florida | 20 | 2.5 | 10 | 2.0 | ||||||||||||
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• | Term insurance — policies under which a death benefit is payable only if the insured dies during a specific period of time or term. For policies without a return of premium provision, no benefit is payable if the insured survives to the end of the term. For policies with a return of premium provision, a benefit equal to the sum of all paid premiums 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. | |
• | 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 as a loan collateralized by the cash surrender value 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. | |
• | 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 as a loan collateralized by the cash surrender value to withdrawing policyholders. The proposed insured is evaluated using normal underwriting standards. |
• | 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. | |
• | 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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• | Because our property casualty operations are held in high regard, the property casualty agency’s management is predisposed to consider carefully our proposals to sell our life products. | |
• | All of our marketing efforts, property casualty and life, are directed by our field marketing department, which assures consistency of message. Our life field marketing representatives are available to meet face-to-face with the agency personnel responsible for life insurance production. | |
• | The resources of our life headquarters underwriters and other associates are available to the agents and field team to assist in the placement of business. We find fewer and fewer of our competitors provide direct, personal contact between the agent and the insurance carrier. |
• | We primarily offer products targeted at addressing the needs of businesses that require key person coverage and individuals who require mortality coverage. | |
• | Term insurance is our largest life insurance product line. We continue to introduce new term products with features our agents indicate are important, such as a return of premium rider. Reaction to our term portfolio was favorable in 2006 with approximately 25 percent of applications requesting the return-of-premium feature. | |
• | In 2007 we plan to enhance our term and other life insurance products, including an expanded worksite product portfolio, and investigate new survivor universal life and whole life products. The priority is expansion within the insurance agencies marketing our property casualty insurance products. |
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• | Fixed-maturity investments — Includes taxable and tax-exempt bonds and redeemable preferred stocks | |
• | Equity investments — Includes common and nonredeemable preferred stocks | |
• | Short-term investments — Primarily commercial paper |
At December 31, 2006 | At December 31, 2005 | |||||||||||||||
(In millions) | Book value | Fair value | Book value | Fair value | ||||||||||||
Taxable fixed maturities | $ | 3,357 | $ | 3,389 | $ | 3,304 | $ | 3,359 | ||||||||
Tax-exempt fixed maturities | 2,382 | 2,416 | 2,083 | 2,117 | ||||||||||||
Common equities | 2,400 | 7,564 | 1,961 | 6,936 | ||||||||||||
Preferred equities | 221 | 235 | 167 | 170 | ||||||||||||
Short-term investments | 95 | 95 | 75 | 75 | ||||||||||||
Total | $ | 8,455 | $ | 13,699 | $ | 7,590 | $ | 12,657 | ||||||||
• | $972 million in U.S. agency paper, which is rated AAA by both Moody’s and Standard & Poor’s. | |
• | $1.818 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-. | |
• | $321 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. |
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At December 31, 2006 | At December 31, 2005 | |||||||||||||||
Fair | Percent | Fair | Percent | |||||||||||||
(Dollars in millions) | value | to total | value | to total | ||||||||||||
Moody’s Ratings | ||||||||||||||||
Aaa, Aa, A | $ | 4,039 | 68.5 | % | $ | 3,651 | 65.8 | % | ||||||||
Baa | 1,086 | 18.4 | 1,094 | 19.7 | ||||||||||||
Ba | 266 | 4.5 | 324 | 5.8 | ||||||||||||
B | 122 | 2.1 | 110 | 2.0 | ||||||||||||
Caa | 28 | 0.5 | 13 | 0.2 | ||||||||||||
Ca | 0 | 0.0 | 0 | 0.0 | ||||||||||||
C | 0 | 0.0 | 0 | 0.0 | ||||||||||||
Non-rated | 359 | 6.0 | 359 | 6.5 | ||||||||||||
Total | $ | 5,900 | 100.0 | % | $ | 5,551 | 100.0 | % | ||||||||
Standard & Poor’s Ratings | ||||||||||||||||
AAA, AA, A | $ | 3,631 | 61.5 | % | $ | 3,233 | 58.3 | % | ||||||||
BBB | 1,044 | 17.7 | 1,112 | 20.0 | ||||||||||||
BB | 310 | 5.3 | 354 | 6.4 | ||||||||||||
B | 131 | 2.2 | 117 | 2.1 | ||||||||||||
CCC | 10 | 0.2 | 2 | 0.0 | ||||||||||||
CC | 0 | 0.0 | 0 | 0.0 | ||||||||||||
D | 0 | 0.0 | 0 | 0.0 | ||||||||||||
Non-rated | 774 | 13.1 | 733 | 13.2 | ||||||||||||
Total | $ | 5,900 | 100.0 | % | $ | 5,551 | 100.0 | % | ||||||||
Years ended December 31, | ||||
2006 | 2005 | |||
Weighted average yield-to-book value | 5.3 % | 5.4% | ||
Weighted average maturity | 8.7 yrs | 9.5 yrs | ||
Effective duration | 5.1 yrs | 5.2 yrs | ||
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As of and for the year ended December 31, 2006 | ||||||||||||||||||||
Earned | Earned | |||||||||||||||||||
Actual | Fair | Percent of | dividend | dividend to | ||||||||||||||||
(Dollars in millions) | cost | value | fair value | income | fair value | |||||||||||||||
Fifth Third Bancorp | $ | 283 | $ | 2,979 | 39.4 | % | $ | 115 | 3.9 | % | ||||||||||
Exxon Mobil Corporation | 133 | 687 | 9.1 | 11 | 1.7 | |||||||||||||||
The Procter & Gamble Company | 192 | 469 | 6.2 | 8 | 1.8 | |||||||||||||||
National City Corporation | 171 | 358 | 4.7 | 15 | 4.2 | |||||||||||||||
PNC Financial Services Group, Inc. | 62 | 348 | 4.6 | 10 | 2.9 | |||||||||||||||
AllianceBernstein Holding L.P. | 60 | 266 | 3.5 | 12 | 4.3 | |||||||||||||||
U.S. Bancorp | 150 | 251 | 3.3 | 9 | 3.7 | |||||||||||||||
Johnson & Johnson | 194 | 238 | 3.1 | 5 | 2.1 | |||||||||||||||
Wyeth | 62 | 225 | 3.0 | 4 | 2.0 | |||||||||||||||
Wells Fargo & Company | 96 | 193 | 2.5 | 6 | 3.0 | |||||||||||||||
Piedmont Natural Gas Company, Inc. | 64 | 151 | 2.0 | 5 | 3.6 | |||||||||||||||
Sky Financial Group, Inc. | 91 | 133 | 1.8 | 4 | 3.3 | |||||||||||||||
FirstMerit Corporation | 55 | 129 | 1.7 | 6 | 4.7 | |||||||||||||||
All other common stock holdings | 787 | 1,137 | 15.1 | 31 | 2.6 | |||||||||||||||
Total | $ | 2,400 | $ | 7,564 | 100.0 | % | $ | 241 | ||||||||||||
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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 group. 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. | |
The Ohio Department of Insurance must give prior approval before the payment of an extraordinary dividend by an insurance subsidiary to shareholders. You can find information about the dividends paid by our insurance subsidiary in 2006 in Item 8, Note 8 to the Consolidated Financial Statements, Page 93. | ||
• | 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. | |
• | 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. Our insurance subsidiaries received a net refund of $500,000 and $3 million from guaranty associations in 2006 and 2005. 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. | |
While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. | ||
• | 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 |
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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 $318 million (17.5 percent of 2005 subject premiums) in 2006, $328 million (15 percent of 2004 subject premiums) in 2005 and $199 million (10 percent of 2003 subject premiums) in 2004. For 2007, the deductible is an estimated $388 million (20.0 percent of 2006 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. | |
• | 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 17 other insurance groups, or 1.6 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. | |
• | Concerns that doing business with us is difficult or perceptions that our level of service is no longer a distinguishing characteristic in the marketplace. This could occur if agents or policyholders believe that we were no longer providing the prompt, reliable personal service that has long been a distinguishing characteristic of our insurance operations. | |
• | 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 | |
• | Speed 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 | |
• | Claims satisfaction and reputation |
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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 and Southeast and, to a certain extent, the mid-Atlantic. |
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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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(Source: Nasdaq Global Select Market) | 2006 | 2005 | |||||||||||||||||||||||||||||||
Quarter: | 1st | 2nd | 3rd | 4th | 1st | 2nd | 3rd | 4th | |||||||||||||||||||||||||
High | $ | 45.56 | $ | 47.01 | $ | 48.44 | $ | 49.07 | $ | 43.92 | $ | 43.12 | $ | 42.64 | $ | 45.95 | |||||||||||||||||
Low | 42.07 | 41.43 | 45.93 | 44.25 | 40.84 | 38.38 | 39.00 | 39.91 | |||||||||||||||||||||||||
Period-end close | 42.07 | 47.01 | 48.12 | 45.31 | 41.53 | 39.56 | 41.89 | 44.68 | |||||||||||||||||||||||||
Cash dividends declared | 0.335 | 0.335 | 0.335 | 0.335 | 0.290 | 0.305 | 0.305 | 0.305 | |||||||||||||||||||||||||
Total number of shares | Maximum number of | |||||||||||||||
Total number | Average | purchased as part of | shares that may yet be | |||||||||||||
of shares | price paid | publicly announced | purchased under the | |||||||||||||
Month | purchased(1) | per share | plans or programs(2) | plans or programs | ||||||||||||
January 1-31, 2006 | 0 | $ | 0.00 | 0 | 9,466,035 | |||||||||||
February 1-28, 2006 | 537,322 | 44.12 | 537,322 | 8,928,713 | ||||||||||||
March 1-31, 2006 | 1,316,978 | 43.97 | 1,312,678 | 7,616,035 | ||||||||||||
April 1-30, 2006 | 0 | 0.00 | 0 | 7,616,035 | ||||||||||||
May 1-31, 2006 | 0 | 0.00 | 0 | 7,616,035 | ||||||||||||
June 1-30, 2006 | 150,000 | 45.89 | 150,000 | 7,466,035 | ||||||||||||
July 1-31, 2006 | 0 | 0.00 | 0 | 7,466,035 | ||||||||||||
August 1-31, 2006 | 31,666 | 45.98 | 31,666 | 7,434,369 | ||||||||||||
September 1-30, 2006 | 113,598 | 46.23 | 110,900 | 7,323,469 | ||||||||||||
October 1-31, 2006 | 27,345 | 48.44 | 0 | 7,323,469 | ||||||||||||
November 1-30, 2006 | 484,021 | 45.15 | 458,221 | 6,865,248 | ||||||||||||
December 1-31, 2006 | 46,000 | 44.29 | 46,000 | 6,819,248 | ||||||||||||
Totals | 2,706,930 | 44.48 | 2,646,787 | |||||||||||||
(1) | Includes 34,343 acquired in 2006, primarily in satisfaction of withholding taxes due upon exercise of stock options. | |
(2) | The current repurchase program was announced on August 19, 2005, and became effective on September 1, 2005. It replaced a program which had been in effect since 1999. No repurchase program has expired during the period covered by the above table. |
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• | The Standard & Poor’s Composite 1500 Property & Casualty Insurance Index includes 28 companies: Ace Ltd., Allstate Corporation, AMBAC Financial Group, Berkley (W R) Corporation, Chubb Corporation, Cincinnati Financial Corporation, Fidelity National Financial Inc., First American Corporation, Hanover Insurance Group, Infinity Property Casualty Corporation, Landamerica Financial Group, MBIA Inc., Mercury General Corporation, Ohio Casualty Corporation, Old Republic International Corporation, Philadelphia Consolidated Holding Corporation, Proassurance Corporation, Progressive Corporation, RLI Corporation, Safeco Corporation, Safety Insurance Group, SCPIE Holdings Inc., Selective Insurance Group Inc., St. Paul Travelers Companies Inc., Stewart Information Services, United Fire & Casualty Company, XL Capital Ltd. and Zenith National Insurance Corp. | |
• | The Standard & Poor’s 500 Index includes a representative sample of 500 leading companies in a cross section of industries of the U.S. economy. Although this index focuses on the large capitalization segment of the market, it is widely viewed as a proxy for the total market. |
CFC vs. Market Indices
December 31 Totals
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Years ended December 31, | ||||||||||||||||
(In millions except per share data) | 2006 | 2005 | 2004 | 2003 | ||||||||||||
Consolidated Income Statement Data | ||||||||||||||||
Earned premiums | $ | 3,278 | $ | 3,164 | $ | 3,020 | $ | 2,748 | ||||||||
Investment income, net of expenses | 570 | 526 | 492 | 465 | ||||||||||||
Realized investment gains and losses | 684 | 61 | 91 | (41 | ) | |||||||||||
Total revenues | 4,550 | 3,767 | 3,614 | 3,181 | ||||||||||||
Net income | 930 | 602 | 584 | 374 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 5.36 | $ | 3.44 | $ | 3.30 | $ | 2.11 | ||||||||
Diluted | 5.30 | 3.40 | 3.28 | 2.10 | ||||||||||||
Cash dividends per common share: | ||||||||||||||||
Declared | 1.34 | 1.205 | 1.04 | 0.90 | ||||||||||||
Paid | 1.31 | 1.162 | 1.02 | 0.89 | ||||||||||||
Shares Outstanding | ||||||||||||||||
Weighted average, diluted | 175 | 177 | 178 | 178 | ||||||||||||
Consolidated Balance Sheet Data | ||||||||||||||||
Invested assets | $ | 13,759 | $ | 12,702 | $ | 12,677 | $ | 12,485 | ||||||||
Deferred policy acquisition costs | 453 | 429 | 400 | 372 | ||||||||||||
Total assets | 17,222 | 16,003 | 16,107 | 15,509 | ||||||||||||
Loss and loss expense reserves | 3,896 | 3,661 | 3,549 | 3,415 | ||||||||||||
Life policy reserves | 1,409 | 1,343 | 1,194 | 1,025 | ||||||||||||
Long-term debt | 791 | 791 | 791 | 420 | ||||||||||||
Shareholders’ equity | 6,808 | 6,086 | 6,249 | 6,204 | ||||||||||||
Book value per share | 39.38 | 34.88 | 35.60 | 35.10 | ||||||||||||
Property Casualty Insurance Operations | ||||||||||||||||
Earned premiums | $ | 3,164 | $ | 3,058 | $ | 2,919 | $ | 2,653 | ||||||||
Unearned premiums | 1,576 | 1,557 | 1,537 | 1,444 | ||||||||||||
Loss and loss expense reserves | 3,860 | 3,629 | 3,514 | 3,386 | ||||||||||||
Investment income, net of expenses | 367 | 338 | 289 | 245 | ||||||||||||
Loss ratio | 51.9 | % | 49.2 | % | 49.8 | % | 56.1 | % | ||||||||
Loss expense ratio | 11.6 | 10.0 | 10.3 | 11.6 | ||||||||||||
Expense ratio | 30.8 | 30.0 | 29.7 | 27.0 | ||||||||||||
Combined ratio | 94.3 | % | 89.2 | % | 89.8 | % | 94.7 | % | ||||||||
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2002 | 2001 | 2000 | 1999 | 1998 | 1997 | 1996 | ||||||||||||||||||
$ 2,478 | $ | 2,152 | $ | 1,907 | $ | 1,732 | $ | 1,613 | $ | 1,516 | $ | 1,423 | ||||||||||||
445 | 421 | 415 | 387 | 368 | 349 | 327 | ||||||||||||||||||
(94 | ) | (25 | ) | (2 | ) | 0 | 65 | 69 | 48 | |||||||||||||||
2,843 | 2,561 | 2,331 | 2,128 | 2,054 | 1,942 | 1,809 | ||||||||||||||||||
238 | 193 | 118 | 255 | 242 | 299 | 224 | ||||||||||||||||||
$ 1.33 | $ | 1.10 | $ | 0.67 | $ | 1.40 | $ | 1.31 | $ | 1.64 | $ | 1.21 | ||||||||||||
1.32 | 1.07 | 0.67 | 1.37 | 1.28 | 1.61 | 1.17 | ||||||||||||||||||
0.81 | 0.76 | 0.69 | 0.62 | 0.55 | 0.50 | 0.44 | ||||||||||||||||||
0.80 | 0.74 | 0.67 | 0.60 | 0.54 | 0.49 | 0.43 | ||||||||||||||||||
180 | 179 | 181 | 186 | 190 | 188 | 191 | ||||||||||||||||||
$11,226 | $ | 11,534 | $ | 11,276 | $ | 10,156 | $ | 10,296 | $ | 8,778 | $ | 6,340 | ||||||||||||
343 | 286 | 259 | 226 | 143 | 135 | 128 | ||||||||||||||||||
14,122 | 13,964 | 13,274 | 11,795 | 11,484 | 9,867 | 7,397 | ||||||||||||||||||
3,176 | 2,887 | 2,473 | 2,154 | 2,055 | 1,937 | 1,881 | ||||||||||||||||||
917 | 724 | 641 | 885 | 536 | 482 | 440 | ||||||||||||||||||
420 | 426 | 449 | 456 | 472 | 58 | 80 | ||||||||||||||||||
5,598 | 5,998 | 5,995 | 5,421 | 5,621 | 4,717 | 3,163 | ||||||||||||||||||
31.43 | 33.62 | 33.80 | 30.35 | 30.58 | 25.71 | 17.19 | ||||||||||||||||||
$ 2,391 | $ | 2,073 | $ | 1,828 | $ | 1,658 | $ | 1,543 | $ | 1,454 | $ | 1,367 | ||||||||||||
1,317 | 1,060 | 920 | 835 | 458 | 442 | 424 | ||||||||||||||||||
3,150 | 2,894 | 2,416 | 2,093 | 1,979 | 1,889 | 1,824 | ||||||||||||||||||
234 | 223 | 223 | 208 | 204 | 199 | 190 | ||||||||||||||||||
61.5 | % | 66.6 | % | 71.1 | % | 61.6 | % | 65.4 | % | 58.3 | % | 61.6 | % | |||||||||||
11.4 | 10.1 | 11.3 | 10.0 | 9.3 | 10.1 | 13.8 | ||||||||||||||||||
26.8 | 28.2 | 30.4 | 28.6 | 29.6 | 30.0 | 28.2 | ||||||||||||||||||
99.7 | % | 104.9 | % | 112.8 | % | 100.2 | % | 104.3 | % | 98.4 | % | 103.6 | % | |||||||||||
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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 | 40 | |||||
Consolidated Property Casualty Insurance Results of Operations | 41 | |||||
Commercial Lines Insurance Results of Operations | 42 | |||||
Personal Lines Insurance Results of Operations | 49 | |||||
Life Insurance Results of Operations | 54 | |||||
Investments Results of Operations | 56 | |||||
Liquidity and Capital Resources | 59 | |||||
Sources of Liquidity | 59 | |||||
Uses of Liquidity | 61 | |||||
Property Casualty Insurance Reserves | 63 | |||||
Life Insurance Reserves | 69 | |||||
2006 Reinsurance Programs | 69 | |||||
Safe Harbor Statement | 71 | |||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | ||||||
Introduction | 72 | |||||
Fixed-maturity Investments | 73 | |||||
Short-term Investments | 74 | |||||
Equity Investments | 74 | |||||
Unrealized Investment Gains and Losses | 75 |
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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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Twelve months ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions except share data) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Income statement data | ||||||||||||||||||||
Earned premiums | $ | 3,278 | $ | 3,164 | $ | 3,020 | 3.6 | 4.8 | ||||||||||||
Investment income, net of expenses | 570 | 526 | 492 | 8.4 | 6.9 | |||||||||||||||
Realized investment gains and losses (pretax) | 684 | 61 | 91 | 1,026.1 | (33.1 | ) | ||||||||||||||
Total revenues | 4,550 | 3,767 | 3,614 | 20.8 | 4.2 | |||||||||||||||
Net income | 930 | 602 | 584 | 54.5 | 3.1 | |||||||||||||||
Per share data (diluted) | ||||||||||||||||||||
Net income | $ | 5.30 | $ | 3.40 | $ | 3.28 | 55.9 | 3.7 | ||||||||||||
Cash dividends declared | 1.34 | 1.205 | 1.04 | 11.2 | 16.1 | |||||||||||||||
Weighted average shares outstanding | 175,451,341 | 177,116,126 | 178,376,848 | (0.9 | ) | (0.7 | ) | |||||||||||||
• | The consolidated property casualty underwriting profit declined in 2006 due to higher catastrophe losses, increased loss severity and less savings from favorable development of prior period losses as well as higher underwriting expenses. Underwriting profitability was healthy in 2005. The factors behind these changes are discussed in the Results of Operations. | |
• | Realized investment gains and losses are 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 investment gains in the past three years. |
o | 2006 — Raised net income by $434 million, or $2.48 per share. The sale of our Alltel common stock holding contributed $412 million, or $2.35 per share, of the gain. |
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o | 2005 — Raised net income by $40 million, or 23 cents per share. | ||
0 | 2004 — Raised net income by $60 million, or 34 cents per share. |
• | Weighted average shares outstanding may 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 2006, weighted average shares outstanding on a diluted basis had declined 2 million from year-end 2005. |
At December 31, | At December 31, | At December 31, | ||||||||||
(Dollars in millions except share data) | 2006 | 2005 | 2004 | |||||||||
Balance sheet data | ||||||||||||
Invested assets | $ | 13,759 | $ | 12,702 | $ | 12,677 | ||||||
Total assets | 17,222 | 16,003 | 16,107 | |||||||||
Short-term debt | 49 | 0 | 0 | |||||||||
Long-term debt | 791 | 791 | 791 | |||||||||
Shareholders’ equity | 6,808 | 6,086 | 6,249 | |||||||||
Book value per share | 39.38 | 34.88 | 35.60 | |||||||||
Debt-to-capital ratio | 11.0 | % | 11.5 | % | 11.2 | % | ||||||
Years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Performance measures | ||||||||||||
Comprehensive income | $ | 1,057 | $ | 99 | $ | 287 | ||||||
Return on equity | 14.4 | % | 9.8% | 9.4 | % | |||||||
Return on equity based on comprehensive income | 16.4 | 1.6 | 4.6 | |||||||||
Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Property casualty highlights | ||||||||||||||||||||
Written premiums | $ | 3,178 | $ | 3,076 | $ | 2,997 | 3.3 | 2.6 | ||||||||||||
Earned premiums | 3,164 | 3,058 | 2,919 | 3.5 | 4.8 | |||||||||||||||
Underwriting profit | 181 | 330 | 298 | (45.2 | ) | 10.8 | ||||||||||||||
GAAP combined ratio | 94.3 | % | 89.2% | 89.8 | % | |||||||||||||||
Statutory combined ratio | 93.9 | 89.0 | 89.4 | |||||||||||||||||
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• | Maintaining our strong relationships with our established agencies, writing a significant portion of each agency’s business and attracting new agencies – In 2007, we expect to continue to rank No. 1 or No. 2 by premium volume in approximately 75 percent or more of the locations that have marketed our products for more than five years. We expect to improve service to our agencies by subdividing or creating four field territories in 2007. We also expect to appoint another 50 agencies. We are working on plans to enter New Mexico and eastern Washington within the next year and will soon begin the process by preparing policy forms and rates to submit to the departments of insurance in those states. | |
In 2007, 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 2007 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 growth in our consolidated property casualty written premiums may be in the low single digits in 2007 compared with the 3.3 percent increase in 2006. | |
Legislative and regulatory developments in early 2007 added to the uncertainty that already existed for the insurance industry in Florida. In February 2007, we asked our agents that they not send us new business submissions. This request, which extends to all lines of insurance and other business areas, may result in lower 2007 premium growth. It does not affect policies in force, which we will continue to support and address at renewal, in line with our current underwriting guidelines and in compliance with Florida rules and regulations. We continue to assess the changing insurance environment in Florida and hope to resume writing policies in the state as the market stabilizes. | ||
Overall industry premium growth is projected to be 0.1 percent in 2007, which includes an estimated 18.6 percent reinsurance sector growth rate. Net written premiums for the commercial lines industry are expected to be flat in 2007 while the personal lines sector is expected to grow 1.2 percent. | ||
Our combined ratio estimate for 2007 is 97 percent to 99 percent on either a GAAP or statutory basis compared with 94.3 percent on a GAAP basis in 2006. The year-over-year increase reflects four assumptions: |
o | Catastrophe losses should contribute approximately 5.5 percentage points to the combined ratio. We think this is an appropriate estimate based on our reinsurance treaty retention and catastrophe loss experience in recent years. | ||
o | Savings from favorable reserve development in line with our historical norms. Savings from favorable development on prior period reserves averaged about 2 percentage points between 2000 and 2003. Between 2004 and 2006, the average rose to an unusually high level of approximately 5 percentage points. | ||
o | Loss ratio deterioration as pricing becomes even more competitive and loss severity increases. |
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o | Higher other underwriting expenses as we continue to invest in people and technology. We believe the consolidated property casualty 2007 underwriting expense ratio could be approximately 31.5 percent. |
• | Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation – In 2007, we are estimating pretax investment income growth to 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 current portfolio attributes. | |
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. In 2006, our compound annual equity portfolio return was 16.1 percent, compared with a compound annual total return of 15.8 percent for the Index. Over the five years ended December 31, 2006, our compound annual equity portfolio return was 2.0 percent compared with a compound annual total return of 6.2 percent for the Index. Our equity portfolio underperformed the market for the five-year period because of the decline in the market value of our holdings of Fifth Third common stock between 2002 and 2005. | ||
• | 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. 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 exceed 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 2007, the board increased the indicated annual dividend rate 6.0 percent, marking the 47th 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 49.4 percent was below the 71.4 percent return for 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 2007. As a result, we believe our debt-to-capital ratio will remain approximately 11 percent. | |
In December 2006, we finalized our property casualty reinsurance program for 2007, updating it to maintain the balance between the cost of the program and the level of risk we retain. Under the new program, our 2007 reinsurance premiums are expected to be $22 million higher than in 2006. | ||
We provide more detail on our reinsurance programs in 2007 Reinsurance Programs, Page 69. |
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• | 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 and to the use of a claims mediation process that promotes earlier liability settlement resolution | |
• | Reporting pattern changes attributable to case reserving practices, particularly with respect to workers’ compensation claims | |
• | Absence of cost-effective methods for accurately assessing asbestos and environmental claim liabilities (see Property Casualty Insurance Reserves, Asbestos and Environmental Reserves, Page 66, for discussion of related reserve levels and trends) |
• | The Case Incurred Development Method | |
• | The Paid Development Method | |
• | The Bornhuetter-Ferguson Method | |
• | Probability Trend Family Models |
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• | 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) | Years ended December 31, | 2006-2005 | 2005-2004 | |||||||||||||||||
2006 | 2005 | 2004 | Change % | Change % | ||||||||||||||||
Written premiums | $ | 3,178 | $ | 3,076 | $ | 2,997 | 3.3 | 2.6 | ||||||||||||
Earned premiums | $ | 3,164 | $ | 3,058 | $ | 2,919 | 3.5 | 4.8 | ||||||||||||
Loss and loss expenses excluding catastrophes | 1,833 | 1,685 | 1,605 | 8.8 | 5.0 | |||||||||||||||
Catastrophe loss and loss expenses | 175 | 127 | 148 | 37.9 | (14.8 | ) | ||||||||||||||
Commission expenses | 596 | 592 | 583 | 0.7 | 1.6 | |||||||||||||||
Underwriting expenses | 363 | 319 | 274 | 13.9 | 16.3 | |||||||||||||||
Policyholder dividends | 16 | 5 | 11 | 208.1 | (52.3 | ) | ||||||||||||||
Underwriting profit | $ | 181 | $ | 330 | $ | 298 | (45.2 | ) | 10.8 | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 58.0 | % | 55.1 | % | 55.0 | % | ||||||||||||||
Catastrophe loss and loss expenses | 5.5 | 4.1 | 5.1 | |||||||||||||||||
Loss and loss expenses | 63.5 | 59.2 | 60.1 | |||||||||||||||||
Commission expenses | 18.8 | 19.4 | 20.0 | |||||||||||||||||
Underwriting expenses | 11.5 | 10.4 | 9.4 | |||||||||||||||||
Policyholder dividends | 0.5 | 0.2 | 0.3 | |||||||||||||||||
Combined ratio | 94.3 | % | 89.2 | % | 89.8 | % | ||||||||||||||
• | New business written directly by agencies – New business written directly by agencies was $357 million, $314 million and $330 million in 2006, 2005 and 2004, respectively. New business levels reflected market conditions for commercial and personal lines as well as the advantages of our agency relationship strategy. | |
• | Savings from favorable development on prior period reserves reduced the combined ratio by 3.7 percentage points in 2006 compared with 5.2 and 6.7 percentage points in 2005 and 2004. The unusually high level of savings in 2004 partially reflected the release of uninsured motorist/underinsured motorist (UM/UIM) reserves following an Ohio Supreme Court decision in late 2003 to limit its 1999 Scott-Pontzer vs. Liberty Mutual decision. | |
• | The adoption of stock option expensing increased the 2006 combined ratio by 0.5 percentage points. | |
• | Catastrophe losses contributed 5.5, 4.1 and 5.1 percentage points to the combined ratio in 2006, 2005 and 2004, respectively. Catastrophe losses in 2006 included wind and hail losses in March, April and October, with incurred losses of $37 million, $37 million and $38 million, respectively. Of the almost 13,000 catastrophe claims reported through January 31, 2007, for all catastrophes in 2006, more than 95 percent are already closed. Our field claims representatives’ prompt responses and personal approach reflect positively on our agents, supporting their marketing efforts. The following table shows catastrophe losses incurred, net of reinsurance, for the past three years as well as the effect of loss development on prior period catastrophe events. | |
The Cincinnati Insurance Companies do not appoint agencies to actively market property casualty insurance in Louisiana, Mississippi or Texas. Our 2005 Hurricane Katrina and Rita losses included losses associated with commercial accounts written by agents in other states to cover locations and vehicles in multiple states, including Louisiana, Mississippi and Texas. | ||
Hurricane Katrina losses also included $18 million of assumed losses. The Cincinnati Insurance Company participates in three assumed reinsurance treaties with two reinsurers that spread the risk of very high catastrophe losses among many insurers. The assumed losses from Hurricane Katrina included $16 million under a treaty with the Munich Re Group to assume 2 percent of property losses between $400 million and $1.2 billion from a single event. Munich Re has reserved its Hurricane Katrina losses above $1.2 billion. In 2006, we reduced our participation in the Munich Re assumed reinsurance treaty to 1 percent as discussed in Item 1A, Risk Factors, Page 20. |
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(In millions, net of reinsurance) | Years ended December 31, | |||||||||||||||
Commercial | Personal | |||||||||||||||
Dates | Cause of loss | Region | lines | lines | Total | |||||||||||
2006 | ||||||||||||||||
Mar. 11-13 | Wind, hail | Midwest, Mid-Atlantic | $ | 29 | $ | 8 | $ | 37 | ||||||||
Apr. 2-3 | Wind, hail | Midwest | 12 | 5 | 17 | |||||||||||
Apr. 6-8 | Wind, hail | South | 13 | 24 | 37 | |||||||||||
Apr. 13-15 | Wind, hail | South | 4 | 6 | 10 | |||||||||||
Jun. 18-22 | Wind, hail, flood | South | 3 | 2 | 5 | |||||||||||
Jul. 19-21 | Wind, hail, flood | South | 4 | 1 | 5 | |||||||||||
Aug. 23-25 | Wind, hail, flood | Midwest | 5 | 2 | 7 | |||||||||||
Oct. 2-4 | Wind, hail, flood | Midwest | 7 | 31 | 38 | |||||||||||
Nov. 30 — Dec. 3 | Wind, hail, ice, snow | Midwest, South | 4 | 4 | 8 | |||||||||||
Other 2006 catastrophes | 7 | 3 | 10 | |||||||||||||
Development on 2005 and prior catastrophes | 1 | 0 | 1 | |||||||||||||
Calendar year incurred total | $ | 89 | $ | 86 | $ | 175 | ||||||||||
2005 | ||||||||||||||||
Jan. 4-6 | Wind, ice, snow | Midwest, Mid-Atlantic | $ | 0 | $ | 1 | $ | 1 | ||||||||
May 6-12 | Wind, hail | Midwest | 4 | 8 | 12 | |||||||||||
Jul. 9-11 | Hurricane Dennis | South | 5 | 2 | 7 | |||||||||||
Aug. 25-26 | Hurricane Katrina | South | 36 | 11 | 47 | |||||||||||
Sep. 20-24 | Hurricane Rita | South | 3 | 0 | 3 | |||||||||||
Oct. 24 | Hurricane Wilma | South | 13 | 12 | 25 | |||||||||||
Nov. 6 | Wind, hail | Midwest | 2 | 9 | 11 | |||||||||||
Nov. 15-16 | Wind | Midwest, South | 2 | 10 | 12 | |||||||||||
Other 2005 catastrophes | 0 | 0 | 0 | |||||||||||||
Development on 2004 and prior catastrophes | 11 | (2 | ) | 9 | ||||||||||||
Calendar year incurred total | $ | 76 | $ | 51 | $ | 127 | ||||||||||
2004 | ||||||||||||||||
May 17-19 | Wind, hail | Midwest, Mid-Atlantic | $ | 1 | $ | 9 | $ | 10 | ||||||||
May 21-27 | Wind, hail | Midwest, Mid-Atlantic, South | 11 | 20 | 31 | |||||||||||
Jul. 12-14 | Wind, hail | Midwest, Mid-Atlantic, South | 7 | 5 | 12 | |||||||||||
Aug. 13-14 | Hurricane Charley | South | 16 | 10 | 26 | |||||||||||
Sep. 3-4 | Hurricane Frances | South | 4 | 7 | 11 | |||||||||||
Sep. 15-21 | Hurricane Jeanne | Mid-Atlantic, South | 4 | 2 | 6 | |||||||||||
Sep. 25-29 | Hurricane Ivan | Midwest, Mid-Atlantic, South | 21 | 18 | 39 | |||||||||||
Dec. 22-25 | Wind, ice, snow | Midwest, South | 5 | 8 | 13 | |||||||||||
Other 2004 catastrophes | 3 | 2 | 5 | |||||||||||||
Development on 2003 and prior catastrophes | (1 | ) | (4 | ) | (5 | ) | ||||||||||
Calendar year incurred total | $ | 71 | $ | 77 | $ | 148 | ||||||||||
• | Premiums – Although competition in our commercial markets continued to increase, our written premium growth rate increased in 2006, reflecting our agency relationships, strong new business growth, healthy policy retention rates, more accurate risk classification, insurance-to-value initiatives, higher reinsurance treaty retentions and exposure growth due to the healthy economy. These more than offset our deliberate decisions not to write or renew certain business and the loss of some accounts due to competition. In the more competitive pricing environment we have been careful to maintain our underwriting discipline for both renewal and new business. We believe that our written premium growth rate continues to exceed the average for the overall commercial lines industry, which was estimated at 1.0 percent in 2006 after declining 0.4 percent in 2005. Earned premium growth remained relatively steady over the period. | |
• | Combined ratio – Our commercial lines combined ratio rose to 91.3 percent in 2006 largely because of softer pricing, increasing loss severity, less savings from favorable development on prior period reserves and the adoption of stock option expensing. The combined ratio was very strong in 2005 and 2004. We continue to focus on sound underwriting fundamentals and seek to obtain adequate premiums per policy. A single large loss in 2005 increased the ratio in that year by 1.0 percentage point. We discuss large |
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losses and other factors affecting the combined ratio beginning on Page 44. We discuss the savings from favorable loss reserve development by commercial lines of business on Page 47. | ||
Our commercial lines statutory combined ratio was 90.8 percent in 2006 compared with 87.1 percent in 2005 and 83.7 percent in 2004. By comparison, the estimated industry commercial lines combined ratio was 94.3 percent in 2006, 99.7 percent in 2005 and 102.5 percent in 2004. We believe our results are trending differently than the overall industry because the industry experienced unusually high catastrophe losses in 2004 and 2005 and unusually low catastrophe losses in 2006. |
• | Retention of the terms and conditions that policyholders originally selected, backed by our superior claims service and our A++ rating from A.M. Best Co. | |
• | Stable rates on some of the shorter-tail coverages within the policies. |
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Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Written premiums | $ | 2,442 | $ | 2,290 | $ | 2,186 | 6.7 | 4.7 | ||||||||||||
Earned premiums | $ | 2,402 | $ | 2,254 | $ | 2,126 | 6.6 | 6.0 | ||||||||||||
Loss and loss expenses excluding catastrophes | 1,377 | 1,222 | 1,083 | 12.7 | 12.9 | |||||||||||||||
Catastrophe loss and loss expenses | 89 | 76 | 71 | 16.6 | 6.0 | |||||||||||||||
Commission expenses | 444 | 438 | 423 | 1.4 | 3.6 | |||||||||||||||
Underwriting expenses | 268 | 228 | 200 | 17.8 | 13.5 | |||||||||||||||
Policyholder dividends | 16 | 5 | 11 | 208.1 | (52.3 | ) | ||||||||||||||
Underwriting profit | $ | 208 | $ | 285 | $ | 338 | (27.0 | ) | (15.6 | ) | ||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 57.3 | % | 54.2 | % | 50.9 | % | ||||||||||||||
Catastrophe loss and loss expenses | 3.7 | 3.4 | 3.4 | |||||||||||||||||
Loss and loss expenses | 61.0 | 57.6 | 54.3 | |||||||||||||||||
Commission expenses | 18.5 | 19.5 | 19.9 | |||||||||||||||||
Underwriting expenses | 11.1 | 10.1 | 9.4 | |||||||||||||||||
Policyholder dividends | 0.7 | 0.2 | 0.5 | |||||||||||||||||
Combined ratio | 91.3 | % | 87.4 | % | 84.1 | % | ||||||||||||||
2006 10-K Page 44
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Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Losses $1 million or more | $ | 180 | $ | 124 | $ | 80 | 45.3 | 54.3 | ||||||||||||
Losses $250 thousand to $1 million | 139 | 105 | 103 | 32.3 | 1.2 | |||||||||||||||
Development and case reserve increases of $250 thousand or more | 193 | 149 | 133 | 29.5 | 12.7 | |||||||||||||||
Other losses excluding catastrophes | 561 | 596 | 536 | (5.7 | ) | 11.1 | ||||||||||||||
Total losses incurred excluding catastrophe losses | 1,073 | 974 | 852 | 10.3 | 14.2 | |||||||||||||||
Catastrophe losses | 89 | 76 | 71 | 16.6 | 6.0 | |||||||||||||||
Total losses incurred | $ | 1,162 | $ | 1,050 | $ | 923 | 10.7 | 13.6 | ||||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Losses $1 million or more | 7.5 | % | 5.5 | % | 3.8 | % | ||||||||||||||
Losses $250 thousand to $1 million | 5.8 | 4.7 | 4.9 | |||||||||||||||||
Development and case reserve increases of $250 thousand or more | 8.0 | 6.6 | 6.2 | |||||||||||||||||
Other losses excluding catastrophes | 23.4 | 26.4 | 25.1 | |||||||||||||||||
Loss ratio excluding catastrophe losses | 44.7 | 43.2 | 40.0 | |||||||||||||||||
Catastrophe losses | 3.7 | 3.4 | 3.4 | |||||||||||||||||
Total loss ratio | 48.4 | % | 46.6 | % | 43.4 | % | ||||||||||||||
2006 10-K Page 45
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Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Commercial casualty: | ||||||||||||||||||||
Written premiums | $ | 838 | $ | 779 | $ | 708 | 7.7 | 10.0 | ||||||||||||
Earned premiums | 831 | 759 | 686 | 9.5 | 10.7 | |||||||||||||||
Loss and loss expenses incurred | 440 | 302 | 321 | 45.8 | (5.9 | ) | ||||||||||||||
Loss and loss expense ratio | 53.0 | % | 39.8 | % | 46.8 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 53.0 | 39.8 | 46.8 | |||||||||||||||||
Commercial property: | ||||||||||||||||||||
Written premiums | $ | 505 | $ | 476 | $ | 455 | 6.1 | 4.5 | ||||||||||||
Earned premiums | 491 | 467 | 440 | 5.1 | 6.0 | |||||||||||||||
Loss and loss expenses incurred | 282 | 300 | 240 | (5.9 | ) | 24.9 | ||||||||||||||
Loss and loss expense ratio | 57.5 | % | 64.2 | % | 54.5 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 43.6 | 49.3 | 42.1 | |||||||||||||||||
Commercial auto: | ||||||||||||||||||||
Written premiums | $ | 450 | $ | 448 | $ | 458 | 0.3 | (2.2 | ) | |||||||||||
Earned premiums | 453 | 457 | 450 | (0.9 | ) | 1.5 | ||||||||||||||
Loss and loss expenses incurred | 278 | 274 | 236 | 1.5 | 16.3 | |||||||||||||||
Loss and loss expense ratio | 61.5 | % | 60.1 | % | 52.4 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 60.6 | 60.0 | 52.1 | |||||||||||||||||
Workers’ compensation: | ||||||||||||||||||||
Written premiums | $ | 379 | $ | 338 | $ | 320 | 12.1 | 5.4 | ||||||||||||
Earned premiums | 366 | 328 | 313 | 11.4 | 5.1 | |||||||||||||||
Loss and loss expenses incurred | 313 | 299 | 251 | 4.7 | 18.9 | |||||||||||||||
Loss and loss expense ratio | 85.4 | % | 90.9 | % | 80.3 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 85.4 | 90.9 | 80.3 | |||||||||||||||||
Specialty packages: | ||||||||||||||||||||
Written premiums | $ | 144 | $ | 138 | $ | 135 | 4.6 | 2.1 | ||||||||||||
Earned premiums | 141 | 137 | 133 | 3.2 | 2.5 | |||||||||||||||
Loss and loss expenses incurred | 94 | 92 | 80 | 2.1 | 14.6 | |||||||||||||||
Loss and loss expense ratio | 66.3 | % | 67.0 | % | 59.9 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 54.9 | 61.8 | 47.4 | |||||||||||||||||
Surety and executive risk: | ||||||||||||||||||||
Written premiums | $ | 97 | $ | 85 | $ | 85 | 15.3 | (0.1 | ) | |||||||||||
Earned premiums | 93 | 80 | 80 | 16.3 | (0.8 | ) | ||||||||||||||
Loss and loss expenses incurred | 47 | 27 | 21 | 72.2 | 27.9 | |||||||||||||||
Loss and loss expense ratio | 50.7 | % | 34.2 | % | 26.6 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 50.7 | 34.2 | 26.6 | |||||||||||||||||
Machinery and equipment: | ||||||||||||||||||||
Written premiums | $ | 29 | $ | 26 | $ | 25 | 8.7 | 6.8 | ||||||||||||
Earned premiums | 27 | 26 | 24 | 5.8 | 8.0 | |||||||||||||||
Loss and loss expenses incurred | 12 | 6 | 5 | 98.7 | 17.1 | |||||||||||||||
Loss and loss expense ratio | 42.0 | % | 22.4 | % | 20.6 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 41.6 | 22.5 | 20.2 |
Accident Year | ||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | |||||||||
Loss and loss expenses incurred: | ||||||||||||
Commercial casualty | $ | 540 | $ | 420 | $ | 359 | ||||||
Commercial property | 278 | 300 | 261 | |||||||||
Commercial auto | 300 | 281 | 269 | |||||||||
Workers’ compensation | 303 | 254 | 250 | |||||||||
Specialty packages | 91 | 80 | 82 | |||||||||
Surety and executive risk | 41 | 39 | 29 | |||||||||
Machinery and equipment | 11 | 7 | 4 | |||||||||
Loss and loss expenses ratio: | ||||||||||||
Commercial casualty | 64.9 | % | 55.4 | % | 52.4 | % | ||||||
Commercial property | 56.6 | 64.2 | 59.3 | |||||||||
Commercial auto | 66.1 | 61.4 | 59.8 | |||||||||
Workers’ compensation | 82.8 | 77.4 | 79.8 | |||||||||
Specialty packages | 64.7 | 58.6 | 61.2 | |||||||||
Surety and executive risk | 44.4 | 48.3 | 36.2 | |||||||||
Machinery and equipment | 39.2 | 28.6 | 18.6 |
2006 10-K Page 46
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• | 2006 – Favorable development lowered the loss and loss expense ratio by 12.0 percentage points. | |
• | 2005 – Favorable development lowered the loss and loss expense ratio by 22.5 percentage points. | |
• | 2004 – Favorable development lowered the loss and loss expense ratio by 20.0 percentage points. |
• | 2006 – Reserve strengthening raised the loss and loss expense ratio by 0.9 percentage points. | |
• | 2005 – Reserve strengthening raised the loss and loss expense ratio by 3.5 percentage points. | |
• | 2004 – Reserve strengthening raised the loss and loss expense ratio by 0.3 percentage points. |
• | 2006 – Favorable development lowered the loss and loss expense ratio by 4.6 percentage points. |
• | 2005 – Favorable development lowered the loss and loss expense ratio by 5.0 percentage points. |
• | 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. |
2006 10-K Page 47
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• | 2006 – Reserve strengthening raised the loss and loss expense ratio by 2.6 percentage points, as discussed above. |
• | 2005 – Reserve strengthening raised the loss and loss expense ratio by 12.9 percentage points. The reserve strengthening primarily was due to medical cost inflation and longer estimated payout periods compared with our original projections. |
• | 2004 – Reserve strengthening raised the loss and loss expense ratio by 4.9 percentage points, which also was due to medical cost inflation. |
• | 2006 – Reserve strengthening raised the loss and loss expense ratio by 1.6 percentage points. | |
• | 2005 – Reserve strengthening raised the loss and loss expense ratio by 10.9 percentage points. | |
• | 2004 – Reserve strengthening raised the loss and loss expense ratio by 3.7 percentage points. |
2006 10-K Page 48
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• | 2006 – Reserve strengthening raised the loss and loss expense ratio by 21.1 percentage points due to case reserves additions for director and officer liability claims. |
• | 2005 – Favorable development lowered the loss and loss expense ratio by 5.4 percentage points. |
• | 2004 – Favorable development lowered the loss and loss expense ratio by 9.3 percentage points. |
• | 2006 – Reserve strengthening raised the loss and loss expense ratio by 0.8 percentage points. | |
• | 2005 – Favorable development lowered the loss and loss expense ratio by 3.7 percentage points. | |
• | 2004 – Favorable development lowered the loss and loss expense ratio by 1.3 percentage points. |
• | Premiums – As competition in our personal lines markets continued to increase and we continued to work to generate consistent profitability in our personal lines market, our written premiums declined again in 2006, reflecting lower new business and policy retention rates through the first half of the year and lower pricing in the second half of the year. Industry average written premium growth was estimated at 2.0 percent for 2006, 3.7 percent for 2005 and 6.6 percent for 2004. | |
Personal lines new business premiums written directly by agencies increased 1.6 percent to $33 million in 2006 after declining 33.9 percent to $32 million in 2005 and 19.9 percent to $48 million in 2004. | ||
• | Combined ratio – After improving substantially in 2005, the combined ratio increased in 2006 due to higher catastrophe losses, less savings from favorable development on prior period reserves, an increase in loss severity and higher expenses. Lower earned premiums exacerbated the year-over-year comparisons. Our personal lines statutory combined ratio was 103.6 percent in 2006 compared with 94.3 percent in 2005 and 104.6 percent in 2004. By comparison, the estimated industry personal lines combined ratio was 92.0 percent in 2006, 97.6 percent in 2005 and 94.9 percent in 2004. We believe our results are trending differently than the overall industry because of the competitive and pricing factors discussed below. |
2006 10-K Page 49
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2006 10-K Page 50
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Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Written premiums | $ | 736 | $ | 786 | $ | 811 | (6.4 | ) | (3.0 | ) | ||||||||||
Earned premiums | $ | 762 | $ | 804 | $ | 793 | (5.3 | ) | 1.4 | |||||||||||
Loss and loss expenses excluding catastrophes | 456 | 463 | 522 | (1.5 | ) | (11.3 | ) | |||||||||||||
Catastrophe loss and loss expenses | 86 | 51 | 77 | 69.8 | (34.2 | ) | ||||||||||||||
Commission expenses | 152 | 154 | 160 | (1.6 | ) | (3.6 | ) | |||||||||||||
Underwriting expenses | 95 | 91 | 74 | 4.2 | 24.0 | |||||||||||||||
Underwriting profit (loss) | $ | (27 | ) | $ | 45 | $ | (40 | ) | (160.0 | ) | 214.0 | |||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Loss and loss expenses excluding catastrophes | 59.9 | % | 57.6 | % | 65.9 | % | ||||||||||||||
Catastrophe loss and loss expenses | 11.3 | 6.3 | 9.7 | |||||||||||||||||
Loss and loss expenses | 71.2 | 63.9 | 75.6 | |||||||||||||||||
Commission expenses | 19.9 | 19.2 | 20.1 | |||||||||||||||||
Underwriting expenses | 12.5 | 11.3 | 9.3 | |||||||||||||||||
Combined ratio | 103.6 | % | 94.4 | % | 105.0 | % | ||||||||||||||
Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Losses $1 million or more | $ | 23 | $ | 13 | $ | 17 | 79.1 | (26.0 | ) | |||||||||||
Losses $250 thousand to $1 million | 39 | 34 | 43 | 14.5 | (19.9 | ) | ||||||||||||||
Development and case reserve increases of $250 thousand or more | 22 | 19 | 21 | 16.8 | (7.7 | ) | ||||||||||||||
Other losses excluding catastrophes | 309 | 339 | 371 | (8.9 | ) | (8.5 | ) | |||||||||||||
Total losses incurred excluding catastrophe losses | 393 | 405 | 452 | (3.0 | ) | (10.2 | ) | |||||||||||||
Catastrophe losses | 86 | 51 | 77 | 69.8 | (34.2 | ) | ||||||||||||||
Total losses incurred | $ | 479 | $ | 456 | $ | 529 | 5.1 | (13.7 | ) | |||||||||||
Ratios as a percent of earned premiums: | ||||||||||||||||||||
Losses $1 million or more | 3.0 | % | 1.5 | % | 2.2 | % | ||||||||||||||
Losses $250 thousand to $1 million | 5.2 | 4.3 | 5.4 | |||||||||||||||||
Development and case reserve increases of $250 thousand or more | 2.9 | 2.4 | 2.6 | |||||||||||||||||
Other losses excluding catastrophes | 40.5 | 42.2 | 46.8 | |||||||||||||||||
Loss ratio excluding catastrophe losses | 51.6 | 50.4 | 57.0 | |||||||||||||||||
Catastrophe losses | 11.3 | 6.3 | 9.7 | |||||||||||||||||
Total loss ratio | 62.9 | % | 56.7 | % | 66.7 | % | ||||||||||||||
2006 10-K Page 51
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Years ended December 31, | 2006-2005 | 2005-2004 | ||||||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | Change % | Change % | |||||||||||||||
Personal auto: | ||||||||||||||||||||
Written premiums | $ | 359 | $ | 409 | $ | 453 | (12.4 | ) | (9.6 | ) | ||||||||||
Earned premiums | 385 | 433 | 451 | (11.2 | ) | (4.0 | ) | |||||||||||||
Loss and loss expenses incurred | 250 | 259 | 298 | (3.5 | ) | (13.0 | ) | |||||||||||||
Loss and loss expense ratio | 65.0 | % | 59.9 | % | 66.1 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 62.2 | 59.3 | 65.1 | |||||||||||||||||
Homeowner: | ||||||||||||||||||||
Written premiums | $ | 290 | $ | 288 | $ | 270 | 0.7 | 6.7 | ||||||||||||
Earned premiums | 289 | 282 | 256 | 2.3 | 10.4 | |||||||||||||||
Loss and loss expenses incurred | 240 | 213 | 247 | 12.4 | (13.4 | ) | ||||||||||||||
Loss and loss expense ratio | 83.0 | % | 75.5 | % | 96.3 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 59.3 | 58.6 | 69.0 | |||||||||||||||||
Other personal: | ||||||||||||||||||||
Written premiums | $ | 87 | $ | 89 | $ | 88 | (2.0 | ) | 1.3 | |||||||||||
Earned premiums | 88 | 89 | 86 | (1.1 | ) | 3.4 | ||||||||||||||
Loss and loss expenses incurred | 52 | 40 | 55 | 31.6 | (27.6 | ) | ||||||||||||||
Loss and loss expense ratio | 59.4 | % | 44.6 | % | 63.7 | % | ||||||||||||||
Loss and loss expense ratio excluding catastrophes | 52.0 | 41.6 | 60.0 |
Accident year | ||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | |||||||||
Loss and loss expenses incurred: | ||||||||||||
Personal Auto | $ | 248 | $ | 272 | $ | 303 | ||||||
Homeowner | 235 | 219 | 255 | |||||||||
Other Personal | 77 | 58 | 64 | |||||||||
Loss and loss expenses ratio: | ||||||||||||
Personal Auto | 64.5 | % | 62.8 | % | 67.3 | % | ||||||
Homeowner | 81.5 | 77.6 | 99.6 | |||||||||
Other Personal | 88.0 | 65.4 | 74.4 |
2006 10-K Page 52
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• | 2006 — Reserve strengthening raised the loss and loss expense ratio by 0.6 percentage points. | |
• | 2005 — Favorable development lowered the loss and loss expense ratio by 1.9 percentage points. | |
• | 2004 — Reserve strengthening raised the loss and loss expense ratio by 0.2 percentage points. |
• | 2006 — Reserve strengthening raised the loss and loss expense ratio by 1.5 percentage points. | |
• | 2005 — Favorable development lowered the loss and loss expense ratio by 0.4 percentage points. | |
• | 2004 — Favorable development lowered the loss and loss expense ratio by 2.7 percentage points. |
• | 2006 — Favorable development lowered the loss and loss expense ratio by 28.6 percentage points. | |
• | 2005 — Favorable development lowered the loss and loss expense ratio by 28.7 percentage points. |
2006 10-K Page 53
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• | 2004 — Favorable development lowered the loss and loss expense ratio by 18.9 percentage points. |
• | Competitive rates —In mid-2006, we introduced insurance scores into our program of policy credits for homeowner and personal auto pricing. That action led to the increased new business for both personal auto and homeowners in the second half of 2006. It also led to improved retention of current business. While these pricing refinements have reduced premiums per policy, we believe they present an opportunity to attract our agents’ more quality conscious clientele. | |
• | Policy characteristics — In keeping with industry practices, most of our homeowner products no longer automatically provide guaranteed full replacement cost coverage in our basic policies. 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 have diminished some of the factors that distinguished our products. | |
• | Diamond introduction —The Diamond system is in use by agencies writing approximately 90 percent of personal lines premium volume. 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 47 percent and headquarters printing for 81 percent of policy transactions in 2006. | |
• | 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 and geographic diversity. We currently market both homeowner and personal auto insurance products through 772 of our 1,289 reporting agency locations in 22 of the 32 states where we market commercial lines insurance. We market homeowner products through 22 locations in three additional states (Maryland, North Carolina and West Virginia). | |
During 2007, we hope to add personal lines for 30 to 35 agency locations in the 13 states in which Diamond is in use that currently market only our commercial lines products. During 2007, our field teams and personal lines associates are contacting these agencies to re-introduce them to our personal lines product line and technology. Expanding into these agencies would provide additional sources of premiums and help geographically diversify our personal lines portfolio. |
• | Revenues — Revenue growth has accelerated over the past three years as gross in-force policy face amounts increased to $56.971 billion at year-end 2006 from $51.493 billion at year-end 2005 and $44.921 billion at year-end 2004. | |
• | Profitability — The life insurance segment reports a small GAAP loss because its investment income is included in investment segment results, except investment income credited to contract holders (interest assumed in life insurance policy reserve calculations). The segment operating profit declined in 2006 after improving in 2005 due to: |
o | Higher mortality expenses compared with the year-earlier periods principally due to growth in life insurance in force. Mortality experience remained within pricing guidelines. | ||
o | Adoption of stock option expensing, which added approximately $1 million to 2006 other operating expenses. |
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At the same time, we recognize that 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 products. For that reason, we also evaluate GAAP data, including all investment activities on life insurance-related assets, which grew 32.6 percent in 2006 to $63 million and 23.8 percent in 2005 to $47 million. The life insurance company portfolio had pretax realized investment gains of $45 million in 2006 compared with $17 million in 2005 and $9 million in 2004. |
(In millions) | Years ended December 31, | 2006-2005 | 2005-2004 | |||||||||||||||||
2006 | 2005 | 2004 | Change % | Change % | ||||||||||||||||
Written premiums | $ | 161 | $ | 205 | $ | 193 | (21.3 | ) | 6.5 | |||||||||||
Earned premiums | $ | 115 | $ | 106 | $ | 101 | 7.9 | 5.7 | ||||||||||||
Separate account investment management fees | 3 | 4 | 3 | (0.3 | ) | 18.5 | ||||||||||||||
Total revenues | 118 | 110 | 104 | 7.6 | 6.0 | |||||||||||||||
Contract holders benefits incurred | 122 | 102 | 95 | 20.1 | 7.2 | |||||||||||||||
Investment interest credited to contract holders | (54 | ) | (51 | ) | (46 | ) | 5.7 | 12.9 | ||||||||||||
Operating expenses incurred | 51 | 52 | 53 | (1.8 | ) | (0.3 | ) | |||||||||||||
Total benefits and expenses | 119 | 103 | 102 | 16.1 | 0.8 | |||||||||||||||
�� | ||||||||||||||||||||
Life insurance segment profit (loss) | $ | (1 | ) | $ | 7 | $ | 2 | (115.4 | ) | 334.2 | ||||||||||
• | Statutory written premiums for term and other life insurance products rose 12.7 percent to $127 million for 2006 and declined 4.2 percent to $113 million for 2005. | |
• | Statutory written annuity premiums declined $58 million in 2006 and increased $18 million in 2005. Since late 2005, we have de-emphasized annuities because of an unfavorable interest rate environment. |
• | Contract holders benefits incurred related to traditional life and interest-sensitive products accounted for 70.3 percent of 2006 total benefits and expenses, 66.0 percent of 2005 total benefits and expenses and 64.3 percent of 2004 total benefits and expenses. | |
• | Operating expenses incurred, net of deferred acquisition costs, accounted for 29.7 percent of 2006 total benefits and expenses, 34.0 percent of 2005 total benefits and expenses and 35.7 percent of 2004 total benefits and expenses. Stock option expense added $1 million, or 0.7 percentage points, to expenses in 2006. |
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• | Investment income — Pretax investment income reached a new record in 2006, rising 8.4 percent from the prior record in 2005. 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 investment gains and losses — We reported realized investment gains in 2006 and 2005 largely due to investment sales. The sale of our Alltel common stock holding contributed $647 million (pretax) of the 2006 gain. |
(In millions) | Years ended December 31, | 2006-2005 | 2005-2004 | |||||||||||||||||
2006 | 2005 | 2004 | Change % | Change % | ||||||||||||||||
Investment income: | ||||||||||||||||||||
Interest | $ | 300 | $ | 280 | $ | 252 | 7.1 | 11.2 | ||||||||||||
Dividends | 262 | 244 | 239 | 7.5 | 2.1 | |||||||||||||||
Other | 15 | 8 | 6 | 90.0 | 29.4 | |||||||||||||||
Investment expenses | (7 | ) | (6 | ) | (5 | ) | (19.3 | ) | (22.3 | ) | ||||||||||
Total net investment income | 570 | 526 | 492 | 8.4 | 6.9 | |||||||||||||||
Investment interest credited to contract holders | (54 | ) | (51 | ) | (46 | ) | 5.7 | 12.9 | ||||||||||||
Net realized investment gains and losses: | ||||||||||||||||||||
Realized investment gains and losses | 678 | 69 | 87 | 883.0 | (20.7 | ) | ||||||||||||||
Change in valuation of embedded derivatives | 7 | (7 | ) | 10 | 200.7 | (167.2 | ) | |||||||||||||
Other-than-temporary impairment charges | (1 | ) | (1 | ) | (6 | ) | 41.7 | 78.5 | ||||||||||||
Net realized investment gains | 684 | 61 | 91 | 1,026.0 | (33.1 | ) | ||||||||||||||
Investment operations income | $ | 1,200 | $ | 536 | $ | 537 | 124.0 | (0.4 | ) | |||||||||||
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• | 2006 — We sold the remainder of our Alltel common stock holdings. We discuss this sale in Item 1, Investments Segment, Page 14, and Item 8, Note 2 to the Consolidated Financial Statements, Page 90. | |
• | 2005 — We had gains from the sale of equity holdings that no longer met our investment parameters or were obtained from convertible securities whose underlying common stock was never intended to be a long-term holding. Included in 2005 were gains from the initial sales of a portion of our Alltel holding. | |
• | 2004 — We sold $356 million in equity holdings as part of a program to support the financial strength ratings of our property casualty insurance operations. We selected holdings to sell primarily based on the belief of the investment committee and management 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. Partial sales of holdings in which we held over $100 million in fair value at year-end 2003 contributed $311 million. |
(In millions) | Years ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
Automotive | $ | (1 | ) | $ | (1 | ) | $ | 0 | ||||
Airline | 0 | 0 | (5 | ) | ||||||||
Other | 0 | 0 | (1 | ) | ||||||||
Total | $ | (1 | ) | $ | (1 | ) | $ | (6 | ) | |||
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(Dollars in millions) | Years ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
Taxable fixed maturities: | ||||||||||||
Impairment amount | $ | (1 | ) | $ | (1 | ) | $ | 0 | ||||
New book value | $ | 0 | $ | 0 | $ | 2 | ||||||
Percent to total owned | 0 | % | 0 | % | 1 | % | ||||||
Number of securities impaired | 1 | 2 | 1 | |||||||||
Percent to total owned | 0 | % | 0 | % | 1 | % | ||||||
Tax-exempt fixed maturities: | ||||||||||||
Impairment amount | $ | 0 | $ | 0 | $ | (5 | ) | |||||
New book value | $ | 0 | $ | 0 | $ | 9 | ||||||
Percent to total owned | 0 | % | 0 | % | 1 | % | ||||||
Number of securities impaired | 0 | 0 | 2 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Common equities: | ||||||||||||
Impairment amount | $ | 0 | $ | 0 | $ | (1 | ) | |||||
New book value | $ | 0 | $ | 0 | $ | 0 | ||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Number of securities impaired | 0 | 0 | 1 | |||||||||
Percent to total owned | 0 | % | 0 | % | 2 | % | ||||||
Total: | ||||||||||||
Impairment amount | $ | (1 | ) | $ | (1 | ) | $ | (6 | ) | |||
New book value | $ | 0 | $ | 0 | $ | 11 | ||||||
Percent to total owned | 0 | % | 0 | % | 0 | % | ||||||
Number of securities impaired | 1 | 2 | 4 | |||||||||
Percent to total owned | 0 | % | 0 | % | 0 | % |
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(In millions) | Years ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
Premiums collected | $ | 3,285 | $ | 3,187 | $ | 3,055 | ||||||
Loss and loss expenses paid | (1,859 | ) | (1,752 | ) | (1,694 | ) | ||||||
Commissions and other underwriting expenses paid | (1,036 | ) | (995 | ) | (894 | ) | ||||||
Insurance subsidiary cash flow from underwriting | 390 | 440 | 467 | |||||||||
Investment income received | 471 | 427 | 362 | |||||||||
Insurance subsidiary operating cash flow | $ | 861 | $ | 867 | $ | 829 | ||||||
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• | 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 continued to decline in 2006 as interest rates generally shifted upward. | |
• | Sales of equity securities investments — The decision to divest an equity position is generally reached after careful analysis regarding the direction the company is headed and how well it meets our investment parameters. In 2006, we completed the sale of our Alltel common stock holdings and made other sales of all or part of smaller holdings. |
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(In millions) | Payment due by period | |||||||||||||||||||
Within | Years | Years | More than | |||||||||||||||||
1 year | 2-3 | 4-5 | 5 years | Total | ||||||||||||||||
Interest on long-term debt | $ | 52 | $ | 104 | $ | 104 | $ | 996 | $ | 1,256 | ||||||||||
Long-term debt | 0 | 0 | 0 | 795 | 795 | |||||||||||||||
Short-term debt | 49 | 0 | 0 | 0 | 49 | |||||||||||||||
Annuitization obligations | 17 | 47 | 30 | 104 | 198 | |||||||||||||||
Headquarters building expansion | 45 | 17 | 0 | 0 | 62 | |||||||||||||||
Computer hardware and software | 9 | 11 | 2 | 0 | 22 | |||||||||||||||
Other invested assets | 10 | 12 | 3 | 1 | 26 | |||||||||||||||
Net life claims payments | 9 | 0 | 0 | 0 | 9 | |||||||||||||||
Subtotal | 191 | 191 | 139 | 1,896 | 2,417 | |||||||||||||||
Net property casualty claims payments | 1,074 | 1,150 | 493 | 639 | 3,356 | |||||||||||||||
Total | $ | 1,265 | $ | 1,341 | $ | 632 | $ | 2,535 | $ | 5,773 | ||||||||||
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• | Dividends to shareholders — Over the past 10 years, the company has paid an average of 38 percent of net income as dividends, with the remaining 62 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 2007, the board of directors authorized a 6.0 percent increase in the regular quarterly cash dividend to an indicated annual rate of $1.42 per share. In 2006, 2005 and 2004, we paid cash dividends of $228 million and $204 million and $177 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 from share-based compensation. In 2006, 2005 and 2004, we used $120 million, $63 million and $66 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 2006, 6.8 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 26. Between February 1999 and year-end 2006, we have repurchased 17.4 million shares at a total cost to the company of $661 million. We do not adjust the number of shares repurchased and average price per repurchased share for stock dividends. |
• | Increases in coverage in force in selected business lines | |
• | New business activity | |
• | Higher initial case reserves on liability claims |
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• | Workers’ compensation case reserving practices | |
• | Increased loss expenses due to higher legal fees | |
• | Judicial decisions and mass tort claims | |
• | Changes in reinsurance treaty retentions | |
• | Loss cost inflation in selected lines | |
• | Higher loss adjustment expense due to a claims mediation process that promotes earlier liability settlement resolution |
• | Section A shows 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 unpaid loss and loss expenses for claims arising in the indicated calendar year and all prior accident years at the balance sheet date, including losses that have been incurred but not yet reported to the company. | |
• | Section B shows 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, 2006, we had paid $1.175 billion of loss and loss expenses in calendar years 1997 through 2006, for losses that occurred in accident years 1996 and prior. An estimated $148 million of losses remained unpaid as of year-end 2006 (net re-estimated reserves of $1.323 billion from Section C less cumulative paid loss and loss expenses of $1.175 billion). |
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• | Section C shows 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, 1996, had developed a $379 million redundancy over 10 years, net of reinsurance, which was reflected in income over the 10 years. The table shows redundant reserves as a negative number. The effects on income in 2006, 2005 and 2004 of changes in estimates of the reserves for loss and loss expenses for all accident years are shown in the reconciliation below. |
(In millions) | Calendar year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||||||||||||||||||||
A. Originally reported reserves for unpaid loss and loss expenses: | ||||||||||||||||||||||||||||||||||||||||||||
Gross of reinsurance | $ | 1,824 | $ | 1,889 | $ | 1,978 | $ | 2,093 | $ | 2,401 | $ | 2,865 | $ | 3,150 | $ | 3,386 | $ | 3,514 | $ | 3,629 | $ | 3,860 | ||||||||||||||||||||||
Reinsurance recoverable | 122 | 112 | 138 | 161 | 219 | 513 | 542 | 541 | 537 | 518 | 504 | |||||||||||||||||||||||||||||||||
Net of reinsurance | $ | 1,702 | $ | 1,777 | $ | 1,840 | $ | 1,932 | $ | 2,182 | $ | 2,352 | $ | 2,608 | $ | 2,845 | $ | 2,977 | $ | 3,111 | $ | 3,356 | ||||||||||||||||||||||
B. Cumulative net paid as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 453 | $ | 499 | $ | 522 | $ | 591 | $ | 697 | $ | 758 | $ | 799 | $ | 817 | $ | 907 | $ | 944 | ||||||||||||||||||||||||
Two years later | 732 | 761 | 833 | 943 | 1,116 | 1,194 | 1,235 | 1,293 | 1,426 | |||||||||||||||||||||||||||||||||||
Three years later | 884 | 965 | 1,067 | 1,195 | 1,378 | 1,455 | 1,519 | 1,626 | ||||||||||||||||||||||||||||||||||||
Four years later | 992 | 1,075 | 1,207 | 1,327 | 1,526 | 1,614 | 1,716 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,049 | 1,152 | 1,283 | 1,412 | 1,623 | 1,717 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,093 | 1,205 | 1,333 | 1,464 | 1,680 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,123 | 1,239 | 1,366 | 1,496 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,146 | 1,260 | 1,390 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,159 | 1,279 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,175 | |||||||||||||||||||||||||||||||||||||||||||
C. Net reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | 1,582 | $ | 1,623 | $ | 1,724 | $ | 1,912 | $ | 2,120 | $ | 2,307 | $ | 2,528 | $ | 2,649 | $ | 2,817 | $ | 2,995 | ||||||||||||||||||||||||
Two years later | 1,470 | 1,551 | 1,728 | 1,833 | 2,083 | 2,263 | 2,377 | 2,546 | 2,743 | |||||||||||||||||||||||||||||||||||
Three years later | 1,405 | 1,520 | 1,636 | 1,802 | 2,052 | 2,178 | 2,336 | 2,489 | ||||||||||||||||||||||||||||||||||||
Four years later | 1,380 | 1,465 | 1,615 | 1,771 | 2,010 | 2,153 | 2,299 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,326 | 1,466 | 1,608 | 1,757 | 1,999 | 2,127 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,333 | 1,463 | 1,602 | 1,733 | 1,992 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,333 | 1,460 | 1,577 | 1,739 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,332 | 1,435 | 1,593 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,305 | 1,456 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,323 | |||||||||||||||||||||||||||||||||||||||||||
D. Cumulative net redundancy as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | $ | (120 | ) | $ | (154 | ) | $ | (116 | ) | $ | (20 | ) | $ | (62 | ) | $ | (45 | ) | $ | (80 | ) | $ | (196 | ) | $ | (160 | ) | $ | (116) | |||||||||||||||
Two years later | (232 | ) | (226 | ) | (112 | ) | (99 | ) | (99 | ) | (89 | ) | (231 | ) | (299 | ) | (234 | ) | ||||||||||||||||||||||||||
Three years later | (297 | ) | (257 | ) | (204 | ) | (130 | ) | (130 | ) | (174 | ) | (272 | ) | (356 | ) | ||||||||||||||||||||||||||||
Four years later | (322 | ) | (312 | ) | (225 | ) | (161 | ) | (172 | ) | (199 | ) | (309 | ) | ||||||||||||||||||||||||||||||
Five years later | (376 | ) | (311 | ) | (232 | ) | (175 | ) | (183 | ) | (225 | ) | ||||||||||||||||||||||||||||||||
Six years later | (369 | ) | (314 | ) | (238 | ) | (199 | ) | (190 | ) | ||||||||||||||||||||||||||||||||||
Seven years later | (369 | ) | (317 | ) | (263 | ) | (193 | ) | ||||||||||||||||||||||||||||||||||||
Eight years later | (370 | ) | (342 | ) | (247 | ) | ||||||||||||||||||||||||||||||||||||||
Nine years later | (397 | ) | (321 | ) | ||||||||||||||||||||||||||||||||||||||||
Ten years later | (379 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net liability re-estimated—latest | $ | 1,323 | $ | 1,456 | $ | 1,593 | $ | 1,739 | $ | 1,992 | $ | 2,127 | $ | 2,299 | $ | 2,489 | $ | 2,743 | $ | 2,995 | ||||||||||||||||||||||||
Re-estimated recoverable—latest | 183 | 198 | 224 | 230 | 259 | 532 | 568 | 547 | 551 | 517 | ||||||||||||||||||||||||||||||||||
Gross liability re-estimated—latest | $ | 1,506 | $ | 1,654 | $ | 1,817 | $ | 1,969 | $ | 2,251 | $ | 2,659 | $ | 2,867 | $ | 3,036 | $ | 3,294 | $ | 3,512 | ||||||||||||||||||||||||
Cumulative gross redundancy | $ | (318 | ) | $ | (235 | ) | $ | (161 | ) | $ | (124 | ) | $ | (150 | ) | $ | (206 | ) | $ | (283 | ) | $ | (350 | ) | $ | (220 | ) | $ | (117 | ) | ||||||||||||||
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(In millions) | Loss reserves | Loss | Total | |||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
reserves | reserves | reserves | reserves | of total | ||||||||||||||||
At December 31, 2006 | ||||||||||||||||||||
Commercial casualty | $ | 923 | $ | 437 | $ | 483 | 1,843 | 54.0 | % | |||||||||||
Commercial property | 132 | 31 | 36 | 199 | 5.8 | |||||||||||||||
Commercial auto | 274 | 52 | 64 | 390 | 11.4 | |||||||||||||||
Workers’ compensation | 411 | 277 | 99 | 787 | 23.1 | |||||||||||||||
Specialty packages | 80 | 1 | 5 | 86 | 2.5 | |||||||||||||||
Surety and executive risk | 67 | 1 | 32 | 100 | 2.9 | |||||||||||||||
Machinery and equipment | 5 | 3 | 1 | 9 | 0.3 | |||||||||||||||
Total | $ | 1,892 | $ | 802 | $ | 720 | $ | 3,414 | 100.0 | % | ||||||||||
At December 31, 2005 | ||||||||||||||||||||
Commercial casualty | $ | 859 | $ | 451 | $ | 423 | $ | 1,733 | 54.6 | % | ||||||||||
Commercial property | 135 | 40 | 36 | 211 | 6.6 | |||||||||||||||
Commercial auto | 268 | 55 | 65 | 388 | 12.2 | |||||||||||||||
Workers’ compensation | 283 | 333 | 79 | 695 | 21.9 | |||||||||||||||
Specialty packages | 63 | 0 | 12 | 75 | 2.4 | |||||||||||||||
Surety and executive risk | 36 | 0 | 32 | 68 | 2.1 | |||||||||||||||
Machinery and equipment | 3 | 3 | 0 | 6 | 0.2 | |||||||||||||||
Total | $ | 1,647 | $ | 882 | $ | 647 | $ | 3,176 | 100.0 | % | ||||||||||
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(Dollars in millions) | Commercial | Commercial | Commercial | Workers’ | Specialty | Surety & | Machinery & | |||||||||||||||||||||||||
casualty | property | auto | compensation | packages | executive risk | equipment | Totals | |||||||||||||||||||||||||
As of December 31, 2006 2005 accident year | $ | (52 | ) | $ | 17 | $ | (17 | ) | $ | (2 | ) | $ | 3 | $ | 7 | $ | 1 | $ | (43 | ) | ||||||||||||
2004 accident year | (21 | ) | (3 | ) | 1 | 5 | (1 | ) | (3 | ) | 0 | (22 | ) | |||||||||||||||||||
2003 accident year | (12 | ) | (3 | ) | 1 | 0 | 1 | (1 | ) | 0 | (14 | ) | ||||||||||||||||||||
2002 accident year | 2 | (1 | ) | (2 | ) | (3 | ) | 0 | 1 | 0 | (3 | ) | ||||||||||||||||||||
2001 accident year | (9 | ) | (4 | ) | (2 | ) | (1 | ) | 0 | 1 | 0 | (15 | ) | |||||||||||||||||||
2000 accident year | (9 | ) | (1 | ) | (1 | ) | 1 | (1 | ) | 0 | 0 | (11 | ) | |||||||||||||||||||
1999 and prior accident years | 2 | 0 | (1 | ) | 9 | 0 | 0 | 0 | 10 | |||||||||||||||||||||||
Deficiency/(redundancy) | $ | (99 | ) | $ | 5 | $ | (21 | ) | $ | 9 | $ | 2 | $ | 5 | $ | 1 | $ | (98 | ) | |||||||||||||
Reserves as originally estimated | $ | 1,359 | $ | 160 | $ | 386 | $ | 634 | $ | 73 | $ | 63 | $ | 6 | $ | 2,681 | ||||||||||||||||
Reserves re-estimated as of December 31, 2006 | 1,260 | 165 | 365 | 643 | 75 | 68 | 7 | 2,583 | ||||||||||||||||||||||||
Deficiency/(redundancy) | $ | (99 | ) | $ | 5 | $ | (21 | ) | $ | 9 | $ | 2 | $ | 5 | $ | 1 | $ | (98 | ) | |||||||||||||
Impact on loss and loss expense ratio | (12.0) | % | 0.9 | % | (4.6) | % | 2.6 | % | 1.6 | % | 6.3 | % | 2.8 | % | (4.1) | % | ||||||||||||||||
As of December 31, 2005 2004 accident year | $ | (78 | ) | $ | 23 | $ | (15 | ) | $ | 9 | $ | 7 | $ | 2 | $ | (1 | ) | $ | (53 | ) | ||||||||||||
2003 accident year | (51 | ) | (3 | ) | (5 | ) | 13 | 3 | (4 | ) | 0 | (47 | ) | |||||||||||||||||||
2002 accident year | (17 | ) | (3 | ) | (1 | ) | 8 | 2 | 0 | 0 | (11 | ) | ||||||||||||||||||||
2001 accident year | (7 | ) | (1 | ) | (1 | ) | 3 | 0 | (1 | ) | 0 | (7 | ) | |||||||||||||||||||
2000 accident year | 8 | 0 | 0 | 3 | 2 | 0 | 0 | 13 | ||||||||||||||||||||||||
1999 accident year | (1 | ) | 0 | 0 | 3 | 0 | 0 | 0 | 2 | |||||||||||||||||||||||
1998 and prior accident years | (25 | ) | 1 | (1 | ) | 2 | 1 | (1 | ) | 0 | (23 | ) | ||||||||||||||||||||
Deficiency/(redundancy) | $ | (171 | ) | $ | 17 | $ | (23 | ) | $ | 41 | $ | 15 | $ | (4 | ) | $ | (1 | ) | $ | (126 | ) | |||||||||||
Reserves as originally estimated | $ | 1,332 | $ | 104 | $ | 372 | $ | 558 | $ | 72 | $ | 64 | $ | 5 | $ | 2,507 | ||||||||||||||||
Reserves re-estimated as of December 31, 2005 | 1,161 | 121 | 349 | 599 | 87 | 60 | 4 | 2,381 | ||||||||||||||||||||||||
Deficiency/(redundancy) | $ | (171 | ) | $ | 17 | $ | (23 | ) | $ | 41 | $ | 15 | $ | (4 | ) | $ | (1 | ) | $ | (126 | ) | |||||||||||
Impact on loss and loss expense ratio | (22.5) | % | 3.5 | % | (5.0) | % | 12.9 | % | 10.9 | % | (5.4) | % | (3.7) | % | (5.6) | % | ||||||||||||||||
As of December 31, 2004 2001 accident year | $ | (46 | ) | $ | 7 | $ | (11 | ) | $ | (5 | ) | $ | 3 | $ | (1 | ) | $ | 0 | $ | (53 | ) | |||||||||||
2000 accident year | (44 | ) | (2 | ) | (10 | ) | 1 | 1 | (3 | ) | 0 | (57 | ) | |||||||||||||||||||
1999 accident year | (27 | ) | (7 | ) | (4 | ) | 6 | 1 | (1 | ) | 0 | (32 | ) | |||||||||||||||||||
1998 accident year | (19 | ) | 0 | (5 | ) | 3 | 0 | (1 | ) | 0 | (22 | ) | ||||||||||||||||||||
1997 accident year | (1 | ) | 0 | (7 | ) | 2 | 0 | 0 | 0 | (6 | ) | |||||||||||||||||||||
1996 accident year | (1 | ) | 0 | (3 | ) | 1 | 0 | 0 | 0 | (3 | ) | |||||||||||||||||||||
1995 and prior accident years | 2 | 0 | (8 | ) | 6 | 0 | (1 | ) | 0 | (1 | ) | |||||||||||||||||||||
Deficiency/(redundancy) | $ | (136 | ) | $ | (2 | ) | $ | (48 | ) | $ | 14 | $ | 5 | $ | (7 | ) | $ | 0 | $ | (174 | ) | |||||||||||
Reserves as originally estimated | $ | 1,280 | $ | 101 | $ | 382 | $ | 515 | $ | 75 | $ | 57 | $ | 5 | $ | 2,415 | ||||||||||||||||
Reserves re-estimated as of December 31, 2004 | 1,144 | 99 | 334 | 529 | 80 | 50 | 5 | 2,241 | ||||||||||||||||||||||||
Deficiency/(redundancy) | $ | (136 | ) | $ | (2 | ) | $ | (48 | ) | $ | 14 | $ | 5 | $ | (7 | ) | $ | 0 | $ | (174 | ) | |||||||||||
Impact on loss and loss expense ratio | (20.0) | % | (0.3) | % | (10.5) | % | 4.9 | % | 3.7 | % | (9.3) | % | (1.3) | % | (8.2) | % |
• | The initiative, begun in 2001, to establish higher initial case reserves on liability claims in the period in which the claim is reported | |
• | The initiative, begun in 2000 and expanded to other states in 2004, to use a claims mediation process that promotes earlier liability settlement resolution | |
• | Increased loss expenses due to higher legal fees | |
• | Workers’ compensation claim reserve practices | |
• | Higher than expected medical inflation affecting the workers’ compensation line | |
• | Changes in reinsurance treaty retentions | |
• | 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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(In millions) | Loss reserves | Loss | Total | |||||||||||||||||
Case | IBNR | expense | gross | Percent | ||||||||||||||||
reserves | reserves | reserves | reserves | of total | ||||||||||||||||
At December 31, 2006 | ||||||||||||||||||||
Personal auto | $ | 169 | $ | 5 | $ | 32 | $ | 206 | 46.2 | % | ||||||||||
Homeowners | 69 | 24 | 17 | 110 | 24.7 | |||||||||||||||
Other personal | 55 | 61 | 14 | 130 | 29.1 | |||||||||||||||
Total | $ | 293 | $ | 90 | $ | 63 | $ | 446 | 100.0 | % | ||||||||||
At December 31, 2005 Personal auto | $ | 175 | $ | 4 | $ | 34 | $ | 213 | 47.1 | % | ||||||||||
Homeowners | 70 | 21 | 18 | 109 | 24.0 | |||||||||||||||
Other personal | 52 | 67 | 12 | 131 | 28.9 | |||||||||||||||
Total | $ | 297 | $ | 92 | $ | 64 | $ | 453 | 100.0 | % | ||||||||||
(Dollars in millions) | Personal | Other | ||||||||||||||
auto | Homeowner | personal | Totals | |||||||||||||
As of December 31, 2006 | ||||||||||||||||
2005 accident year | $ | 4 | $ | 5 | $ | (7 | ) | $ | 2 | |||||||
2004 accident year | 6 | 1 | (2 | ) | 5 | |||||||||||
2003 accident year | (3 | ) | 0 | (4 | ) | (7 | ) | |||||||||
2002 accident year | (2 | ) | (1 | ) | (4 | ) | (7 | ) | ||||||||
2001 accident year | (2 | ) | 0 | (2 | ) | (4 | ) | |||||||||
2000 accident year | (1 | ) | 0 | (3 | ) | (4 | ) | |||||||||
1999 and prior accident years | 0 | 0 | (3 | ) | (3 | ) | ||||||||||
Deficiency/(redundancy) | $ | 2 | $ | 5 | $ | (25 | ) | $ | (18 | ) | ||||||
Reserves as originally estimated | $ | 213 | $ | 99 | $ | 118 | $ | 430 | ||||||||
Reserves re-estimated as of December 31, 2006 | 215 | 104 | 93 | 412 | ||||||||||||
Deficiency/(redundancy) | $ | 2 | $ | 5 | $ | (25 | ) | $ | (18 | ) | ||||||
Impact on loss and loss expense ratio | 0.6 | % | 1.5 | % | (28.6) | % | (2.4) | % | ||||||||
As of December 31, 2005 | ||||||||||||||||
2002 accident year | $ | 0 | $ | 0 | $ | (5 | ) | $ | (5 | ) | ||||||
2001 accident year | 0 | (2 | ) | (11 | ) | (13 | ) | |||||||||
2000 accident year | (3 | ) | 0 | (3 | ) | (6 | ) | |||||||||
1999 accident year | (4 | ) | 0 | (3 | ) | (7 | ) | |||||||||
1998 accident year | (1 | ) | 0 | 0 | (1 | ) | ||||||||||
1997 accident year | 0 | 1 | 0 | 1 | ||||||||||||
1996 and prior accident years | 0 | 0 | (3 | ) | (3 | ) | ||||||||||
Deficiency/(redundancy) | $ | (8 | ) | $ | (1 | ) | $ | (25 | ) | $ | (34 | ) | ||||
Reserves as originally estimated | $ | 231 | $ | 114 | $ | 125 | $ | 470 | ||||||||
Reserves re-estimated as of December 31, 2005 | 223 | 113 | 100 | 436 | ||||||||||||
Deficiency/(redundancy) | $ | (8 | ) | $ | (1 | ) | $ | (25 | ) | $ | (34 | ) | ||||
Impact on loss and loss expense ratio | (1.9) | % | (0.4) | % | (28.7) | % | (4.3) | % | ||||||||
As of December 31, 2004 | ||||||||||||||||
2001 accident year | $ | 9 | $ | (1 | ) | $ | (3 | ) | $ | 5 | ||||||
2000 accident year | 1 | (1 | ) | (4 | ) | (4 | ) | |||||||||
1999 accident year | (3 | ) | (4 | ) | (5 | ) | (12 | ) | ||||||||
1998 accident year | (3 | ) | (1 | ) | (3 | ) | (7 | ) | ||||||||
1997 accident year | (1 | ) | 0 | 0 | (1 | ) | ||||||||||
1996 accident year | (1 | ) | 0 | 0 | (1 | ) | ||||||||||
1995 and prior accident years | (1 | ) | 0 | (1 | ) | (2 | ) | |||||||||
Deficiency/(redundancy) | $ | 1 | $ | (7 | ) | $ | (16 | ) | $ | (22 | ) | |||||
Reserves as originally estimated | $ | 224 | $ | 90 | $ | 116 | $ | 430 | ||||||||
Reserves re-estimated as of December 31, 2004 | 225 | 83 | 100 | 408 | ||||||||||||
Deficiency/(redundancy) | $ | 1 | $ | (7 | ) | $ | (16 | ) | $ | (22 | ) | |||||
Impact on loss and loss expense ratio | 0.2 | % | (2.7) | % | (18.9) | % | (2.8) | % |
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• | The initiative, begun in 2001, to establish higher initial case reserves on liability claims in the period in which the claim is reported |
• | Settlements that differed from the established case reserves |
• | Changes in reinsurance treaty retentions |
• | 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 |
• | Property per risk treaty – The primary purpose of the property treaty is to provide 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 $35 million for 2007, compared with $30 million in 2006 and $29 million in 2005. We retain the first $4 million of each loss. Losses between $4 million and $25 million are reinsured at 100 percent. |
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• | Casualty per occurrence treaty – The casualty treaty provides 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 $50 million in 2007, compared with $45 million in 2006 and $64 million in 2005. We retain the first $4 million of each loss. Losses between $4 million and $25 million are reinsured at 100 percent. | |
We have modified our casualty per occurrence treaty for director and officer policies for four Fortune 1000 companies and one financial services company. For one of the five companies, our retention could be as high as $15 million rather than the $4 million for a typical policy; for one of the companies, our retention could be as high as $10 million; for the remaining three 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 policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The ceded premium is estimated to be $2 million in 2007 and is comparable with the premium paid in 2006. | |
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 2007, comparable with the premium paid in 2006. | ||
• | 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 2007 treaty, ceded premiums are estimated to be $49 million, up from $38 million in 2006, and $29 million, excluding the reinstatement premium, in 2005. The premium increase for 2007 primarily was due to the difficult market conditions brought on in part by the record catastrophe losses experienced by reinsurance companies in recent years. Our retention on this program remains at $45 million and we will retain: |
o | 5 percent of losses between $45 million and $200 million | ||
o | 14 percent of losses between $200 million and $300 million | ||
o | 18 percent of losses between $300 million and $500 million |
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• | Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes | |
• | Increased frequency and/or severity of claims | |
• | Inaccurate estimates or assumptions used for critical accounting estimates | |
• | Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 | |
• | 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 |
• | Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements | |
• | Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for non-payment or delay in payment by reinsurers | |
• | 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 | |
• | Actions of insurance departments, state attorneys general or other regulatory agencies that: |
o | Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business | ||
o | Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations | ||
o | Increase our expenses | ||
o | Add assessments for guaranty funds, other insurance related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes | ||
o | Limit our ability to set fair, adequate and reasonable rates | ||
o | Place us at a disadvantage in the marketplace or | ||
o | Restrict our ability to execute our business model, including the way we compensate agents |
• | Sustained decline in overall stock market values negatively affecting the company’s equity portfolio and book value; in particular a sustained decline in the market value of Fifth Third shares, a significant equity holding |
• | Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products |
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• | 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 or interest-rate fluctuations that result in declining values of fixed-maturity investments |
• | Adverse outcomes from litigation or administrative proceedings |
• | Investment activities or market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940 |
• | Events, such as an avian flu epidemic, natural catastrophe, terrorism or construction delays, that could hamper our ability to assemble our workforce at our headquarters location |
• | 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.) |
• | 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 |
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Taxable | Tax-exempt | Common | Preferred | Short-term | ||||||||||||||||
fixed maturities | fixed maturities | 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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(In millions) | Fair value of | Effective duration | ||||||||||
fixed maturity | 100 basis point | 100 basis point | ||||||||||
portfolio | spread decrease | spread increase | ||||||||||
At December 31, 2006 | $ | 5,805 | $ | 6,099 | $ | 5,511 | ||||||
At December 31, 2005 | 5,476 | 5,759 | 5,194 |
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(In millions except market price data) | Years ended December 31, | |||||||
2006 | 2005 | |||||||
Fifth Third Bancorp common stock holding: | ||||||||
Dividends earned | $ | 115 | $ | 106 | ||||
Percent of total net investment income | 20.2 | % | 20.2 | % |
At December 31, | At December 31, | |||||||
2006 | 2005 | |||||||
Shares held | 73 | 73 | ||||||
Closing market price of Fifth Third | $ | 40.93 | $ | 37.72 | ||||
Book value of holding | 283 | 283 | ||||||
Fair value of holding | 2,979 | 2,745 | ||||||
After-tax unrealized gain | 1,752 | 1,600 | ||||||
Market value as a percent of total equity investments | 38.2 | % | 38.6 | % | ||||
Market value as a percent of invested assets | 21.7 | 21.6 | ||||||
Market value as a percent of total shareholders’ equity | 43.8 | 45.1 | ||||||
After-tax unrealized gain as a percent of total shareholders’ equity | 25.7 | 26.3 |
• | 671 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 671 securities was $2.698 billion at December 31, 2006, and they accounted for $55 million in unrealized losses. |
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• | Eight of these holdings were trading below 90 percent of book value at December 31, 2006. The fair value of these holdings was $30 million, and they accounted for the remaining $4 million in unrealized losses. These holdings are being monitored for credit- and industry-related risk factors, but we believe the changes in value primarily are due to normal fluctuations and economic factors. | |
Of these securities, the largest is a media-related convertible debenture with a fair value of $9 million and an unrealized loss of $1.5 million. No other security had an unrealized loss in excess of $1 million. | ||
• | No holdings were trading below 70 percent of book value at December 31, 2006. |
(Dollars in millions) | 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 | |||||||||||||||||||||||||
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 | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | ||||||||||||||||||||
Trading at 70% to less than 100% of book value | 28 | (2 | ) | 55 | (3 | ) | 195 | (33 | ) | 40 | (12 | ) | ||||||||||||||||||||
Trading at 100% and above of book value | 145 | 12 | 12 | 2 | 7 | 1 | 258 | 67 | ||||||||||||||||||||||||
Total | 173 | 10 | 67 | (1 | ) | 202 | (32 | ) | 298 | 55 | ||||||||||||||||||||||
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 | 95 | (1 | ) | 12 | 0 | 213 | (3 | ) | 34 | (2 | ) | |||||||||||||||||||||
Trading at 100% and above of book value | 437 | 9 | 14 | 1 | 3 | 0 | 337 | 31 | ||||||||||||||||||||||||
Total | 532 | 8 | 26 | 1 | 216 | (3 | ) | 371 | 29 | |||||||||||||||||||||||
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 | 0 | 0 | 1 | (2 | ) | 1 | 0 | 0 | 0 | |||||||||||||||||||||||
Trading at 100% and above of book value | 7 | 10 | 6 | 267 | 2 | 14 | 33 | 4,875 | ||||||||||||||||||||||||
Total | 7 | 10 | 7 | 265 | 3 | 14 | 33 | 4,875 | ||||||||||||||||||||||||
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 | 0 | 0 | 2 | 0 | 1 | 0 | 1 | (1 | ) | |||||||||||||||||||||||
Trading at 100% and above of book value | 24 | 6 | 2 | 0 | 0 | 0 | 5 | 8 | ||||||||||||||||||||||||
Total | 24 | 6 | 4 | 0 | 1 | 0 | 6 | 7 | ||||||||||||||||||||||||
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 | 1 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 100% and above of book value | 2 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total | 3 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Summary: | ||||||||||||||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Trading at 70% to less than 100% of book value | 124 | (3 | ) | 70 | (5 | ) | 410 | (36 | ) | 75 | (15 | ) | ||||||||||||||||||||
Trading at 100% and above of book value | 615 | 37 | 34 | 270 | 12 | 15 | 633 | 4,981 | ||||||||||||||||||||||||
Total | 739 | $ | 34 | 104 | $ | 265 | 422 | $ | (21 | ) | 708 | $ | 4,966 | |||||||||||||||||||
2006 10-K Page 76
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(Dollars in millions) | Gross | Gross | ||||||||||||||||||
Number | Book | Fair | unrealized | investment | ||||||||||||||||
of issues | value | value | gain/loss | income | ||||||||||||||||
At December 31, 2006 | �� | |||||||||||||||||||
Taxable fixed maturities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||
Trading at 70% to less than 100% of book value | 318 | 1,943 | 1,893 | (50 | ) | 100 | ||||||||||||||
Trading at 100% and above of book value | 422 | 1,414 | 1,496 | 82 | 93 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 10 | |||||||||||||||
Total | 740 | 3,357 | 3,389 | 32 | 203 | |||||||||||||||
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 | 354 | 785 | 778 | (7 | ) | 26 | ||||||||||||||
Trading at 100% and above of book value | 791 | 1,597 | 1,638 | 41 | 72 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 3 | |||||||||||||||
Total | 1,145 | 2,382 | 2,416 | 34 | 101 | |||||||||||||||
Common equities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 2 | 35 | 33 | (2 | ) | 0 | ||||||||||||||
Trading at 100% and above of book value | 48 | 2,365 | 7,531 | 5,166 | 240 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 1 | |||||||||||||||
Total | 50 | 2,400 | 7,564 | 5,164 | 241 | |||||||||||||||
Preferred equities: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 4 | 18 | 18 | 0 | 1 | |||||||||||||||
Trading at 100% and above of book value | 31 | 203 | 217 | 14 | 11 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total | 35 | 221 | 235 | 14 | 12 | |||||||||||||||
Short-term investments: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 1 | 6 | 6 | 0 | 0 | |||||||||||||||
Trading at 100% and above of book value | 2 | 89 | 89 | 0 | 0 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 5 | |||||||||||||||
Total | 3 | 95 | 95 | 0 | 5 | |||||||||||||||
Portfolio summary: | ||||||||||||||||||||
Trading below 70% of book value | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Trading at 70% to less than 100% of book value | 679 | 2,787 | 2,728 | (59 | ) | 127 | ||||||||||||||
Trading at 100% and above of book value | 1,294 | 5,668 | 10,971 | 5,303 | 416 | |||||||||||||||
Securities sold in current year | 0 | 0 | 0 | 0 | 19 | |||||||||||||||
Total | 1,973 | $ | 8,455 | $ | 13,699 | $ | 5,244 | $ | 562 | |||||||||||
At December 31, 2005 | ||||||||||||||||||||
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 | |||||||||||
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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. |
/S/ John J. Schiff, Jr. | ||
Chairman and Chief Executive Officer | ||
/S/ Kenneth W. Stecher | ||
Chief Financial Officer, Executive Vice President, Secretary and Treasurer | ||
(Principal Accounting Officer) | ||
February 23, 2007 |
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Cincinnati, Ohio
February 23, 2007
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(Dollars in millions except per share data) | December 31, | December 31, | ||||||
2006 | 2005 | |||||||
ASSETS | ||||||||
Investments | ||||||||
Fixed maturities, at fair value (amortized cost: 2006—$5,739; 2005—$5,387) | $ | 5,805 | $ | 5,476 | ||||
Equity securities, at fair value (cost: 2006—$2,621; 2005—$2,128) | 7,799 | 7,106 | ||||||
Short-term investments, at fair value (amortized cost: 2006— $95; 2005—$75) | 95 | 75 | ||||||
Other invested assets | 60 | 45 | ||||||
Total investments | 13,759 | 12,702 | ||||||
Cash and cash equivalents | 202 | 119 | ||||||
Investment income receivable | 121 | 117 | ||||||
Finance receivable | 108 | 105 | ||||||
Premiums receivable | 1,128 | 1,116 | ||||||
Reinsurance receivable | 683 | 681 | ||||||
Prepaid reinsurance premiums | 13 | 14 | ||||||
Deferred policy acquisition costs | 453 | 429 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: | ||||||||
2006—$261; 2005—$232) | 193 | 168 | ||||||
Other assets | 58 | 66 | ||||||
Separate accounts | 504 | 486 | ||||||
Total assets | $ | 17,222 | $ | 16,003 | ||||
LIABILITIES | ||||||||
Insurance reserves | ||||||||
Loss and loss expense reserves | $ | 3,896 | $ | 3,661 | ||||
Life policy reserves | 1,409 | 1,343 | ||||||
Unearned premiums | 1,579 | 1,559 | ||||||
Other liabilities | 533 | 455 | ||||||
Deferred income tax | 1,653 | 1,622 | ||||||
Note payable | 49 | 0 | ||||||
6.125% senior notes due 2034 | 371 | 371 | ||||||
6.9% senior debentures due 2028 | 28 | 28 | ||||||
6.92% senior debentures due 2028 | 392 | 392 | ||||||
Separate accounts | 504 | 486 | ||||||
Total liabilities | 10,414 | 9,917 | ||||||
Commitments and contingent liabilities (Note 15) | — | — | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, par value—$2 per share; (authorized: 2006—500 million shares, 2005—500 million shares; issued: 2006—196 million shares, 2005—194 million shares) | 391 | 389 | ||||||
Paid-in capital | 1,015 | 969 | ||||||
Retained earnings | 2,786 | 2,088 | ||||||
Accumulated other comprehensive income | 3,379 | 3,284 | ||||||
Treasury stock at cost (2006—23 million shares, 2005—20 million shares) | (763 | ) | (644 | ) | ||||
Total shareholders’ equity | 6,808 | 6,086 | ||||||
Total liabilities and shareholders’ equity | $ | 17,222 | $ | 16,003 | ||||
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(In millions except per share data) | Years ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
REVENUES | ||||||||||||
Earned premiums | ||||||||||||
Property casualty | $ | 3,163 | $ | 3,058 | $ | 2,919 | ||||||
Life | 115 | 106 | 101 | |||||||||
Investment income, net of expenses | 570 | 526 | 492 | |||||||||
Realized investment gains and losses | 684 | 61 | 91 | |||||||||
Other income | 18 | 16 | 11 | |||||||||
Total revenues | 4,550 | 3,767 | 3,614 | |||||||||
BENEFITS AND EXPENSES | ||||||||||||
Insurance losses and policyholder benefits | 2,128 | 1,911 | 1,846 | |||||||||
Commissions | 630 | 627 | 615 | |||||||||
Other operating expenses | 354 | 302 | 270 | |||||||||
Taxes, licenses and fees | 77 | 72 | 75 | |||||||||
Increase in deferred policy acquisition costs | (21 | ) | (19 | ) | (30 | ) | ||||||
Interest expense | 53 | 51 | 38 | |||||||||
Total benefits and expenses | 3,221 | 2,944 | 2,814 | |||||||||
INCOME BEFORE INCOME TAXES | 1,329 | 823 | 800 | |||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||
Current | 404 | 188 | 171 | |||||||||
Deferred | (5 | ) | 33 | 45 | ||||||||
Total provision for income taxes | 399 | 221 | 216 | |||||||||
NET INCOME | $ | 930 | $ | 602 | $ | 584 | ||||||
PER COMMON SHARE | ||||||||||||
Net income—basic | $ | 5.36 | $ | 3.44 | $ | 3.30 | ||||||
Net income—diluted | 5.30 | 3.40 | 3.28 |
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(In millions) | Years ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
COMMON STOCK | ||||||||||||
Beginning of year | $ | 389 | $ | 370 | $ | 352 | ||||||
5% stock dividend | 0 | 18 | 18 | |||||||||
Stock options exercised | 2 | 1 | 0 | |||||||||
End of year | 391 | 389 | 370 | |||||||||
PAID-IN CAPITAL | ||||||||||||
Beginning of year | 969 | 618 | 306 | |||||||||
5% stock dividend | 0 | 341 | 312 | |||||||||
Stock loan | 0 | 0 | (3 | ) | ||||||||
Stock options exercised | 28 | 9 | 3 | |||||||||
Share-based compensation | 17 | 0 | 0 | |||||||||
Other | 1 | 1 | 0 | |||||||||
End of year | 1,015 | 969 | 618 | |||||||||
RETAINED EARNINGS | ||||||||||||
Beginning of year | 2,088 | 2,057 | 1,986 | |||||||||
Net income | 930 | 602 | 584 | |||||||||
5% stock dividend | 0 | (359 | ) | (330 | ) | |||||||
Dividends declared | (232 | ) | (212 | ) | (183 | ) | ||||||
End of year | 2,786 | 2,088 | 2,057 | |||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME | ||||||||||||
Beginning of year | 3,284 | 3,787 | 4,084 | |||||||||
Other comprehensive income, net | 127 | (503 | ) | (297 | ) | |||||||
Cumulative effect of change in accounting for pension obligations | (32 | ) | 0 | 0 | ||||||||
End of year | 3,379 | 3,284 | 3,787 | |||||||||
TREASURY STOCK | ||||||||||||
Beginning of year | (644 | ) | (583 | ) | (524 | ) | ||||||
Purchase | (120 | ) | (63 | ) | (66 | ) | ||||||
Reissued | 1 | 2 | 7 | |||||||||
End of year | (763 | ) | (644 | ) | (583 | ) | ||||||
Total shareholders’ equity | $ | 6,808 | $ | 6,086 | $ | 6,249 | ||||||
COMMON STOCK — NUMBER OF SHARES OUTSTANDING | ||||||||||||
Beginning of year | 174 | 167 | 160 | |||||||||
5% stock dividend | 0 | 9 | 8 | |||||||||
Shares issued | 1 | 0 | 0 | |||||||||
Purchase of treasury shares | (2 | ) | (2 | ) | (1 | ) | ||||||
End of year | 173 | 174 | 167 | |||||||||
COMPREHENSIVE INCOME | ||||||||||||
Net income | $ | 930 | $ | 602 | $ | 584 | ||||||
Other comprehensive income, net | 127 | (503 | ) | (297 | ) | |||||||
Total comprehensive income | $ | 1,057 | $ | 99 | $ | 287 | ||||||
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(In millions) | Years ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 930 | $ | 602 | $ | 584 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation, amortization and other non-cash items | 38 | 33 | 28 | |||||||||
Realized gains on investments | (684 | ) | (61 | ) | (91 | ) | ||||||
Share-based compensation | 17 | 0 | 0 | |||||||||
Interest credited to contract holders | 31 | 28 | 24 | |||||||||
Changes in: | ||||||||||||
Investment income receivable | (3 | ) | (10 | ) | (8 | ) | ||||||
Premiums and reinsurance receivable | (13 | ) | 2 | (118 | ) | |||||||
Deferred policy acquisition costs | (21 | ) | (19 | ) | (30 | ) | ||||||
Other assets | 17 | 5 | (13 | ) | ||||||||
Loss and loss expense reserves | 235 | 112 | 134 | |||||||||
Life policy reserves | 81 | 84 | 109 | |||||||||
Unearned premiums | 20 | 20 | 93 | |||||||||
Other liabilities | (5 | ) | (17 | ) | 83 | |||||||
Deferred income tax | (5 | ) | 33 | 45 | ||||||||
Current income tax | (23 | ) | (7 | ) | (17 | ) | ||||||
Net cash provided by operating activities | 615 | 805 | 823 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Sale of fixed maturities | 110 | 243 | 175 | |||||||||
Call or maturity of fixed maturities | 343 | 466 | 664 | |||||||||
Sale of equity securities | 859 | 104 | 536 | |||||||||
Collection of finance receivables | 35 | 34 | 32 | |||||||||
Purchase of fixed maturities | (753 | ) | (1,297 | ) | (1,718 | ) | ||||||
Purchase of equity securities | (689 | ) | (219 | ) | (148 | ) | ||||||
Change in short-term investments, net | (15 | ) | (4 | ) | (71 | ) | ||||||
Investment in buildings and equipment, net | (52 | ) | (44 | ) | (33 | ) | ||||||
Investment in finance receivables | (41 | ) | (45 | ) | (46 | ) | ||||||
Collection of negotiated settlement-software cost recovery | 0 | 0 | 9 | |||||||||
Change in other invested assets, net | (11 | ) | (9 | ) | (1 | ) | ||||||
Net cash used in investing activities | (214 | ) | (771 | ) | (601 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from 6.125% senior notes | 0 | 0 | 371 | |||||||||
Debt issuance costs from 6.125% senior notes | 0 | 0 | (4 | ) | ||||||||
Payment of cash dividends to shareholders | (228 | ) | (204 | ) | (177 | ) | ||||||
Purchase of treasury shares | (120 | ) | (61 | ) | (59 | ) | ||||||
Increase in notes payable | 49 | 0 | (183 | ) | ||||||||
Proceeds from stock options exercised | 27 | 11 | 3 | |||||||||
Contract holder funds deposited | 32 | 87 | 93 | |||||||||
Contract holder funds withdrawn | (78 | ) | (54 | ) | (51 | ) | ||||||
Excess tax benefits on share-based compensation | 2 | 0 | 0 | |||||||||
Other | (2 | ) | 0 | 0 | ||||||||
Net cash used in financing activities | (318 | ) | (221 | ) | (7 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 83 | (187 | ) | 215 | ||||||||
Cash and cash equivalents at beginning of year | 119 | 306 | 91 | |||||||||
Cash and cash equivalents at end of year | $ | 202 | $ | 119 | $ | 306 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Interest paid (net of capitalized interest: 2006—$2; 2005—$1; 2004—$0) | $ | 53 | $ | 51 | $ | 34 | ||||||
Income taxes paid | 429 | 195 | 188 | |||||||||
Non-cash activities: | ||||||||||||
Conversion of fixed maturity to equity security and fixed maturity investments | $ | 50 | $ | 42 | $ | 23 | ||||||
Equipment acquired under capital lease obligations | 12 | 0 | 0 |
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1.Summary of Significant Accounting Policies |
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Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Investment income summarized by investment category: | ||||||||||||
Interest on fixed maturities | $ | 300 | $ | 280 | $ | 252 | ||||||
Dividends on equity securities | 262 | 244 | 239 | |||||||||
Other investment income | 15 | 8 | 6 | |||||||||
Total | 577 | 532 | 497 | |||||||||
Less investment expenses | 7 | 6 | 5 | |||||||||
Total | $ | 570 | $ | 526 | $ | 492 | ||||||
Realized investment gains and losses summary: | ||||||||||||
Fixed maturities: | ||||||||||||
Gross realized gains | $ | 27 | $ | 36 | $ | 36 | ||||||
Gross realized losses | (2 | ) | (1 | ) | (20 | ) | ||||||
Other-than-temporary impairments | (1 | ) | (1 | ) | (5 | ) | ||||||
Equity securities: | ||||||||||||
Gross realized gains | 656 | 40 | 101 | |||||||||
Gross realized losses | (5 | ) | (6 | ) | (30 | ) | ||||||
Other-than-temporary impairments | 0 | 0 | (1 | ) | ||||||||
Embedded derivatives | 7 | (7 | ) | 10 | ||||||||
Other | 2 | 0 | 0 | |||||||||
Total | $ | 684 | $ | 61 | $ | 91 | ||||||
Change in unrealized investment gains and losses and other summary: | ||||||||||||
Fixed maturities | $ | (23 | ) | $ | (198 | ) | $ | (6 | ) | |||
Equity securities | 200 | (575 | ) | (448 | ) | |||||||
Adjustment to deferred acquisition costs and life policy reserves | 2 | 6 | 3 | |||||||||
Other | 2 | 18 | (6 | ) | ||||||||
Income taxes on above | (54 | ) | 246 | 160 | ||||||||
Total | $ | 127 | $ | (503 | ) | $ | (297 | ) | ||||
Amortized | Fair | % of Fair | ||||||||||
(In millions) | cost | value | value | |||||||||
Maturity dates occurring: | ||||||||||||
Less than one year | $ | 203 | $ | 204 | 3.5 | % | ||||||
One year through five years | 787 | 802 | 13.6 | |||||||||
After five years through ten years | 2,860 | 2,865 | 48.5 | |||||||||
After ten years through twenty years | 1,729 | 1,763 | 29.9 | |||||||||
Over twenty years | 255 | 266 | 4.5 | |||||||||
Total | $ | 5,834 | $ | 5,900 | 100.0 | % | ||||||
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Cost or | ||||||||||||||||
(In millions) | amortized | Gross unrealized | Fair | |||||||||||||
At December 31, | cost | gains | losses | value | ||||||||||||
2006 | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
States, municipalities and political subdivisions | $ | 2,382 | $ | 40 | $ | 6 | $ | 2,416 | ||||||||
Convertibles and bonds with warrants attached | 264 | 17 | 3 | 278 | ||||||||||||
Public utilities | 140 | 4 | 2 | 142 | ||||||||||||
United States government | 5 | 0 | 0 | 5 | ||||||||||||
Government-sponsored enterprises | 995 | 0 | 23 | 972 | ||||||||||||
Foreign government | 3 | 0 | 0 | 3 | ||||||||||||
All other corporate bonds and short-term investments | 2,045 | 61 | 22 | 2,084 | ||||||||||||
Total | $ | 5,834 | $ | 122 | $ | 56 | $ | 5,900 | ||||||||
Equity securities | $ | 2,621 | $ | 5,181 | $ | 3 | $ | 7,799 | ||||||||
2005 | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
States, municipalities and political subdivisions | $ | 2,083 | $ | 48 | $ | 14 | $ | 2,117 | ||||||||
Convertibles and bonds with warrants attached | 270 | 17 | 9 | 278 | ||||||||||||
Public utilities | 139 | 5 | 1 | 143 | ||||||||||||
United States government | 5 | 0 | 0 | 5 | ||||||||||||
Government-sponsored enterprises | 992 | 0 | 19 | 973 | ||||||||||||
Foreign government | 3 | 0 | 0 | 3 | ||||||||||||
All other corporate bonds and short-term investments | 1,970 | 89 | 27 | 2,032 | ||||||||||||
Total | $ | 5,462 | $ | 159 | $ | 70 | $ | 5,551 | ||||||||
Equity securities | $ | 2,128 | $ | 4,986 | $ | 8 | $ | 7,106 | ||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
(In millions) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
At December 31, | value | losses | value | losses | value | losses | ||||||||||||||||||
2006 | ||||||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
States, municipalities and political subdivisions | $ | 190 | $ | 1 | $ | 589 | $ | 5 | $ | 779 | $ | 6 | ||||||||||||
Convertibles and bonds with warrants attached | 6 | 0 | 43 | 3 | 49 | 3 | ||||||||||||||||||
Public utilities | 4 | 0 | 54 | 2 | 58 | 2 | ||||||||||||||||||
United States government | 3 | 0 | 1 | 0 | 4 | 0 | ||||||||||||||||||
Government-sponsored enterprises | 1 | 0 | 970 | 23 | 971 | 23 | ||||||||||||||||||
Foreign government | 3 | 0 | 0 | 0 | 3 | 0 | ||||||||||||||||||
All other corporate bonds and short-term investments | 88 | 2 | 726 | 20 | 814 | 22 | ||||||||||||||||||
Total | 295 | 3 | 2,383 | 53 | 2,678 | 56 | ||||||||||||||||||
Equity securities: | 39 | 2 | 11 | 1 | 50 | 3 | ||||||||||||||||||
Total | $ | 334 | $ | 5 | $ | 2,394 | $ | 54 | $ | 2,728 | $ | 59 | ||||||||||||
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 | 1 | 0 | 0 | 0 | 1 | 0 | ||||||||||||||||||
Government-sponsored enterprises | 607 | 8 | 354 | 11 | 961 | 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 | ||||||||||||
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2006 | 2005 | |||||||||||||||
(In millions) | Cost | Fair value | Cost | Fair value | ||||||||||||
Issuers: | ||||||||||||||||
Fifth Third Bancorp common stock | $ | 283 | $ | 2,979 | $ | 283 | $ | 2,745 | ||||||||
Exxon Mobil Corporation common stock | 133 | 687 | 133 | 503 | ||||||||||||
Alltel Corporation common stock and fixed maturity | 0 | 0 | 122 | 807 |
At December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Deferred policy acquisition costs asset at beginning of year | $ | 429 | $ | 400 | $ | 372 | ||||||
Capitalized deferred policy acquisition costs | 706 | 683 | 657 | |||||||||
Amortized deferred policy acquisition costs | (685 | ) | (664 | ) | (626 | ) | ||||||
Amortized shadow deferred policy acquisition costs | 3 | 10 | (3 | ) | ||||||||
Deferred policy acquisition costs asset at end of year | $ | 453 | $ | 429 | $ | 400 | ||||||
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Gross loss and loss expense reserves, January 1 | $ | 3,629 | $ | 3,514 | $ | 3,386 | ||||||
Less reinsurance receivable | 518 | 537 | 541 | |||||||||
Net loss and loss expense reserves, January 1 | 3,111 | 2,977 | 2,845 | |||||||||
Net incurred loss and loss expenses related to: | ||||||||||||
Current accident year | 2,124 | 1,972 | 1,949 | |||||||||
Prior accident years | (116 | ) | (160 | ) | (196 | ) | ||||||
Total incurred | 2,008 | 1,812 | 1,753 | |||||||||
Net paid loss and loss expenses related to: | ||||||||||||
Current accident year | 819 | 772 | 804 | |||||||||
Prior accident years | 944 | 906 | 817 | |||||||||
Total paid | 1,763 | 1,678 | 1,621 | |||||||||
Net loss and loss expense reserves, December 31 | 3,356 | 3,111 | 2,977 | |||||||||
Plus reinsurance receivable | 504 | 518 | 537 | |||||||||
Gross loss and loss expense reserves, December 31 | $ | 3,860 | $ | 3,629 | $ | 3,514 | ||||||
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At December 31, | ||||||||
(In millions) | 2006 | 2005 | ||||||
Ordinary/traditional life | $ | 453 | $ | 419 | ||||
Universal life | 396 | 376 | ||||||
Annuities | 537 | 523 | ||||||
Other | 23 | 25 | ||||||
Total | $ | 1,409 | $ | 1,343 | ||||
(In millions) | ||||||||||||||||
Interest | Year of | At December 31, | ||||||||||||||
rate | issue | 2006 | 2005 | |||||||||||||
6.90 | % | 1998 | Senior debentures, due 2028 | $ | 28 | $ | 28 | |||||||||
6.92 | % | 2005 | Senior debentures, due 2028 | 392 | 392 | |||||||||||
6.125 | % | 2004 | Senior notes, due 2034 | 375 | 375 | |||||||||||
Total | $ | 795 | $ | 795 | ||||||||||||
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2006 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||
Before | Income | Before | Income | Before | Income | |||||||||||||||||||||||||||||||
(In millions) | tax | tax | Net | tax | tax | Net | tax | tax | Net | |||||||||||||||||||||||||||
Accumulated unrealized gains (losses) on securities available for sale at January 1 | $ | 5,060 | $ | 1,776 | $ | 3,284 | $ | 5,809 | $ | 2,022 | $ | 3,787 | $ | 6,269 | $ | 2,183 | $ | 4,086 | ||||||||||||||||||
Net unrealized gains (losses) | 880 | 298 | 582 | (692 | ) | (226 | ) | (466 | ) | (372 | ) | (131 | ) | (241 | ) | |||||||||||||||||||||
Reclassification adjustment for (gains) losses included in net income | (701 | ) | (245 | ) | (456 | ) | (61 | ) | (21 | ) | (40 | ) | (91 | ) | (31 | ) | (60 | ) | ||||||||||||||||||
Adjustment to deferred acquisition costs and life policy reserves | 2 | 1 | 1 | 4 | 1 | 3 | 3 | 1 | 2 | |||||||||||||||||||||||||||
Effect on other comprehensive income | 181 | 54 | 127 | (749 | ) | (246 | ) | (503 | ) | (460 | ) | (161 | ) | (299 | ) | |||||||||||||||||||||
Accumulated unrealized gains (losses) on securities available for sale at December 31 | $ | 5,241 | $ | 1,830 | $ | 3,411 | $ | 5,060 | $ | 1,776 | $ | 3,284 | $ | 5,809 | $ | 2,022 | $ | 3,787 | ||||||||||||||||||
Accumulated unrealized gains (losses) on derivatives used in cash flow hedging relationships at January 1 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (3 | ) | $ | (1 | ) | $ | (2 | ) | |||||||||||||||
Net unrealized gains (losses) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Reclassification adjustment for (gains) losses included in net income | 0 | 0 | 0 | 0 | 0 | 0 | 3 | 1 | 2 | |||||||||||||||||||||||||||
Effect on other comprehensive income | 0 | 0 | 0 | 0 | 0 | 0 | 3 | 1 | 2 | |||||||||||||||||||||||||||
Accumulated unrealized gains (losses) on derivatives used in cash flow hedging relationships at December 31 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Accumulated unrealized losses for pension obligations at January 1 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Cumulative effect of change in accounting for pension obligations | (49 | ) | (17 | ) | (32 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Accumulated unrealized losses for pension obligations at December 31 | $ | (49 | ) | $ | (17 | ) | $ | (32 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Accumulated other comprehensive income at January 1 | $ | 5,060 | $ | 1,776 | $ | 3,284 | $ | 5,809 | $ | 2,022 | $ | 3,787 | $ | 6,266 | $ | 2,182 | $ | 4,084 | ||||||||||||||||||
Other comprehensive income (loss) | 181 | 54 | 127 | (749 | ) | (246 | ) | (503 | ) | (457 | ) | (160 | ) | (297 | ) | |||||||||||||||||||||
Cumulative effect of change in accounting for pension obligations | (49 | ) | (17 | ) | (32 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Accumulated other comprehensive income at December 31 | $ | 5,192 | $ | 1,813 | $ | 3,379 | $ | 5,060 | $ | 1,776 | $ | 3,284 | $ | 5,809 | $ | 2,022 | $ | 3,787 | ||||||||||||||||||
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Direct earned premiums | $ | 3,296 | $ | 3,209 | $ | 3,062 | ||||||
Assumed earned premiums | 26 | 28 | 32 | |||||||||
Ceded earned premiums | (158 | ) | (179 | ) | (175 | ) | ||||||
Net earned premiums | $ | 3,164 | $ | 3,058 | $ | 2,919 | ||||||
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Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Direct incurred loss and loss expenses | $ | 2,072 | $ | 1,898 | $ | 1,870 | ||||||
Assumed incurred loss and loss expenses | 13 | 40 | 17 | |||||||||
Ceded incurred loss and loss expenses | (77 | ) | (126 | ) | (134 | ) | ||||||
Net incurred loss and loss expenses | $ | 2,008 | $ | 1,812 | $ | 1,753 | ||||||
At December 31, | ||||||||
(In millions) | 2006 | 2005 | ||||||
Deferred tax liabilities: | ||||||||
Unrealized gains on investments and derivatives | $ | 1,824 | $ | 1,788 | ||||
Deferred acquisition costs | 142 | 135 | ||||||
Other | 36 | 32 | ||||||
Total | 2,002 | 1,955 | ||||||
Deferred tax assets: | ||||||||
Loss and loss expense reserves | 190 | 179 | ||||||
Unearned premiums | 109 | 108 | ||||||
Life policy reserves | 22 | 26 | ||||||
Other | 28 | 20 | ||||||
Total | 349 | 333 | ||||||
Net deferred tax liability | $ | 1,653 | $ | 1,622 | ||||
Years ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (decrease) resulting from: | ||||||||||||
Tax-exempt municipal bonds | (2.2 | ) | (3.2 | ) | (2.5 | ) | ||||||
Dividend exclusion | (3.9 | ) | (5.7 | ) | (5.7 | ) | ||||||
Other | 1.1 | 0.7 | 0.2 | |||||||||
Effective rate | 30.0 | % | 26.8 | % | 27.0 | % | ||||||
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Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Numerator: | ||||||||||||
Net income—basic and diluted | $ | 930 | $ | 602 | $ | 584 | ||||||
Denominator: | ||||||||||||
Weighted-average common shares outstanding | 173,423,395 | 175,062,669 | 176,476,722 | |||||||||
Effect of stock options | 2,027,946 | 2,053,457 | 1,900,126 | |||||||||
Adjusted weighted-average shares | 175,451,341 | 177,116,126 | 178,376,848 | |||||||||
Earnings per share: | ||||||||||||
Basic | $ | 5.36 | $ | 3.44 | $ | 3.30 | ||||||
Diluted | 5.30 | 3.40 | 3.28 | |||||||||
Number of anti-dilutive option shares | 1,336,150 | 0 | 264,602 | |||||||||
Exercise price of anti-dilutive option shares | $ | 45.26 | — | $ | 41.14 |
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Qualified Pension Plan | Supplemental Pension Plan | Totals | ||||||||||||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Change in projected benefit obligation: | ||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 235 | $ | 199 | $ | 9 | $ | 5 | $ | 244 | $ | 204 | ||||||||||||
Service cost | 16 | 13 | 0 | 0 | 16 | 13 | ||||||||||||||||||
Interest cost | 14 | 12 | 0 | 1 | 14 | 13 | ||||||||||||||||||
Plan amendments | 0 | 0 | 0 | 3 | 0 | 3 | ||||||||||||||||||
Actuarial loss | 11 | 18 | 0 | 0 | 11 | 18 | ||||||||||||||||||
Benefits paid | (10 | ) | (7 | ) | (4 | ) | 0 | (14 | ) | (7 | ) | |||||||||||||
Projected benefit obligation at end of year | $ | 266 | $ | 235 | $ | 5 | $ | 9 | $ | 271 | $ | 244 | ||||||||||||
Accumulated benefit obligation | $ | 200 | $ | 165 | $ | 4 | $ | 6 | $ | 204 | $ | 171 | ||||||||||||
Change in plan assets: | ||||||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 173 | 158 | 0 | 0 | $ | 173 | $ | 158 | |||||||||||||||
Actual return on plan assets | 35 | 12 | 0 | 0 | 35 | 12 | ||||||||||||||||||
Employer contributions | 10 | 10 | 4 | 0 | 14 | 10 | ||||||||||||||||||
Benefits paid | (10 | ) | (7 | ) | (4 | ) | 0 | (14 | ) | (7 | ) | |||||||||||||
Fair value of plan assets at end of year | $ | 208 | $ | 173 | $ | 0 | $ | 0 | $ | 208 | $ | 173 | ||||||||||||
Funded (unfunded) status: | ||||||||||||||||||||||||
Funded (unfunded) status at end of year | $ | (58 | ) | $ | (62 | ) | $ | (5 | ) | $ | (9 | ) | $ | (63 | ) | $ | (71 | ) | ||||||
Qualified | Supplemental | |||||||||||
(In millions) | Pension Plan | Pension Plan | Total | |||||||||
Amounts recognized in the statement of financial position consist of: | ||||||||||||
Noncurrent liability | $ | (58 | ) | $ | (5 | ) | $ | (63 | ) | |||
Total | $ | (58 | ) | $ | (5 | ) | $ | (63 | ) | |||
Amounts recognized in accumulated other comprehensive income not yet recognized as a component of net periodic benefit cost consist of: | ||||||||||||
Net actuarial loss/(gain) | $ | 40 | $ | (1 | ) | $ | 39 | |||||
Prior service cost | 6 | 4 | 10 | |||||||||
Total | $ | 46 | $ | 3 | $ | 49 | ||||||
Qualified Pension Plan | Supplemental Pension Plan | Total | ||||||||||||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Projected benefit obligation in excess of plan assets: | ||||||||||||||||||||||||
Projected benefit obligation, at end of year | $ | 266 | $ | 235 | $ | 5 | $ | 9 | $ | 271 | $ | 244 | ||||||||||||
Fair value of plan assets at end of year | 208 | 173 | 0 | 0 | 208 | 173 |
Supplemental Pension Plan | ||||||||
(In millions) | 2006 | 2005 | ||||||
Accumulated benefit obligation in excess of plan assets: | ||||||||
Projected benefit obligation, at end of year | $ | 5 | $ | 9 | ||||
Accumulated benefit obligation, at end of year | 4 | 6 | ||||||
Fair value of plan assets at end of year | 0 | 0 |
2006 | 2005 | |||||||
Discount rate | 5.75 | % | 5.50 | % | ||||
Rate of compensation increase | 4-6 | 5-7 |
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(In millions) | Qualified Pension Plan | Supplemental Pension Plan | Total | |||||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||
Service cost | $ | 16 | $ | 13 | $ | 11 | $ | 0 | $ | 0 | $ | 0 | $ | 16 | $ | 13 | $ | 11 | ||||||||||||||||||
Interest cost | 14 | 12 | 10 | 0 | 1 | 0 | 14 | 13 | 10 | |||||||||||||||||||||||||||
Expected return on plan assets | (14 | ) | (13 | ) | (12 | ) | 0 | 0 | 0 | (14 | ) | (13 | ) | (12 | ) | |||||||||||||||||||||
Amortization of actuarial gain, prior service cost and transition asset | 2 | 1 | 0 | 1 | 0 | 0 | 3 | 1 | 0 | |||||||||||||||||||||||||||
Net periodic benefit cost | $ | 18 | $ | 13 | $ | 9 | $ | 1 | $ | 1 | $ | 0 | $ | 19 | $ | 14 | $ | 9 | ||||||||||||||||||
Qualified Pension Plan | Supplemental Pension Plan | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Discount rate | 5.50 | % | 5.75 | % | 6.00 | % | 5.50 | % | 5.75 | % | 6.00 | % | ||||||||||||
Expected return on plan assets | 8.00 | 8.00 | 8.00 | NA | NA | NA | ||||||||||||||||||
Rate of compensation increase | 5-7 | 5-7 | 5-7 | 5-7 | 5-7 | 5-7 |
At December 31, | ||||||||
2006 | 2005 | |||||||
Asset category: | ||||||||
Equity securities | 94 | % | 93 | % | ||||
Fixed maturities | 4 | 5 | ||||||
Cash and cash equivalents | 2 | 2 | ||||||
Total | 100 | % | 100 | % | ||||
(In millions) | Qualified | Supplemental | ||||||||||
For the years ended December 31, | Pension Plan | Pension Plan | Total | |||||||||
2007 | $ | 9 | $ | 0 | $ | 9 | ||||||
2008 | 12 | 2 | 14 | |||||||||
2009 | 13 | 0 | 13 | |||||||||
2010 | 10 | 2 | 12 | |||||||||
2011 | 15 | 0 | 15 | |||||||||
Years 2012-2016 | 108 | 1 | 109 |
(In millions) | Qualified | Supplemental | ||||||||||
Pension Plan | Pension Plan | Total | ||||||||||
Actuarial (gain)/loss | $ | 2 | $ | (1 | ) | $ | 1 | |||||
Prior service cost | 0 | 1 | 1 | |||||||||
Total | $ | 2 | $ | 0 | $ | 2 | ||||||
Qualified Pension Plan | Supplemental Pension Plan | Total | ||||||||||||||||||||||||||||||||||
Without | With | Increase/ | Without | With | Increase/ | Without | With | Increase/ | ||||||||||||||||||||||||||||
(In millions) | FAS 158 | FAS 158 | (Decrease) | FAS 158 | FAS 158 | (Decrease) | FAS 158 | FAS 158 | (Decrease) | |||||||||||||||||||||||||||
Other liabilities | $ | 12 | $ | 58 | $ | 46 | $ | 2 | $ | 5 | $ | 3 | $ | 14 | $ | 63 | $ | 49 | ||||||||||||||||||
Deferred income tax | (4 | ) | (20 | ) | (16 | ) | (1 | ) | (2 | ) | (1 | ) | (5 | ) | (22 | ) | (17 | ) | ||||||||||||||||||
Accumulated other comprehensive income | 0 | (30 | ) | (30 | ) | 0 | (2 | ) | (2 | ) | 0 | (32 | ) | (32 | ) |
• | policy acquisition costs are expensed when incurred, |
• | life insurance reserves are based upon different actuarial assumptions and |
• | deferred income taxes are valued and established using a different basis. |
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SAP Net Income | Capital and Surplus | |||||||||||||||||||
Years ended December 31, | At December 31, | |||||||||||||||||||
(In millions) | 2006 | 2005 | 2004 | 2006 | 2005 | |||||||||||||||
The Cincinnati Insurance Company | $ | 572 | $ | 517 | $ | 588 | $ | 4,723 | $ | 4,220 | ||||||||||
The Cincinnati Casualty Company | 15 | 13 | 9 | 282 | 263 | |||||||||||||||
The Cincinnati Indemnity Company | 2 | 2 | 2 | 62 | 63 | |||||||||||||||
The Cincinnati Life Insurance Company | 28 | 21 | 28 | 479 | 451 |
• | 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 |
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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. |
• | compensation cost for all stock options granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R) | |
• | compensation cost for all non-vested stock options granted prior to January 1, 2006, that vested during 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and | |
• | compensation cost for all non-vested stock options that have nonsubstantive vesting requirements, such as those to associates who are eligible for retirement. |
• | 2005 — Dividend yield of 2.66 percent; expected volatility of 25.61 percent; risk-free interest rate of 4.62 percent; and expected lives of 10 years. | |
• | 2004 — Dividend yield of 2.40 percent; expected volatility of 25.65 percent; risk-free interest rate of 4.37 percent; and expected lives of 10 years. |
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Years ended December 31, | ||||||||||
(In millions except per share data) | 2005 | 2004 | ||||||||
Net income | As reported | $ | 602 | $ | 584 | |||||
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 13 | 12 | ||||||||
Pro forma | $ | 589 | $ | 572 | ||||||
Net income per common share—basic | As reported | $ | 3.44 | $ | 3.30 | |||||
Pro forma | 3.36 | 3.24 | ||||||||
Net income per common share—diluted | As reported | $ | 3.40 | $ | 3.28 | |||||
Pro forma | 3.32 | 3.21 |
Weighted- | Aggregate | |||||||||||
average | intrinsic | |||||||||||
(Dollars in millions, shares in thousands) | Shares | exercise | value | |||||||||
2006 | ||||||||||||
Outstanding at beginning of year | 10,589 | $ | 33.70 | |||||||||
Granted/reinstated | 1,372 | 45.26 | ||||||||||
Exercised | (1,084 | ) | 24.93 | |||||||||
Forfeited/revoked | (210 | ) | 36.16 | |||||||||
Outstanding at end of period | 10,667 | 36.03 | $ | 99 | ||||||||
Options exercisable at end of period | 7,985 | $ | 33.70 | $ | 93 | |||||||
Weighted-average fair value of options granted during the period | 10.09 | |||||||||||
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 period | 10,589 | 33.70 | $ | 116 | ||||||||
Options exercisable at end of period | 7,794 | $ | 31.69 | $ | 101 | |||||||
Weighted-average fair value of options granted during the period | 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 period | 9,698 | 32.05 | $ | 98 | ||||||||
Options exercisable at end of period | 7,050 | $ | 30.50 | $ | 82 | |||||||
Weighted-average fair value of options granted during the period | 11.18 |
Options outstanding | Options exercisable | |||||||||||||||||||
Weighted-average | Weighted- | Weighted- | ||||||||||||||||||
(Shares in thousands) | remaining contractual | average | average | |||||||||||||||||
Range of exercise prices | Shares | life | exercise price | Shares | exercise price | |||||||||||||||
$15.00 to $19.99 | 2 | 0.11 yrs | $ | 19.34 | 2 | $ | 19.34 | |||||||||||||
$20.00 to $24.99 | 161 | 0.28 yrs | 20.60 | 161 | 20.60 | |||||||||||||||
$25.00 to $29.99 | 944 | 3.01 yrs | 27.07 | 944 | 27.07 | |||||||||||||||
$30.00 to $34.99 | 4,571 | 4.19 yrs | 32.66 | 4,571 | 32.66 | |||||||||||||||
$35.00 to $39.99 | 1,968 | 5.31 yrs | 38.44 | 1,535 | 38.34 | |||||||||||||||
$40.00 to $44.99 | 1,685 | 6.94 yrs | 41.54 | 757 | 41.45 | |||||||||||||||
$45.00 to $49.99 | 1,336 | 9.08 yrs | 45.26 | 15 | 45.26 | |||||||||||||||
Total | 10,667 | 5.28 yrs | 36.03 | 7,985 | 33.70 | |||||||||||||||
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• | 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 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. |
o | 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. | ||
o | For the life insurance segment, we calculate underwriting income or loss by recording 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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Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Revenues: | ||||||||||||
Commercial lines insurance | ||||||||||||
Commercial casualty | $ | 831 | $ | 759 | $ | 686 | ||||||
Commercial property | 491 | 467 | 440 | |||||||||
Commercial auto | 453 | 457 | 450 | |||||||||
Workers’ compensation | 366 | 328 | 313 | |||||||||
Specialty packages | 141 | 137 | 133 | |||||||||
Surety and executive risk | 93 | 80 | 80 | |||||||||
Machinery and equipment | 27 | 26 | 24 | |||||||||
Total commercial lines insurance | 2,402 | 2,254 | 2,126 | |||||||||
Personal lines insurance | ||||||||||||
Personal auto | 385 | 433 | 451 | |||||||||
Homeowner | 289 | 282 | 256 | |||||||||
Other personal lines | 88 | 89 | 86 | |||||||||
Total personal lines insurance | 762 | 804 | 793 | |||||||||
Life insurance | 118 | 110 | 104 | |||||||||
Investment operations | 1,254 | 587 | 583 | |||||||||
Other | 15 | 12 | 8 | |||||||||
Consolidated eliminations | (1 | ) | 0 | 0 | ||||||||
Total | $ | 4,550 | $ | 3,767 | $ | 3,614 | ||||||
Income (loss) before income taxes: | ||||||||||||
Insurance underwriting results: | ||||||||||||
Commercial lines insurance | $ | 208 | $ | 285 | $ | 338 | ||||||
Personal lines insurance | (27 | ) | 45 | (40 | ) | |||||||
Life insurance | (1 | ) | 7 | 2 | ||||||||
Investment operations | 1,200 | 536 | 537 | |||||||||
Other | (51 | ) | (50 | ) | (37 | ) | ||||||
Total | $ | 1,329 | $ | 823 | $ | 800 | ||||||
Identifiable assets: | ||||||||||||
Property casualty insurance | $ | 2,220 | $ | 2,167 | ||||||||
Life insurance | 886 | 845 | ||||||||||
Investment operations | 13,820 | 12,774 | ||||||||||
Other | 296 | 217 | ||||||||||
Total | $ | 17,222 | $ | 16,003 | ||||||||
Quarter | ||||||||||||||||||||
(Dollars in millions except per share data) | 1st | 2nd | 3rd | 4th | Full year | |||||||||||||||
2006 | ||||||||||||||||||||
Revenues | $ | 1,607 | $ | 981 | $ | 967 | $ | 995 | $ | 4,550 | ||||||||||
Income before income taxes | 834 | 175 | 148 | 172 | 1,329 | |||||||||||||||
Net income | 552 | 132 | 115 | 130 | 930 | |||||||||||||||
Net income per common share—basic | 3.17 | 0.77 | 0.67 | 0.75 | 5.36 | |||||||||||||||
Net income per common share—diluted | 3.13 | 0.76 | 0.66 | 0.75 | 5.30 | |||||||||||||||
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 |
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• | 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 | |
• | 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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a) | Financial Statements — information contained in Part II, Item 8 of this report, Pages 81-85 | |
b) | Exhibits — see Index of Exhibits, Page 117 | |
c) | Financial Statement Schedules | |
Schedule I — Summary of Investments — Other than Investments in Related Parties, Page 106 | ||
Schedule II — Condensed Financial Statements of Registrant, Page 108 | ||
Schedule III — Supplementary Insurance Information, Page 111 | ||
Schedule IV — Reinsurance, Page 113 | ||
Schedule V — Valuation and Qualifying Accounts, Page 114 | ||
Schedule VI — Supplementary Information Concerning Property Casualty Insurance Operations, Page 115 |
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At December 31, 2006 | ||||||||||||
(In millions) | Cost or | Fair | Balance sheet | |||||||||
Type of investment | amortized cost | value | amount | |||||||||
Fixed maturities: | ||||||||||||
United States government: | ||||||||||||
The Cincinnati Insurance Company | $ | 1 | $ | 1 | $ | 1 | ||||||
The Cincinnati Life Insurance Company | 4 | 4 | 4 | |||||||||
Total | 5 | 5 | 5 | |||||||||
Government-sponsored enterprises: | ||||||||||||
The Cincinnati Insurance Company | 620 | 605 | 605 | |||||||||
The Cincinnati Casualty Company | 6 | 6 | 6 | |||||||||
The Cincinnati Indemnity Company | 2 | 2 | 2 | |||||||||
The Cincinnati Life Insurance Company | 367 | 359 | 359 | |||||||||
Total | 995 | 972 | 972 | |||||||||
Foreign government: | ||||||||||||
The Cincinnati Insurance Company | 3 | 3 | 3 | |||||||||
Total | 3 | 3 | 3 | |||||||||
States, municipalities and political subdivisions: | ||||||||||||
The Cincinnati Insurance Company | 2,218 | 2,248 | 2,248 | |||||||||
The Cincinnati Casualty Company | 127 | 129 | 129 | |||||||||
The Cincinnati Indemnity Company | 32 | 32 | 32 | |||||||||
The Cincinnati Life Insurance Company | 5 | 7 | 7 | |||||||||
Total | 2,382 | 2,416 | 2,416 | |||||||||
Public utilities: | ||||||||||||
The Cincinnati Insurance Company | 55 | 56 | 56 | |||||||||
The Cincinnati Casualty Company | 4 | 4 | 4 | |||||||||
The Cincinnati Indemnity Company | 1 | 1 | 1 | |||||||||
The Cincinnati Life Insurance Company | 78 | 79 | 79 | |||||||||
Cincinnati Financial Corporation | 2 | 2 | 2 | |||||||||
Total | 140 | 142 | 142 | |||||||||
Convertibles and bonds with warrants attached: | ||||||||||||
The Cincinnati Insurance Company | 163 | 174 | 174 | |||||||||
The Cincinnati Life Insurance Company | 92 | 95 | 95 | |||||||||
Cincinnati Financial Corporation | 9 | 9 | 9 | |||||||||
Total | 264 | 278 | 278 | |||||||||
All other corporate bonds: | ||||||||||||
The Cincinnati Insurance Company | 977 | 995 | 995 | |||||||||
The Cincinnati Casualty Company | 27 | 29 | 29 | |||||||||
The Cincinnati Indemnity Company | 10 | 11 | 11 | |||||||||
The Cincinnati Life Insurance Company | 819 | 837 | 837 | |||||||||
Cincinnati Financial Corporation | 117 | 117 | 117 | |||||||||
Total | 1,950 | 1,989 | 1,989 | |||||||||
Total fixed maturities | $ | 5,739 | $ | 5,805 | $ | 5,805 | ||||||
2006 10-K Page 106
Table of Contents
Summary of Investments — Other than Investments in Related Parties
At December 31, 2006 | ||||||||||||
(In millions) | Cost or | Fair | Balance sheet | |||||||||
Type of investment | amortized cost | value | amount | |||||||||
Equity securities: | ||||||||||||
Common stocks: | ||||||||||||
Public utilities: | ||||||||||||
The Cincinnati Insurance Company | $ | 82 | $ | 144 | $ | 144 | ||||||
The Cincinnati Casualty Company | 2 | 7 | 7 | |||||||||
The Cincinnati Life Insurance Company | 11 | 28 | 28 | |||||||||
CinFin Capital Management Company | 1 | 1 | 1 | |||||||||
Cincinnati Financial Corporation | 29 | 86 | 86 | |||||||||
Total | 125 | 266 | 266 | |||||||||
Banks, trust and insurance companies: | ||||||||||||
The Cincinnati Insurance Company | 466 | 2,485 | 2,485 | |||||||||
The Cincinnati Casualty Company | 16 | 84 | 84 | |||||||||
The Cincinnati Life Insurance Company | 59 | 182 | 182 | |||||||||
CinFin Capital Management Company | 1 | 2 | 2 | |||||||||
Cincinnati Financial Corporation | 502 | 1,813 | 1,813 | |||||||||
Total | 1,044 | 4,566 | 4,566 | |||||||||
Industrial, miscellaneous and all other: | ||||||||||||
The Cincinnati Insurance Company | 703 | 1,784 | 1,784 | |||||||||
The Cincinnati Casualty Company | 19 | 71 | 71 | |||||||||
The Cincinnati Indemnity Company | 6 | 18 | 18 | |||||||||
The Cincinnati Life Insurance Company | 118 | 283 | 283 | |||||||||
CinFin Capital Management Company | 4 | 5 | 5 | |||||||||
Cincinnati Financial Corporation | 381 | 571 | 571 | |||||||||
Total | 1,231 | 2,732 | 2,732 | |||||||||
Nonredeemable preferred stocks: | ||||||||||||
The Cincinnati Insurance Company | 169 | 182 | 182 | |||||||||
The Cincinnati Life Insurance Company | 38 | 39 | 39 | |||||||||
CinFin Capital Management Company | 0 | 0 | 0 | |||||||||
Cincinnati Financial Corporation | 14 | 14 | 14 | |||||||||
Total | 221 | 235 | 235 | |||||||||
Total equity securities | $ | 2,621 | $ | 7,799 | $ | 7,799 | ||||||
Short-term investments: | ||||||||||||
The Cincinnati Insurance Company | $ | 92 | $ | 92 | $ | 92 | ||||||
The Cincinnati Life Insurance Company | 3 | 3 | 3 | |||||||||
Total short-term investments | $ | 95 | $ | 95 | $ | 95 | ||||||
Other invested assets: | ||||||||||||
Real estate: | ||||||||||||
The Cincinnati Life Insurance Company | $ | 3 | — | $ | 3 | |||||||
Policy loans: | ||||||||||||
The Cincinnati Life Insurance Company | 32 | — | 32 | |||||||||
Limited partnerships: | ||||||||||||
Cincinnati Financial Corporation | 25 | — | 25 | |||||||||
Total other invested assets | $ | 60 | — | $ | 60 | |||||||
Total investments | $ | 8,515 | — | $ | 13,759 | |||||||
2006 10-K Page 107
Table of Contents
Condensed Balance Sheets
At December 31, | ||||||||
(In millions) | 2006 | 2005 | ||||||
ASSETS | ||||||||
Investments | ||||||||
Fixed maturities, at fair value | $ | 128 | $ | 123 | ||||
Equity securities, at fair value | 2,484 | 2,444 | ||||||
Other invested assets | 25 | 13 | ||||||
Cash and cash equivalents | 38 | 7 | ||||||
Equity in net assets of subsidiaries | 5,303 | 4,685 | ||||||
Investment income receivable | 16 | 17 | ||||||
Land, building and equipment, net, for company use (accumulated depreciation: 2006—$64; 2005—$61) | 121 | 98 | ||||||
Prepaid federal income tax | 0 | 32 | ||||||
Other assets | 19 | 17 | ||||||
Due from subsidiaries | 150 | 144 | ||||||
Total assets | $ | 8,284 | $ | 7,580 | ||||
LIABILITIES | ||||||||
Dividends declared but unpaid | $ | 58 | $ | 53 | ||||
Deferred federal income tax | 526 | 635 | ||||||
6.92% senior debentures due 2028 | 392 | 392 | ||||||
6.9% senior debentures due 2028 | 28 | 28 | ||||||
6.125% senior notes due 2034 | 371 | 371 | ||||||
Other liabilities | 101 | 15 | ||||||
Total liabilities | 1,476 | 1,494 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock | 391 | 389 | ||||||
Paid-in capital | 1,015 | 969 | ||||||
Retained earnings | 2,786 | 2,088 | ||||||
Accumulated other comprehensive income | 3,379 | 3,284 | ||||||
Treasury stock at cost | (763 | ) | (644 | ) | ||||
Total shareholders’ equity | 6,808 | 6,086 | ||||||
Total liabilities and shareholders’ equity | $ | 8,284 | $ | 7,580 | ||||
2006 10-K Page 108
Table of Contents
Condensed Statements of Income
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
REVENUES | ||||||||||||
Dividends from subsidiaries | $ | 275 | $ | 275 | $ | 175 | ||||||
Investment income, net of expenses | 98 | 89 | 110 | |||||||||
Realized gains on investments | 410 | 2 | 18 | |||||||||
Other revenue | 10 | 10 | 9 | |||||||||
Total revenues | 793 | 376 | 312 | |||||||||
EXPENSES | ||||||||||||
Interest expense | 51 | 52 | 36 | |||||||||
Depreciation expense | 3 | 3 | 3 | |||||||||
Other expenses | 18 | 16 | 14 | |||||||||
Total expenses | 72 | 71 | 53 | |||||||||
INCOME BEFORE INCOME TAXES AND EARNINGS OF SUBSIDIARIES | 721 | 305 | 259 | |||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||
Current | 153 | (27 | ) | (17 | ) | |||||||
Deferred | (11 | ) | 20 | 20 | ||||||||
Total provision for income taxes | 142 | (7 | ) | 3 | ||||||||
NET INCOME BEFORE EARNINGS OF SUBSIDIARIES | 579 | 312 | 256 | |||||||||
Increase in undistributed earnings of subsidiaries | 351 | 290 | 328 | |||||||||
NET INCOME | $ | 930 | $ | 602 | $ | 584 | ||||||
Table of Contents
Condensed Statements of Cash Flows
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 930 | $ | 602 | $ | 584 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1 | 3 | 3 | |||||||||
Realized (gains) on investments | (410 | ) | (2 | ) | (18 | ) | ||||||
Changes in: | ||||||||||||
Investment income receivable | 1 | 0 | 10 | |||||||||
Current federal income taxes | 48 | (12 | ) | (30 | ) | |||||||
Deferred income taxes | (11 | ) | 19 | 20 | ||||||||
Other assets | 2 | (3 | ) | (2 | ) | |||||||
Other liabilities | 16 | 0 | 6 | |||||||||
Undistributed earnings of subsidiaries | (351 | ) | (290 | ) | (328 | ) | ||||||
Net cash provided by operating activities | 226 | 317 | 245 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Sale of fixed-maturities | 4 | 8 | 193 | |||||||||
Call or maturity of fixed-maturities | 36 | 2 | 50 | |||||||||
Sale of equity securities | 511 | 18 | 36 | |||||||||
Purchase of fixed-maturities | (42 | ) | (9 | ) | (95 | ) | ||||||
Purchase of equity securities | (351 | ) | (12 | ) | (196 | ) | ||||||
Change in short-term investments, net | 3 | 21 | (21 | ) | ||||||||
Investment in buildings and equipment, net | (26 | ) | (24 | ) | (1 | ) | ||||||
Change in other invested assets, net | (8 | ) | (8 | ) | (1 | ) | ||||||
Net cash (used in) provided by investing activities | 127 | (4 | ) | (35 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from 6.125% senior notes | 0 | 0 | 371 | |||||||||
Debt issuance costs from 6.125% senior notes | 0 | 0 | (4 | ) | ||||||||
Decrease in notes payable | 0 | 0 | (152 | ) | ||||||||
Payment of cash dividends to shareholders | (228 | ) | (204 | ) | (177 | ) | ||||||
Purchase/issuance of treasury shares | (119 | ) | (61 | ) | (59 | ) | ||||||
Proceeds from stock options exercised | 30 | 11 | 3 | |||||||||
Net transfers to subsidiaries | (5 | ) | (80 | ) | (170 | ) | ||||||
Net cash used in financing activities | (322 | ) | (334 | ) | (188 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 31 | (21 | ) | 22 | ||||||||
Cash and cash equivalents at beginning of year | 7 | 28 | 6 | |||||||||
Cash and cash equivalents at end of year | $ | 38 | $ | 7 | $ | 28 | ||||||
Table of Contents
Supplementary Insurance Information
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 235 | $ | 226 | $ | 218 | ||||||
Personal lines insurance | 80 | 85 | 88 | |||||||||
Total property casualty insurance | 315 | 311 | 306 | |||||||||
Life insurance | 138 | 118 | 94 | |||||||||
Total | $ | 453 | $ | 429 | $ | 400 | ||||||
Future policy benefits, losses, claims and expense losses: | ||||||||||||
Commercial lines insurance | $ | 3,414 | $ | 3,173 | $ | 3,016 | ||||||
Personal lines insurance | 446 | 456 | 498 | |||||||||
Total property casualty insurance | 3,860 | 3,629 | 3,514 | |||||||||
Life insurance | 1,430 | 1,362 | 1,213 | |||||||||
Total (1) | $ | 5,290 | $ | 4,991 | $ | 4,727 | ||||||
Unearned premiums: | ||||||||||||
Commercial lines insurance | $ | 1,195 | $ | 1,150 | $ | 1,112 | ||||||
Personal lines insurance | 382 | 407 | 425 | |||||||||
Total property casualty insurance | 1,577 | 1,557 | 1,537 | |||||||||
Life insurance | 2 | 2 | 2 | |||||||||
Total (1) | $ | 1,579 | $ | 1,559 | $ | 1,539 | ||||||
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 | 15 | 13 | 16 | |||||||||
Total (1) | $ | 15 | $ | 13 | $ | 16 | ||||||
Premium revenues: | ||||||||||||
Commercial lines insurance | $ | 2,402 | $ | 2,254 | $ | 2,126 | ||||||
Personal lines insurance | 762 | 804 | 793 | |||||||||
Total property casualty insurance | 3,164 | 3,058 | 2,919 | |||||||||
Life insurance | 115 | 106 | 101 | |||||||||
Consolidated eliminations | (1 | ) | 0 | 0 | ||||||||
Total | $ | 3,278 | $ | 3,164 | $ | 3,020 | ||||||
Table of Contents
Supplementary Insurance Information
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Investment income, net of expenses: | ||||||||||||
Commercial lines insurance | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance | 0 | 0 | 0 | |||||||||
Total property casualty insurance (3) | 367 | 338 | 289 | |||||||||
Life insurance | 108 | 99 | 91 | |||||||||
Total | $ | 475 | $ | 437 | $ | 380 | ||||||
Benefits, claims losses and settlement expenses: | ||||||||||||
Commercial lines insurance | $ | 1,466 | $ | 1,298 | $ | 1,154 | ||||||
Personal lines insurance | 542 | 514 | 599 | |||||||||
Total property casualty insurance | 2,008 | 1,812 | 1,753 | |||||||||
Life insurance | 122 | 102 | 95 | |||||||||
Total | $ | 2,130 | $ | 1,914 | $ | 1,848 | ||||||
Amortization of deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 504 | $ | 473 | $ | 448 | ||||||
Personal lines insurance | 160 | 168 | 162 | |||||||||
Total property casualty insurance | 664 | 641 | 610 | |||||||||
Life insurance | 21 | 23 | 16 | |||||||||
Total (2) | $ | 685 | $ | 664 | $ | 626 | ||||||
Other operating expenses: | ||||||||||||
Commercial lines insurance | $ | 224 | $ | 198 | $ | 186 | ||||||
Personal lines insurance | 87 | 77 | 72 | |||||||||
Total property casualty insurance | 311 | 275 | 258 | |||||||||
Life insurance | 30 | 29 | 37 | |||||||||
Total (2) | $ | 341 | $ | 304 | $ | 295 | ||||||
Written premiums: | ||||||||||||
Commercial lines insurance | $ | 2,442 | $ | 2,290 | $ | 2,186 | ||||||
Personal lines insurance | 736 | 786 | 811 | |||||||||
Total property casualty insurance | 3,178 | 3,076 | 2,997 | |||||||||
Accident health insurance | 3 | 3 | 3 | |||||||||
Consolidated eliminations | (1 | ) | 0 | 0 | ||||||||
Total | $ | 3,180 | $ | 3,079 | $ | 3,000 | ||||||
Table of Contents
Reinsurance
Years ended December 31, | ||||||||||||
(Dollars in millions) | 2006 | 2005 | 2004 | |||||||||
Gross amounts: | ||||||||||||
Life insurance in force | $ | 56,968 | $ | 51,488 | $ | 44,916 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 2,513 | $ | 2,386 | $ | 2,246 | ||||||
Personal lines insurance | 783 | 823 | 816 | |||||||||
Total property casualty insurance | 3,296 | 3,209 | 3,062 | |||||||||
Life insurance | 159 | 150 | 138 | |||||||||
Consolidated eliminations | (1 | ) | 0 | 0 | ||||||||
Total | $ | 3,454 | $ | 3,359 | $ | 3,200 | ||||||
Ceded amounts to other companies: | ||||||||||||
Life insurance in force | $ | 31,744 | $ | 30,705 | $ | 28,196 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 134 | $ | 157 | $ | 148 | ||||||
Personal lines insurance | 24 | 22 | 27 | |||||||||
Total property casualty insurance | 158 | 179 | 175 | |||||||||
Life insurance | 44 | 44 | 37 | |||||||||
Total | $ | 202 | $ | 223 | $ | 212 | ||||||
Assumed amounts from other companies: | ||||||||||||
Life insurance in force | $ | 3 | $ | 5 | $ | 5 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 24 | $ | 25 | $ | 28 | ||||||
Personal lines insurance | 2 | 3 | 4 | |||||||||
Total property casualty insurance | 26 | 28 | 32 | |||||||||
Life insurance | 0 | 0 | 0 | |||||||||
Total | $ | 26 | $ | 28 | $ | 32 | ||||||
Net amounts: | ||||||||||||
Life insurance in force | $ | 25,227 | $ | 20,788 | $ | 16,725 | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | $ | 2,402 | $ | 2,254 | $ | 2,126 | ||||||
Personal lines insurance | 762 | 804 | 793 | |||||||||
Total property casualty insurance | 3,164 | 3,058 | 2,919 | |||||||||
Life insurance | 115 | 106 | 101 | |||||||||
Consolidated eliminations | (1 | ) | 0 | 0 | ||||||||
Total | $ | 3,278 | $ | 3,164 | $ | 3,020 | ||||||
Percentage of amounts assumed to net: | ||||||||||||
Life insurance in force | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Earned premiums | ||||||||||||
Commercial lines insurance | 1.1 | % | 1.1 | % | 1.3 | % | ||||||
Personal lines insurance | 0.4 | 0.4 | 0.5 | |||||||||
Total property casualty insurance | 0.9 | 0.9 | 1.1 | |||||||||
Life insurance | 0.0 | 0.0 | 0.1 | |||||||||
Total | 0.9 | 0.9 | 1.1 |
Table of Contents
Valuation and Qualifying Accounts
At December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Allowance for doubtful receivables: | ||||||||||||
Balance at beginning of period | $ | 1 | $ | 0 | $ | 0 | ||||||
Additions charged to costs and expenses | 1 | 1 | 0 | |||||||||
Other additions | 0 | 0 | 0 | |||||||||
Deductions | (1 | ) | 0 | 0 | ||||||||
Balance at end of period | $ | 1 | $ | 1 | $ | 0 | ||||||
Table of Contents
Supplementary Information Concerning Property Casualty Insurance Operations
Years ended December 31, | ||||||||||||
(In millions) | 2006 | 2005 | 2004 | |||||||||
Deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 235 | $ | 226 | $ | 218 | ||||||
Personal lines insurance | 80 | 85 | 88 | |||||||||
Total | $ | 315 | $ | 311 | $ | 306 | ||||||
Reserves for unpaid claims and claim adjustment expenses: | ||||||||||||
Commercial lines insurance | $ | 3,414 | $ | 3,173 | $ | 3,016 | ||||||
Personal lines insurance | 446 | 456 | 498 | |||||||||
Total | $ | 3,860 | $ | 3,629 | $ | 3,514 | ||||||
Reserve discount deducted | $ | 0 | $ | 0 | $ | 0 | ||||||
Unearned premiums: | ||||||||||||
Commercial lines insurance | $ | 1,194 | $ | 1,150 | $ | 1,112 | ||||||
Personal lines insurance | 382 | 407 | 425 | |||||||||
Total | $ | 1,576 | $ | 1,557 | $ | 1,537 | ||||||
Earned premiums: | ||||||||||||
Commercial lines insurance | $ | 2,402 | $ | 2,254 | $ | 2,126 | ||||||
Personal lines insurance | 762 | 804 | 793 | |||||||||
Total | $ | 3,164 | $ | 3,058 | $ | 2,919 | ||||||
Investment income: | ||||||||||||
Commercial lines insurance (1) | $ | 0 | $ | 0 | $ | 0 | ||||||
Personal lines insurance (1) | 0 | 0 | 0 | |||||||||
Total | $ | 367 | $ | 338 | $ | 289 | ||||||
Loss and loss expenses incurred related to current accident year: | ||||||||||||
Commercial lines insurance | $ | 1,564 | $ | 1,424 | $ | 1,328 | ||||||
Personal lines insurance | 560 | 548 | 621 | |||||||||
Total | $ | 2,124 | $ | 1,972 | $ | 1,949 | ||||||
Loss and loss expenses incurred related to prior accident years: | ||||||||||||
Commercial lines insurance | $ | (98 | ) | $ | (126 | ) | $ | (174 | ) | |||
Personal lines insurance | (18 | ) | (34 | ) | (22 | ) | ||||||
Total | $ | (116 | ) | $ | (160 | ) | $ | (196 | ) | |||
Amortization of deferred policy acquisition costs: | ||||||||||||
Commercial lines insurance | $ | 504 | $ | 473 | $ | 448 | ||||||
Personal lines insurance | 160 | 168 | 162 | |||||||||
Total | $ | 664 | $ | 641 | $ | 610 | ||||||
Paid loss and loss expenses: | ||||||||||||
Commercial lines insurance | $ | 1,218 | $ | 1,126 | $ | 1,062 | ||||||
Personal lines insurance | 545 | 552 | 559 | |||||||||
Total | $ | 1,763 | $ | 1,678 | $ | 1,621 | ||||||
Written premiums: | ||||||||||||
Commercial lines insurance | $ | 2,442 | $ | 2,290 | $ | 2,186 | ||||||
Personal lines insurance | 736 | 786 | 811 | |||||||||
Total | $ | 3,178 | $ | 3,076 | $ | 2,997 | ||||||
Table of Contents
Cincinnati Financial Corporation | ||
/S/ Kenneth W. Stecher | ||
Title: Chief Financial Officer, Executive Vice President, Secretary and Treasurer | ||
Date: February 28, 2007 |
Signature | Title | Date | ||
/S/ John J. Schiff, Jr. | Chairman, Chief Executive Officer and Director | February 28, 2007 | ||
/S/ Kenneth W. Stecher | Chief Financial Officer, Executive Vice President, Secretary and Treasurer (Principal Accounting Officer) | February 28, 2007 | ||
/S/ William F. Bahl | Director | February 28, 2007 | ||
/S/ James E. Benoski | Vice Chairman, President, Chief Operating Officer, Chief Insurance Officer and Director | February 28, 2007 | ||
/S/ Gregory T. Bier | Director | February 28, 2007 | ||
/S/ Michael Brown | Director | February 28, 2007 | ||
/S/ Dirk J. Debbink | Director | February 28, 2007 | ||
/S/ Kenneth C. Lichtendahl | Director | February 28, 2007 | ||
/S/ W. Rodney McMullen | Director | February 28, 2007 | ||
/S/ Gretchen W. Price | Director | February 28, 2007 | ||
/S/ Thomas R. Schiff | Director | February 28, 2007 | ||
/S/ John M. Shepherd | Director | February 28, 2007 | ||
John M. Shepherd | ||||
/S/ Douglas S. Skidmore | Director | February 28, 2007 | ||
/S/ John F. Steele, Jr. | Director | February 28, 2007 | ||
/S/ Larry R. Webb | Director | February 28, 2007 | ||
/S/ E. Anthony Woods | Director | February 28, 2007 |
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 | 2003 Non Employee Directors’ Stock Plan(8) | |
10.3 | Cincinnati Financial Corporation Stock Option Plan No. VI(9) | |
10.4 | Cincinnati Financial Corporation Stock Option Plan No. VII(10) | |
10.5 | Standard Form of Nonqualified and Incentive Option Agreements for Stock Option Plan No. VI(7) | |
10.6 | Cincinnati Financial Corporation Incentive Compensation Plan(11) | |
10.7 | Cincinnati Financial Corporation 2006 Stock Compensation Plan(11) | |
10.8 | Standard Form of Combined Incentive/Nonqualified Stock Option for Stock Option Plan VI(12) | |
10.9 | 364-Day Credit Agreement by and among Cincinnati Financial Corporation and CFC Investment Company, as Borrowers, and Fifth Third Bank, as Lender(13) | |
10.10 | Director and Named Executive Officer Compensation Summary(11) | |
10.11 | Executive Compensation Plan(14) | |
10.12 | Amendment No. 1 to Credit Agreement by and among Cincinnati Financial Corporation and CFC investment Company, as Borrower, and Fifth Third Bank, as lender.(15) |
(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 Definitive Proxy Statement dated March 21, 2005. | |
(9) | Incorporated by reference to the company’s Definitive Proxy Statement dated March 1, 1999 (File No. 000-04604). | |
(10) | Incorporated by reference to the company’s Definitive Proxy Statement dated March 8, 2002 (File No. 000-04604). | |
(11) | Incorporated by reference to the company’s Definitive Proxy Statement to be filed no later than April 13, 2007. | |
(12) | Incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated July 15, 2005. | |
(13) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated May 31, 2005. | |
(14) | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated November 23, 2005. | |
(15) | Incorporated by reference to Exhibit 10.01 filed with the company’s Current Report on Form 8-K dated May 26, 2006. |
Table of Contents
10.13 | Cincinnati Financial Corporation Supplemental Retirement Plan(16) | |
10.14 | Standard Form of Incentive Stock Option Agreement for Stock Option Plan VII(17) | |
10.15 | Standard Form of Nonqualified Stock Option Agreement for Stock Option Plan VII(18) | |
10.16 | Standard Form of Incentive Stock Option Agreement for the 2006 Stock Compensation Plan(19) | |
10.17 | Standard Form of Nonqualified Stock Option Agreement for the 2006 Stock Compensation Plan(20) | |
10.18 | Restricted Stock Unit Agreement for John J. Schiff, Jr., dated January 31, 2007(21) | |
10.19 | Restricted Stock Unit Agreement for James E. Benoski., dated January 21, 2007(21) | |
10.20 | Restricted Stock Unit Agreement for Jacob F. Scherer, Jr., dated January 31, 2007(21) | |
10.21 | Restricted Stock Unit Agreement for Kenneth W. Stecher., dated January 31, 2007(21) | |
10.22 | Restricted Stock Unit Agreement for Thomas A. Joseph, dated January 31, 2007(21) | |
10.23 | Form of Restricted Stock Unit Agreement for use under the Cincinnati Financial Corporation 2006 Stock Purchase Incentive Plan (service based) | |
10.24 | Form of Restricted Stock Unit Agreement for use under the Cincinnati Financial Corporation 2006 Stock Purchase Incentive Plan (performance based) | |
11 | Statement re: Computation of per share earnings for the year ended December 31, 2006 and 2005, contained in Note 11 to the Consolidated Financial Statements included in Part II, Item 8 of this report,, Page 95 | |
14 | Cincinnati Financial Corporation Code of Ethics for Senior Financial Officers(22) | |
21 | Cincinnati Financial Corporation Subsidiaries contained in Part I, Item 1, Page 1 | |
23 | Consent of Independent Registered Public Accounting Firm, Page 119 | |
31.1 | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 — Chief Executive Officer, Page 120 | |
31.2 | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 — Chief Financial Officer, Page 121 | |
32 | Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, Page 122 | |
(16) | Incorporated by reference to Exhibit 10.17 filed with the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. | |
(17) | Incorporated by reference to Exhibit 10.1 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(18) | Incorporated by reference to Exhibit 10.2 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(19) | Incorporated by reference to Exhibit 10.3 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(20) | Incorporated by reference to Exhibit 10.4 filed with the company’s Current Report on Form 8-K dated October 20, 2006. | |
(21) | Incorporated by reference to the company’s Current Report on Form 8-K dated January 31, 2007. | |
(22) | Incorporated by reference to the company’s Definitive Proxy Statement dated March 18, 2004. |